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Applying Personal Finance Principles to FIRE

The subject of FIRE (Financial Independence Retire Early) has captured the imaginations of many.  Some love it and some hate it, because it’s a good strategy for some and not others.  Many variants of FIRE have evolved over time to suit people’s different needs and desires.  This makes it hard to speak generally about FIRE, but there are principles that we can use to judge a particular FIRE plan. Here is a general personal finance principle: Don’t cheat your future self by indulging your present self. The fact that we tend to discount the future too much makes this principle difficult to follow for some.  Roughly speaking, this principle means you should plan for your future consumption to match your current consumption.  In some cases, a carefully thought out plan can have some higher consumption in the present than in the future.  The key here is having a sensible plan rather than just living for today and ignoring the future. FIRE enthusiasts don’t have ...
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Should Young People Invest 100% in Equities?

Another great question David Chilton, The Wealthy Barber, asked me on his podcast is should young people invest 100% in equities?  Opinions on this point change with the times.  In the late 1970s, popular opinion was that it was crazy to put any money at all in the stock market.  By the late 1990s dot-com bubble, people believed that stocks were the path to great wealth. Stock markets have been performing very well for a long time, so it’s not surprising that popular opinion favours stock investing today.  Ironically, investing 100% in stocks is best when popular opinion is against stocks.  At today’s elevated stock prices, the case for 100% stock ownership is weaker than it has been in most of the past. But this doesn’t mean that investing in stocks today is a bad idea.  It just means that expected future returns are lower than usual, and the odds of a stock crash are higher than usual.  But if you can hold for the long term, you can ride out the sho...
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The Value of Delaying RRSP Withdrawals

We’ve heard that melting down an RRSP early can be valuable when it lowers your future tax rate on RRSP withdrawals later in retirement.  But we’ve also heard that delaying RRSP withdrawals so the RRSP can continue growing tax-free is valuable.  But not everyone agrees that longer tax-free compounding is valuable.  Who’s right?  Let’s dig in. We can make mistakes when we try to measure the value of some portfolio choice in isolation.  We have to consider all of its effects to draw a correct conclusion.  Here’s an example: Scenario 1 (RRSP meltdown) : You withdraw an amount M from your RRSP today.  If your average tax rate on the withdrawal is T, you get to keep M(1-T). Scenario 2 (no RRSP meltdown) : In a second scenario, you delay RRSP withdrawals for a decade.  Your RRSP grows by a factor of R in that decade, and you withdraw MR then.  If your future average tax rate on that withdrawal is U, you get to keep MR(1-U). It’s important to note t...
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RRSP vs. TFSA vs. Paying Down Debt

When Canadians have some money available, a big decision they face is whether to invest it in an RRSP or TFSA or to focus on paying down debt.  Dave Chilton, The Wealthy Barber, asked me how I thought about this choice on his podcast .  Here I give a fuller answer to his question. This is really two separate questions.  The first is whether to invest savings or pay down debt.  The second is whether to put savings you’ve decided to invest into an RRSP or a TFSA. It never makes sense to invest ahead of paying down high-interest debt.  We could make a case for starting to invest a little, just to start the habit, but paying down high-interest debt should be the initial priority.  This leaves the question of whether to invest or pay down your mortgage. Invest or pay down your mortgage A popular answer to this question is that you expect to make about 7% per year on your investments, but your mortgage is only 4%, so you should always invest.  This is right ...
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Cognitive Decline and Your Finances

One of the talking points of financial advisors is that even if right now you’re able to handle your own investments, tax planning, and other aspects of personal finance, you may face cognitive decline later in life.  The implication is that maybe you should get a financial advisor now before it’s too late. The challenge here is that many people who hold themselves out as financial advisors are little more than sellers of expensive mutual funds.  Some might even be inclined to take advantage of your cognitive decline to churn your account and generate excess fees. What you may need is a good financial advisor.  Some financial advisors are excellent.  They range from those who charge by the hour for advice only to those who manage your investments directly for you.  However, if you’re in cognitive decline, it won’t help to just get the occasional portfolio checkup.  The advisor would have to directly manage your investments.  But it’s hard to get this ...
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How I Handle High Stock Prices in My Portfolio

The best way to respond to stock market news is usually to ignore it.  This is (almost) what I do.  The exception is that I make small adjustments when stock prices are very high.  David Chilton asked me about these adjustments when he interviewed me for his podcast .  Here I give a fuller answer to his question. I hesitate to talk too much about this part of my portfolio plan, because it is a small step toward market timing, and investors get themselves into a lot of trouble with market timing.  I once described how I handle high stock prices to a friend, and he responded by selling all of his stocks.  The change in my own stock allocation percentage was barely noticeable, but he had gone to zero, mainly because I caused him to think about high stock valuations.  This was definitely not the outcome I wanted. Most sensible people avoid market timing.  I used to be one of them.  But I realized that I was against market timing unless something ...
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RRSP Meltdown

People who have savings when they retire are faced with tough choices for how to spend their money to get the most out of retirement.  Their instincts to try to preserve their savings often leads them to mistakes such as living too small, overpaying their taxes, and not getting the most they can out of CPP and OAS. The common investment accounts retirees have are RRSPs, LIRAs, TFSAs, and taxable (non-registered) accounts.  Trying to figure out which accounts to draw from is already a complex problem.  To add more complexity, retirees might have a workplace pension, a possible inheritance, income from part-time work, and face decisions on when to start drawing CPP and OAS.  Fortunately, it’s not important to come up with a perfect plan.  What you need is a good plan that isn’t too far from the best possible. It’s not possible to go through all combinations of retirement scenarios in a single article.  Instead, I’ll discuss how some good savers go wrong in re...
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