FIRE under fire
I’ve said it before, and I’ll say it again: I have the best in-laws ever! I’ve spoken fondly of them often—including in my summer update (in which I mentioned how easy it was to live with them in their RV for three weeks)!
From the beginning of our FIRE journey, one of our biggest cheerleaders has been my mother-in-law. She’s always been nothing but supportive, encouraging, and enthusiastic about our pursuit of FIRE.
But when it came time for my husband M to actually retire, both of his parents had questions for us! 😬 Suddenly, FIRE was no longer a far-off, hypothetical scenario. It was really happening, and it prompted them to voice their concerns about M retiring early.
Like any caring parent, M’s mom and dad wanted to ensure we had our bases covered. Their concerns were justified, and we’re glad they felt comfortable enough to put our feet to the fire.
After all, M’s early retirement was one of the most significant decisions of our lives. If we got it wrong, the consequences could be disastrous and life-altering.
So, when M said he was going to quit his job and his parents expressed concern, we encouraged them to go ahead and question us. We were more than happy to address their worries and assuage their fears.
Also, it was another opportunity for me to run through our plans and ensure we were covered for every eventuality. (My regular readers know I’ve always done this—I make emergency plans because that’s more effective than holding a generic emergency fund.)
Ask us anything
I asked my in-laws to question us about every possible issue and concern they could think of… and they aced the assignment! Below, I’ve shared our email conversation (lightly edited for clarity)—with all their questions and all my replies.
As you’ll see, M’s parents didn’t hold back! They got very detailed and specific about their concerns, and I’m glad they did. For one thing, it was an excellent opportunity to stress test our FIRE plans.
For another, I wanted M’s parents to feel fully at ease with us FIREing. I didn’t want them losing sleep worrying about us, so I was happy to lay everything out for them to see and understand.
Why I’m sharing our private conversation
Why am I sharing this private conversation between my in-laws and me? Well, like everything I share here on the blog, I want to help others on the FIRE path. If I’ve experienced something in my FIRE journey, maybe you have too.
Perhaps, by sharing my experience, you’ll find new ways to talk about FIRE with your family and friends. Or maybe you’ll take away ideas to add to your own FIRE plans.
For others still, it may just be a voyeuristic peek into my life and my relationship with my in-laws! Whatever the case, I hope you find our email exchange helpful (or entertaining).
Note: My in-laws gave me permission to share our email conversation. 🙂 Also, this email thread was from mid-2021, before M retired. Therefore, some info and references may be outdated.
My in-laws grill us on our FIRE plans
To help make the email a little easier to read, I’ve broken it up into two posts and into sub-sections. (Part 2 is coming next week!)
Part 1 (this post)
Part 2 (next week)
With that, let’s get started with Part 1…
In-laws: We put this email together after reading the article that M sent last week. It does cover many issues that dad & I are concerned about, and we are happy to see you are looking into it with eyes wide open rather than just seeing the positive side only.
Chrissy: Absolutely. I know it appears we’re only looking at the positives. But we have, in fact, put a lot of time into discussing and planning for potential downsides.
I’ll go through each of your points in my reply and hopefully reassure you that we’ve done our best to think of everything.
Cash versus stocks
In-laws: We do understand that we have never known much about the financial markets and appreciate all the effort from Chrissy to educate us and help us so that we are more diversified and getting more return on our investments rather than GICs. We are old-fashioned and still believe in having cash on hand and a home that is paid for.
Chrissy: You’re neither old-fashioned nor alone in your beliefs. There are people our age or younger who feel the same way as you. Personal finance has a strong psychological component, and most people feel better with more cash and a paid-off home.
There’s nothing wrong with this. In fact, it’s wise to manage your money with your psychological needs in mind. Going against that could result in fear, panic, and undue worry. This could then cause you to sell your investments at the wrong time.
It’s better for each individual to know themselves and invest as it suits their goals, timeline, and personal money psychology. Personally, I take comfort in detailed math, extensive planning, reliable data, and professional guidance. All those factors lead us to feel better about:
- Holding less cash (because cash won’t survive the ravages of inflation).
- Putting our home equity to work (because it helped us reach retirement sooner and is a powerful way to turn Vancouver’s expensive real estate into an advantage).
This isn’t to say there’s a right or wrong approach—it all depends on each individual’s situation. We just have to know which tactics suit us best and then learn how to use them safely and effectively.
In-laws: Right now, it is the financial markets that are gaining because no one wants cash making almost 0% interest. Things go in cycles—who knows when the cycle will change again, and markets do poorly, and cash will give a higher return?
Chrissy: It’s true; our investments will never be up all the time. There will always be market cycles, and all investors must be prepared for bad times to eventually arrive.
We plan to implement a flexible withdrawal strategy to mitigate the risk of drawing too much in bad times. Here’s how it would work:
- If stock returns are excellent, we’ll withdraw more and splurge on big-ticket items (a big trip, replacement vehicle, new roof, renovations, etc.)
- If returns are okay, we’ll spend like we normally do, plus a few extras.
- If stocks drop a little, we’ll scale down or cut out travel and large purchases.
- If stocks drop a lot, we’ll cut out all travel and most extras.
To be honest, I can’t see us ever facing a scenario where we’d need to cut down to barebones spending, but that’s another option if needed.
Flexible spending will go a long way in sustaining our portfolio and income for life. In addition, we could bring in income by hosting students, working part-time, or picking up freelance design jobs. These measures will be more than enough to sustain us through even the worst markets.
However, note that this is all based on sound retirement research—not just my assumptions! Michael Kitces is a well-known retirement researcher who has done a lot of work on flexible spending strategies.
In this article, he discusses how small changes (such as earning a small amount of income in retirement) can, 90% of the time, result in a much bigger nest egg than what a retiree started with: The Problem With FIREing At 4% And The Need For Flexible Spending Rules.
In-laws: We think having some cash, financial market investments, and real estate is the safest way because all our eggs are not in one basket. Never in my wildest dreams did I think interest on my money would be less than 1%!!!
I am just worried that it can be the same with the financial markets. Everyone kept predicting that the housing prices would crash for decades, but it’s only now started to cool—so who can predict anything 100% correctly.
Chrissy: You’re right; no one can predict what will happen. This is why we have a detailed plan that covers us for a wide variety of scenarios. It’s also why our investments are well diversified into thousands of companies and some real estate (our home*).
*See the box below for why I see our home as an investment—despite this being a controversial viewpoint.
As for my thoughts on cash: we’ll likely keep more cash on hand once M stops working. However, based on historical data and much research, there’s a much higher chance that we’ll run out of money when holding more cash. Therefore, we’ll keep a reasonable amount of cash, but not so much that it would hurt us in the long run.
As for stocks earning only 1%, that could happen in the short term (1–5 years). However, it rarely happens over the long term (5–10 years) and never over the very long term (20+ years).
I know that stocks can seem scary because of their short-term unpredictability. But when you zoom out and look at the long term, you can see they FAR outperform cash, bonds, and inflation:
Stocks versus bonds and cash
Stocks versus bonds, gold, and US home prices
Stocks versus long and short bonds and inflation
Chrissy: So, while there’s no predicting what the markets could do, the best guess we can make is based on historical evidence. And the evidence shows that stocks do far better than 1% over the long term.
Can your home be an investment?
I know many people would disagree about our home being an investment. They’re not wrong—most homes only appreciate enough to keep up with inflation. In addition, a home that you live in is really more of a consumption item than it is an investment.
However, I still see our home as an investment because:
Whether you agree or disagree, feel free to share your thoughts on this in the comments!
In-laws: We’ve heard of people who had a trusted financial advisor and did well when the market was up, then crashed with everyone else. I still don’t think they’ve recovered from the 2008 crash. Where were the good advisors to guide people like that? This is why we never really trusted anyone to help us invest.
Chrissy: It’s terrible what happened to those people. Unfortunately, ‘financial advisor’ isn’t a regulated title or credential (at least not yet). Therefore, many who claim to be ‘advisors’ are little more than salespeople.
These ‘advisors’ earn commissions from selling investment products to their clients—all while providing poor or very little advice. Due to the commission structure, they may be incentivized to sell investments that may not be in the best interests of their clients.
Sadly, it sounds like the people you knew probably weren’t working with qualified, well-trained advisors. However, there are good advisors/planners out there. The gold standard to look for is someone with the CFP certification.
The financial planner we work with is a CFP and charges on a fee-for-service model. That means his fees are for services he provides (e.g. financial planning, investment management, retirement planning, etc.)—instead of commissions for selling investments.
This isn’t to say that working with a financial planner is for everyone—it’s not. But there’s definitely a place for qualified, skilled financial advisors. You just have to know what to look for!
In-laws: Maybe if we had been educated on how to invest in the markets, we could have made lots of money from it. Our generation relied on advice from businesses like Edward Jones, Merrill Lynch, Canaccord, Odlum Brown, etc. We know of no one that has become rich or even comfortable financially investing that way.
Chrissy: Yes, you definitely would’ve done even better if you’d been properly invested (and advised) from the start. But you and dad still did very well with your money, largely because you’re such amazing savers. (And also because you listened, learned, and changed when I nudged you towards better investments and advisors!)
Smith Manoeuvre worries
In-laws: Even though we knew about the Smith Manoeuvre, as realtors, we never knew when and where the next cheque was coming from, so it was way too scary for us to mortgage and invest. It is different for you guys since M has a steady income and is well situated in his job.
Chrissy: I think you made the right decision to avoid the Smith Manoeuvre. It’s definitely not for everyone. (In fact, I think it’s unsuitable for most people.)
If owing money keeps you up at night or, as you mentioned, your income isn’t consistent, it’s probably not the best strategy for your situation. You’re also right that our situation is very different from yours.
Before we started leveraged investing, we carefully weighed all the pros and cons. Our financial planner also did a detailed analysis of our cash flow and finances to see if it was safe for us to use the Smith Manoeuvre.
In addition, he ensured we had multiple ways to keep the loan payments going, no matter what happens, BEFORE we implemented anything.
This is why I feel it’s so important to have professional help with the Smith Manoeuvre. 90% of people shouldn’t even consider it, even with help. And of the ones who do use the Smith Manoeuvre, most shouldn’t do it without professional help!
In-laws: Here is something that helps to give us our comfort level—we have always been told to pay off our mortgage ASAP, so our house is one thing no one can ever take away from us. We didn’t use the Smith Manoeuvre because we always believed that as long as we own our home, no one can ever take it away from us.
Chrissy: Most people hold the same beliefs as you and are not wrong. But to put your mind at ease, no one can take our house from us either! Here are some common concerns about the Smith Manoeuvre/leveraged investing and how we are covered for them:
1) What if the bank “calls” your loan?
When a loan is “called”, it means that the lender can demand, without notice, that you pay back the amount owing on your loan. They can then also decrease or eliminate your credit limit. Considering the amount we’ve borrowed, that sounds pretty scary!
Fortunately, we’re at very low risk for this because even though they’re technically allowed to, banks haven’t been known to call HELOCs in Canada—not even during the housing crash in the 90s. They may reduce your available credit, but they usually won’t unless you’ve missed payments or been otherwise delinquent.
Also, while our bank could call our HELOC, they can’t call our mortgage unless we breach the terms of our mortgage. Most of our borrowing is in the mortgage portion of what we’ve borrowed. Very little is in the HELOC portion, so we’re quite safe.
In addition, we’re always on time with our payments and have the funds to continue making our payments for as long as needed. Finally, we’ve thoroughly assessed all these risks with our financial planner and his team.
They have decades of experience using leverage (especially mortgages and HELOCs) to invest. They know and understand all the legal and tax rules, how mortgages work, what banks will or won’t do, etc.
Our financial planner and his team have educated us and built our financial plan to address and mitigate any risks. Therefore, I’m confident we’ll have no issues with our HELOC or mortgage ever being called.
2) What if the markets crash?
The concern is that if the markets crash, we won’t have enough investment income to make our loan payments. This is yet another scary scenario, but once again, we planned ahead for this.
When working out our retirement and overall financial plan, our financial planner and his team used conservative numbers:
- A much higher mortgage rate.
- Higher inflation.
- Lower returns.
Then, we not only saved enough to cover the larger amount needed to account for those factors but also added an extra buffer on top of that. Therefore, even if there’s a crash, we’ll still be able to make our payments—without affecting the long-term sustainability of our portfolio.
3) What if we’re “underwater” with our loan?
Being “underwater” with our loan could mean two things with the Smith Manoeuvre:
- The value of our house drops and is worth less than what we owe.
- The investments we made with our borrowed money are worth less than what we owe.
In situation 1, that’s highly unlikely, given that we live in Vancouver. And, even if our home value were to drop that low, our bank won’t call our HELOC or reduce our credit unless we’ve been delinquent.
In situation 2, the bank doesn’t know anything about our investments, so they wouldn’t know that we were underwater. Regardless, we’d only be in trouble if we sold most or all of our investments when they’re down.
As long as we don’t sell (and we keep making our mortgage payments), it wouldn’t matter that we were underwater. We’re invested and leveraged for the long term, and the markets and our investments will go back up again. Being underwater would just be a temporary non-issue.
4) What if interest rates go up?
If interest rates went up to 12% or more (like they did in the 80s), we’d be in trouble! But that’s highly unlikely. More realistically, if they went up to 4 or 5%, we’ve accounted for that in our plan.
Even so, rate increases won’t affect us much until we renew our mortgage. But that’s a few years away. As a worst-case backup to help lower our payments, we could pay down some of our mortgage (using our leveraged investments).
5) What if you can’t renew your mortgage in retirement?
As most people know, banks look at everything before approving you for a mortgage. Naturally, many worry that once they retire and no longer have a job and employment income, they won’t be able to borrow as much.
Again, I’m not concerned about this because I checked with our financial planner and his team. They told us that as long as we don’t change our lender or the terms of our borrowing, we should have no issues renewing our mortgage. (This is true even if our employment situation has changed, e.g. M retiring.)
I hope that helps you to better understand how our leveraged investing works and that we (and our house) are safe! Let me know if you have more questions.
To be continued…
As mentioned, I’ve decided to break up my email conversation with my in-laws into two posts. (As a single post, it was clocking in at 8,000 words!!!) As riveting as this conversation may be, I’ll have to keep you in suspense until next week. 😉
Check back in for Part 2, in which I’ll cover:
- Why not keep working?
- Living too long
- Healthcare concerns
- Worst case scenarios
- Closing thoughts
Share your thoughts
Do you agree with my in-laws’ worries and skepticism? Have you wondered about some of the same things? What about your family and friends—have they also expressed concerns about your FIRE plans?
Also, let me know if I’ve missed anything or if there’s anything you want to know more about. I’m open to questions about our FIRE plans and would love your feedback—leave a comment below!
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