Same idea applies to other assets such as your car, cherished keepsakes, furniture, jewelery, etc.<\/p>\n

Both of our cars were bought used in cash upfront but can you buy a dozen eggs with your car? No!<\/p>\n

We currently own two cars and we plan to drop to a one car household once we retire early and we will likely sell my beloved Carol the Corolla for about $6,000.\u00a0 The proceeds from Carol will go into our investment accounts to grow with the market which will allow us buy a low mileage used car down the road once Bucky bucks out on us (he only has 90k km\/55k miles so he should last us awhile post FIRE).\u00a0 In fact, the $6,000 from Carol will be able to fund all our future cars down the road.<\/p>\n

Don\u2019t believe us?\u00a0 Here\u2019s the math:<\/p>\n

Sell Carol for $6,000 and assume a 7% return for 10 years until Bucky bucks out.\u00a0 Carol\u2019s investment account is now worth $12,057.\u00a0 We will likely be able to sell Bucky for at least $3,000 (likely more).\u00a0 So we now have $15,057 in our car fund.\u00a0 We can likely purchase another used car for $7,000. That then leaves $8,057 in our accounts to keep growing for the next car 10 years later which will be valued at $16,191.<\/p>\n

We can likely get $3,000 for our next used car purchase again when it’s time to sell, so we now have $19,191 for the subsequent car.<\/p>\n

Continue to purchase the next used car for roughly half of our car investments account value and let the rest grow and we will never run out of car funds for the future.<\/p>\n

This is essentially the rule of 72 for anyone who’s familiar with that. For those <\/span><\/span>unfamiliar, the\u00a0<\/span><\/span>rule says that to find the number of years required to double your money at a given interest rate, you divide the interest rate into<\/span>\u00a0<\/span><\/span>72<\/b>. For example, if you want to know how long it will take to double your money at seven percent interest, divide 7 into<\/span>\u00a0<\/span><\/span>72<\/b>\u00a0<\/span><\/span>and get 10.2 years.<\/span><\/p>\n

<\/p>\n

So as long as our cars last 10 years and we only take out half of our car fund to pay for the next used car, this car fund will last us for all future cars as well.<\/p>\n

And yes, there are MANY low mileage reliable used cars in the $7,000 range that will last 10 years without having to put in much maintenance costs and will resell for $3,000.\u00a0 We\u2019ve done it a few times and know its possible.<\/p>\n

Since we do not include housing and car payments in our post-FIRE annual expenses, it would not be fair to include the value of these illiquid assets in our FIRE number as that would be double dipping.<\/p>\n

The 4% Rule<\/strong><\/h2>\n

Many people in the FIRE community have written about the Trinity Study and the 4% Rule so I will point you their way to further dig into it and how the math works:<\/p>\n

\n
• Mr Money Mustache: The 4% Rule: The Easy Answer to “How Much I Need For Early Retirement?”<\/a><\/li>\n
• Mad Fientist: Safe Withdrawal Rate for Early Retirees<\/a><\/li>\n
• Go Curry Cracker: What is Your Retirement Number: The 4% Rule<\/a><\/li>\n<\/ul>\n

  The cliff notes explanation is that, in theory your portfolio should grow at 7% annually and that inflation will grow at 3% annually. That then leaves 4% of growth that you can withdraw out of your accounts without having to dip into the investments themselves and so it will theoretically last you the rest of your life. Note that over the last 100 years, the S&P 500 has grown at 10% per year on average and inflation has grown at 3% so some can argue that the 4% rule is too conservative assuming you are investing in low fee index funds tracking the overall market. However, it’s important to remember that past returns do not guarantee future returns.<\/p>\n

  While we understand why the 4% Rule works for so many members of the FIRE community, we are a bit more cautious especially in regards to sequence of returns risk and follow the research conducted by Early Retirement Now who advocates for a SWR in the 3.0-3.5% range in his Ultimate Guide to Safe Withdrawal Rates<\/a>. While this series is very technical, I found it to be a fantastic read and would highly recommend it.<\/p>\n

  The 4% Rule equates to 25 times your annual expenses, a 3.5% SWR would equate to 28.57 times your annual expenses, and a 3.0% SWR would equate to 33.33 times your annual expenses. So depending on your comfort level, you can plug in the numbers to understand what your FIRE number is.<\/p>\n

  How do we calculate our Safe Withdrawal Rate?<\/strong><\/h2>\n

  First off, as noted above, you need to figure out what your projected annual expenses are. Actually, let\u2019s back it up even further. You need to be tracking your spending <\/b>everyday<\/strong> to know your current annual expenses to be able to project your future annual expenses!<\/p>\n

  We use a modified 4% Rule, in that we plan to actually withdraw less than 3% of our passive income each year but base our calculations on the 4% Rule.<\/p>\n

  How can we use the 4% Rule (aka 25x our projected annual expenses) to calculate our FIRE number BUT we do not plan to actually withdraw 4% from our investments? Is this where we get the skeptics and naysayers screaming from the top of their lungs that this whole FIRE concept is a hoax, scam, and cult!?<\/p>\n

  Read on my friends.<\/p>\n

  We have two items in our FIRE ammo to allow us to withdraw less than 4% of our portfolio.<\/strong><\/p>\n

  \n
  • Geo Arbitrage\n
    \n
    • Currently, about 70% of our investments are in USD (401ks, IRA, Brokerage Accounts) and the USD\/CAD exchange rate has been sitting around 1.30-1.35 for quite some time now.\u00a0 What does this mean?\n
      \n
      • If we converted the funds currently in USD into CAD today (where we live, the currency we use, and the country we plan on living in long term) without ever working another day in my life, we\u2019d be way past our FIRE number and down to a 3.29% SWR.<\/li>\n
      • If our funds in USD grew at 3% over the next 2 years until we FIRE (yes this is how conservative I am) and we again didn\u2019t work another day and kept our Canadian portfolio as is, we\u2019d be sitting at a 3.14% SWR.<\/li>\n
      • If we assumed our entire portfolio (both USD and CAD) grew at 3% over the next 2 years until we FIRE and we again didn\u2019t work another day we would be sitting at a 3.09% SWR.<\/li>\n
      • If I switched to a part time role for the next 2 years, which would knock us down to a 50% savings rate vs our current 75% savings rate, and we again assumed our entire portfolio (both USD and CAD) grew at 3% over the next 2 years until we FIRE we would be sitting a 2.96% SWR. This is our current base case scenario. Boom boom boom!<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n
      • The Canadian Child Tax Benefit\n
        \n
        • As if the geo-arbitrage piece wasn\u2019t enough, we also have the Canadian Child Tax Benefit in our ammo.\u00a0 What is the Canadian Child Tax Benefit you ask? It\u2019s a tax free<\/strong> monthly payment made to eligible families to help with the cost of raising children under 18 years of age.\u00a0 Based off our family\u2019s current income, we earn about $1,000\/year from this benefit.\u00a0 However, if I shift to part time, this benefit will jump to ~$5,500\/year.\u00a0Woo! Once we FIRE and our income is reduced further, we would be eligible for the max benefit which is $6,639 per child under the age of six and $5,602 per child aged 6 through 17 (as of July 2019). Again, this is tax free money in our pockets<\/strong>! Have I mentioned how much I love Canada? Now of course, this is subject to change based off the political party in play so we realize these exact figures are not guaranteed forever and just icing on the cake and will only help us reduce our SWR lower if it remains as is.\u00a0 Some sort of federal family allowance has been in place in Canada since 1944 so we don\u2019t see it disappearing completely anytime soon.<\/li>\n
        • If we assume the weighted average 2019 figures, that\u2019s an extra $5,907 in our pockets each year until each child is 17 which is pretty much our assumed child costs each year.\u00a0 Mind blown. That in and of itself brings us from a 4% SWR to 2.64% SWR.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

          If we tag team the lowered projected annual expenses thanks to the Canadian Child Tax Benefit with our higher portfolio from our base case geo-arbitrage scenario above, we are sitting at 1.96% SWR. Holy moly!<\/p>\n

          So there you have it, we are confident we can reduce our SWR closer to the 2% range vs the standard 4% value all while still basing our FIRE number on the 4% rule.<\/p>\n

          Side Hustlin’<\/h2>\n

          And of course, this does not account for any future side hustles or going back to work part time for the social side of things once the kid(s) are in school.\u00a0 If we also managed to bring in $7,000\/year in a side hustle, that would bring us down from 1.96% to a 1.37% SWR.<\/p>\n

          Most stock index funds yield dividends higher than this so it would be amazing to somehow be able to live off only our yield from VTSAX (1.8%) or VUN.TO (1.46%) and never have to withdraw any of the funds ever and let them grow baby grow.\u00a0 Or worst case, it looks like we can withdraw the dividends and then withdraw 1% of the portfolio versus the typical 4%. Not bad at all!<\/p>\n

          How do we calculate what our FIRE number is?<\/strong><\/h2>\n

          Since we are comfortable using the math behind the 4% rule of 25 times our projected annual expenses even though we will be withdrawing less than 4%, we simply multiple our projected annual expenses by 25<\/strong>. For those following along, you know we covered our projected annual expenses in our previous post<\/a> and we are sitting at a post-FIRE annual expense figure of ~$35,000.<\/p>\n

          $35,000 x 25 = $875,000<\/p>\n

          What investments do we use to calculate out FIRE number?<\/strong><\/h2>\n

          So you reviewed above that your FIRE number is the amount you must save in passive investments<\/strong> in order to pull the plug from your current job and that we do not include our home and car values in our FIRE number.<\/p>\n

          So what do<\/strong> we use to calculate our FIRE numbers?<\/p>\n

          \n
          • Tax Advantaged Accounts\n
            \n
            • Accounts such as 401ks, Roth 401ks, IRAs, Roth IRAs, RRSPs, TFSAs, etc.<\/li>\n
            • For those in the States worried about tapping into your 401k early and getting hit with a penalty, check out the Roth Conversion Ladder.<\/a><\/li>\n<\/ul>\n<\/li>\n
            • Taxable Accounts\n
              \n
              • Brokerage accounts which for us include Vanguard and Questrade<\/li>\n<\/ul>\n<\/li>\n
              • Cash\n
                \n
                • Cash in our checking or savings accounts<\/li>\n
                • Cash in our high interest savings account<\/li>\n<\/ul>\n<\/li>\n
                • CDs\/GICs (Certificates of Deposits (US) or Guaranteed Investment Certificate (Canada))\n
                  \n
                  • Typically, higher interest than a savings account but has a penalty for making a withdrawal before maturity (typically 1-3 years)<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

                    There are some other accounts that we have in our back pocket that we do not<\/strong> include in our FIRE calculations (again, I’m very cautious and conservative with our FIRE plans):<\/p>\n

                    \n
                    • Health Savings Account (HSA)\n
                      \n
                      • I currently have about $5,000 invested in my HSA from when I was living in the States.\u00a0 If this grows at 7% over the next 35 years, it will then be valued at $57,530. HSAs probably deserve a whole entire post on their own so stay tuned for that in the future.<\/li>\n<\/ul>\n<\/li>\n
                      • All of Nic\u2019s accounts\n
                        \n
                        • Nic has about $25,000 in her various accounts that we do not include in our FIRE calculations.\u00a0 We view this as our true emergency fund.\u00a0 If this grows at 7% over the next 35 years, this will be an additional $287,653 for us to use as we get older if unexpected medical bills arise (unlikely in Canada but you never know) or if we need home health care, home aids, long term care, etc.<\/li>\n<\/ul>\n<\/li>\n
                        • Federal public funds such as Social Security, CPP (Canadian Pension Plan), or OAS (Old Age Security, another thing I love about Canada)\n
                          \n
                          • With the way things are going, who know if any of these will still be in place in 30+ years when it\u2019s our turn to tap into the system. I’m more confident in the Canadian accounts but still not banking on anything here. Granted the number we would receive here is low since we haven’t worked the typical 30+ years to reach the maximum SS\/CPP benefit.<\/li>\n<\/ul>\n<\/li>\n
                          • Pension\n
                            \n
                            • I have a pension from when I was working in the States that is currently valued at $32,254.\u00a0 It has a neat feature in that you can estimate your monthly benefits based on different dates.\u00a0 For example, if I start withdrawing at age 60, it\u2019s either a lump sum value of $88,239 or $451\/month for a 50% Joint and Survivor Annuity. Or at age 65, it becomes a lump sum value of $106,837 or $600\/month for a 50% Joint and Survivor Annuity.\u00a0 Or at 70, it then becomes a lump sum value of $129,381 or $819\/month for a 50% Joint and Survivor Annuity. We would wait to access this until the very end so the monthly benefit is at it’s highest during our later years (same for the federal funds above). $819\/month or $9,828\/year starting at age 70 may not sound like a lot to most people but for us that’s wonderful news to help bridge any extra medical costs as we get older!<\/li>\n<\/ul>\n<\/li>\n
                            • RESP (Registered Education Savings Plan)\n
                              \n
                              • We view this as money for our child’s education, once money enters this account, in our eyes it belongs to the child (even though we are fully aware that it doesn’t actually and we can access these funds if need be – however that is not our intention\/plan with these funds).<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

                                So even if our sub-4% withdrawal rate fails on us somehow, we have some contingencies in place once we reach “typical” retirement age.<\/p>\n

                                There you have it!\u00a0 You have now been enlightened as to how conservative we are with our finances.\u00a0 We know that retiring early does not mean we can never go back to work if we need to but we want to be as cautious as possible with the goal to enjoy our post-FIRE life to the max.<\/p>\n

                                What is your FIRE number and how do you calculate it? Do you see any flaws in our system?\u00a0 Thanks for tuning in and please leave a comment below!<\/p>\n

                                Support This Blog<\/h2>\n

                                If you liked this article and want more content like this, please support this blog by sharing it.\u00a0 Not only does it help spread the FIRE, but it lets me know what content you find beneficial.\u00a0 Writing is NOT my strong suit and it honestly takes me hours to write each post so the more encouragement the better!\u00a0 Engaging in the comments below keeps me motivated.\u00a0 You can also support this blog by subscribing to receive emails anytime a new post is published.\u00a0 Thank you FImily!<\/p>\n

                                We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.\u00a0 Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:<\/p>\n

                                \n
                                • Investing Newbies: Check out our\u00a0free Investing 101 Series.<\/a><\/li>\n
                                • How much are you paying for your phone plan?\u00a0 Canadians,\u00a0learn more about Public Mobile, and see how we are paying $3\/mo for our cell phone plan<\/a>.<\/li>\n
                                • How much are you paying for internet?\u00a0 Canadians,\u00a0learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills<\/a>.<\/li>\n
                                • How much are you paying for home insurance?\u00a0 We were able to reduce our rates by 25% by switching over to Square One Insurance.\u00a0 If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and\/or tenant insurance<\/a>.\u00a0 Use this link to receive an extra $15 off your quote.\u00a0 (Note that you must use this link to start the process to get the $15 off even if you prefer to pay over the phone.)<\/li>\n
                                • How much are you paying for your monthly utility bills?\u00a0 See how you can likely save on this monthly expense.<\/a><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"

                                  In our last post we focused on our current monthly expenses and a path leading up to our projected monthly expenses once we FIRE. Naturally, …<\/p>\n

                                  What Is Our FIRE Number And Why?<\/span> Read More \u00bb<\/a><\/p>\n","protected":false},"author":2,"featured_media":767,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"default","site-content-layout":"default","ast-global-header-display":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","footnotes":""},"categories":[13],"tags":[],"yoast_head":"\n