physician-financial-cpas

What is FIRE? (Financial Independence, Retire Early)

umer@physicianfinancial.ca (Umer Adil) — Sat, 23 Mar 2024 18:35:11 GMT

All you need to know about FIRE.

So you've heard about FIRE and you'd like to learn more. Here is a quick run-down of what you need to know.

FIRE prioritizes achieving financial independence early to retire well before traditional ages.

Who is it for?

Fire is more than just a financial or investing strategy. It's a lifestyle philosophy that has gained substantial popularity among those looking to achieve financial freedom before the traditional retirement age. Here is who its for:

Motivated to retire early: FIRE Is appealing to individuals looking to retire in their 50's or even sooner.
High discipline savers and investors: Since FIRE requires significant discipline and putting away a large portion of your income, you need consistency over a long period of time.
Able to start saving and investing : You need to pay down high-interest debt so you can begin to save a significant portion of your income.
Advice for early-career MDs: If you are early career, especially with a large student loan and in a high-cost-of-living city, you may need to focus paying down the debt by maximizing your income (e.g. through loan forgiveness in certain areas, rural service, additional side hustles).

How to get started on FIRE?

Here are a few easy tips for getting started:

Assess Financial Status beginning with a a budget, and calculating your net worth (feel free to ask for our complimentary budget worksheet to help!)
Set Clear Goals including age for reaching financial independence, and how much you will need (if you're not sure, book a call with us to discuss!)
Create a High Savings Target . For FIRE, this usually sits between 50% to 70% of your income.
Invest Wisely by picking diversified index funds such as VGRO, VEQT, XEQT, etc. depending on your time horizon and risk preferences.
Live Frugally and plan every major purchase as well as things like dining out and grocery spend.
Generate Additional Income by pursuing a side hustle like consulting.

What works well:

FIRE can be a helpful strategy for many individuals because it does many things well. For instance:

Accelerates Financial Independence : By making you more mindful and strategic about your financial situation, it can help you accumulate assets faster.
Creates Accountability by forcing you to set goals and defining them in tangible ways.
Encourages a Minimalist Lifestyle which can lead to a more sustainable life vs the consumption driven lifestyle that has grown over the past few decades.

Common Criticisms

FIRE can't work for everyone. For instance:

Requires high income: To be able to save 50% or more of your income, you need a high income, and that makes it inaccessible for many lower income practitioners, especially when in HCOL cities.
Market dependence : While you can take all the right steps, a market or economic downturn can affect your returns.
Quality of Life concerns : The high levels of saving and frugality can diminish quality of life, social interactions and opportunities like family vacations with kids while they are young.
Potential for shortfall: There is always a chance that savings may not be sufficient to cover your expenses if you have a longer than expected lifespan or unexpected expenses.

Putting it into Practice

Set a target for timeline and know when you would like to achieve financial independence
Determine your financial needs and have a clear financial goal to reach your target
Pay down high cost debt, especially when it exceeds your expected return in market
Save aggressively, from 40% to 70% of your income each month life a disciplined lifestyle
Avoid splurges like sports cars and other lifestyle inflation purchases
Build your financial acumen and become involved in financial decisions
Invest in ETFs with low management fees, while also offering international and sector diversification
Continue to refresh your portfolio and monitor it atleast on an annual basis (ideally quarterly)
Do not let economic downturns or slumps detract you from your long term goals and do not try to time the market
When you reach your retirement goals, you can safely withdraw up to 4% of your retirement portfolio each year in retirement, without running out of money for atleast 30 years. For example, if you have a $5,000,000 portfolio, at 4% you can safely withdraw $200,000 per year for living expenses.
The 4% rule is considered aggressive by some for longer retirement periods. You can adjust the withdrawal rate to 3% for extra cushion.

Will I leave anything to the family?

Depending on how long you withdraw from the portfolio, and the return it is earning, you may still be able to leave a sizeable inheritance to your family.
The goal s hould be to withdraw at the same rate, or at a lower rate than the real rate of return for your portfolio.
Estimates for global diversified equities range from 6% at an optimistic level, vs 3% for a conservative estimate (adjusted for inflation).

Conclusion

FIRE is a compelling approach for those seeking early retirement and financial independence through disciplined saving, investing, remaining frugal and fighting lifestyle creep. It can work well for MDs willing to make significant lifestyle choices to achieve financial freedom.

However, it's also important to consider the potential challenges and criticisms of FIRE, including its feasibility, the risks associated with investment dependence, and the impact on current quality of life.

How much money do you need for financial independence?

umer@physicianfinancial.ca (Umer Adil) — Tue, 05 Mar 2024 14:47:24 GMT

It Depends.

To understand how much you need to retire, you need to know how you want to live. It's important to consider the following factors:

How much do you want to spend on a monthly or annual basis?
Do you want to keep living in your home for as long as possible?
Do you want to drive newer vehicles?
Do you like to travel and is it on a budget or luxury vacations?
What do you want to leave your family or children?
Do you have any philanthropic wishes?
When do you want to stop working?
Do you have any preferences for asset classes? (e.g. ethical investing)

In addition, there are some factors not in your control, e.g.:

What is the state of inflation in the domestic and international economy?
Could there be "shocks" along the way (e.g. Covid-19 or 2008 recession) and how much contingency do you want to save as a percent?
Projected or expected returns on assets versus actual returns
Future changes in income, sales or other taxes that affect cost of living

Reality is complex and dynamic. Depending on your preferences, there is a wide range

W hat you can see from the points above is that there are many personal preferences, as well as macro-economic and political factors you want to consider when thinking about your future financial independence.

But how much will I need?

So lets start with a simple assumption.:

Financial planners typically provide ranges of 60-80% of your pre-retirement spending in retirement. Depending on your answers to the personal questions above, you should pick a range between these two estimates. More high-end choices mean staying closer to the higher end of the range.
Once you know the monthly spend, you can then apply a few assumptions: 3-4% for annual inflation, 10 to 20% for "contingencies" like pandemics or recessions, etc.
Then plug your monthly living costs into a present-value calculator to determine the cost of the cash flow on the day of your retirement. This is how much you want to have available.
If you have family, and children, you have to decide on whether you want to leave them an inheritance of a certain amount. Similarly, if you have goals for philanthropy, you need to account for them in your "retirement model" as well. Start by adding this figure to your required assets on retirement day.
Don't forget to account for taxes as you draw income from your registered and non-registered investments.

If you would like assistance with starting to put together a comprehensive financial model for your retirement planning, a good place to start is listing out estimated monthly or annual cost for everything you would like to do (e.g. annual trip to Europe, 3 months rental and living expenses in Florida per year, budget for dining at restaurants each month, monthly vehicle costs, professional memberships costs, etc.). If you would like a professional to help you put this together, we are always happy to help you put together a realistic model that helps you assess your financial situation and come up with a plan - just drop us a line .

Things may change or require tweaking along the way, but you will always benefit from having a well-quantified plan, so you know where things are at. It is never too early or too late to get started on having a strong retirement model and plan.

How to know when you need an accountant?

Sun, 25 Feb 2024 22:52:56 GMT

Choosing the right professional for dealing with your tax and financial plan is vital for protecting and growing your finances, wealth, family and retirement.

When considering hiring or changing your accountant, it is important to consider the benefits, risks, and mutual fit with the professional. It is also important to hire someone who can provide independent, professional advice without bias, and can help you learn, plan, and grow your own financial skillset.

Do you need an accountant?

So you've saved frugally and done your own taxes (or asked a parent or friend for help) during undergraduate and maybe even medical school or residency. And now you're wondering if you should hire accountant. How do you know it's the right time?

If it's costing you more than 4-5 hours a year to do your taxes, its usually time to get an accountant
If you are incorporated and have a CCPC (Canadian controlled private corporation), an accountant is a must-have
If you are wondering whether you need to file HST, spending time on figuring out payroll issues, or googling tax questions, its likely time to get an accountant

What are the the benefits of finding the right accountant?

The right accountant helps prevent your assets and wealth from over-taxation
Can support you through your career and practice growth
Can help you realize blind spots (you don't know what you don't know!)

What can go wrong if you don't have the right accountant?

Failing to optimize your taxes, reducing your lifetime take-home earnings
Not being able to analyze and take advantage of business or financial opportunities
Overspending on unnecessary services

W hat are red flags for an existing accountant?

Not knowing how much taxes to put aside or how you will pay your tax bill
Being pushed for services like incorporation when you are early stage, use all your earnings, and have no clear tax benefits from incorporating
Only hearing from them once a year at tax time
Only communicating by email and not offering you a chance to meet in person or by a video/virtual call to review your results
Being billed for services and fees you did not expect, or feeling the lack of transparency on fees
Does not get back to you within 24 to 48 hours after an email or voicemail
Provides inconsistent advice or does not explain the rationale clearly
Overly aggressive recommendations or being extremely conservative
Poor attention to detail and missing things or making mistakes
Causing you penalties or interest due to delayed filings
Not completing engagements in a timely manner
Not employing technology to help reduce time spent or your administrative burden
Does not remember your financial situation
Not coming to meetings prepared to help you
Does not take notes, asks insightful questions, or repeats the same questions
Lack of critical thinking and problem solving
They don't know what they don't know (and when to refer you to a tax lawyer or expert)
They fail to follow up after a meeting with you, or fail to keep their word

How can an accountant help you save time and money?

Accountants understand the Canadian tax code, which is complex and continuously evolving. You do not have time to take this on as a practicing professional.
Tax planning can help you save an extremely significant amount of funds by strategies like income smoothing, making incorporation vs proprietor decisions, and utilizing dividends vs salary.
They can help you set up processes and technology so that your tax returns are audit-ready in case CRA ever comes knocking.

What to consider when choosing an accountant?

Familiarity with your field : Experience with physicians is very helpful so try to look for someone who will understand your unique needs.
What sort of responsiveness do you expect? Ease of communication is extremely important, especially if you are already very busy. If you don't want to wait a week to hear back on an email, it's important to set expectations early on with your accountant.
Balance and match the risk vs reward : Someone who is too conservative will cost you higher taxes, but being too aggressive can lead to harsh penalties from the CRA. Its important to find someone who is balanced and aligned with your risk level, but can also counsel you to help you make key decisions.
Consider your current and future state and needs: How much help you do you need? Do you have a set of clean books, or do you even do your bookkeeping? Do you want to update your annual minute book and corporate renewals yourself?
Cost of services: Do you want someone who does everything after you email them your bank statements, or are you fairly organized? Do you have a lot of ad-hoc requests? What are the fixed fees and hourly rates charged by the accountant?
Frequency of advice : Are you someone who wants to meet and review your taxes once a year or do you rely on the accountant for advice and questions throughout the year?
Ongoing needs : Do you need help with bookkeeping, payroll and HST returns? Do your employees often have questions about pay or benefits, and who handles them? Do you need your accountant to sometimes step in?

It is important to consider the benefits and the risks of working with the right accountant. When you find the right professional, it is important to have a comprehensive discussion to review their services, costs, risk threshold, and expectations. Ultimately, if things work out well, you may be working with this professional for 20 to 30 years, or possibly even longer!