The words “retirement” and “trendy” don’t often go hand in hand. But the FIRE movement in Canada is a method for early financial independence that's surged in popularity in recent years.
If you follow it right, and you're prepared for some tradeoffs — you could end up retired years or even decades before you thought you would.
What is FIRE?
The FIRE method (Financial Independence Retire Early) aims to get you to a comfortable retirement far earlier than the normal age of 65 or so.
Unless you're already a millionaire, it'll require some diligent saving for retirement. It works by socking away as much money as you can, as early as you can, so you can cover your living expenses with the dividends from your stock market investments without having to work.
Usually, that saved money goes into long-term, low-yield, low-volatility investment account, like a selection of ETFs and index funds. Then, due to the magic of compound interest, that account will hit a critical mass.
At that point, FIRE investors can withdraw enough to sustain their lifestyles each year, without making much of a dent in the fund’s capital (base amount before interest).
There are different types of FIRE, like LeanFIRE, FatFIRE, BaristaFIRE, and SmokeyBBQFIRE (okay, I made that last one up). They all boil down to cutting back on indulgences for the reward of early retirement. But they vary in how extreme they are.
LeanFIRE adherents live an ultra-spartan lifestyle, focused getting to financial independence ASAP. Some LeanFIREers have retired in their mid-30s.
FatFIRE devotees allow themselves a few more pleasures, and are okay with delaying the full rewards for a few years. If they start early enough, they could get there in their 40s or 50s.
BaristaFIRE investors have the goal of semi-retirement, and are fine with — or even prefer — to work part-time when they’re older. If you enjoy your work, or can comfortably scale it down in old age, this might be your best bet.
Whether you choose to follow FIRE — and if so, which type you choose — will depend on how early you want to get to financial independence, and how much you’re willing to give up right now.
How does FIRE compare to the “normal” Canadian retirement?
Most Canadian seniors’ retirements involve the Canada Pension Plan (CPP). You and your employer each pay 5.7% of each paycheque over the course of your working life, and you get that money when you retire. (For freelancers, you have to pay both the employer and employee CPP contributions for anything you make over $3,500 in a year. The total rate for 2022 is 11.4%).
But the earliest age you can start taking CPP payments is one month after your 60th birthday. So we can’t factor that into the FIRE method, since the goal is to retire much earlier than that.
That is, unless you’re practicing a mild version of BaristaFIRE. At that point, the line between FIRE and “saving some money” gets pretty blurry. And if you’re content to work part-time in your 60s, you should delay taking CPP payments until age 70, when they’ll be much higher.
Keep in mind that if you retire at 35, you won’t be paying into CPP at all, which is a risk you have to be okay with.
CPP is sometimes combined with Old Age Security (OAS) payments, a supplementary pension plan for low-income Canadians over 65.
The final part of retirement is your own savings and your company’s retirement plan, which, unfortunately, we can't explain.
Key considerations before choosing the FIRE lifestyle
To get the aggressive savings you need to retire early, it’ll come with a few tradeoffs.
How much are you willing to give up?
This is the first question most people have about FIRE. Many of us save money every month. Maybe you even max out your employer RRSP contributions (good for you!). But are you willing to make a more drastic change for the promise of early retirement?
Are you a big foodie, or are you fine with eating simply? Depending on which FIRE method you go with, you may have to give up eating out almost entirely. And when you do, prepare to think about how much cash that bill could have turned into in 20 or 30 years.
The same thinking can be applied to fashion, cars, housing — anywhere you can feasibly cut costs. It’s a question of values here, and there are no wrong answers.
How will your partner handle this?
If you share your life with someone — never mind your finances — you’re going to want to discuss this decision with them. Even if their bank account won’t be affected by your FIRE journey, it’s not exactly fun to share a bed with someone eating rice and beans three times a day.
Do you have kids? Will you have to scale back on Christmas gifts, or after-school programs?
Do you split groceries? What if they want to grab a carton of ice cream, but you’re willing to let it go to get to FIRE sooner?
Are you going to cancel any planned vacations? What about future ones? Maybe your partner would rather maximize their time on beaches now, while they’re not old and wrinkly.
Seemingly basic questions that you settled long ago may need to be rethought if you’re going to embark on this journey.
How old are you, and when do you want to retire?
Compound interest is a magical thing. A few paycheques invested early in life can turn into a down payment on a Florida condo in retirement. But the greatest returns come in the longest time frames.
If you’re childless, single and in your 20s, it’s a great time to start FIRE. Your expenses are likely lower, and while you’re probably not making as much money as you will later in life, you can live cheaper than people with families to support. Want to retire at age 45? Poke around a few investment calculators — you might be surprised at what’s possible.
If you’re middle-aged, the fact is that FIRE will be more difficult. But it’s far from impossible! Many FIRE investors started in their 30s or 40s — or even later — and achieved their financial independence dreams. If you’ve always assumed you’d retire at age 65, moving that up by a decade could be very appealing.
Don’t forget — you not only need to decide when to retire, but what you want out of retirement — will you be living it up in Ibiza, or travelling Southeast Asia in a camper van? Will you work part-time, or not at all? Different retirement plans will require different spending levels that your investments will have to sustain.
How to tell if FIRE is right for you
If you’re not willing to give up any luxuries you currently splurge on, you can rule out FIRE. But if that’s you, you probably stopped reading in the intro.
Also consider whether you have the job for FIRE right now. If you’re just making ends meet as it is, it might be hard for you to find fat in your budget to cut, and you might not be able to save enough for financial independence.
FIRE is about more than throwing money into an investment portfolio whenever you can. It’ll require a plan for how much you can cut back and where; how much to save; where to invest it; and for how long.
If you’re not the budgeting type, try keeping track of your income and expenses for a few months before jumping into FIRE.
And think about your current debt, and whether you can pay it down quickly. Debt — especially if it carries high interest — is a common barrier to the FIRE lifestyle, as investing money usually won’t generate a larger return than the financial drain of debt.
Finally, think about the other people in your life. Will they learn to live with a more minimalist version of you, or will their happiness be drastically affected by your decision to spend less?
Frequently asked questions
Have any Canadians retired early through FIRE?
Yes! There are countless examples of Canadians who have retired early through diligent saving and smart, low-risk investment. Personal finance blogger Peter Adeney — a.k.a. Mr. Money Mustache — retired at 30 by following FIRE principles.
Waterlooers Kristy Shen and Bryce Leung of the Millennial Revolution blog retired at 31 and 32, respectively the same way.
What is the 4% rule in FIRE?
As a general rule, it’s safe for many FIRE investors to retire when they have a large enough portfolio to sustain their spending habits, adjusted to inflation — which often comes out to about 4% of their portfolio’s starting value.
But the rule isn’t perfect and has been criticized for being too simplistic. Investment company Vanguard notes that it was designed for investors with a 30-year retirement window, whereas many FIRE devotees may be looking at 40 or 50 years.
Is retiring early a good idea?
The unsatisfying answer is: it depends! If you have the time and the willpower to live well below your means for a decade (or a few), and being freed from the shackles of working life sounds so appealing that you’ll downgrade your quality of life in the meantime to get there sooner, then FIRE might be for you.
Most importantly, you’ll have to come up with a plan that will allow you to responsibly — and without alienating your loved ones — save enough money to gain financial independence. Once that’s done, you’re well on your way.