Can Brandon and Michelle achieve financial independence in six years?

Amber Bracken/The Globe and Mail

Inspired by the FIRE movement, Brandon and Michelle – both in their mid-30s – have built a collection of income-generating properties and dividend-paying stocks that they hope will soon free them from having to work. FIRE is characterized by excessive saving and investment, and stands for “Financial Independence, Retire Early”. It helps if you get a good income.

Brandon earns $127,000 annually in addition to employer pension plan contributions, while Michelle earns $92,000 annually. Their combined combined career income is $238,000.

Michel has a defined benefit pension plan that is partly linked to inflation. They have two children, ages one and three.

Their ambitious goal is to “become financially independent, and not dependent on income from work, before the age of 40,” Brandon wrote in an email. Ideally, they can live off their earnings and income from rentals. Perhaps their most realistic goal is to have enough income from rents and dividends to allow them to work part-time — “resulting in about 50 percent of current wages” — within five years or so, Brandon wrote.

The retirement spending goal is $120,000 a year. Achieving this at half the salary will be a challenge.

When can our passive income cover our expenses? Brandon asks.

We asked Matthew Ardry, Vice President and Portfolio Manager at TriDelta Financial in Toronto, to look into Brandon and Michelle’s situation. Mr. Ardrey is a Certified Financial Planner (CFP), Registered Advanced Financial Planner (RFP) and Certified Investment Manager (CIM).

What does the expert say?

Brandon and Michelle are looking to withdraw from full-time employment in mid-2028, says Mr. Ardrey. “Before engaging in what may seem like pipe dreams to many Canadians in their mid-30s, they want to make sure they are on a secure financial footing,” the chart says.

In addition to their main residence, they have four rental properties. They are also renting an apartment in their home. Their rental properties generate $1,100 per month, net of all expenses including mortgage payments, and the unit in their home is another $1,600 per month. Brandon earns $400 a month managing a relative’s rental property.

Ardrey says the dividend yield from their unrecorded accounts is about $2,500 annually. Brandon’s $15,000 contributions from his employer will go to a defined contribution retirement plan. In addition, they maximize their tax-deductible savings accounts and contribute $2,500 per child to their registered educational savings plans each year. They do not have an unused contribution room in their registered plans.

“After all that savings and spending, they still have a surplus of $50,000 a year, which they put into unrecorded savings,” the planner says. Presumably they split this surplus 50/50 to increase tax efficiency. “That amount is growing annually at an expected rate of 4.9 percent until they reach half-retirement age and have to use part of it to supplement their lower income,” Ardrey says. The inflation rate is expected to reach 3 percent.

In the middle of 2028, it is assumed that Michelle and Brandon reduced their work by 50 percent. Brandon will be 39, and Michelle 41. Brandon’s bonus and employer contributions to his DC plan. Michelle’s pension contributions to DB are halved. Brandon is supposed to maximize his RRSP each year based on 50 percent of his current salary.

After adjusting for inflation, Brandon will make $78,000 a year and Michelle $56,000. They will receive $3,000 in dividend income, $6,000 in property management income and a total rental income of $93,000.

At the same time, the chart says, their spending is expected to increase. “They feel that in another five years, things will be exponentially more expensive. Also, less work will create more free time and increase expenses. So, they asked us to estimate spending $10,000 per month starting with half of retirement in 2028 and continuing thereafter, Adjusted for inflation.”

They would still be about 17 years away from full retirement. They continue to work part-time until Michelle turns 58, when she can receive an unreduced pension. “At this point, we’re assuming they’ve gone into full retirement,” Mr. Ardry says. Michelle will be entitled to a retirement pension of $37,845. Her pension is capped at 60 percent for inflation, or 1.8 percent.

In his first full year of retirement, Michelle’s pension will have been slightly increased to $38,526, property management income of $10,000 and total rental income of $154,000. The mortgages will be paid off.

At age 65, they will start collecting Canada Pension Plan benefits (estimated at 70 percent of the maximum) and full old-age insurance. “Under these assumptions, they meet their retirement spending goal of $120,000 per year after taxes,” Ardry says.

“However, when we test the scenario in a Monte Carlo simulation, their probability of success drops to 77 percent, which is a ‘fairly likely’ range for retirement success,” he says. A Monte Carlo simulation is randomized to a number of factors, including returns, to test the success of a retirement plan. For a program to be considered a “likely to succeed” plan, it must have at least a 90 percent probability of success.

“Given their portfolio creation, it’s great for accumulation, but the volatility inherent in an all-share portfolio is less desirable for withdrawals,” says Mr. Ardrey. They have a portfolio of exchange-traded funds with a geographic distribution of 55 percent in the United States, 25 percent internationally, and 20 percent Canadian.

As they near half-retirement, Brandon and Michelle could benefit by diversifying their portfolio by adding some non-traditional income-producing investments, such as private REITs that invest in a large and diversified portfolio of residential properties, or perhaps in specific areas such as wireless network infrastructure , especially in the United States, the chart says. Such investments are not affected by the ups and downs of the financial markets.

“By diversifying their portfolio, we estimate that they can add at least one percentage point to their overall net return — bringing it to 5.9 percent — and significantly reduce the volatility risk in the portfolio.” In conclusion, Brandon and Michelle are on the right track to achieving something that most Canadians can only dream of, “semi-retirement in their early forties and full retirement before 60,” says Mr. Ardrey.

customer case

People: Brandon, 33, Michelle, 35, and their two young children.

the problem: Can they achieve financial independence in six years, allowing them to work part-time while spending $120,000 a year?

the plan: Keep saving and investing. Go part-time in 2028 and fully retire at 58, when she gets her pension. Add some non-traditional income-producing assets to their investments as they approach retirement.

Yield: Plenty of vacation to reap the rewards of their hard work while they’re still relatively young.

Net monthly income from business: $13,910

Origins: cash $14,000; Exchange traded funds $100,000; US$153,000 TFSA; $127,000 has a TFSA; $154,000 from RRSP; $44,000 from RRSP; The market value of his capital pension is $188,000; The estimated present value of her defined contribution retirement pension is $125,000; Registered Education Savings Plan $46,000; rental units $915,000; Accommodation $605,000. Total: $2.47 million

Monthly expenses: residence mortgage $1,700; property tax $385; Water, Sanitation, and Trash $145; Home insurance $70; Electric and heat $255; maintenance $200; Transportation $435; Grocery $900; Childcare $415; clothes $230; Charitable Gifts $375; vacation, travel $300; Dining, beverages, and entertainment $555; Personal Care $50; pets $80; Sports and Hobbies $30; Medicare $75; Communications $130; DC $1000 pension plan; RESP $415; TFSAs $1,000; Her contribution to her DB pension plan is $1,000. Total: $9,745. Surplus $4,165

Liabilities: residence mortgage $428,000; Rental mortgages $707,000. Total: $1,135,000

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