Not a new movement
By saving up to 70 per cent of their income some years, Shen and Leung grew their portfolio to a tidy $1 million in less than 10 years and decided to officially retire in 2015.
They live off $40,000 a year and spend their time travelling and writing. Although they’ve spent the pandemic in Toronto, the couple says they’re eager to get back on the road, where retirement is often cheaper — especially compared to one of Canada’s most expensive cities.
However, proponents of the FIRE movement weren’t the first to spark the idea of early retirement. Many Canadians over the age of 30 will remember insurer London Life’s “Freedom 55” commercials, which featured miserable office workers visiting their future selves in an idyllic setting.
London Life’s ads sold a whole generation on what retiring young could look like. The trouble, financial advisors say, is that selling something to Canadians was the whole point.
“It was a sales pitch,” says Jason Pereira, partner and senior financial consultant at Woodgate Financial Inc., in Toronto. “The reality is, even back then, the joke was it was the advisor on the boat, not the actual client.”
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Planning is harder than ever
In fact, the first retirement plans didn’t bank on many citizens making it to retirement age. Otto von Bismarck, Chancellor of Germany, rolled out his radical idea of caring for citizens when they were too old to continue working in 1881. However, many Germans still worked until they died — especially when you consider the retirement plan only kicked in at age 70 and German life expectancy at the time was under 40.
Canada’s history with pensions is not nearly as long, but Pereira says its foundation was also rooted in caring for citizens who could no longer provide for themselves.
“And that has slowly evolved into this vision of leisure and fulfillment. And that is a very new and modern construct,” says Pereira. “That's fine, except if you adjust the retirement age for mortality gains since [Otto von Bismarck’s time], pensions wouldn't pay out until you’re into your mid-90s.”
That’s why, Pereira says, many pensions are going broke these days. And Canadians will increasingly have to rely on themselves to fund the last few decades of their life.
“Retirement planning used to be simple,” says David Trahair, a personal finance trainer and author in Toronto. “In the old days, you'd work for the same company for say, 30 years, and you’d retire with a defined benefit pension plan guaranteeing you money for the rest of your life. You didn't have to worry about RRSPs or investing.”
The generational divide is widening
With only themselves to rely on, many younger workers like Shen and Leung are looking for ways to make their portfolios work smarter rather than harder.
Since they retired six years ago, they say their portfolio has grown to $1.8 million.
“It's not just about putting a bunch of money into a bank account … it's about investing it properly, and in a way that ensures long-term growth,” says Leung.
What would worry advisors about Shen and Leung’s portfolio is that a major downturn in the market could see their portfolio taking a huge hit. That could force them back into the workplace after a decade’s absence, and with outdated skills.
But Leung says he and his partner don’t worry about their financial future.
“We're now finding that because our living expenses haven't grown in the past five or six years, but our portfolio has, we're now projecting that if it keeps doing this kind of thing, by the time we’re 80 or 90, it'll be like $10 or $15 million.”
“So no, I'm not concerned about that at all, in fact, by then the problem will be how I spend all this before I go.”
Financial advisors, on the other hand, are cautious creatures and they don’t like to bank on everything going the way it always has. And once you factor in longevity risk, Trahair and Pereira would caution their clients to avoid giving up their prime earning years as it can have serious consequences far down the road.
Beyond that, both advisors argue that work helps give people meaning and structure in their lives.
“The key to everything is balance,” says Trahair. “You don't want to be a workaholic who works 120 hours a week with no social life, right? But you don't want to be unemployed. You want to be somewhere in the middle.”
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No magic in personal finance
Saving for retirement is all about delaying gratification. But one of the hardest questions in finance is when is the right time to be gratified. And advisors would caution against looking for easy solutions to these complex issues.
“There's no magic in personal finance,” says Trahair. “People make money off putting out something that seems magical … like the latte factor. I'll just skip a cup of coffee every day, and you get rich. But the math doesn't work — unless you’re having 17 lattes a day.”
While Pereira acknowledges that there are some thoughtful people in the early retirement community, many oversimplify complex financial considerations and are locking themselves in to a lifestyle that may no longer work for them when returning to work is no longer an option.
“Understand that it's one thing to settle for less when you're in your 30s ... it's something else to be forced to settle for less when you're in your 70s.”
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