The hugely popular term FIRE stands for Financial Independence, Retire Early. There are countless articles and blogs devoted to the FIRE movement. But what does FIRE mean? The answer is different from what many would guess. Financial Independence Let’s start with the FI part of FIRE: are those who say they’ve FIREd financially independent? Here’s my definition: You are financially independent if you have enough money or other assets to cover the costs of living the life you want for the rest of your life without having to earn more money along the way. You can be financially independent if you depend on truly passive income such as dividends, capital gains, interest, or a business you own but where you don’t work. However, there should be sufficient margin in your assets and passive income to cover possible market crashes or increased spending needs with reasonably high probability. Based on this definition, few people who have FIREd are financially independent. Some s...

Last week’s article on Smith Manoeuvre risk sparked reader RS to ask the following thoughtful (lightly-edited) question: Have a mortgage and have non-registered investments (mostly in XIC) that can cover a significant portion of my outstanding mortgage. Wondering if it will make sense to pay off the mortgage using non-registered investments and take a HELOC and buy the same (or similar to avoid attribution) assets. I will be in the same position as I am now, but now I will be able to write off interest (which will be about 25% more in HELOC). My marginal rate is 50%, so I guess it might be advantageous. I will also need to factor in any capital gains taxes (25% of gains) that I will incur now against the savings. But this thinking sounds too simplistic. Not sure if I am missing something here. I don’t think you’re missing much. Given that you have had a mortgage at the same time as building non-registered investments, it would have been better to have set things up to make your...

Here are my posts for the past two weeks: Avoiding the Stock Market Where Retirement Income Plans Fall Down 10 Ways to Stay Broke Forever Smith Manoeuvre Risk Assessment Here are some short takes and some weekend reading: Joe Pinsker has a very interesting article about lowering spending by increasing the pain of spending. In the end, I’m suspicious that making yourself feel pain about all spending isn’t sustainable. Somehow we need to feel fine about sensible spending and feel pain for dumb spending. Condo Essentials has a list of signs that will allow you to spot a bad condo before you buy it. I’m not a big fan of buying overpriced condos, but you should at least check for these problems before diving in. Canadian Couch Potato compares bond ETFs to GICs for retirees. Big Cajun Man explains why you might want to open an RESP for your disabled child instead of using an RDSP only. Boomer and Echo review Larry Bates’ new book, Beat the Bank: The Canadian Guide...

The Smith Manoeuvre is a tax-efficient way to borrow against your home to invest more in stocks. This increases your potential returns, but also increases risk. Periodically, it makes sense to evaluate whether you can handle the potential downside. It’s clear that if you can follow the Smith Manoeuvre plan through to near retirement without collapsing it at a bad time, you’ll end up with more money than if you hadn’t borrowed to invest. The important question is how likely you are to be forced to sell stocks to pay your debts at a bad time. It’s easy to decide you’re safe without really considering the risks. I find that employees, particularly in the private sector, underestimate the odds of getting laid off. Most of the time, they’ll say it can’t happen. But it can. You can lose your job, stocks can fall, real estate prices can fall, and all 3 can happen at once. In fact, a single event could trigger all 3 bad outcomes. Anything that could cause stocks to drop 30% coul...

One starting point for improving your personal finances is to look at what doesn’t work. This is the approach Laura J. McDonald and Susan L. Misner take in their book 10 Ways to Stay Broke Forever . The authors offer many suggestions for changing negative spending habits, but the book also contains a number of parts that make me question the authors’ numeracy. Financial education “tends to be technical, overly complex and written in obscure, jargon-filled prose. As a result, it often fails to reach the very people for whom it is designed.” This book is quite easy to read. However, some attempts to lighten the subject matter seem forced, such as starting an explanation of liquid assets with “This always makes us think of the bottle of Patrón Gold tequila stashed in our freezer.” Positive aspects of the book include discussions about cars. Rather than leasing, if you save up before you need a car “you could go buy that sweet ride outright, with cash .” Another section has some...

Whether you use the 4% rule for retirement income or some other strategy such as my cushioned retirement investing , a fatal flaw lurks, threatening to undermine any sensible plan. This flaw is the number one reason why it makes sense to be conservative with the percentage of your assets you plan to spend each year. I saw a good example of the problem when I helped a retired family member with her finances. I worked out a safe withdrawal amount each month and set up her portfolio to transfer this amount into her chequing account each month. Within a year, she needed to make a large withdrawal from her savings. The reason doesn’t matter. It could have been for a car, a grown child who needed money, or something else. The problem was that she wanted to have her cake and eat it too. She wanted a steady income from her savings and to be able to dip into her savings when necessary. The problem is you can’t do both safely. I don’t think the rest of us are much different. We ca...

I used to think that the main factors that kept people from investing in the stock market were volatility and risk. However, a recent conversation with someone I’ll call Jim taught me that the difficulty of finding decent advice is a barrier as well. Jim runs a successful small business in a rural area. He is at retirement age now and has turned over most of the business operations to his sons. He’d prefer to retire fully, but he still works enough out of his home to draw a minimum wage salary. Jim’s retirement plan consists of continuing to work at his business and occasionally severing parts of his land to sell. He has some assets in an RRSP, but he’s not sure how much to trust the income he can draw from it. He had his RRSP at one of the big banks for many years, but his results were poor. Recently, he took a recommendation for another advisor who turned out to work for an insurance company. So, now Jim’s in expensive segregated funds, not that he’d heard of “segregated f...