The situation
Francis, 38, arrived in Quebec in 2017 and earns a very good living as an engineer. However, he wants to leave his job soon to accept a job that he is really passionate about, but which pays little. He is now looking for solutions to be able to concentrate on his new job without worrying about his finances. He is interested in the FIRE (Financial Independence, Retire Early) method, which aims to radically reduce your expenses to save a lot of money, invest it, then retire early and live off its returns. Not counting his property, he wants to have 1 million in investments, then achieve an average return of 4% and live on around $40,000 per year. He hopes to get there in 2031, at age 45. Francis first wonders if his project is realistic.
Additionally, he wonders if he should pay off his mortgage to get rid of his debt and the risk of rate fluctuations. “But that would make my passive income totally dependent on the financial markets,” he notes. My other option would be to invest in real estate to diversify my passive income with rental income, for example by buying a chalet. But this would significantly increase my debt and expose me even more to rate fluctuations, in addition to having to manage the rental. What do you think ? »
The financial portrait
- Gross salary : $220,000
- Registered retirement savings plan : $75,000 (part comes from his employer)
- Tax-Free Savings Account (TFSA) : $48,300 (maximized)
- Unregistered savings : $127,000 and 38,000 euros
- Condominium : $499,000 (purchase price in 2021)
- Mortgage : $366,000 (fixed rate of 1.79% until 2026)
- Unused RRSP contribution room : $50,700
- Annual cost of living : $60,000
- Annual personal savings : $70,000
Advice
First of all, Hadi Ajab, independent financial planner and collective savings representative attached to PEAK Investment Services, would like to congratulate Francis. “It is certain that his salary is high, around $130,000 net, but we see that he has control over his expenses and excellent discipline, which allows him to save a substantial amount each year,” says -he. Francis is a good candidate for FIRE. »
Hadi Ajab also notes that more and more people are interested in this movement. “While traditionally, we aim for a savings rate of around 10 or 20% of the person’s gross income, with FIRE, we aim for between 50 and 70%, he explains. To achieve this, we do the opposite of what the majority of people do: we prioritize saving and then spending. »
Choose your investments strategically
Before seeing if Francis will be able to leave his job without fear in seven years, Hadi Ajab first suggests a few adjustments. Looking at Francis’s list of investments, he realized that he needed to better take tax into account. Because in his $127,000 of non-registered investments, more than $100,000 earns interest, such as guaranteed investment certificates, government savings bonds and certain types of funds.
“However, interest is 100% taxable,” emphasizes the financial planner. He could recover several thousand dollars by switching to investments that provide capital gains or dividends that are less taxable. If he values his investments that earn interest, he should have them in his RRSP or TFSA, since the amounts grow tax-free. »
Hadi Ajab sees another problem in the TFSA which contains American stocks.
Canada has a tax treaty with the United States that levies 15% tax on dividends from American sources, even if they are in a TFSA. It penalizes him. He would really benefit from reviewing his choice of investments.
Hadi Ajab, financial planner
This is all the more important since Francis has a negative return in his TFSA. “He arrived in Canada in 2017, so his contribution room is $48,500 and he maximized his TFSA,” notes Hadi Ajab. However, he has $48,300 in this account at the moment. He must choose investments that will allow him to have an average positive return, while respecting his objectives. »
Maximize your RRSP
The financial planner also sees that Francis has $50,700 in unused RRSP contribution room. “I invite him to use them now by dipping into his unregistered savings,” he said. This will allow him to greatly reduce his taxable income, so he will have a tax refund of approximately $26,000 in 2025 which he will also be able to invest in his TFSA and in his non-registered savings, taking tax into account. »
Currently, Francis has around $305,000 invested. With these strategies proposed by Hadi Ajab, he will have around $434,000 next year. “It’s significant and it’s important to do this cleaning to get off to a good start,” he says.
Realistic or not?
Now let’s look at whether the investment target for 2031 is realistic. First, due to inflation of around 2.5% per year, 1 million today will correspond to $1,190,000 in 2031. Hadi Ajab therefore suggests adding 190,000 to his objective.
“In his current situation, taking into account what the employer invests in his RRSP, I calculated that he can save approximately $86,000 per year by also reinvesting his tax refunds,” says Hadi Ajab. It therefore arrives right at $1,190,000 for 2031 with a return of 5%. »
However, if he has a return of 4%, Francis would have to be able to save $95,000 more during these seven years, therefore reducing his expenses by $9,000 per year. “I advise him to try to follow both strategies at the same time: aim for an average return of 5% and reduce his expenses to be sure to achieve his objective,” says Hadi Ajab.
Mortgage loan or not?
As for repaying your mortgage loan, there is no rush at the moment with a rate of 1.79%, in the eyes of the financial planner. But when renewing it in 2026, he advises him to compare the rate of the mortgage loan offered with what he obtains as an average net rate of return for his investments.
“So, if Francis has a rate of return of 5%, but half goes with taxes, he would therefore have 2.5% return left,” says Hadi Ajab. If your mortgage rate is 5% interest, then it might be wise to take out some of your unregistered savings to reduce your mortgage and then pay it off as quickly as possible. »
On the other hand, getting out of your investments to repay your debt more quickly will have an effect on reaching your goal of $1,190,000.
He may have to wait a few more years to reach that amount, but he will no longer be in debt. It’s up to him to decide which goal he wants to achieve first: FIRE or get out of debt?
Hadi Ajab, financial planner
When it comes to investing more in real estate to rent, the financial planner advises taking this question completely separately. “Francis will have to ask himself if he really wants to embark on this adventure,” he said. To see if it will be profitable, he will have to look at the purchase price of the property, his down payment, his monthly expenses linked to this property, his rental income once he has paid the tax, his expenses he will be able to deduct such as mortgage interest, etc. »
He will also have to consider that it will not be his main residence, so when he decides to sell it, part of the capital gain will be taxable. Finally, you will need to assess the impact of this purchase on your savings capacity.
“It is certain that buying a new property is an interesting asset, but it will mean that Francis will be more in debt, that he will have less savings and more expenses,” says Hadi Ajab. This could therefore mean that he will have to wait a little longer before reaching his FIRE goal. But, there is no right or wrong decision. It depends on what he wants to experience. »
* Although the case highlighted in this section is real, the first name used is fictitious.