What FIRE (Financial Independence, Retire Early) Means for Canadians, with Bob Lai
Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.
In case you haven’t heard, there’s a movement creating waves in the world of personal finance, and it’s got a name. The acronym is known as FIRE, and it stands for Financial Independence, Retire Early.
It describes a community of people who have saved enough money to live off of the income that their investments generate. In other words, work has become optional.
What’s interesting, is that many people are achieving financial independence at a very early age, some as early as their 30’s.
Bob Lai is my guest in this week’s episode. Bob is the founder of Tawcan, a popular personal finance blog which specializes on the topic of financial independence, and early retirement.
Bob explains why the FIRE acronym can be misleading, and why financial independence, rather than early retirement, is the more important goal. Bob shares definitions like “Lean FIRE”, and “Fat FIRE” and explains how they differ.
Bob explains that FIRE should never be about deprivation or extreme frugality. Instead, like most things in life, it’s all about balance. In other words, the balance between saving for the future and spending for today.
With RRSP season right around the corner, now’s the time to make sure you have enough room available for your annual contribution. This week’s sponsor, Wealthsimple, has an RRSP calculator that makes it easy! It adjusts for your salary, including any increases you get, plus the contributions already made to other RRSP and employer plans. Find out more at Wealthsimple.
- What is the acronym FIRE all about?
- FIRE: Why the title can be misleading.
- The value of having multiple income streams.
- How savings rate plays a role in achieving financial independence.
- Is the FIRE movement only for high income earners?
- Understanding how “The Gap” works, and how to grow it.
- Achieving financial independence shouldn’t be about deprivation.
- The difference between ‘Lean FIRE’ and ‘Fat FIRE’.
Have you heard of FIRE yet? It’s a movement to achieve financial independence so you can retire early. But, does FIRE mean you need to make six figures or live in an RV? Bob Lai from the site, Tawcan, comes on the show to discuss what FIRE really means and how it applies to Canadians.
Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. If you’re unsure about how much room you have left for RRSP contributions, our sponsor Wealthsimple has an RRSP tracker that takes into account your salary, adjusts for any raise you get, plus contributions already made to your RRSP and employer plans. Find out more at maplemoney.com/wealthsimple. Now, let’s gather around the fire with Bob.
Tom: Bob, welcome to the Maple Money Show.
Bob: Thanks for having me.
Tom: I want to talk about FIRE. It’s a big movement lately and I feel like it kind of came up as a surprise to me. I didn’t realize it was a thing until maybe two or three years ago. Can you just take us back to the basics and explain not only what FIRE stands for but also what it is?
Bob: Sure. So FIRE stands for Financial Independence, Retire Early. I don’t actually know who came up with that acronym but essentially it means if you save enough and invest enough in appreciating assets, it generates enough passive income to be equal or greater than your expenses. At that point, once you’re financially independent you could choose to retire early if you wanted to or continue to work. You have that freedom. The movement is getting more and more popular. It’s getting a lot of media coverage but I think it’s a little bit mislabeled because most of the media coverage by CNBC or Yahoo, MSNBC and all these big names, even The New York Times, all focus on the “retire early” part and it’s kind of mislabeled as a movement because a lot of people are financially independent and are still working—but at different aspects. For example, Mr. Money Mustache is a really well-known figure within the FIRE community or personal finance community in general. He was financially independent when he retired from his work. I think he was working as a computer engineer and now he works as a carpenter as a hobby. He still makes money but he likes it. Some people think that he’s still working in the traditional sense but from his point of view he’s not working, he’s doing stuff he enjoys. Whether he gets paid or not doesn’t really matter. Unfortunately, a lot of the media put a little bit of spin on these stories to make people want to read them which kind of puts a negative vibe on the FIRE movement. But, in general, I think the FIRE movement is pretty positive. It basically just stands for finding financial freedom so you can do things you want in life. That’s how I understand it.
Tom: There’s nothing wrong with continuing to have some sort of job even if someone is 80 years old and retired. They might work at Wal-Mart just because they want to talk to people, not because they necessarily have to.
Bob: Exactly. Take ourselves for example. My wife and I technically could be financially independent. We decided not to. We’re prolonging our FIRE journey. We were aiming to be at FIRE by our early 40s but we’re not really in a hurry to get there right now. And whether we retire or not we’ll just kind of play as it goes. If that happens it happens. If not, we’ll see what happens. I might continue working at my full-time job. Things might change in high tech, so who knows? Ask me again in five years.
Tom: I guess it’s still about having that independent choice. If you feel like you’re able to retire doesn’t mean you have to retire. You can continue to not only get that paycheck but it also gives you a chance to spend time with peers. I assume you probably like your job?
Bob: Yeah, and the big thing people need to understand is when you have the power to decide whether you want to work or not, you’re no longer tied to that paycheck every two weeks. So you could quit today if you wanted to. Whereas, before you were financially independent, even though you might want to quit, you still need that paycheck. It just shifts that mentality so the power is completely in your lap. Say your job is lame for 50 percent of the people tomorrow; you wouldn’t worry about it because you’d be fine either way. That’s the kind of power it gives you. The power of capital belongs to you (and your employer), for example.
Tom: Yeah, with my day job I’ve gone through a reorganization of the company or the department almost once a year for quite awhile now and I totally get that mental aspect where I’ve got something going on the side with my business and it sort of changes that mindset where you’re not in total fear. I feel like I can make this work if I had to, but for now I’m staying with my job. I totally get that mental aspect. I think that would apply to anybody even if they were driving Uber on the side. Just making some extra money would take some of that pressure off of this idea where it seems like everything’s riding on this one job.
Bob: Yeah. It’s about having multiple income streams too. The idea you’re buying your own stocks, real estate or if you have royalties somewhere with side businesses that generate income, you’re not just relying on one single source. That’s another way to look at it. Right now if you’re working a full-time job, and let’s say 99 percent your income comes from that job, if you get laid off, that’s it—you’ll have to find another job. Now, if you’re able to have different side businesses going on and possibly being house-top to other incomes as well, it’s not as much of a burden if you don’t have your full-time job anymore. So that’s part of the equation as well.
Tom: You touched earlier on this idea that in the media they focus on whether or not you’re truly retired and I’ve even seen that in the community. People can have different opinions on whether that counts or not. But I’ve also seen the other side where people in this FIRE community kind of get upset if someone’s not frugal enough. Can you explain what’s going on there?
Bob: Well it’s almost the opposite of keeping up with the Joneses. It could be very detrimental in the FIRE community, I suppose. A lot of people compare savings. By savings I mean, the amount of money you save each month divided by the amount of money you earn each month. That gives you your savings rate per month. Traditional personal finance experts say you need to save 10 to 15 percent for retirement and within the FIRE community we’re saving 50, 60, 70 percent—even 80 percent of our income each month. And that puts on a tremendous amount of pressure if you’re actually comparing yourself to another FIRE person. It’s encouraging to see what other people are doing but you shouldn’t feel trapped or pressured to have to keep up with these people because everybody’s situation is different. Some people are doubling contributions, some people are singling contributions. Some people have kids, some don’t have kids. We live in Vancouver, one of the country’s most expensive cities but somebody could be living in Raleigh, North Carolina which certainly has a lower cost of living compared to Vancouver so it’s hard to compare. I think the important part is encouraging each other and help each other in connecting—in how we can do things differently and stuff. I think that’s very helpful within the community instead of having to compare all the time, because the other side of the thing is to compare your net worth. And you can’t compare that. Just because we’re both 35 doesn’t mean we should have the exact same amount of net worth because we come from different backgrounds. We might have different jobs; our living situations are completely different so it’s just not very fair to compare savings rate as well as net worth.
Tom: Obviously, it’s better if you have a higher income but is it only for people with high incomes? I’ve seen stories where someone is saving 75 percent but they make $200,000 and their spouse makes $150,000 so you can see how they can save 75 percent.
Bob: That’s another negative from within the FIRE community. In general, I think people are saying it’s usually a white male in the “tech sector” which means they make a lot of money—somebody who is making six-figure money where the spouse is working as well. So they’re doubling. And there may be no kids. So, they’re making $250,000 a year and it doesn’t take a rocket scientist to say you can save a million dollars if you’re making $250,000 a year.
Bob: But at the same time, I think it is also possible to re-fire when you have a lower income to support it. It does take more time. It does take more sacrifices. But it’s also possible. Basically, the fundamental about FIRE is just increasing your savings gap. You want to increase the amount of money you make and decrease the amount of money you spend. That way you’re increasing your savings rate. I call that the “gap.” As your gap widens, it means you could save more money with investment money and watch that money grow faster. Obviously, if you have a higher income it’s easier to save more. Say you’re making $200,000 and you only spend $50,000, you have $150,000 to save. If you’re only making $100,000 and you’re spending $50,000 you’ll only have $50,000 to save so obviously (using simple math) it takes longer. But, I think it’s totally doable even if you have a lower income. It just takes longer. You might need to look at other work, maybe side-hustles or side businesses or try to get promotions. Try to increase your income to re-fire your FIRE journey.
Tom: That’s really just good advice anyways. Even if someone’s looking to retire at 55 or 60, it still comes down to if you want to save you certainly need to spend less than you make it. That sounds simple but, obviously, people can still get that wrong.
Bob: The other thing is, when they start, people usually look at their expenses, right? The thing is you can only cut your expenses by so much. After awhile you start depriving yourself. You don’t want to be eating Ramen noodles every day, eating unhealthy and watching your health go sideways. That’s not good. There are only so many things you can do to cut your expenses. Once your expenses are pretty lean you need to look at the other side of the equation by increasing your income. It goes hand-in-hand. When they look at FIRE, I think a lot of people think about extreme frugality. I don’t agree with that. For me, my motto on my blog is, “You need to find the right personal balance between saving for the future and spending for today.” You still need to enjoy your life because when you’re dead you can’t spend your money. That’s the reality. You can always say, “I’ll do it later, later, later,” but will later actually come for you? To give you an example, my wife and I went to Italy for our honeymoon six years ago. We wanted to go queen-class but it was expensive. I was looking at the price and thought perhaps we’d do it later. Six years later and we’ve never been back to Italy. And now we’re wishing we would have done that because it wasn’t really that much for us, in hindsight. It’s about finding that balance between spending and saving for your future. The right balance for me may not be the right balance for you. Find that balance for you so you can still be happy while saving for the future. That’s very important.
Tom: Yeah, I’m still struggling with that balance too. When I first got into personal finance and started the blog and everything, I was very frugality-based. It was cut the expenses—that seemed to be where to get the money, but you’re right, you hit a point where you’re not going to improve anymore. There’s only so much you can cut. The last few years I’ve been more interested in the “make money” side of it because there’s just so much more potential there. You also touched on doing things you still enjoy. My wife and I did an all-inclusive vacation for our honeymoon. That was 10 years ago. We loved it. We’re doing our next all-inclusive vacation this coming year which is 10 years later but that’s only because of work and kids. But we are at a point now where we’re thinking we should probably actually be doing that stuff. And I don’t want to wait to retire just to enjoy a trip that isn’t connected to work in any way.
Tom: Another question I had too was I’ve heard the term lean-FIRE and fat-FIRE. And again, I don’t know if these are just separate camps within the FIRE community or what but can you explain what those are?
Bob: Sure. There’s the term lean-FIRE, fat-FIRE and I think I’ve heard the term boost-the-FIRE as well so— that’s crazy. Lean-FIRE is basically when you’re financially independent and can retire any year. You save 25 times your annual expenses. So it’s the 4 percent withdrawal rule. That’s typically called lean-FIRE. It’s where you’re able to sustain your current lifestyle. Fat-FIRE is you’re actually greater than 25 times. You’re essentially living a little bit large in retirement and you’re spending a lot more than lean-FIRE.
Bob: And, boost-the-FIRE— I think this applies more to the States because health insurance is a mess in the States. A lot of people there actually go and work at Starbucks so they can get health insurance. That way they don’t have to worry about that aspect. Here in Canada, that’s something we don’t have to worry about which makes FIRE a lot easier in Canada, in my opinion.
Tom: That’s something else I wanted to touch on was what makes FIRE different in Canada. You mentioned health care. Are there any other things that are different? I heard something in the States… It was probably on some American blog where, if you make a certain amount you can qualify for Social Security or something like that. That’s almost like one of the goals. Are there certain dollar amounts we’re looking at?
Bob: I think for one, our (tax-free savings account) TFSA doesn’t have a withdrawal age limit. I think the equivalent in the States is the Roth IRA where you have to be over the age of 51 before you can withdrawal whereas with the TFSA, you can make a withdrawal anytime. It’s a lot more flexible in Canada. Health insurance—that’s a huge aspect because I hear stories of people going in for simple surgeries and coming out with a $10,000 or $20,000 bill even though they’re insured. It’s crazy. Other than that, I don’t think there are significant differences. We have CPP and Old Age Security (OAS). I think they’ve got something similar in the States as well. They have something similar to an RRSP which is capped. You can only withdrawal at a certain age. If withdraw before you get to that age, you get a penalty. I think the healthcare is the biggest difference.
Tom: I think with something like CPP you have to wait for a certain age. And you should wait because the longer you wait with CPP, the more you get. If you’re able to live without that, you’re all the better for it. Another thought I had was, obviously, the TFSAs are way more useful but with the RRSP you can withdrawal when you are at a low income. So, say you’re that guy making $200,000 a year and putting money into an RRSP, you could withdrawal that in your 40s or whatever because maybe you’ve purposely kept your income down to a really low tax bracket.
Bob: I do some calculations on my blog where I do the tax assumption for when we’re retired and living off our dividend income or our income from investing and simulate how much we can withdrawal from our RRSPs without getting hit. With the RRSP, if you withdraw $5,000 or more… Below $5,000 I think the withholding tax is 10 percent and then $5,000 and up to $10,000 is 20 percent and after that is 30 percent. I did those types of simulations and found out my wife and I could withdraw $10,000 each and still get that money back. So that’s pretty significant if you think about it. That’s $20,000 right there that you can use each year.
Tom: And even if you went into that next tax bracket it would still be less than probably what you contributed to it. And if you’re in a higher tax bracket in the first step you get that tax refund. Yeah, maybe FIRE is easier in Canada. One thing you mentioned too though is, you live in Vancouver which is very, very, far from cheap. I don’t know if there are a lot of great opportunities in Canada but when I look at the US I see there are a lot of places where you can live a lot cheaper. Obviously, healthcare then becomes a problem so you might not want to just pack up and move to the States. Have you ever considered if you were to go fully FIRE, would you move from Vancouver?
Bob: Yes, I referred to it earlier. Technically, we could be FIRED— and by FIRED I mean if we pack up in Vancouver, sell our house and move somewhere else. My wife is from Denmark which isn’t the cheapest place to live on Earth either but if moving to Taiwan, that’s certainly a lot cheaper than in Vancouver and Denmark. Also, we thought about whether we could move to Asia for a couple of years to live somewhere cheap. Even somewhere in Europe like Italy, Portugal, Spain—those are pretty cheap countries. So there are different ways, it’s called geo-arbitrage. Essentially, you try to find a lower cost of living so you don’t have to save as much money to claim yourself as FIRE. That’s one of the things you certainly can do. There are also people that sell their house and travel around in an RV. That’s another way to cut down your living expenses. It’s whatever you’re comfortable with, I think. What we learned is, we’re trying to be as flexible as we can. We’ve got two young kids so we thought, “Hey, if we move to Asia for a couple of years that would be a great learning experience for the kids.” We could home-school them. They can learn different languages from different cultures. I think that’s way better than them in school for two years learning from books. I think you gain way more experience by traveling as a kid. So that’s certainly something we’re considering.
Tom: For sure. Well, at an early enough age too, I don’t think they’re going to mind at all.
Tom: I know as my kids start to get older if I tried to move them around they’d probably get a little upset with me. Or if I told them they had to live in an RV now.
Bob: In general, I think if we’re talking about FIRE in Canada, there are not as many bloggers that blog about FIRE. It’s predominant in America so a lot of the information you get is sort of American-related. The concept still applies for the most part though. But when you start talking about healthcare, I kind of tune myself out, especially with tax-deferred, tax-advantage accounts—that’s a bit different. The tax situation is different in Canada versus the States. I know a few FIRE bloggers in Canada and it’s nice to connect with them. The feedback I get from my readers is mostly from Canadians. It’s always nice to get a Canadian perspective when it comes to investing and how to achieve FIRE conceptually. I think that’s pretty neat to have. And it’s different with each country too. I think as the FIRE movement grows— it’s certainly getting more popular in Europe and Asia, there are a few bloggers here and there, and in different countries as well.
Tom: For Canadians, in addition to your own blog, of course, what other blogs could they be checking out?
Bob: Millennial Revolution. I think they retired in their early 30s and are living in Europe. I think their site is more geared toward Americans, to be honest. I could be wrong. My own advisor talks about FIRE but Mark is really more personal finance oriented.
Tom: Ultimately, any personal finance blogs—
Bob: It’s about financing basically.
Tom: Yeah, I can’t think of anyone that wants to fix their finances that isn’t interested in retiring early to some degree. Nobody wants to “have to work” until they’re 70. So like you said, ultimately it just comes down to a cash flow and spend less than you make. Anybody that does that and tries to increase that gap more and more is heading in the right direction. That also helps them come to retirement because one thing I think people have issues with sometimes is they’re used to spending at a certain level while they’re working, and even as a traditional retirement at 65, it’s hard to make that adjustment. You’re not going to work now, so how do you change your spending? But, if you’re living as lean you can comfortably, that’s got to help a long ways. Any blog could help with that.
Bob: I think there is absolutely nothing wrong for you to retire at age 60, 65 or whatever. There’s absolutely nothing wrong with it. It’s just that some people love working until they’re 65 or longer. Just because you’re retiring at 65, 66 or 67, doesn’t make you less successful than people retired at age 30. Take me for example. People say, “Oh, you’re thinking of achieving FIRE in your early 30s or 40s. That’s amazing! You must be so successful.” And I say, “No, I’m no more successful than somebody else who retires at 65.” Again, going back to what we talked about in the beginning, we each have to frame our own “life path.” My situation is different than yours so you can’t judge two people the same. Still, if somebody says they’ll be retiring at age 65, I tell them congratulation and wish them well and just be encouraging and supportive.
Tom: And if someone wants to work longer, that’s totally fine. But I think just having that ability to know you didn’t need to work would be nice. It does change that mindset. Anyways, thanks for being on the show. And can you tell everybody where they can find you?
Bob: Yes, thanks for having me on the show. You can find me on my blog at; tawcan.com. I’m also pretty active on Twitter so you can find me @ tawcan. Drop me off a line if you want to chat and learn more about FIRE.
Tom: Great, thanks for being on the show.
Bob: Hey, no problem.
Thanks to Bob for breaking down FIRE for us. You can find the show notes for this episode at maplemoney.com/boblai. If you’re interested in achieving FIRE, head over to maplemoney.com/save-money where you’ll find all our articles on frugal living, paying off debt, and saving your money. Thanks for listening to the show. See you next week.