I don't know about you, but retirement can feel like it's a world away.
And retiring early? That's a whole other universe – something not even attainable in our dimension.
But an increasing amount of people are desperately trying to make early retirement a reality – and some of them have actually achieved it.
The reaction to this movement hasn't been entirely positive, to say the least. It even earned criticism from several high-profile personal finance writers, including Canada's very own Rob Carrick. He has been more level-headed than others, suggesting a "balanced approach" where you simply employ active saving for the future, while still enjoying yourself in the present.
So what is it about FIRE that has attracted so much criticism? And is there anything to love about it?
Let's check out:
- what the FIRE movement is,
- if the average Canadian can realistically retire early, and
- my response to some pro-FIRE arguments.
What the heck is the FIRE movement?
FIRE stands for Financial Independence, Retire Early. The basic premise is to cut down your spending (aiming for about $30,000 a year), invest what you save (in index funds and retirement savings), and retire early in 10-15 years.
Some Canadians have made the lifestyle change. Take Toronto couple, Kristy Shen and Bryce Leung, for example, who retired at 31 and are now travelling the world on $40,000 annual investment income.
There's also Mr. Money Mustache (known as MMM), a driving force behind the FIRE movement's recent expansion into the spotlight. He's Canadian born but now living in Colorado.
Think you can make the change? Or are you still wondering if it's even possible?
Can the average Canadian realistically retire early?
Let's look at some numbers.
Retirement age in Canada
According to Stats Canada, the average age of retirement for Canadians has been increasing for over a decade now – 61.6 in 2000 and 63.8 in 2018. This is a bit lower for public sector employees, higher for private sector, and higher still for self-employed Canadians.
These numbers all conflict with the FIRE movement's devotion to retiring in your 40s and even 30s.
Retiring 20 to 30 years early...is that even possible? You're effectively doubling the amount of time you'll spend in retirement.
How much money do I need to retire in Canada?
There are lots of rules of thumb out there for figuring out how much you need to retire.
Usually they involve taking the amount of money you want to live on per year, then times it by 25. So if you want to live off of $30,000 a year, you'll need $750,000 saved up. This corresponds with a 2018 poll of Canadians who came up with the magic number of $756,000.
But with FIRE, you need enough to get you through 40-50 years of work-free living...So do you need to double this magic number?
No, not according to the FIRE gurus. This is where your investments come in.
And how much do I need to retire early in Canada?
Mr. Money Mustache uses the example of a $1mil retirement savings – $500,000 in taxable accounts (high-interest savings, for example) and $500,000 in your RRSP, CPP, and TFSAs.
You need the first $500,000 for when you're at prime early-retirement age, so around 35. Then you'll start withdrawing your earnings, leaving the principal as is.
Assuming 4% after-inflation stock market returns and a yearly withdrawal of $30,000, MMM calculates you can survive off that money for 23 years.
Meanwhile, your retirement investments in your RRSP and other accounts have accumulated much growth. Once you finish off the first $500,000, you can start relying on the second lump of money which has grown to $1,200,000 (assuming a 6%-7% return).
How long will it take me to save that up?
Assuming your partner is equally committed and you both make the average Canadian salary of $51,000 per year, spending $30,000 of that – it'll take you 13.8 years to save $1,000,000. This, of course, doesn't factor in the compound interest you'll be earning as you save.
$102,000 - $30,000 = $72,000 yearly savings
$1,000,000 / $72,000 = 13.8 years
Is it even possible to live off $30,000 a year?
The average Canadian household spending on goods and services is $62,183 – so the average Canadian would have to cut spending by more than half. With the rising cost of living, especially in Canada's biggest cities, this could prove very difficult – maybe even impossible.
Think about your own budget. Do you think you'd be able to make this cut?
This all sounds too good to be true...
You're far from alone in thinking this.
In fact, Mr. Money Mustache replied to a few of the common criticisms...but I've got something to say about his responses too.
His claim: there are no downsides to the FIRE movement
If you think there is even the slightest flaw with the ideas behind FIRE, you're probably just not understanding it correctly.
This is by far the weakest argument he made, and for some reason he put it first in his list of rebuttals.
Of course there are downsides, there are downsides for everything. Just because you can make them seem positive doesn't mean they aren't downsides.
It'll be hard to change your lifestyle completely, live off less than you were before, and learn which sacrifices you're willing to make. Those are downsides – they may be worth it, assuming things work out, but they'll be hard nonetheless.
His claim: It doesn't matter how much money you make
[The ideas of FIRE] work even better, the further down the income scale you go.
His argument is that someone earning $200,000 a year will find it harder to change their expensive lifestyle than someone living on $20,000. The less you make, the more used to saving and being frugal you are.
But that doesn't erase the fact that the upper class make more. If they change their spending habits the same way someone in the bottom bracket does, they're much farther ahead already.
His claim: FIRE isn't really about early retirement
Everybody uses the FIRE acronym because it is catchy and "Early Retirement" sounds desirable. But for most people who get there, Financial Independence does not mean the end of your working career. … Early retirement means quitting any job that you wouldn’t do for free — but then continuing right ahead with work in something that works for you, even when you don’t need the money.
This is a realistic response that actually paints the FIRE movement in a good light – while also admitting that a lot of its fame is just successful marketing.
If FIRE was about quitting the job you hate to work for minimum wage at something you love, then it makes sense. There's more to life than chasing higher paycheques.
But it goes against the claim that your investments will be enough to support you until you can withdraw your retirement funds. And...well, basically all other claims of FIRE. Can you really become financially independent if you don't make thousands of dollars from your blog after retirement?
His claim: You can be happy on ANY level of spending
Happiness is your goal in life, and it comes from meeting certain core human needs. The thing is, that there are many ways to meet each of these needs — some of them free and some of them shockingly expensive.
I'm all for living below your means, but there are certain realities that come with not making that much money.
So yes, you can be happy even if you cut down your spending, but it's hard to be happy on any level of earning – and the two often go hand-in-hand. If you earn less, you spend less...but does this make you any happier?
His claim: It doesn't depend on a booming stock market
Our uninformed opponents think that FIRE-style early retirees are extra vulnerable to [market crashes]. But in reality, it’s just the opposite: we are on a safe island, far above the choppy seas of the everyday economy.
His response to the concern that you'd be extra vulnerable to a stock market crash is that FIRE-devotees know how to get by on little funds...but he fails to address the fact that he suggests to put up to 2/3rds of your earnings in investments.
This would be a major blow, no matter what way you look at it.
And it does depend on a booming stock market because you need to be earning a return on your investments in order to live on your first $500,000 for 23 years. Maybe you'll learn the skills to live on less than you think you need, but in a crashed economy, FIRE wouldn't work. Period.
His claim: Education, health care, and high cost of living areas are tiny obstacles
The potentially costly monsters mentioned above are simply things that cost money. So if you get better at managing your money, do you think these problems will loom larger, or smaller, in your life?
Not everything is surmountable. If you don't make enough to afford these things, then you don't make enough. This seems like something he can't even fathom, let alone factor in his equation.
His claim: You're just scared to try
His response seems backwards – isn't FIRE supposed to make us perfectly capable of handling anything? After all "health care" is just a "comically tiny" obstacle. But here he wants you to ignore what could go wrong...because it might not.
I'm all for optimism, but there needs to be some sort of realism in the mix. If your entire system of sustaining yourself depends on things going at least somewhat smoothly, you'll be in for some very hard times if something bad happens – no matter how low the possibility.
It may seem like I completely disagree with everything Mr. Money Mustache has to say, but that isn't the case. I agree on many things:
- you can get by on less than you think you can,
- it's important to re-evaluate your spending to see where you can cut down without sacrificing your happiness,
- it's important to save for the future.
But despite the strong allure of "early retirement," it just seems too good to be true. And though it might be true in some cases, this lifestyle clearly isn't for everyone.
And the worst part is, his actual teachings are covered up by this seemingly unrealistic dream. It's not really about early retirement – it's about being happy with what you have, and learning that you don't need a whole lot.
You can work an entry-level job with no degree and get by just fine. That's inspiring!
Promising early retirement is just far-fetched and unrealistic for many people.
But this is just my opinion
And it can work for some people if you're making enough to sustain yourself.
Have you guys been paying any attention to the FIRE movement? How do you feel about it?