Are You On the Right Path for Financial Independence, Retire Early (FIRE)? [Secret Sauce Ep1]

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Buckle up as we uncover the true secrets of achieving financial independence while maintaining or growing the lifestyle you’re after.

Are you truly prepared for financial independence, or could the FIRE movement be leading you astray?

In this “Canadian Wealth Secret Sauce” episode of the podcast, we dive into the weeds of the FIRE (Financial Independence, Retire Early) movement and question the practicality of living “financially free” while in the lowest Canadian tax bracket. If you’re aiming for financial freedom but uncertain about the steps that can get you there, this episode addresses the critical issue of accurately determining your financial freedom number. By exploring common strategies and their pitfalls, including but not limited to trying to maximize the Canada Child Benefit (CCB) amount for your household and pushing your Registered Retirement Savings Plan (RRSP) to the limit, this episode highlights the challenges and misconceptions that many face on their journey to early retirement.

Understanding these financial nuances is crucial for anyone looking to secure their future without compromising their current lifestyle. Dig in with us as we unpack realistic financial planning perspectives that promote a balanced and intentional approach that takes into account current expenses and future needs. This is essential learning for anyone striving for financial independence but unsure of how to actually get there with an intentional, ambitious, but realistic goal.

What you’ll learn:

  • Why deferring taxes through RRSPs might lead to unexpected financial burdens and how to plan more effectively.
  • Discover the real challenges of trying to plan for a low-tax bracket income while aiming for financial freedom, with practical insights and examples.
  • Understand the importance of a balanced financial strategy that doesn’t overly rely on government programs but focuses on sustainable wealth-building approaches.

Buckle up as we uncover the true secrets of achieving financial independence while maintaining or growing the lifestyle you’re after.

Resources:

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

  • …taking a salary with a goal of stuffing RRSPs;
  • …investing inside your corporation without a passive income tax minimization strategy;
  • …letting a large sum of liquid assets sit in low interest earning savings accounts;
  • …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
  • …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

By hopping on a discovery call with Kyle, he will review your specific personal and corporate financial situation in order to determine if there are some quick wins available for you to minimize taxes personally or corporately, provide ideas for how you can increase your personal cash flow, and ensure that the net worth of your estate continues to grow in tandem.

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Detailed Episode Summary 

Introduction and New Format

Kyle Pearce introduces a new segment to the Canadian Wealth Secrets Podcast called “Wealth Secret Sauce” episodes which aims to provide concise, impactful episodes on a weekly basis. These episodes are designed to be shorter and more to the point. The first “Secret Sauce” episode focuses on the FIRE (Financial Independence, Retire Early) movement, exploring the concept of financial freedom and the practicality of living on minimal income.

Concerns with the FIRE Movement

The discussion begins with the concept of a financial freedom number, a critical component of the FIRE (Financial Independence, Retire Early) movement. While the idea of reaching a specific financial milestone to achieve early retirement is appealing, the hosts express concerns about the feasibility for many people. They question whether individuals truly understand how much money they need to sustain a lifestyle they enjoy while staying within lower tax brackets. The episode delves into the specifics of the Canada Child Benefit (CCB), highlighting the challenges of maintaining a low reported income to maximize government benefits.

Financial Planning and Tax Strategies

Kyle Pearce critiques some commonly advocated financial strategies within the FIRE community, particularly the heavy reliance on Registered Retirement Savings Plans (RRSPs). They argue that deferring taxes through RRSPs can lead to significant tax burdens later in life, especially in Ontario where tax rates can be as high as 54%. Instead, they emphasize the importance of a realistic understanding of current expenses and future needs, suggesting a more balanced approach to financial planning that does not overly depend on government programs.

Lifestyle and Sustainability

A significant portion of the episode discusses the practicality of living on a very low income while still enjoying life. The hosts challenge the idea that it’s possible or desirable to live on under $35,000 annually, even with the maximum Canada Child Benefit (CCB) amount. He shares personal insights and examples to illustrate the difficulties of maintaining a reasonable lifestyle on such a budget. The episode suggests that many people pursuing FIRE (Financial Independence, Retire Early) might underestimate the expenses required to sustain their desired quality of life.

Case Examples and Real-World Applications

To ground their discussion in real-world scenarios, the hosts provide examples of individuals and families navigating their financial independence journeys. One example includes a teacher’s pension, which may not be sufficient to support a desired lifestyle post-retirement, forcing individuals to continue working beyond their planned retirement age. Another example involves a listener with an ambitious five-year plan to achieve financial freedom, which the hosts deem unrealistic given current savings and spending patterns.

Final Reflections and Call to Action

In the concluding segment, the hosts reflect on the broader implications of the FIRE (Financial Independence, Retire Early) movement. They stress that financial freedom should enable individuals to continue adding value to the world and pursuing fulfilling activities, rather than solely focusing on minimizing income and expenses. The episode ends with a call to action, encouraging listeners to provide feedback on the new format and engage with the hosts through various platforms. They emphasize the importance of continuous planning, implementing, reflecting, and revising financial goals to achieve true financial independence.

Transcript:

Hey, hey there, Canadian Wealth Secret Seekers. Today you are getting a piece of our latest edition to the podcast. We are considering doing a weekly secret sauced episode each and every week, which means we’re going to experiment with a new format, a new episode format so we can release a second episode each and every week. We’re going to keep them short and we’re going to get right to the point, and today we’re going to use our first secret sauce episode. Topic is going to be all about the fire movement and even some of those who might consider wealth as living on very little and working as very little as possible. So what triggered me to really just off the cuff record this episode and share it to you to see what you’re thinking here on the podcast was that I was listening to my regular podcast routine of all kinds of great shows, and this one show in particular, which I love has great messaging around it, was actually unpacking this financial freedom number, right?

If you’re familiar with the fire movement, fire is financial independence retire early, and they we’re talking about creative ways to stay in the lowest tax bracket and while the host on the show has reached their financial freedom number, and that’s fantastic, what concerns me about the fire movement is that many on that path may not be fully understanding how much they’re actually going to need to reach a financial freedom number, and whether that financial number or freedom number would actually work for them to live a lifestyle that they would actually enjoy. So for example, in this particular episode, they were talking about a discussion about the Canadian or Canada child benefit, the CCB and finding ways that you can try to report as a little income to stay under the combined household income level of 35,000 in order to receive the maximum benefit per child in your household.

Now, of course, if I could do this and still sustain a lifestyle that I enjoy and that I’m currently living, then of course all for it. Don’t get me wrong. However, not only do I see this living a financially free life under 35,000 as very difficult for my own household, it would be something that I also wonder about is how are we going to fund the rest of our lifestyle? So as many people would know, even if let’s say you are renting, or let’s say you have paid off a mortgage and you are living financially free and you’re reporting under $35,000 in annual earnings for your household to get that CCB amount, that’s still quite a small budget. Not saying it cannot be done, but my wonder would be is that how many people out there are actually working towards that financial freedom number and

Actually living within those constraints. So that’s something that I’d like to think about. The second thing I’m thinking about when I think about wealth is not trying to take advantage of government sponsored programs. So I’m thinking about the CCB as being provided by the government, although I don’t agree with a lot of the spending that our government does. The purpose is to help those families that are truly struggling. So trying to find ways to maximize that benefit when in reality I’m supposedly at a financial freedom stage of life where I don’t have to work if I don’t want to. To me seems like the opposite of what we’re trying to achieve with CCB. Now, don’t get me wrong, probably going to take that number if that’s the amount that I’m able to show on my income tax. However, that’s a very, very difficult thing to do.

Ironically, in the same episode, they talked and made a little bit of a joke about permanent life insurance and how that’s not something that people want to be considering, and in reality, I’m wondering how I could possibly keep my stated income below $35,000 based on only my tax-free savings account and whatever RSPs we’re going to pull out, and what else are we going to use? We’re probably going to have to leverage against some other assets unless I’m living a very, very low cost or low expense lifestyle. Again, no judgment, but I’m a fairly frugal person and I know that that number would be very difficult for us to sustain even if we had the support of the CCB. Alright, the other point that really popped into my mind here that really was a bit of a concern is this idea of shoving as much into your RRSP as possible and actually deferring as much and as long on the taxes as you can, even though at death, if there’s too much in there, which there probably would be, if you’re taking out the minimum amount out of your RSP each year, you are going to get taxed at about 53, 50 4% if you’re here in Ontario.

That was sort of advocated on the show, which to me does not make any sense whatsoever. It seems that you are not utilizing that income because you’re not willing to push yourself maybe into one of the other lower tax brackets, let’s say, and utilize some other tax-free buckets that we should be putting in place on this wealth building journey. One major area of concern that I have looking for that financial freedom number also is this disconnected understanding of what you’re spending now, what you’re earning now, what you’re spending now, and then what you’re contributing to help you generate that financial freedom number. Alright, so for example, I want to just give you a simple example. A teacher in Ontario, my wife is still a teacher, T four employee for one of the public boards here in Ontario. She’s earning over a hundred thousand dollars a year because she’s at the top of the grid.

She’s been working for almost 20 years, and if she continues to work to her 85 factor, that’ll put her at about 30 years in this job, she is anticipating receiving 60,000 or so in retirement income, which of course puts you almost at double the 35,000 required for taking advantage of the Canada Child Benefit Plan. And of course, our children will actually be quite a bit older and not living with us anymore by the time she reaches that number. But here’s the part that’s really challenging is that that’s one income and most people are struggling to live off of one six figure income currently. Now, again, children are gone, maybe the mortgage is gone, maybe you’re not buying fancy cars. I don’t know what that lifestyle is. However, I don’t see looking at that 60,000, what we see right now is a lot of teachers that are getting to the 85 factor and actually working longer because they actually can’t sustain their lifestyle because the pension will drop too dramatically and their lifestyle requires more income than the pension is going to provide.

So let’s talk about another scenario chatting with a listener. Recently, a listener reached out to us. They have a five-year plan to reach unquote fire. They’re young, which is great. They earn over a hundred thousand dollars a year, which is great, amazing person, amazing attitude dedicated to doing the learning. However, as of now, the five-year goal to attain that financial freedom number is actually massively unrealistic when we look at their current lifestyle expenses, which is coming in at around, say, $60,000 pre-tax dollars and the amount of assets that they’re accumulating right now. So the thought on this call was that a hundred thousand dollars in a tax-free savings account is going to be enough for them in five years to be able to reach this financial freedom number. When I let them know that a million dollars in tax-free income, which again, we can’t do inside the TFSA unless you get a 10 x return on your a hundred thousand that you can get in there. She needs about 10 times what she was anticipating in her mind in order to get to that 60,000, assuming her return is 6% per year annualized, which again, markets go up, markets go down, and that can impact things as well. So while big audacious financial freedom goals are amazing, the only way they can really come true is by consistently and intentionally planning, implementing, reflecting, and revising those plans. That is the secret sauce for this particular

Episode. Okay, so I’ve got to be honest, it’s rare when I find a client whose goal is to get to a place, a financial freedom number where they can spend less money than they’re currently spending. Now, for most, they want to at least maintain their lifestyle. Maybe they might want to trim certain things in their budget, but most of the clients that we work with are trying to find a way to at least, or at minimum, replace the income they have, and usually they actually don’t feel comfortable and confident to do so until they actually have more than enough money coming in because of course, uncertainties can arise. So this is that most ironic part about these fire seekers is about that anti permanent insurance. We talk about this idea of index funds and so forth, and those are all amazing. They can provide great wealth opportunities, but then when we hear things like kicking the can on an RRSP and then getting taxed at 54% on whatever you accumulated in there as being a logical move is really not a logical way to go about things.

So what I want you to be doing is that if you are a Canadian wealth secret seeker and you have a goal to reach your financial freedom number, but you simply aren’t interested in sitting on the beach at 40 years old, 50 years old, whatever the age is that you’re hoping to reach that number, but rather you want to create financial freedom that allows you to bring value to the world through the actions that bring you joy without the worry of where your next paycheck comes from, then I think you’re in the right place here in our podcast. So feel free to reach out to us if that sounds like you, where you’re looking to build wealth so that you have more time freedom, more comfort, more financial freedom to do the work you love, but not necessarily earn little, earn less or do less.

In order to be able to achieve that goal, you should be reaching out to us@canadianwealthsecrets.com slash discovery. And this is our first of hopefully many Canadian Wealth Secret sauce episodes that we’re going to be planning to do weekly, in short, raw, and unedited formats. So do us a solid and let us know what do you think about this? On Apple, on Apple Podcasts, Spotify. Leave us a rating and review. Let us know because if we don’t hear from you, we’re not going to know if this content is what you are after or what you feel can actually help you along your journey. You can also reach out to us on social media by searching for Canadian Wealth Secrets on all platforms, and depending on if we hear from you, maybe we’ll see you with a secret sauce episode next week. Take care.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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