0:00

On today's podcast , I'm joined by Sam Littman

0:02

. Sam is a certified financial planner

0:04

and we're going to be talking about all things fire

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, that's financial independence

0:09

, retire early it's a whole movement

0:11

of people trying to save as much

0:14

as they possibly cancel . They don't have to work so

0:16

long . We talk about some challenges and some opportunities

0:19

, and the conversation actually goes into

0:21

some other things that you might want to consider

0:23

If retiring early is part

0:26

of your financial plans . So I hope

0:28

you enjoy this conversation with Sam Littman

0:30

. All right , sam , thank you

0:32

so much for joining me today on the Canadian Money Roadmap

0:34

podcast .

0:35

Thanks so much for having me , Evan .

0:36

Awesome . So today we're going to be talking about the fire

0:38

movement , and fire is an acronym

0:40

which stands for financial

0:43

independence . Retire early

0:45

. We're going to break down all of the uh

0:47

, the different aspects here . Sam is a

0:50

bit more of an expert on this than me , so I'm curious

0:52

to learn from you and your experience

0:54

as well . Um , but let's get started

0:56

. High level what is fire ?

0:59

Fire is the idea that

1:01

millennials can achieve a

1:03

certain level of financial independence , whether

1:06

that is retiring completely or

1:08

whether that's retiring partially and

1:11

working part time at an earlier

1:13

age . And what it is is

1:15

. It's basically a focused

1:17

savings program where a group of like-minded

1:19

people get together and decide that they

1:22

want to save large percentages of their income

1:24

. There's different types of

1:27

fire movements there's the fat fire club

1:29

, there's the barista fire club

1:31

. The idea behind it is

1:33

it's just new school

1:35

language for thoughts that have existed

1:38

for a very long time , like I'm going to

1:40

go retire on a beach somewhere when I'm 45

1:42

. Who doesn't want to do that ? Right , that's

1:45

what the fat fire club is . It's luxurious

1:47

retirement early . And there's things

1:50

like the barista fire club , which is just

1:52

semi retirement . I kind of want to retire

1:54

early , but I want to still work . The

1:57

main premise of fire is that

1:59

you have to get to a point where you can live

2:01

off of 4% of your total investment

2:04

portfolio . And that's driven from

2:06

William Bengen's theory in 1994

2:09

of the 4% rule , which

2:11

, for all my friends out there , we know it's not a

2:13

rule , but

2:16

what it is is this idea that

2:18

, adjusted to inflation , 4%

2:20

of a 50% stock and 50%

2:23

bond portfolio can sustain

2:25

retirement spending , and

2:27

so their magic number is

2:29

getting to 4% , which

2:32

is look at my lifestyle , what does it cost

2:34

, and then look at my portfolio

2:36

and can it sustain that ?

2:38

Gotcha . So there's a variety of things that we can

2:40

break down in there . So you described the idea of it being

2:43

a movement where people you know that it's largely

2:45

online that people get in encouragement

2:48

or motivation from seeing other people succeed

2:50

at this there's you might have seen websites

2:52

like Mr Money Mustache . He's

2:54

a really common one

2:56

for people that are interested in this . But

2:59

as far as pursuing financial

3:01

independence , what does that

3:03

really mean ? There's got to be a few definitions there that

3:05

we could take a peek at .

3:07

Yeah , I would agree with that . I think financial independence

3:10

should be different for everyone , which is why

3:12

I'm actually not a huge fan of the fire

3:14

movement , because it has a very

3:16

singular definition of financial independence

3:19

. For some , financial independence means

3:21

that they can afford to buy

3:23

their own home and still actually

3:26

save money . For some , financial

3:28

independence means being debt free . For

3:30

others , it means not having the need

3:32

to work . So I think there's a lot of different

3:34

definitions of financial independence , but

3:37

with fire it mostly seems

3:39

to mean when can I get to that

3:42

money stage

3:44

of I want to say FU money right

3:46

, that's what we kind of call it right when we get

3:48

to that stage where I don't have to be

3:50

employed anymore in

3:52

order to meet my financial lifestyle

3:54

requirements ? And I would

3:57

say that's probably the broadly defined financial independence

3:59

that the fire movement is looking at .

4:00

Yeah , so I would totally agree with that , and

4:05

I've been thinking about all the different types of fire . Like you

4:07

mentioned before already , it's fat fire , lean

4:10

fire , coast fire , breeze to

4:12

fire all those different ones , and

4:15

so each of those would probably come with their own definition of what

4:17

independent is right . So

4:19

like , if you're looking at the coast fire , that's

4:22

the idea of having enough money currently invested

4:24

so that the growth ends up taking

4:26

care of itself up until

4:28

your retirement date . I

4:30

guess Would you kind of agree with that , Like

4:33

the certain type that you're pursuing

4:35

kind of defines what independence is . Yeah , I would agree

4:37

with that .

4:38

I think there's so many different areas

4:40

and so many different segments . It's

4:43

a very structured movement , but

4:47

I do agree with that , I

4:49

think , as broadly defined

4:51

. If people aren't like very in depth with it , I

4:54

think they'd more generally defined it as just not having to work . But

4:57

when you get into those different types of fire movements , yeah , there's

4:59

definitely and I don't know all of them but

5:03

there's definitely different definitions of

5:05

financial independence within that . For

5:07

sure .

5:08

Okay , so you talked about that

5:10

4% rule , which isn't a rule . I

5:16

don't mind it as a target honestly , like if it just kind

5:18

of gives a rule

5:20

of thumb , like we're largely

5:23

speaking to other millennials

5:25

here and we've got a long time even

5:27

ahead of an early retirement , let

5:29

alone a typical retirement here . So having

5:31

some sort of target in mind

5:34

I don't think that's such a bad thing . But

5:36

how else would one calculate

5:38

their fired number ?

5:40

It's a good question , I think , if

5:43

they look at a

5:45

few things . Number one is what

5:47

is their ideal retirement date , what

5:49

is their ideal retirement age ? And

5:51

when we're looking at that retirement number

5:54

we have to understand a few things

5:56

. Number one is it pre-tax or post-tax

5:58

money for everyone in Canada

6:01

, because fire is largely US

6:03

movement . Basically , is it RSPs

6:05

or TFSAs or non-registered money

6:07

. So after tax is how much do you actually

6:10

need ? Because a million dollars

6:12

at 4% let's say your lifestyle

6:14

is at 40,000 , but you've got a million dollar RSP

6:17

. You're not really going to have

6:19

a million dollars there . Part of that's the government's money

6:21

, part of that goes to pay taxes , so that can't sustain

6:23

the same 4% withdrawal . Let's say a

6:25

million dollar TFSA can sustain , but

6:28

then it's your path to get there as well . So I

6:30

think it's a bit of more of a complex discussion

6:33

. I think what I would say generally is

6:35

, if you're going to target the 4% rule , be

6:37

a little bit more conservative and look at maybe

6:39

a 3% rule of after

6:42

tax money . So a TFSA

6:44

being tax-free money we know that's going to come out tax-free

6:47

and RSP being pre-tax money

6:49

we know that that's going to come out as taxable

6:51

. So if we want to apply

6:53

a general tax rate . Let's say we have a million dollar

6:55

RSP that we're talking about and say , okay

6:58

, well , maybe let's estimate that 60%

7:00

of that value can be calculated for my

7:02

retirement number , 100% of my TFSA

7:04

value and maybe closer to 80% of my non-registered

7:07

account , considering the fact that the dividends

7:09

I earn are taxable , the capital gains I'm going to have to

7:11

liquidate are taxable , or any interest

7:13

earned is going to be taxable as well . So I think

7:15

that if we're talking general framework , that could

7:18

work , but we're

7:20

getting very general , because if

7:22

someone has a large non-registered portfolio

7:24

that they just bought an index fund and

7:26

are just holding to retirement , there might

7:28

be pretty large capital gains on there

7:31

and they may have

7:33

closer to that 20% . They're probably under

7:35

good problems . Yeah , exactly , exactly

7:37

. But it can be misleading , right ? Because then that's where

7:39

it's like oh , I've gotten enough to retire , but really do you

7:41

? Because we have to consider the after tax value

7:43

and it gets a little bit more

7:46

complicated . I think the people who like sophisticated

7:48

DIYers , they're very capable of discovering

7:51

that number . I think the people who are generally just

7:53

have a singular target in mind and they're

7:55

not really sure how they're going to get there . They're not really

7:57

sure what all this means . I might encourage

7:59

them to seek out a little bit of financial advice before just

8:01

arbitrarily targeting a 4% number .

8:03

Right . So even getting to

8:05

that 4% number , like on the

8:07

RE side of things , the retire

8:10

early right , knowing what

8:12

date that is really matters

8:14

, right Like , are we talking 40 here we're

8:16

talking 60 , right Like , that's

8:19

a huge difference and a huge difference in the amount

8:21

of saving that you need to do , and so

8:23

you know , regardless of

8:25

your income level , frugality has

8:27

to be part of the picture here , right

8:29

Like . It's not like , oh , let's cut

8:32

out a few coffees and now we're going to retire

8:34

early . It's like no , no , no , this is aggressive , right

8:36

.

8:37

Absolutely . I've heard of people who have

8:39

six or seven roommates sharing an apartment

8:41

that costs $2,000 a month

8:43

right , and these are married couples

8:46

, right In some cases who are just saying

8:48

like we're going to commute everywhere , we're going to

8:50

do rides sharing , we don't own

8:52

cars , we don't own property

8:54

, we rent , right , and just save every like

8:57

. I was reading an article earlier today

8:59

in preparation for this and there is

9:01

a story in there where a couple was

9:03

saving 70% of their income and

9:06

I mean , like where is the lifestyle

9:08

enjoyment in the journey at that point in time

9:10

? That's what gets me , and everyone's different , and

9:12

I'm not saying that people who target this aren't right

9:15

in their own minds and what they

9:17

might make them happy , but I think at the end

9:19

of the day , isn't there some enjoyment that needs to be had

9:21

in the process of getting the financial independence ?

9:24

For sure , Because from

9:26

my perspective anyways I don't know you're preaching

9:28

to the choir here a little bit and so we're . I

9:30

wouldn't subscribe to that , mostly because

9:32

, I don't know , that's

9:35

just not something that I've always enjoyed doing

9:38

, Like there's I know some people that

9:41

get a real kick out of frugality

9:44

, Like that's that in and of itself

9:46

is a hobby that they enjoy . But

9:48

you know , if your goal is to have

9:50

a fulfilling retirement , full of travel

9:53

and all these sorts of things , but you're not doing it now

9:55

. You know , I think we're going to

9:57

come back to this maybe , maybe

10:00

later in the conversation , but it's like what

10:03

does that ? even mean for you today

10:06

versus in retirement . Like your lifestyle

10:08

, do you think it's actually going to get meaningfully

10:11

better once you've retired ? But you've

10:13

lived your entire life saving

10:15

every penny and whatnot . Flipping that

10:17

switch is really difficult .

10:19

Right , because we're creatures of habit and

10:22

if we've built our last 20 years

10:24

doing one thing and all of a sudden we have to

10:26

flip a switch . It's not easy

10:28

. I mean you look at the amount of retirees that struggle

10:31

in their first few years of retirement , right , it's

10:33

not as easy just to flip that

10:35

switch . It doesn't matter if you're a career

10:37

government worker or if you've owned a business

10:40

. It's a really difficult thing to just transition

10:42

from being employed or owning

10:44

something to then all of a sudden having all

10:46

of this free time on your hands , and

10:49

so that's one of the other things . And

10:51

look , I'm not . I don't want to be overly critical

10:53

of the fire movement , because it does teach

10:55

some really good principles like delay gratification

10:58

, and I think that's an important principle to have

11:00

and a habit to build

11:02

. But I think that there's a

11:05

reasonable level that we can

11:07

achieve of that while still

11:09

enjoying the life that we're

11:11

able to create now . And

11:13

I'm not too keen on retiring really

11:16

, just personally , just something because I

11:18

really enjoy what I'm doing . And I mean my

11:20

grandpa worked till he was in his nineties . My

11:22

dad is close to 70 and he's still working

11:24

, not because they had to , but they

11:26

enjoyed the work and

11:28

it was fulfilling and meaningful . It's the same with me

11:30

Now . Others may not find it that way and that's fine , but

11:33

I and so I do think there are some important teaching principles

11:36

within the 4% or the fire movement

11:38

. I just personally

11:40

wouldn't subscribe to all of them myself .

11:42

Yeah , that's something interesting that you bring up there

11:45

of , like , why would someone want

11:47

to do this ? Like , are you pursuing

11:49

or you , general listener , pursuing

11:51

fire because

11:54

you currently hate your job so

11:56

much , so much it's like , maybe

11:58

just get a different job and live

12:00

a little now ? Or you know what I mean Because

12:03

would it be worthwhile

12:05

to have a career , job that you

12:07

really really enjoy , even if it pays less and

12:10

you retire on a typical timeline , or all these

12:12

different things ? Right there's , I feel like

12:14

there's always more to the story .

12:16

I agree , and I think it's the trade off

12:18

of sacrifice now and have happiness

12:20

later . But if you don't learn how to

12:22

have happiness in the day

12:25

to day and in the grind , happiness

12:27

isn't really a destination . It's such a cheesy

12:29

, cliche thing , right , but it is

12:31

a mindset , more so than anything else

12:33

. And for me again , I'm talking

12:35

very personally here , right , other people have different

12:37

motivations , but for me personally

12:40

, my desire is to have a fulfilling

12:42

life . It's not necessarily to achieve

12:45

this level of happiness , and I find fulfillment

12:47

in a number of things , but one of them is work , and

12:49

so that's why I'm not too keen on that . Now

12:51

, other people , if they find you

12:54

know again , they want to achieve

12:56

financial independence and retire early because they want to be happy

12:58

, because they don't have to work . Again , I question that

13:00

, because if you're not happy in the day to day , you

13:02

probably won't be happy when you

13:04

don't have anything else to do . So

13:07

I get it . I think it's a largely

13:09

psychological thing as well . People really need

13:11

to think about their motivations as to why they want

13:13

to retire early and see if it's

13:15

something worth pursuing .

13:17

Yeah , absolutely . But I'm going

13:19

to flip this around

13:22

again to make your earlier

13:24

point of like . There's a lot of good that

13:26

comes from this , because I don't know about you

13:29

, but from my perspective , what I've seen the

13:31

people that have the most challenge

13:33

over you know , building

13:35

financial independence

13:38

, whatever you want to call it is

13:40

their savings rate today , right

13:42

. So you can't do both

13:44

have fire and have

13:47

a very low savings rate unless you win

13:49

the lottery or something like that . It encourages

13:51

good habits , but maybe to the extreme

13:54

, I guess , which is kind of my hang up with

13:56

it . But you know , the

13:58

idea that you're

14:01

going to be able to get

14:04

financial success with anything other

14:06

than a really high savings rate is

14:08

might be a little bit misguided

14:10

. Would you agree with that ? I would agree . Maybe I'm

14:12

oversimplifying it .

14:14

No , I would agree that obviously

14:16

it does take more

14:18

than a savings rate . I actually did

14:20

a video on this a couple of years ago around

14:24

the idea that you know often

14:27

people who are in the fire movement follow fire

14:29

influencers right , who are

14:31

posting these pictures of being on a beach at 30

14:34

or 35 and they're basically saying , like I

14:36

got financially independent because I saved 50% of my income

14:38

in my 20s , when they're not being completely

14:40

transparent because you know , parents

14:42

gave them money or they

14:44

had an exit from a business or you

14:46

know . And again it becomes this idea

14:49

that we can achieve

14:51

this thing too just with that savings rate

14:53

. Sometimes it's possible , sometimes

14:56

it's just flat out . The math just doesn't work right

14:58

and you can't do this , and we've

15:00

got to understand that . And so I think

15:03

there's yeah , there's levels to it . We don't want to get too extreme

15:05

on one thing in

15:08

most areas of life , I would say , but

15:10

especially in the savings rate . Again

15:13

, it just goes back to what are you enjoying about life now

15:15

, and can there be a balance ?

15:17

Yeah , for sure . Okay . So let's assume

15:19

that someone out there is listening and

15:21

they're saying , okay , well , I'm in that camp , I

15:24

don't mind beans and rice , I don't mind having

15:26

five roommates , I don't

15:29

mind my job , I've got a high income , but I'd rather

15:31

be doing other things . You know all these like fine

15:33

enough motivations or

15:36

personal choices that would lead someone down

15:38

this path . What are some

15:40

things for Canadian listeners

15:42

specifically that they should

15:44

be aware of , perhaps before handing

15:47

in that resignation letter and

15:51

getting out of the workforce entirely ? I've got a few

15:53

, if I can set you up , if

15:55

you don't have too many off the top of your head

15:57

, but what have you seen ? There's some challenges

15:59

, maybe common misconceptions , potential

16:02

pitfalls .

16:03

Well , I think the biggest one is the math behind the 4%

16:05

rule . Again , like we said , we don't mind it as a benchmark

16:08

, but if you're retiring early , understand

16:10

that the 4% rule was meant to cover a 30 year

16:12

time horizon . If you retire at 40

16:14

. And have a life expectancy to

16:16

85 , which is the average life expectancy

16:18

for women now for men it's around 82

16:20

, but that's today , right , when we're kind

16:23

of hitting life expectancy , it might be higher . So

16:26

we're looking at a 40 to 50 year time horizon

16:28

where we need

16:30

to sustain a spending rate adjusted to inflation

16:32

, with really a

16:35

theory that was only designed to cover 30 years

16:37

. So I think that's number one

16:39

. We have to be really cognizant of the fact that if

16:41

this doesn't work , are you willing to re-enter

16:44

the workforce , and

16:46

that's number one from a math perspective

16:48

. I think , generally

16:52

speaking , it's a good idea to

16:54

. I think everyone has this

16:56

dream , people who hate their jobs . They have this

16:58

dream that like , oh , I'm gonna like , basically

17:01

like , just

17:03

slam my resignation letter on my boss's desk

17:05

and I'm gonna leave and say things on the way

17:07

out . Right , everyone has this kind of dream , at least

17:10

that from watching the office . Right , at

17:12

least it portrays that everyone has that dream . I

17:15

don't think that's a good idea . Number one because , like

17:17

I said , math doesn't work out . You gotta find a place

17:19

to work . You might wanna go back to that place if they value

17:21

that relationship . But again , I just

17:23

think that you're trying to live life

17:25

in a fulfilling way . Make sure that you

17:27

have something you're retiring to , whether

17:30

it's volunteer work , a hobby , projects

17:32

, some of their skill , like , if you wanna up skill

17:34

yourself , go back to university , any of those

17:36

things . I mean life

17:38

doesn't end at 40 or 50 , right , it's

17:41

really those goals in years where , if

17:43

you are healthy and you can't spend your time traveling

17:45

, do it but also find meaning in that as well

17:47

.

17:47

What about for people who are

17:49

taking a look at fire ? They're reading

17:52

the Reddit forums and they're saving

17:54

like crazy and they're currently single

17:56

. But being single isn't necessarily

17:59

something they wanna plan for for the long

18:01

term . I know not everybody has the choice of whether they get married

18:03

or not , but , like , how do you end up

18:05

doing this with a spouse ? I imagine that would be

18:07

a crazy challenge to be like , hey , I wanna

18:09

do this and maybe your wife is completely

18:13

on the other page , like that . I

18:15

can see that being a huge challenge for

18:17

someone that's just getting started who has this big

18:20

idea .

18:20

Absolutely . I think alignment with your spouse on money

18:23

is one of the number one

18:25

things you need to have . And

18:28

it's so important , right ? Because , as we've

18:30

seen over the years of dealing with people , often

18:33

our job turns into almost a

18:35

counseling role between couples and money

18:37

management . And so when

18:39

and I mean I can turn that back to you , right

18:41

Like if a couple isn't aligned on their money goals

18:43

, I mean that's a , that's a . That's

18:45

often an issue that lots of people can't get

18:48

over that hump right . I don't know

18:50

what you've seen in your practice , but I've definitely seen that a few

18:52

times in mine .

18:53

Totally it's . It was something

18:55

that one of my four partners , who's

18:57

now retired , he told me early

19:00

on . It's like it's all good to

19:02

know the math and the funds

19:04

and watch the markets and all that

19:07

kind of stuff , but more often than not

19:09

you're you put on your psychologist

19:11

hat a little bit right . You have to navigate

19:13

relationships , and it's not always between you

19:16

and the client , it's between clients themselves

19:18

, and so I know most people listening

19:21

aren't advisors like us . But

19:23

we've got to see now

19:25

how this goes when people are not

19:27

aligned with their finances , and it's always

19:29

. People are always going to be different a

19:31

little bit , but it's this is a key philosophy

19:34

that you want to make sure that you're on board with

19:36

your spouse or future spouse or whatever

19:39

, because it's

19:41

an entire lifestyle , it's how you

19:43

live today , it's how you live tomorrow , it's how

19:45

you see generosity , it's how everything

19:48

kind of works . So this one

19:50

is pretty critical from a relationship

19:52

standpoint .

19:53

As well . I mean , you add kids into that

19:55

picture as well of the

19:58

frugality , that lifestyle as well , and

20:00

again it completely changes the equation and lots

20:02

of people do it . But I think being

20:04

on the extreme side of it , that

20:07

presents a lot of issues . Right , are

20:09

you going to , how are you going to maintain , like , a

20:11

low cost of housing when you have two or three kids

20:13

, never

20:16

wanting to own a vehicle or have

20:18

debt payments or anything like

20:20

that ? Or you're gonna buy a house you're gonna be renting for your

20:22

whole life ? I mean , those are things that

20:24

are critically important from a relationship

20:26

standpoint to have those conversations leading

20:28

up to your financial journey . And if

20:31

you're already on the path to financial independence

20:33

and you have a partner that

20:35

you're bringing into the picture that

20:38

doesn't share those same views

20:40

, it's critically important to understand each other

20:42

and where you're coming from so that , even if

20:44

you don't share the same views on frugality

20:47

or money , that you

20:49

can at least live within the context

20:51

of how each other views money

20:53

and that it won't be an issue in the relationship . I

20:56

think that's huge as well .

20:58

So I was thinking of some other things , like

21:01

really practical things that

21:03

might be challenges that dev or Canadians

21:05

pursuing fire might

21:07

not think about

21:09

or know the details of , and so I'm gonna

21:11

put you on the line 20

21:30

years , at 45 instead of 65 .

21:41

You may not be eligible for the full CPP benefit

21:43

. So , again , taking that into account , you

21:46

may want to take CPP at 60 earlier

21:48

to supplement your income as soon

21:50

as you can . That

21:54

could also affect how much you get . So

21:56

there's a few things that's taking into consideration with

21:58

CPP . I think it's just again

22:00

, when you're doing your financial planning and you're looking at

22:02

, I think most , and

22:04

I would say this I don't know if you've experienced

22:07

this , but I've probably met with over 200

22:09

millennials over the past year individually

22:12

, not the same people over and over , but

22:14

individually new people . And

22:16

one common theme I hear

22:19

from people who are part of the fire movement is

22:21

they don't have a great deal of trust in

22:24

the government's programs

22:27

and so they're not necessarily

22:29

counting that . Anyways , I would say

22:32

I think that's misplaced . But at the

22:34

end of the day , understanding

22:36

that if you were counting on CPP , that

22:40

you do have to contribute for a certain number

22:42

of years and be at a certain

22:44

income threshold called the yearly maximum pensionable

22:46

earnings , in order for you to

22:48

maximize those CPP contributions

22:50

and then therefore maximize the

22:53

pension that you're eligible for , yeah

22:55

, I haven't actually heard

22:57

that too much , just in general

22:59

terms .

22:59

It's like the government's going to take whatever

23:02

, just the standard anti-government

23:05

sentiment , which I get it . Whatever

23:08

, I don't put

23:10

a lot of weight behind that , necessarily

23:12

for making long-term financial decisions

23:14

. But if somebody is pursuing

23:17

fire and they don't think CPP

23:19

is going to be there and they adjust their savings

23:22

rate accordingly , great

23:24

, you're going to end up with too much money , I promise

23:26

you . But

23:29

I would file that under a good thing . I guess my

23:32

fear would be that someone would probably

23:35

overestimate how much they might get from

23:37

CPP and so that might not be as

23:40

factored in from that perspective .

23:42

I think there's also an overestimation

23:44

of what their portfolios are going to

23:46

do .

23:50

No , you've never seen that before .

23:53

I've heard comments again and these are anecdotal

23:56

, but I had this one video

23:58

that I posted on TikTok

24:01

about the 4% rule

24:03

I think it hit close to 100,000

24:05

views and the amount of comments

24:08

on there about the fact that

24:10

they're just going to live off of the dividends

24:12

of their portfolio and

24:15

not ever touch the principal and

24:17

that they're going to average 7%

24:19

because they're going to live off of their dividends . That's

24:22

a very flawed way of thinking about it because

24:25

, as we know , when you get a dividend distribution

24:27

, it lowers the share price or

24:29

the fund price of what you own

24:32

. Even though you're not taking

24:34

or selling units of the fund or the shares

24:36

, you're still having a lower portfolio

24:39

value after that's drawn out . I

24:41

think Dimensional just posted a study about

24:43

how they surveyed a number

24:45

of companies and the

24:47

average share price drop was $1.15

24:50

for every dollar . I think

24:52

it was $1.15 or $1.20 for every

24:54

dollar of dividends paid out by the companies

24:57

. That's really important to know

24:59

. Again , we've seen that

25:01

that came up a surprising number of times , people

25:03

thinking that they're going to be a little off of more than

25:05

4% , so we're tiring with less money too . I think

25:07

that's an issue as well .

25:09

Would you see yield chasing

25:11

as a potential pitfall

25:13

for people who are perhaps

25:15

DIY investors that are pursuing fire

25:18

?

25:18

I think so because anytime

25:20

you're looking at higher yield

25:22

investments number one taxation

25:25

becomes like forced taxation , becomes an issue because

25:27

you're taking taxable distributions

25:29

when you don't necessarily have to , whereas

25:32

instead , if you were to cash out units of your portfolio

25:35

, it's only partially

25:37

taxable , but a full distribution of dividends

25:39

or interest is fully taxable . Number

25:41

one you're chasing

25:43

one segment of the market . If

25:46

you're just obsessive about dividend yield

25:48

, you're only chasing dividend

25:50

companies . Well , historically , dividend companies

25:52

in broad markets have

25:54

been good . There's

25:57

some investment studies done

25:59

on the investment factor , which is one of the

26:01

five factors in

26:04

FamaFrench's five-factor

26:07

portfolios . The

26:09

dividend part of that isn't the only

26:11

factor that we look at . Broadly

26:15

speaking , I would say that there is some

26:17

evidence that dividends do perform , or dividend

26:19

companies and dividend funds do perform well over time

26:21

, but you're missing out on entire other

26:23

segments of the market . For instance

26:26

, you could be overlooking large

26:28

growth , small cap value , those other types

26:30

of things which have proven to have really really good track records

26:32

over time . Again , focusing on one

26:34

specific investment signal like yield

26:37

or risk factor or anything like that , I

26:39

think is an inefficient way to

26:42

target investments , especially for DIYers

26:44

owning the total market . Focusing on total return

26:47

is probably a much better way forward . At

26:49

least empirically it has been .

26:52

Yeah , I would tend to agree there . It's just

26:54

one of those things that I would be nervous

26:56

about someone saying well , I'm going to follow

26:58

this 4% rule once I got my big

27:00

pile of money and I'm going to find

27:03

all these quote unquote

27:05

high yielding things that are higher than 4%

27:07

and we'll just let it go . It's like well , yield isn't

27:09

return either , right , and so

27:11

there's potentially a lot

27:14

of misconception there

27:16

when managing your own portfolio

27:18

. What about taxes ? So this

27:21

is something for

27:23

people that are retiring early a big

27:25

difference between what you read about in the States and

27:28

what you read about in Canada , or

27:30

perhaps no one talks about in Canada . It's

27:32

income splitting between spouses . We

27:34

don't have combined income

27:37

reporting like they often do in the States . You hear

27:39

of people it's like oh , I'm getting married for the

27:41

tax benefits . We don't have that in

27:44

the accumulation phase here . Anyways , between

27:46

spouses after the age of 65 , you can

27:48

split certain types of income

27:50

. But do you see this

27:53

like taxes , as being or misunderstanding

27:55

of how taxes work ? When

27:58

someone is quote unquote retired , like

28:00

CRA doesn't get a notice that you're not

28:02

working anymore . It's everything's based on your age

28:04

.

28:05

Yeah , I think there's a . I think

28:07

tax in itself is probably the most

28:10

misunderstood area in Canada has an overly

28:12

complex tax system as well , so they

28:14

don't make it easy on the people who want to do it themselves

28:16

. I've taken

28:18

on this ridiculous challenge of trying to read the

28:20

entire income tax act in one year . It is

28:22

not friendly to people who don't have accountants

28:25

and don't have any training or tax background

28:27

. So I will say

28:29

that , like taxes are , if

28:32

you don't have an education or in

28:35

specifically around taxes , you

28:37

should talk to tax professionals , because

28:40

there's going to be things that you're missing pension

28:42

tax credit , right . The income splitting

28:44

for seniors , things that you may

28:46

not know that you're eligible for , that

28:48

you may be eligible for , that you might overlook

28:50

right , because these are all , for the most part

28:53

, self declared and self

28:55

applied for credits for

28:57

a lot of the time . So , again , if

28:59

you don't know the tax

29:01

piece , consult a tax professional

29:04

. I think , again

29:07

when I talked about this earlier , understanding

29:10

the nature of pre-tax

29:12

and post-tax investments

29:15

that you have . Understanding how RSP

29:17

withdrawals can affect old age security

29:19

. Understanding how the

29:22

different types of taxable incomes interact with each other

29:24

when you sell part of your portfolio to take an income

29:26

as capital gains versus when you get a Canadian

29:28

dividend versus when you get a foreign dividend from your portfolio

29:31

. All of those things are taxed differently , so

29:33

it's important to understand that too . So

29:35

taxes play a big part , and I don't know

29:37

if you're going this way as well , but I think understanding

29:40

risk in your portfolio is

29:42

really really important here too , because

29:45

and it kind of does play with taxes because

29:47

, as you de-risk , if you choose to de-risk

29:49

your portfolio to go less

29:51

in stocks and more in bonds fixed income cash

29:54

equivalents like high interest savings

29:56

or high interest ETFs then

29:58

you're going to get a different type of taxable return as well

30:00

, and so , depending on how large of the balance

30:03

that's in there , that could again affect

30:05

government benefits

30:07

like old age security , things like that . So

30:10

it's just important to understand and be mindful

30:12

of the tax piece .

30:13

Yeah , it gets complicated early

30:16

and often when you start dealing with taxes

30:18

. So if people are

30:21

looking to retire early

30:24

, building up their portfolio

30:26

, like Sam mentioned before

30:28

, I

30:31

often use a line you want to start the way

30:33

that you want to finish , or like build

30:35

your portfolio now in such a way that you

30:37

kind of understand the impact of

30:39

what it's going to look like when

30:41

you turn it into income later

30:43

on , because your

30:46

working paycheck is a whole lot less complicated

30:48

than your retirement paycheck . Different

30:51

sources , different , all sorts of different

30:53

things but this is what we

30:55

help people with

30:57

all the time and

31:00

doing financial plans and a small

31:02

little plug here for us as planners

31:05

is like sometimes there are concepts

31:07

that are simple , but sometimes things like this

31:09

start introducing enough

31:11

complexity in multiple areas that's

31:13

like it's tough to do this on your own . At least

31:15

having a second set of eyes or a sober second

31:18

thought here can really help make your

31:20

decision one way or another .

31:21

Yeah , I absolutely agree with that . I mean , how many times

31:24

do we sit across the table from someone and

31:26

they just ask should

31:29

I be doing this with my money ? Should I be targeting

31:31

this sector , should I

31:35

take money out of my RRSPs

31:37

to buy a boat , these

31:39

types of things ? And ultimately

31:41

, sometimes , yes , absolutely , you've got to be doing

31:43

that . Yeah

31:46

, exactly . Sometimes all our job

31:48

is , or a large part of what our job is

31:50

, is to be a sounding board for

31:53

people to avoid making bad decisions . That's hard

31:55

to quantify , but when

31:58

you have someone that you

32:00

can talk to to say , hey , I'm thinking about

32:02

doing this , what's the risk , what's the upside

32:05

, how does this affect my financial plan

32:07

? Can I still retire early ? If I do this , if

32:10

I target this , am I targeting too much risk ? All

32:12

of those things it

32:15

becomes Sometimes . Again , I

32:17

think the common

32:20

knowledge around DIY and doing it yourself

32:22

is you have to have the time to

32:24

do it , you have to have the

32:26

knowledge level to do it and you have to have

32:28

the emotional capacity to do it

32:31

.

32:31

And if you don't have all three of those things , If

32:50

you , with the last word , any final thoughts or

32:53

ideas from people you've

32:55

seen , have success with pursuing

32:57

fire . Any last words towards

33:00

a wisdom , fire away .

33:02

I would say that fire movement

33:05

is something that is really

33:07

really admirable to chase . My

33:10

advice to people around this is

33:12

defining the type of life you want does start

33:15

today . It's not an end

33:17

goal , and so if you want to live a fulfilling

33:19

life , if you want to live a life

33:22

that you can be proud of and

33:24

work towards it and destination , that's fine

33:27

. Just make sure that you're enjoying the journey on the way

33:29

. Make sure that you're building the good habits that

33:31

can lead to fulfillment today , make

33:33

sure that you know the math behind what you're

33:35

trying to do and have

33:38

an awesome time doing it .

33:40

Awesome , that's great . Cool . Sam

33:42

, how can people find you

33:45

and millenwealth advisors ?

33:47

Yeah , they can follow me on social

33:49

media . I'm on social media on Twitter

33:52

and TikTok as Millennial Money Canada

33:54

and just type in my

33:56

name on LinkedIn . You can find me there , and

33:59

the website that I use for my business is mwadvisorsca

34:03

Awesome .

34:04

Sam , thank you so much for joining me today . This was one .

34:06

Awesome . Thanks , evan , this has been great .

34:10

Thanks for listening to this episode of the Canadian

34:12

Money Roadmap Podcast . Any

34:14

rates of return or investments discussed are

34:16

historical or hypothetical and are

34:18

intended to be used for educational purposes

34:21

only . You should always consult

34:23

with your financial , legal and tax

34:25

advisors before making changes to your financial

34:27

plan . Evan

34:29

Neufeld is a certified financial planner and

34:32

registered investment fund advisor . Mutual

34:34

funds and ETFs are provided by Sterling

34:36

Mutuals Inc .