Reader Case: Immigrant on FIRE

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Today’s reader case is a member of two demographic groups that particularly resonate with me: immigrants (for obvious reason) and fans of our book (for even more obvious reason).

Greetings Kristy/Bryce…
We are fellow Canadians currently residing in a small town in Ontario.  Family of 3 – ages 46, 42 and 12.  
While skimming through your blog materials looking for specific DIY info, we came across your book.  We picked it up and instantaneously fell in-love with Kristy’s life story! Specifically, with her being a Chinese immigrant, the atrocities she faced at a young age, how her upbringing shaped her mindset, what made her who she is today, her transitioning to a new life in Canada etc.  These were some of the values that resonated with us as a family.  It is relatable and mirrored that of our own challenges.  By reading about Kristy’s journey, we came away with a greater sense of pride, appreciation and motivation that if she can make her “life lessons” work out to her advantage then perhaps so can we!
 
Firstly, about myself and personal background…,
I am a proud family man, husband and father.  I am happily married to my lovely wife of 17+ years (since October 2002) as well as a devoted father to my son who is currently in 7th Grade.  I am a Filipino-Canadian who immigrated to Canada in the summer of 1985 when I was still 12 years of age.  My family and I decided to return to the GTA area after college, held several office positions, before finally landing a permanent role as an Auditor in the fall of 1996.
 
In the summer of 2017, I was unfortunately laid off. I went through a transitional phase of trying to land a comparable employment with no such luck before coming across your remarkable story last year.  I have recently come to terms with accepting the lifestyle of the F-I-R-E methodology and doing so at the prime earning age of 46.  I am looking forward in exploring new opportunities albeit as an entrepreneur, downgrading to a less stressful job, dedicating time to volunteering in community service programs that I can be passionate about or simply living the rest of my days in F-I-R-E mode once we align and iron out all the necessary kinks!

Secondly, about our household finances…,
We are and have always been a single income family household.  This is mainly attributed to our strong Filipino heritage where the husband takes the role of the“provider” along with the wife’s traditional role as a “caregiver”.  Our average household gross earnings were at $45k pre-1996, $60k post-1996, $80k by 2003 and breaking six-figures plateau by 2009.  Yes, we can admit that having an above average auditor salary could also be the driving force behind this particular family arrangement but we have always lived within our financial capacity and have operated from a sound perspective of necessity (not luxury).
 
Currently, we are operating at a cash-flow positive and essentially debt free. We do own a residential and a investment property.  The only caveat is that we are carrying a debt associated with the acquisition cost of the investment property for taxation related write-offs.  Outside of this however, we own every other household assets with absolutely zero liabilities.
 
Additionally, we were also continuing to build a sizeable investment portfolio (all registered within an RRSP, LIRA, TFSA and RESP) totalling over $615k.  Presently, the family has a combined household “NET CASH WORTH” north of $1.325 million.
 
Unfortunately, the investment portfolio is currently situated in an “actively” managed mutual funds. In our defence, we were totally unaware index investing even existed but we comprehend the dilemma and are now trying to address the situation to reduce the MER component and limit ROI erosion. The family is in agreement of what must be done but unsure as to how to transition the funds with ease and confidence due to our limited knowledge in self-directed index investing.  Considering the size of our nest egg, we are simply not at all comfortable in our execution and are incapacitated with fear of making an even bigger mistake in our due process!
 
Kristy/Bryce…, there is a ton of moving pieces that we are trying to address as a family, all at once and equally important. We feel we must act (while we are still able) to ensure we attain a favourable retirement outcome at the end. The only problem, we clearly see the finish line but are having issues getting ourselves off the ground, plotting an actual course (as in truly connecting the dots sequentially), to get there and back! We Do Have Options but NOT at all Confident!
 
Thirdly, the detail breakdown of the numbers…,
1- Current NET Income – average income post-termination and figures are reflected on the low side
 
Employment –  $2,250.00 (Wife’s salary)
Property –         $1,725.00 (rental income)
TOTAL –           $3,975.00 (Monthly) OR $47,700.00 (Annualized)

 
2- Current GROSS Expenses – average expenses post termination and figures are reflected on the high side
 
Residential –             $1,985.00 (operating expenses – includes build-in cushion/allowance) 
Investment –                 $1,715.00 (operating expenses – includes acquisition cost via mortgage and HELOC)
Incidentals (for both) –  $   800.00 (both properties – slush fund for discretionary and incidentals) 
TOTAL –                        $4,500.00 (Monthly) OR $54,000.00 (Annualized)
 
3- Assets and Liabilities – All NET figures
 
Chequing –              $   11,500.00
Savings –                 $   15,000.00
Liabilities –               $            0.00
TOTAL –                   $  26,500.00 (All Cash)
My vehicle –  $   10,000.00
Wife’s vehicle –  $     5,000.00
Liabilities –               $            0.00
TOTAL –                   $  15,000.00 (All Vehicles)
 
Residential –            $645,500.00 (conservative equity value net of commissions and fees)
Investment –            $366,625.00 (conservative equity value net of capital gains, commissions and fees)
Liabilities –              $269,125.00 (all acquisition cost – combined mortgage at $162.6k @ 3.80% and HELOC at $106.5k @ 4.45%)
TOTAL –                   $743,000.00 (All properties)
 
RESP –                    $   35,100.00 (Kid’s – at 1.78% MER with 2019 ROI at 15.04% at 60/40 balanced allocation)
TFSA –                     $   24,700.00 (Wife’s – at 1.78% MER with 2019 ROI at 16.78% at 70/30 growth allocation)
TOTAL –                  $   59,800.00 (to be allocated for Justyce’s education – $35.1k RESP guaranteed with $24.7k TFSA optional)
 
Breakdown-  RBC US Dividend Fund – 20%
(RRSP/LIRA) RBC QUBE Low Volatility US Equity Fund – 20% 
RBC QUBE Low Volatility Canadian Equity Fund – 20%
RBC QUBE Low Volatility Global Equity Fund – 20%
RBC Select Balanced Portfolio – 15%
RBC Emerging Markets Dividend Fund – 5%
 
RRSP –                    $521,175.00 (Mine – at 1.78% MER with 2019 ROI at 17.65% at 90/10 aggressive allocation)
LIRA –                      $  36,150.00 (Mine- at 1.78% MER with 2019 ROI at 17.65% at 90/10 aggressive allocation)
TOTAL –                   $557,325.00 (allocated for F-I-R-E purposes)
 
GRAND TOTAL NET CASH WORTH – $1.325+ million (does not include vehicles or RESP/TFSA funds)
 
The options we are seriously considering to attain F-I-R-E ready status (and in priority sequence)…
 
1- Transition all “actively” managed registered mutual funds into a self-directed registered index funds
 
2- Liquidate both properties, take the $743k and allocate $450k in a dual income (top/bottom) investment property generating $3k in total rental income, invest the remaining $293k in non-registered self-directed index funds, live nomadically on a $40k max budget. My wife’s most likely preferred choice should we initiate F-I-R-E.
 
3- Exactly identical in every facet as stated in point #2 but invest the entire $743k in a non-registered self-directed index funds, initiate a 4% SWR to fund for the living expenses and live nomadically using geographic arbitrage on a $40k max budget. My preferred choice should we initiate F-I-R-E.
 
4- Liquidate only the residential property, move to the investment property, take the $338k ($645k less $38k capital gains for the investment property less mortgage and HELOC liabilities) and invest in non-registered self-directed index funds, stay locally mortgage free, downgrade to a single vehicle which further reduces car related expenses such as insurance, gas, maintenance etc, exercise F-I-R-E, initiate a 4% SWR to fund living expenses on a $36k max budget and live exactly no different than what we have done post-termination. Our son’s (not so) preferred choice should we initiate F-I-R-E.
 
As always, we really do appreciate all the time and effort that you have afforded to us. My 12 year old son has read your book and so I am positively sure he would love to meet you both someday and so I am hopeful we can either meet abroad at one of your summit gatherings or get an opportunity to entertain you both for dinner if and when you are back home.  Do keep up the great work and stay safe in your journeys!
 
–Take Care and God Bless,ImmigrantOnFIRE

 
First of all, one thing that never gets old is hearing about how our blog & book have so drastically influenced someone’s life. It’s gratifying and humbling at the same time, and it’s an absolute honour that we get to have that kind of impact.
 
But our reader has a lot of decisions to make, so let’s get to it because this article’s word count is already nutso.]

Transitioning Your Portfolio

ImmigrantOnFIRE has over $500k in actively managed mutual funds, all with an MER between 1.7% and 2%. We’ve definitely got to fix that, but he’s intimidated at such a daunting task and afraid of screwing up.

Fortunately, two of the biggest ways he can “screw up” just don’t apply to him. All his funds are held in an RRSP or TFSA, so there’s no tax consequences of anything he does. And rather than sitting on his money in cash and trying to find a good entry point, his money’s already invested, so there’s no market timing needed. The only thing he could do wrong is pick the wrong ETFs, but we got you, boo! Just use the ETFs we already vetted from our Canadian portfolio.

To start, take your RBC Canadian equity fund, sell it, and immediately buy VCN, the Vanguard Canadian Index ETF. Then, do the same to your RBC US equity fund and buy VUN, which is the Vanguard US Index ETF. Finally, take your 20% allocation in the RBC World equity fund and split it 16% XEF (the iShares EAFE ETF) and 4% XEC (Emerging markets). You can do this all in one go, or do it piecemeal. Whatever’s comfortable for you, just set a deadline (like, say, in a month from now) to get it all done. Your portfolio’s makeup hasn’t changed, but it’s just gotten cheaper.

Next you’re going to need to sit down and figure out how much fixed income you want. A 90/10 portfolio is fine when you’re 10+ years away from retirement, but if you’re transitioning to RE soon, you’re going to want to be more conservative. If I were you, I’d take the rest of your portfolio and plough it into VAB, which is the Vanguard Aggregate Bond Index, leaving you with a 60% equity/40% fixed income split.

And remember that whatever you do now can always be changed later. If you later want to increase the yield of your portfolio by implementing our Yield Shield strategy, you can do it with no tax consequences (because, again, everything’s in a tax-sheltered account), but do the simple stuff first and get comfortable with managing your own portfolio before getting too fancy. And as always, check out our Investment Workshop for more details!

Buying Another Investment Property

I have to confess, I’m a little worried about our reader’s track record on real estate investment. While their instincts were correct to keep their house leveraged using a combination of a mortgage and a readvanceable HELOC to keep their ROE high, their investment house right now is costing them $1715 a month in debt servicing costs. All this to make $1725 in rent, for a grand total of…$10 a month in profit. Yay?

Being able to deduct their interests to save on taxes helps, but tax deductions alone can’t turn a bad investment into a good one. And this is before all the other costs like maintenance, property taxes, insurance, etc. which would turn this property into a net money loser. This is technically not an investment property, it’s a liability property.

So when our reader says he wants to sell his existing property to buy another one for $450k expecting to make $3000 a month, I have to ask, is that $3000 net? Because if it is (meaning, after expenses), that would mean an ROI of $3000 x 12 / $450,000 = 8%, which ain’t bad. But if it’s gross, I wouldn’t bother because after expenses your ROI would likely fall into the 5% range, at which point you’d be better of just buying a REIT.

Going Nomadic

I was surprised by how enthusiastic our reader was on going nomadic. Typically real estate investors are pretty attached to the idea of owning property, so the fact that he so casually proposed selling everything (including his primary residence) and going travelling is rare. And good thing too, because this path is way easier than the others.

If they liquidate both properties, they’ll net $743k (they reader claims this value is after selling fees and commissions, so we’ll take that at face value). Combining this amount with their existing investments will bring their portfolio to $1,300,325. If their max budget will be $40k, then according to FIRECalc, this plan has a whopping 100% success rate. I like them odds.

Moving Into Your Investment Property

In this scenario, our reader ells their current primary residence, pays off the debt on their investment property, and then moves into their investment property whie lowering their living expenses to $36k. Does this make sense?

First of all, I’m really confused by the sentence “take the $338k ($645k less $38k capital gains for the investment property less mortgage and HELOC liabilities)“. Why would you subtract $38k of capital gains of a property you haven’t sold? The correct number would be $645,500 (home sale price net fees) – $269,125 (outstanding loan balance) = $376,375.

Add this to their existing retirement portfolio and we get $933,700. Plug this number (plus spending of $36k) into FIRECalc and you get a success rate of about 97%. Not as good as the nomadic option but still pretty damned good.

Conclusion

So laying out all the math for each scenario, I am throwing my weight behind the “sell everything and go nomadic” option (after COVID is over, of course) (Here’s an example of a Chautauquan friend who moved his family of 6 to Spain for inspiration. And since we don’t know how long it’ll take borders to open again, local arbitrage is also an option for being nomadic within Canada). Moving into the investment property is a close second but I wouldn’t bother with the “buy another investment house” option. You have better options that don’t involve being a landlord forever, so why bother?

WELP, that’s my take. What do you think ImmigrantOnFIRE should do? Let’s hear it in the comments below!


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23 thoughts on “Reader Case: Immigrant on FIRE”

  1. We’ve had some readers reach out for questions and have thought about doing case studies like this. Thanks for always providing such a great example of how to do it properly. It’s tough to make sure you’re delivering useful information while being cautious as to not be too prescriptive.

    And so far as their personal situation, with the changes you mentioned, it looks like they’re on a great track to financial independence and being able to make the decisions they need (or want) to make without as much finacial pressure in the equation. That’s a good place to be. Nearly a mil!

    1. If they move into the rental property and it becomes their primary residence they do owe capital gains (as if they sold it to themselves). They won’t owe any capital gains on any further appreciation.

  2. Wow – great work over the years for the ImmigrantOnFIRE family to get to such a great financial position. And kudos of course to the Millennial Revolution for breaking things down, “mathing shit up” and cutting through the falgercarb (yes, I’m a Battlestar Galactica fan – that dates me).

    My only PickyBastard (Registered Trademark) comment would be to consider the difference between the Vanguard ETFs VUN (US Total Market Index) and VUS (also US Total Market Index – with hedging between US and Canadian dollar currency fluctuations). I tend to buy VUS and VSP (Canadian-hedged S&P 500) so I’m making a directional bet on the markets (always a good idea) and not on the US/Canadian dollar spread (not always a good idea).

    Again, a minor PickyBastard (TM) nit-pick on an otherwise SOLID plan!

  3. Thank you Wanderer, this is an interesting reader case. My instinct is moving into the investment property which is a close second might be better off for ‘Immigration on fire’ in the short to mid term. First, long time property investors can easily develop the fear of missing out if both properties are disposed simultaneously. Moreover, it gives the family a base to return to after an initial nomadic experience and finally it gives them a longer horizon to consider if the nomadic lifestyle is really for them. Overall, I wish them all the best in their FIRE journey. They will be fine!

    1. i like this idea !
      or even rent their primary residence, sell their investment property (or whichever property they have more emotional attachment).

  4. Great article as usual.

    I have a question about 20/20/16/4 “market” weighting between Can,US,Int,Emerging…
    I have been using an equal weighting instead of market weight.

    What is the advantages/disadvantages of each approach?

    Leo

  5. I’m a little sick of you and Jim only talking about Vanguard. Ishares from Blackrock is as good and not so “communist” like Vanguard. I’m only using them and no regrets so far.

    1. Let me guess, you’re American and anything deviating from a hard core capitalist cannon is “communism”? 😀

      That’s not how things work. Open your chakras and consider that if a company’s goal is more aligned with its customers’, the end result will be more in favour of said customers. That is the difference between Blackrock and Vanguard.

      PS: Given FIREcraker’s history, I don’t think you’ll find anything promoting communism on this site. Just sayin’.

  6. Great breakdown however, wouldn’t an all-in-one ETF (VGRO or XGRO as an example) be a better choice rather than building separate ETF? Lower MER, broader diversification, and automatic rebalancing.

    What do you think?

    1. Curious to hear other’s comments on this as well. Currently the vast majority of my net worth is in XGRO. In theory I think you could get slightly better control and personalized rebalancing doing it yourself, but I’m lazy. Plus VGRO/XGRO have been shown to produce returns very close (within the probable randomness) to what you’d get doing it yourself (via Canadian Couch Potato or related sites, I forget exactly where the chart is). Maybe it’s just me, but I prefer to be a bit more hand-wavy towards picking specific ETFs for specific dividend yield etc. One fund and done for me.

  7. Thank you everyone for the comments and input.

    The family and I are really appreciative of all your feedback, and for @FIRECracker and @Wanderer for featuring our personal article in their CASE STUDY. Simply amazing and I cannot thank them both enough for their guidance and mentorship. They have literally supplied and provided us with the necessary tools and knowledge to achieve our FIRE objectives.

    Thank you Millennial-Revolution! This is truly one humbling and tremendous experience.

    Best Regards,

    ImmigrantOnFIRE

  8. I’m wondering how the schooling of the 12-yo fits into all this? If they go nomadic, are they going to home/world school? And how does the 12-yo feel about that? Personally, I’d think that some balance towards remaining somewhere with solid schools at least for the remainder of the sons education needs to be some kind of consideration, right?

    1. Consideration…, you bet! In fact, this was the one crucial factor that we needed to address as a family in order to make the geo-arbitrage “nomadic” option work and as such, our 12 year old (now 13) is heavily involved with the FIRE plans to the point he is actually dictating his own educational path and addressing his own passion projects as it pertains to his schooling.

      What you have to understand is that this is a three legged stool that must operate simultaneously in one direction or it is never going to work. The fact that we each have an oar (mine, my wife’s and my 13 year old son) and are rowing in one direction is the reason why we have a number of options to begin with. The “objective” math maybe simple but it is the “subjective” mental and emotional roller coaster ride that will be the main challenge to overcome.

      We can tell you that our 13 year old learns in multifaceted ways from either hitting the conventional books, to virtual online schooling and even going the holistic path of interactive. We collectively have the mindset that if you want extraordinary results, you will need to do all of the extraordinary things. Do normal things however, then all you get are normal results. That being said, my 13 old also understands the value of having every basis covered than not having sufficient enough so not only will he be involved in world-schooling but will be looking to complete the required provincial curriculum of 30 credits (consisting of 18 compulsory, 12 electives with 5 of the electives being GR12 equivalency for post-secondary university considerations) plus 40 hours of volunteering work along with passing the OSST exam just for the sole purpose of graduating with a high-school diploma in hand even though he knows full well he does not really need to.

      In closing, our primary job as parents is to ensure that he learns the value-add of the underlying life lesson we are trying to provide him in furthering his adulting skills even long after we are both gone…, not satisfying us with scholastic achievements or conforming him to his career-path requirements. Confining him to the traditional four walls of classroom is really not our idea of learning either especially when he has the opportunity to learn from a global-wide scale perspective right at his finger tips! He truly understands that this alone is a much better option than making your “baking soda volcano” in class.

      We sincerely do appreciate the concerns and hope this helps!

      ImmigrantOnFIRE

  9. Good luck! It sounds like you are still trying to figure out what to do. My suggestion is to take it slow. You don’t need to rush it. The biggest issue is probably your son’s education. If you can come to a good compromise by all, that’s the best way to go.
    For us, we plan to become part-time nomadic once our son goes to college. For now, we’ll stay put. I think having a stable environment is better for him.
    Keep at it!

    1. Awesome @Joe and thank you for your well wishes…

      We were thinking about that option to in exercising geo-arbitrage once our son enters post-secondary education. However, he was the one adamant that he can make it work and wants to experience what other students alike his age only dreams about. He understands that the traditional schooling way of being confined to the four walls of a classroom tailors to the “average” kid and that we all learn different ways and at different pace and at different interests. He truly believes that there are much better ways than conforming to the conventional “status-quo” of schooling. Smart kid!!!

      Like we said, our 13 year old son is the one dictating his studies (and not us) and only coming back to us when he truly needs our help and wants input. Otherwise, this is all on him. We are certainly not there to be his teachers, not even as parents, nor trying to fill the role of a guide or mentor BUT if needed, we would be willing participants to learn alongside with him on anything he puts his mind into. To be perfectly honest, I personally wish that I had these same qualities when I was a kid as I could only imagine where I would be.

      ImmigrantOnFIRE

  10. Hi,

    You are currently in a great position. There is no need to rush into your options. I will opt for no debt which appeals most to me.

    WTK

  11. Thank You WTK…, appreciate the advice.

    And yes, we are definitely taking it very slow and ensuring that before we initiate any of our geo-arbitrage plans that all the Ts are crossed and the Is are dotted. FIRE ideology is a relatively new concept to us and there are a ton to learn and process. It is not just one single concept but several key ideas implemented and all working together to achieve the objective. The COVID situation is actually helping the family as it is enabling us to dumb things down a bit further, learn more, prep and get our ducks in a row with the end-goal of executing when we are ready and not a moment earlier or sooner. But @Wanderer is definitely right about the Math…, the nomadic option is the objective way to go with the move to our investment property being a close viable second option. I think I knew that, the family knows that and readers will eventually concur with that overall assessment as well. The nomadic option just seems to be an all around better option for the longevity as it not only provides us with a lifetime of experiences and long lasting memories but afford us with the opportunity to meet other people from all walks of life and hopefully establish meaningful relationships from a global perspective. I am positively sure there are also significant challenges involved with executing such a plan but the rewards just simply far outweighs the risks albeit we are discussing world-travelling, world-schooling or permanent vacation. But yes, I know where you are coming from for sure!

    @Wanderer…, just to provide some clarification on the capital gain of $38k if we were to exercise the second option of moving into the investment property. From my knowledge and understanding, the capital gains is due upon “disposal” of the property. Selling the property is definitely one form of “disposal” but another way I believe that this can also trigger capital gains is when the property changes its status – as in it was assigned as an income property (when it was bought) to now transitioning to a residential property. I am not at all familiar with the tax laws per se but, logically speaking, I would only think that the tax man would want to definitely collect their money owed to them due to the change in assignment of the property. It’s a discussion that I still need to have with my accountant but I do not believe that the investment property needs to be sold to trigger such an event.

    Hope that helps.

    ImmigrantOnFIRE

  12. Congratulations on creating options for your family. My thoughts.
    Get out of mutual funds and move to ETF’s. Personally I would add a bit of stock but one thing at a time. Your TFSA seem underfunded. Top those up first. You don’t have one? I didn’t see yours in the asset list.
    There are tax consequences of having large RRSP values but only on withdraw or if you both pass away. Look into non registered accounts.
    3.8% is high for a mortgage. Consider refinance options. Seek out a good mortgage broker. Not the bank! They already sold you expensive mutual funds.
    Appears if you have $1.3 million in assets you should be able to generate $50K+ pre tax using 4% rule. Seek out a good fee for service advisor. The trick now is to turn the assets into reliable cash flow.
    Do not rush into anything. Baby steps as you learn to manage your own money.

  13. Thanks Gruff403…, appreciate the insights and suggestions.

    Loving the advice and yes, I would want nothing more than to turn the $1.3M valuation asset into a reliable cash flow and doing so without ever incurring a single tax liability in the process. I am working on understanding that concept from the ground up but just as you said, I really do need to take baby steps as there is a ton of information to grasp and implement. I must admit that it can be overwhelming at times but I am also confident in my abilities to be able to work through the specifics and multi-task. It will simply require a bit more time and effort to digest the approach/process.

    That said, I will get there no doubt especially with proper guidance and direction.

    Thanks.

    ImmigrantOnFIRE

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