Tijana Martin/The Globe and Mail
To better understand the FIRE movement – financial independence, retire early – consider Diana and Dominic, a couple in their early 30s with one child and another on the way.
With no windfalls, pension plans or help from their parents, Dominic, 34, and Diana, 31, boast a net worth – assets minus liabilities – of $2.17-million. “Through a series of real estate and stock market investments, we were able to grow our net worth to over $500,000 in our 20s,” Diana writes in an e-mail. While they were both still working, they started a successful business on the side, “and as such we were able to save almost all of the income in our corporation,” Diana adds.
She recalls the hardships that beset her parents. “Seeing them struggle is what pushed me to work so hard on becoming financially literate/stable/free,” Diana writes. Today Diana’s business easily brings in more than $100,000 a year. Dominic manages the investments and takes care of their daughter. Their goal is for Diana to be “work optional” in a year or two, with a spending target of $100,000 a year after tax when they have fully retired.
“How do we protect our assets against inflation?” Diana asks. Does it make sense to move to a less-expensive locale where they can buy a larger home and rent out their city home, keeping it as an inflation hedge? What should their allocation be to real estate and stocks and bonds, “and how do you determine what is safe?” Should they keep a large cash reserve in the event of a downturn? Or would it be better to invest in dividend-paying stocks to avoid having to sell in a downturn?
We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Dominic and Diana’s situation.
What the expert says
Diana and Dominic want to be in a position where they can work at jobs they enjoy, and work because they want to work rather than because they need to, Mr. MacKenzie says. “They also know that children grow up quickly so they are allowing themselves a healthy balance between work and family.”
Diana and Dominic can reasonably expect to live for another 50 years and no financial plan can reliably predict that far into the future, the planner says. “However, if we conservatively assume that in the future, their real rate of …….