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Tips for a Successful Early Retirement in Canada

Victoria Morrison
Out for a mountain bike ride

People usually associate retirement with old age. For many older Canadians, the Canadian dream involves landing a good job with health and retirement benefits and working hard until you're 65. In this scenario, retirees get to spend the autumn years of their lives travelling the world and pursuing their favourite hobbies.

But in reality, people's health and energy levels don't always allow them to live their best life in retirement. Why wait until age 65 or even later to start enjoying our lives fully? This is where the FIRE movement comes in.

What is the FIRE Movement?

Early retirement, sometimes known as the FIRE movement (Financial Independence, Retire Early) has gained a lot of attention as of late. This lifestyle movement is especially popular among millennials. It tends to involve hacking systems and making wise investments to save a high proportion of one's income and maximize returns on investments. The movement is also associated with extreme frugality.

The FIRE movement isn't about doing away with work altogether. In fact, successful adherents have gone on to make more money in "retirement" than they did while they were working. Some have done this through blogging about the movement and pursuing their passion projects.

Early retiree Pete Adeney (aka, Mr. Money Mustache) argues that FIRE isn't just about early retirement. Instead, FIRE provides people with "Complete freedom to be the best, most powerful, energetic, happiest and most generous version of you that you can possibly be."

From this perspective, the financial independence movement isn't about not working. It's about having the freedom to quit a job you might not find fulfilling.

How much money do you need to retire early?

To retire early, a person has to have enough money to live off of for the rest of their lives. Unlike the classic retirement model which involves living off of your retirement income until you die (think RRSPs and CPP benefits), being financially independent means having enough money to live off of the returns on your investments. If you play your cards right, this can happen at any age.

According to the Mad Fientist, if you save up 25 times your annual expenses, you should be able to live off of the fruits of your portfolio for the rest of your life. This means that if you need $40K per year to support yourself, you can retire once you have a million dollars. This is also known as the 4% rule.

What's the 4% rule?

4% rule is an investing concept used to determine how much a person can safely withdraw from their retirement account every year. It is based on a paper known as the Trinity Study, which first appeared in the Journal of the American Association of Individual Investors in 1998.

The Trinity Study shows that by withdrawing 4% from your investment accounts each year, the amounts you withdraw should only consist of interest and dividends. This allows your account balance to remain steady throughout your retirement - even if you retire early.

There are, of course, critics of the 4% rule. Namely, the Trinity Study is based on American stocks, meaning that its findings aren't universal. In addition, it has been shown that the 4% rule may only have a 95% success rate, with no guarantee that today's retirees will enjoy the same success rates. In other words, it may be safer to save up to 30 times your annual living expenditures, and withdraw less than 4% of your annual expenses per year.

From this perspective, early retirement is not risk-proof. And yet, some early retirees have written about their experiences navigating a recession. When you have no debt, own your home outright, and have a sizeable nest egg, a recession is far less likely to ruin you.

Mountain biking friends taking selfie camera phone woods

How to save for early retirement

The best way to achieve financial independence is to increase the amount of money you save by decreasing your spending or increasing your earnings. Ideally, you should aim to make more money and find ways to spend less at the same time.

There are many ways to make extra cash in the sharing economy. A lot of people who are hoping to retire early choose to become Uber drivers or rent rooms on Airbnb, for example. If you're looking for extra inspiration, check out Ramit Sethi's list of side hustle ideas.

Living below your means to save as much of your income as possible becomes very important within the FIRE movement. In fact, it usually involves living well below your means so that you can hit that 25 to 30 times your annual spending requirement figure that much sooner.

"FatFIRE" vs. "LeanFIRE"

The lower your income, the more frugal you will need to be. Listen Money Matters recently outlined the difference between retiring "fat" and retiring "lean." For example, if you make a lot of money as a doctor or software engineer, you might be able to save 50% of your income relatively easily and save $1M within ten years. You might even be able to do this by taking the odd vacation and eating out from time to time.

On the other hand, people who earn less will need to take a more extreme approach if they want to achieve FIRE. That's because the lower your income is, the more you will need to save.

For some, being frugal means never eating out or going on vacation, clipping coupons, and downsizing their homes. This would be on the more extreme end of the frugality spectrum. Many critics of the FIRE movement shun the idea of giving up their creature comforts in order to quit their jobs before long before they've reached the legal retirement age.

For others, investing in index funds and coming up with creative ways to save money becomes a game. You might even say that people who successfully achieve FIRE replace the thrill of trying new restaurants and buying fancy clothes and furniture with the thrill of making money, and the promise of having the freedom to do whatever they want in just a few years. 

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Can investing in index funds help you achieve financial independence faster than other forms of investment?

Investopedia describes index funds as "a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500)." They are a passive form of investment and tend to have lower management fees than traditional mutual funds.

Investing in the stock market is generally risky because people tend to react emotionally; selling stocks when they start to lose money or buying stocks when they are on the rise. While some people get lucky by investing in the right stock at the right time, investing in individual company stocks is generally thought of as a high-risk endeavour.

Index funds, on the other hand, give investors a chance to invest in the entire market rather than a mere piece of it. The result is steadier growth over time. There will always be years in which the market loses money. But according to, if you hold your index fund investments over a long period of time, "it is impossible to lose money. In fact, the median annualized performance of the S&P 500 over 15 years is 12.2%."

When you consider that the leading Canadian banks offer their clients a mere 0.05% interest rate on basic savings accounts, 12.2% is quite a leap.   

Of course, there are other strategies to consider. Investing in real estate is another way to make your money grow. This is especially true if you invest in rental properties since they can yield income in addition to increasing in value over time.

Many discussions have been had about whether it's wiser to invest in stocks or real estate. The answer to that question varies from person to person, and it is definitely a hot topic among FIRE movement proponents.

That being said, investing in index funds may be thought of as a more accessible form of investing, since it doesn't require a lot of money upfront. More specifically, investing in real estate tends to require a large down payment, followed by more hands-on work (think maintenance, dealing with tenants, etc.).  

As Canadians, we also have access to tax advantages through our RRSPs. And let's not forget Canadian TFSAs, which allow us to grow our investments tax-free. The financial independence movement is all about saving as much money as possible, and this includes minimizing your taxes. Maxing out your RRSP room is a great way to do this. If you are a Canadian who is interested in the FIRE movement, you can learn more about the benefits of investing in your RRSPs and TFSAs by reading this article.

Friends mountain biking on trail in woods

How to retire early in Canada?

1. Figure out your net worth

According to the Mad Fientist, you need to know where you are in order to figure out where you're going. Your net worth is made up of the value of all of your assets, including your home, car, investments and savings. Once you have that number, you'll need to subtract any debts you owe. This includes loans, mortgages, and credit card debt.

2. Become debt-free

Start by tackling debt with the highest interest rates first - this usually means credit cards. Aim to replace high-interest debts with low-interest options. If you have good credit, this can involve transferring your debt to a line of credit (LOC). LOCs tend to have much lower interest rates. You might also consider transferring your balance to a card with a lower introductory rate, which would allow you to save on credit card interest for a few months.

Within the FIRE movement, rewards credit cards are often used as a tool to get cashback on your purchases, free flights, and other perks. However, you should only use credit cards if you have the means and discipline to pay your balance in full at the end of the month. 

3. Make a budget and start saving

Achieving financial independence is no easy feat. En route to reaching FIRE, early retirees tend to slash their spending in order to save 50% of their income, if not more.

To make that money grow fast enough to help you hit your retirement target, you will need to invest it. Most FIRE movement proponents advocate for investing in index funds or low fee ETFs, but you should do your own research to find out which option is best for you. As mentioned above, investing in real estate may also be a good option, especially if you invest in one or more rental properties.

4. Track your progress

Knowing exactly where your money is going is a great way to identify where you can easily trim expenses. Tracking your progress will also help you stay motivated, which is a crucial part of the process.

There are a number of ways to track your progress, from using compound interest calculators to keeping a detailed record of every penny you spend, save, and earn. This practice is encouraged in Vicki Robin's influential book, "Your Money or Your Life." The Mad Fientist even created an online tool known as the FI Laboratory to help his readers figure out how close they are to early retirement.

5. Keep your eyes on the prize

Remember that you will be able to retire once your average annual investment portfolio returns match your living expenses. The lower your expenses are, the faster you will get there. Reading blogs and listening to podcasts about the FIRE movement can provide you with a sense of community and help you come up with new ideas on how to spend less and save more.

In order to achieve financial independence and retire early, you will essentially need to spend less than you make, need less, and become a minimalist in many ways. It may not be for everyone, but ultimately, it's a lifestyle that has made certain people feel more fulfilled with fewer material comforts.

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