Episode 256: Financial Freedom Reverse Engineering: A Guide For Canadians

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What would it actually take to make work optional by age 50?

As a Canadian business owner or investor, If you have a good income, some investments, and a rough number in mind for “financial freedom,” it is easy to assume you are on the right track to financial freedom without ever testing the math. But there is a big difference between a financial goal that sounds safe and a goal that truly fits the life you want. This episode helps you cut through the guesswork so you can stop chasing arbitrary numbers and start building a financial plan that matches your timeline, spending, and priorities.

In this episode, you’ll learn how to:

• figure out whether your financial freedom number actually covers the lifestyle you want in the future
• reverse-engineer your financial target based on spending, inflation, rate of return, and time horizon
• separate your minimum financial goal from your stretch goal so you can grow wealth without losing sight of what matters most

Press play now to build a clearer, more realistic path toward financial freedom without sacrificing the life you want along the way.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

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 cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

In this episode of Canadian Wealth Secrets, we explore how financial planning, retirement, and goal setting come together to create a practical Canadian wealth plan for business owners and families who want financial freedom in Canada. You’ll learn how investment strategies, wealth management, and habit tracking support financial independence, portfolio growth, and building long-term wealth in Canada without sacrificing a modest lifestyle wealth approach. The conversation covers early retirement strategy, real estate investing in Canada, real estate vs renting, tax-efficient investing, RRSP optimization, optimizing RRSP room, and passive income planning, while also addressing salary vs dividends in Canada, personal vs corporate tax planning, corporate wealth planning, corporation investment strategies, capital gains strategy, and business owner tax savings. From financial vision setting and financial buckets to investment bucket strategy, financial systems for entrepreneurs, retirement planning tools, financial diversification in Canada, legacy planning Canada, and estate planning Canada, this episode offers actionable wealth building strategies Canada listeners can use to strengthen their path toward financial independence in Canada.

Transcript:

Jon Orr: In this episode, we wanna talk about one of the most sought after questions that we all ask ourselves either at the beginning of our careers, middle of our careers, or end of careers — basically, how do I think about and plan for financial freedom? What is involved? What are the numbers? What are my goals? We wanna talk about goal setting from the perspective of a client call that we’ve had recently, and how we help them think about how to set their financial goals for financial freedom, like nine to ten years down the road.

Jon Orr: We wanna kind of first set the stage there, but then help you think about what are the components that we need to address so that we also feel comfortable, can sleep better at night, and know we’re on the right path towards financial freedom, towards that retirement, towards knowing that we have all of the finances we were hoping for so we can live the life that we want down the road. No matter where I am — whether I’m at the beginning of this journey, the middle, or the end — we wanna help you with this type of thinking. Let’s get into it.

Kyle Pearce: Awesome. Yeah, this really was top of mind for me last week. I was on a call with a couple. They are business owners and they’re doing great. First and foremost, I want to make sure as we dig into this case study that we celebrate how well a lot of people out there are already doing things. Sometimes I’ll say on calls, listen, you’re trying to optimize, you’re trying to plan, you’re trying to do things a little bit better, but let’s not forget all of the good things that you’re doing already.

Kyle Pearce: And with this couple, they’re not overspending. They spend about $160,000 a year as a household. They’ve got kids, you know, like that is not nothing. We’d rather it not going out the door, but we’re not talking about someone who’s spending all of their paycheck or spending all of the retained earnings. So they’re doing a great job there. They’ve got some investment properties already. Now they are a little cashflow negative currently, so that’s on their mind a little bit — you start to wonder and question, is that the right move? Should I keep them? Should I take my losses and sell and move on? Not exactly the best market to be selling in.

Kyle Pearce: And ultimately, at the end of the day, they’re looking to take their currently about $100,000 of retained earnings per year and figure out how do they hit their goal by age 50. They’re 41 ish, both spouses. They’ve got about a nine-year runway here to hit what they described to me as financial freedom by making work optional — meaning they can afford their spending without necessarily taking on work.

Kyle Pearce: They did specify though that they had no plan of sitting and doing nothing. They just wanted to be able to be a little more selective with the clients they work with. They still want purpose, they still wanna do the work that they love and enjoy. They just wanna know that if they did change their mind — because again, we don’t know who we’re gonna be 10 years from now — if they wanted to take a year off, or five years off, or maybe not work anymore at all, they have the ability to do so. That was how they described their goal, their vision.

Kyle Pearce: And then we dug in a little bit deeper and recognized there were a few things here that weren’t super clear and actually didn’t work well together. And that’s what we’re going to dig into here — how do we avoid setting goals that sometimes aren’t necessarily the same goal as we describe them out loud?

Jon Orr: All right, so let’s just go right to it, and then we can back-map the scenario so we can come out and share with everyone some of the components you want to think about. What was their goal? Share that first goal here.

Kyle Pearce: Well, it was described to me in two different ways. So the first goal was, as I mentioned, to be able to cover their expenses and make work optional. That’s usually where the quote unquote FIRE folks — those that want to hit financial independence and retire early — land. They didn’t articulate necessarily retiring, but being able to be financially independent. And in my mind I’m going, okay, so that means if we can replace their $165,000 that they spend in a given year today, we now have to project that out nine years from now.

Kyle Pearce: And then later in the conversation, they had set a monetary goal for a stock portfolio — just shy of $2 million currently. And I was like, that’s fantastic. They’ve got real estate, they’ve got a $2 million public market portfolio. And they had said they wanted that portfolio to grow to $10 million by the age of 50. So nine years from now, they wanted that to be $10 million. And this is where all of my questions started to funnel out and we started to recognize, hey, are we aligned here with our goals and with this monetary goal that we’ve articulated?

Jon Orr: Yeah. And this is common, right? It’s like we get obsessed with round numbers, numbers that sound like the right numbers, instead of actually digging into the math. Let’s answer one fundamental question — are we on track to hit that goal mathematically with the behaviors that we currently have and are putting into place?

Jon Orr: Because $10 million sounds great. Who wouldn’t want a $10 million portfolio? But is that realistic from where we are now? And is that what we need? And if it is, great, okay. Let’s decide whether we’re on track to hit it, and if not, let’s make the moves necessary to get on track. These are the simple ways to think about it. But if it’s not realistic or it’s not what we need, then why do we need that? Is it just a shot in the dark?

Jon Orr: And you’re like, hey, that sounds real safe. I would love to have that because it would just be really the ultimate financial freedom number. And that might be the right goal for these folks. But the first question, and this is how we dig into the math component, is let’s start with the $10 million as a scenario and back map it. Let’s reverse engineer from where their current situation is.

Jon Orr: So their spending is $160,000 a year to pay their bills and live their life. Another number I heard was they have about $100,000 of retained earnings every year — that’s probably what they’re contributing into a corporate stock portfolio or in real estate, wherever this liquid net worth that they’re gonna grow to $10 million is coming from. They’ve got a $2 million head start here. So let’s start with the $10 million and go back. If we took the $10 million and we used the 4% rule, what does that put in their pocket nine years from now? 4% of $10 million — is this more than my projected $160,000? Definitely.

Kyle Pearce: Right. And yeah, even if we use say a 3% inflation rate per year on the cost of living, that $165,000 is gonna grow to about $215,000 in nine years. And again, this is the hardest part about all of this work — all of these variables are unknowns. We don’t know what inflation’s really going to be. Some people are a little more aggressive on that. This is the hardest part of planning. So we want to make sure that at least what we’re envisioning in our mind is clear and we’re not over-emphasizing anything.

Kyle Pearce: And I think with this $10 million goal, they’ve more than doubled this verbal goal they articulated of financial freedom. So if we’ve got $10 million in nine years, the 4% rule tells us $400,000. We needed about $215,000. So we’ve doubled what we need, which sounds great — it gives a huge buffer to do whatever they need to do, invest in a brand new rental property, go elsewhere, whatever.

Kyle Pearce: But we’re not here to say whether the goal is the right goal for these people. What we want to do is help you think about whether the goal is one that you can actually hit and whether you have the behaviors and mechanics to hit it. Because the worst thing would be to make a $10 million goal and then not know the moves required to hit it by that nine-year end and feel like, why didn’t I make different moves along the way?

Kyle Pearce: So I’ve got a $2 million portfolio now. I make $100,000 of retained earnings now. If we put $100,000 a year into this fund at say 7% — which is going conservative, because even though the S&P averages around 10%, most portfolios are a little more balanced — we get to about $4.7 million at the end of year nine. That’s less than half of the projected $10 million. And more importantly, if we assume 3% inflation and this portfolio is going up by 7% a year, they’re actually just shy of what they really need in terms of replacing their income. They’re just shy of the $215,000 per year they’d need from a 4% rule perspective.

Kyle Pearce: So on one end, they’ve almost hit the goal they articulated verbally around being able to make work optional. But they are far from hitting the $10 million goal if we’re investing $100,000 at 7% per year.

Kyle Pearce: Then the question becomes, maybe we’re being too conservative. Maybe it is all in the S&P 500. Keeping in mind a nine-year runway is not super long term. So this is really important — the S&P isn’t always gonna go up by 10% per year. Some years it’s gonna be 20% and some years it’s going to lose 10%. In a nine-year period, who knows what the sequence of returns risk might look like. But if we bump it up to 10% per year, they’re now at almost $6 million. Again, not quite to the $10 million goal, but they are now at about $237,000 at 4% per year — so they’ve hit their verbal goal of more than replacing their own income.

Kyle Pearce: So then the question becomes, which goal is it? Are we allowed to maybe have two separate goals? How do we compartmentalize them? Which one’s more important? Is only one right or is the other one wrong? How do we do this so that we don’t end up in a situation where your goals are actually quite different and maybe you meet one but not the other — and is that a failure, or what do we do?

Jon Orr: Well, what you’re thinking about is what’s my goal range? What’s my best case scenario? What’s my worst case scenario? Obviously they’re saying $10 million, which sounds like a great dream goal, a stretch goal, a best case scenario type of goal. And it sounds like what they’re doing right now — between a 7 to 10% return with putting their existing retained earnings per year into this type of investment — is going to get them close to or hit their actual first goal. Which sounds like to me the minimum. This is the worst case scenario here. To be retiring and being financially free at 50 is pretty good.

Jon Orr: The worst case scenario would be just keeping working a little longer and you get there. So let’s say this is like the acceptable solution — for the next nine years, we move $100,000 in, expecting somewhere between seven to ten percent returns, and we’re gonna hit around $215,000 in terms of a 4% rule for lifestyle expenses. If you’re happy with what that number is, this is a good goal for them and they’re on the right trajectory. Now, let’s go to the $10 million dream goal.

Jon Orr: You only have so many inputs here. You’ve got those rate of return variables, but really it’s the length that you’re investing, which you could stretch out, or you can change how much you’re contributing. And that’s pretty much all you’re playing with. So the real question is, if nine years is still the non-conditional goal timeline, then how much do we need to contribute to hit $10 million?

Jon Orr: What do I need to add on top of my $100,000 a year? What do I need to change my business to be? Because now you’re getting to the numbers of where realisticness can come in, because that’s going to help tell you how realistic it is to hit the $10 million if the only real input I have is how much I could add to my investment portfolio.

Kyle Pearce: Yeah, 100%. And one thing worth noting is we haven’t factored in any of the real estate here. And that was interesting about this goal too — they had the $10 million public market portfolio goal without considering any real estate, which in some ways could be helpful. Maybe it’s liquidating the real estate or refinancing in a few years to add to the portfolio. So many moving parts to consider.

Kyle Pearce: But let’s pretend we’re just gonna grind harder in the business and try to up how much we’re gonna invest. Right now they’re putting $100,000 of retained earnings into a corporate investment account. If they were to put in say $200,000 a year, meaning they’re somehow able to double their retained earnings — which means they’ve got to hustle harder, grow the business somehow — and if it’s at 7% a year, they get to about $6 million at the end of year nine. Getting closer to $10 million. But it’s worth noting that it only takes a few extra years if they kept working to age 56 to surpass the $10 million goal at that stage.

Kyle Pearce: So while $6 million on paper, you might be like, I’m only 60% of the way there to my $10 million goal — if they do want to continue working anyway and don’t touch the investments, and they continue to add $200,000 in retained earnings a year, they’re able to get to that $10 million goal. Even though it supersedes the original goal of just making work optional, maybe they get to just slow down a little bit. But if they still have a strict nine-year timeline, we’re talking about needing to double their retained earnings.

Jon Orr: Well, let’s pause here for just a sec. What you’re saying is in order for me to make that a reality, I have to double my retained earnings. And this is the part I wanted to pause on.

Jon Orr: What does that mean in terms of my business? Like how hard was it for me to get my $100,000 in retained earnings? Does that mean I have to double my inputs to get double the output? Or do I have to quadruple my inputs in terms of my business? These are the questions you now have to ask yourself. Because maybe doubling your retained earnings isn’t as easy as just thinking about doing more — all of a sudden it’s like a whole new business or a whole new way of thinking about my business.

Jon Orr: And then maybe it requires more of your input, more of your time commitment and energy. If maybe it’s not the case, maybe that’s just spending more to make more — you know how your business runs. But you also have to step back and go, do I wanna live this new lifestyle? Because if I have to double my retained earnings, I have to change something about what’s happening in the business now. Do I wanna live that life?

Jon Orr: Like you have to know what that looks like, because this is where the shot-in-the-dark $10 million goal — great, sounds great — but when you reverse engineer all these components we’re talking about here today, the inputs, spending in the future, the 4% rule, rates of return, the variables, contributions into these investment accounts, and then making the behavioral changes or structural changes or business changes — more and more I step back and go, I could make that choice, but do I wanna live the lifestyle that that choice brings me now so that I get that future lifestyle later?

Jon Orr: It is one of the most important questions I ask myself now. Because we project our financial plans every year or multiple times a year and we’re always continually updating the milestones. And it’s like, okay, if I wanted to do this, I just need to ask myself what does it mean in terms of what I have to do today? What are the habits I have to build in, change, manipulate, or move around? And do I wanna do those to get that type of output? Or was the first goal good enough?

Kyle Pearce: Right. 100%. And doubling retained earnings is a pretty significant accomplishment. Most business owners would say if I could double my retained earnings, that would be fantastic. And the question then is, well, why haven’t I already? And it kind of speaks to what you’re saying there — how hard am I willing to grind?

Kyle Pearce: And if we leave it at 7% for a second and we truly wanted to hit $10 million, we’re talking about contributing about $510,000 to $515,000 per year at 7% per year in order to get past the $10 million value.

Jon Orr: So you’re not doubling — you’re five-Xing your retained earnings every year. And you have to maintain that.

Kyle Pearce: 100%. And somewhere in the middle might be, hey, maybe we do try to double the growth of the business. Maybe that’s exciting to you, maybe that’s part of your passion project anyway. So okay, let’s do that. And then maybe we need to be a little bit more aggressive on the rates of return. At $200,000 of retained earnings a year, you’re going to need closer to like 14 to 15% on average. And the part I don’t like about pushing up the rate of return is that sometimes what that means is that our plan is pressuring us to have our money in more volatile assets than maybe we need or want to be in — which could of course be up 15% or 25% one year, but they could be way down as well. We prefer the volume game.

Kyle Pearce: By volume, I mean investing more money. So try to grow the retained earnings. But then also let’s be realistic about what’s a good goal to hit as your minimum. Like when we think about this, they had said originally they just wanted to make work optional by 50. So why not have that as your foundational goal? That means we can go back to this $100,000 per year and we can go back to the 7 or even 8% number, and we’re going to be at about that place just by continuing to do what they’re doing already.

Kyle Pearce: Said another way, keep doing what you’re doing and you’re going to hit that minimum goal of replacing your income if you wanted to. And then anything else that we can add in and push on could be the stretch goal. That could be the $10 million goal — like, listen, we are planning to grow the business. But we don’t have to feel stressed if we don’t hit that doubling of retained earnings in one single year. That’s a very, very lofty goal, and you’re gonna have to be very specific about how you might reach it.

Kyle Pearce: So over time, the move could be, hey, I wanna try to get closer to that $10 million, but the minimum goal is that in nine years I can make work optional by just making sure that my portfolio is large enough to supplement my income should I choose to work less or completely stop for any given period of time.

Kyle Pearce: And when I look at this particular case, one aspect that I really wanted this couple to think about is, you’ve got this real estate portfolio over here that we’re sort of ignoring. I believe they have about $2 million of equity across their primary residence and their rental properties. So rounding down, after capital gains, if they sold their rental properties, let’s say they’re left with an extra million dollars. That million dollars could go into this portfolio as early as now, or maybe it’s over a period of time, or maybe at refinance time they refinance the properties and take those dollars and put them into this public equities portfolio. These are some of the things they can do to help move the needle towards that $10 million goal, without necessarily feeling like they have to grind this thing out so hard over these next nine years.

Kyle Pearce: Because let’s be honest, John — you’ve got kids, your girls are getting older now, my kids are getting older now, they’ve got two young children as well. These next nine years are going to be years that they’re not going to want to just be head down grinding in the business. They’re also going to want to be enjoying the time with their family, with their spouses. All of these pieces are really important for us.

Kyle Pearce: And we want to make sure that when we set these goals, we set something that’s attainable. Are we on track to hit the attainable goal? And then we can still have that stretch goal, but let’s make sure that we’re not making it unrealistic or making two separate goals that are actually very different from one another — which is how I believe this conversation began with this couple. The more clear we can become, the more clear we can be with what actions we’re going to take. Because it’s those actions, those micro habits like you always call them — those are going to be the things that are going to get them to where they want to be in nine years. Or let’s say it’s a bad market — maybe it’s in 11 years. That’s still a massive win. Or maybe the market’s super helpful to us and maybe they reach that goal in seven years.

Kyle Pearce: But if we can make it more realistic at the onset and then have that stretch goal in the back of their mind, no one’s gonna say no to trying to grow their wealth beyond their goal. We can always have that in the back of the mind, but we wanna make sure that it’s not distracting us from ensuring that we hit the true goal that we’ve set out to do, which is making work optional by age 50.

Jon Orr: Yeah, yeah. And another habit I would recommend that this couple do their best to implement is milestone tracking. Whether you’re doing it half-yearly or every year — even every year at the very least — say, okay, I’ve built the spreadsheet because I’ve done the numbers. Obviously recommendation number one is you’ve gotta know the numbers we’re talking about here to make actual projections, to say what these goals look like and where they are.

Jon Orr: But then if you’re looking at one portfolio and the value of that portfolio that you are planning to either utilize — whether you’re selling some of those assets to use via the 4% rule, or maybe there’s a dividend portfolio — that number goes in that spreadsheet. And what you’re doing is saying, where am I compared to the goal that I’ve set for myself? Like, you’ve done the thinking and the planning to say, I need $215,000 in nine years because of inflation. At the end of each year, you add in the value of that portfolio. What was my spending this year? What is my projected spending next year? And what percent right now — if I cashed all that in, or if I took 4% starting now — what percent of that spending am I covering? Is it 25%? Is it 10%? Is it 50%?

Jon Orr: Do that every year so you can see the milestones, because good habits are built with the systems that you’re putting into place. That’s a system to say, hey, I’m seeing progress. I’m seeing where I am on these goals that I’ve set for myself and the moves that I’ve been making to help reach those goals. If you’re making goals and you’re not tracking those goals, they’re going to get lost over time. And then you’re going to have to do all this thinking all over again, which is okay because you reserved the right to change your goal three years from now — that’s fine. But now you’ve got a system built in that says, how do I determine a goal? What do I look at to help determine that goal? And how do I monitor and measure my progress on that goal?

Jon Orr: That’s the system you want to put into place. Because those behaviors, those micro habits, are what are gonna turn your success into a reality. Because what gets measured gets achieved. And if you’re not measuring these things along the way, you likely won’t achieve them. It’s the fact that you look at them and you write them down and you measure them that makes you more likely to hit those goals along the way.

Kyle Pearce: I love it. John was just describing what this entire episode is all about — stage one in the process. We talk about planning your vision and getting that vision clear, which is not an easy task. And as we found out here, I would argue that this couple had a pretty solid vision forming with a few conflicts inside of that vision. And as we back-map in the vision planning, this allows us to start looking at the other stages and to start seeing how do we optimize, how do we grow our wealth reservoir, and what does that look like from an estate and legacy perspective down the road.

Kyle Pearce: This is one big process that you will never be done with. You will never quite get there and feel like it’s over. It’s always going to be iterating and it’s going to be something that we work on and improve over time, especially as you grow as an individual. So if you’re interested in going through that four-stage process with us, you can first head on over to the website at CanadianWealthSecrets.com forward slash pathways. We have a short assessment that will help take you through the different stages and decide where you might want to focus your attention next.

Kyle Pearce: And of course, if you’d like to reach out to us for a completely free discovery call — remember, we are an education-first firm and there’s never an obligation to work with us or any of the services that we provide — we’re here to help guide you along the way. You can do so by reaching out over at CanadianWealthSecrets.com forward slash discovery to book a discovery call. We look forward to doing some planning with you.

Jon Orr: Just a reminder, content you heard here today is for informational purposes only. You should not construe this information as legal, tax, investment, or financial advice. Kyle Pearce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management here at Canadian Wealth Secrets.

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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