According to Jonathon Chevreau’s recent article in the Financial Post, the “magic age for the ideal retirement in Canada is 63, according to a CIBC poll out Thursday, although baby boomers are less optimistic they’ll be able to pull it off.”
“Boomers aged 55 to 64 are less likely to believe they could retire based just on their savings (21%), while 31% believe they would carry some debt into retirement.”
Do you find these numbers surprising?
As a 30-something saving and investing his way to financial freedom, I can say I do not want to carry any debt into retirement; zero, zilch, bagel, na-da, nothing. To match my optimism with reality, we’re putting $200 per month in lump sum payments on our mortgage. These extra mortgage payments are helping us pay off our home a few years earlier. Hopefully in our late-forties, we’ll have a paid off home.
That’s the plan friends!
While a paid off home will be nice, we’ll still need to heat it in the winter, cool it in the summer, put electricity and gas through it, and maintain it year round. Those costs are not going anywhere, anytime soon. If anything, those costs will rise over time. Maybe those costs will rise with inflation (who knows) but paying off our debts prior to retirement is only a part of the financial freedom equation. We’ll need income and maybe lots of it based on a demographic shift well underway.
In 2001, I read the median age of the workforce was about 41 years old. By the end of this year, it is projected to be 44. There are currently about 19 retirees for every 100 workers. By 2030, that ratio will be 39 retirees for every 100 workers. Demographic changes will have macroeconomic as well as microeconomic impacts. In the future, with fewer people of working age, maybe wages will rise as employers fight to retain the small pool of labour available. Maybe they won’t fight at all. Hopefully unemployment will be low. Then again, you never know. What about taxes? Do you think they’ll be low? What about the costs of goods and services?
Confession: I don’t have any answers to these questions. I mean, I could offer some but I won’t know if I’m correct until the future comes and goes. I don’t know anyone who does. If you do, please comment or use my Contact page, I’d like to get to know you dear prophet!
So what I am doing about this uncertainly?
Well, I’m paying down debt like I told you. That’s definitely a priority around our house. My second priority is saving and investing those savings in predominantly ETFs for my RRSP and in my other accounts, buying and holding dividend-paying stocks.
Although actuaries and economists have stated our Canada Pension Plan and other financial programs are well funded, I’m not taking any chances. Not that I don’t trust these fine people, rather I want to be in control of my destiny; I’m putting my retirement plan on my back because it’s what I have the most control over. Who knows what the government will do. Who knows how the economy will perform. Nobody can predict the weather accurately for a day in advance let alone 30 years of market certainty. I do however have a great belief in the companies that heat our homes, companies that are responsible for gas and electricity through our home and companies that provide us entertainment in it. I’ll probably always need a phone or if I don’t, surely some technology that connects me to family and friends across in Ontario and beyond will be needed. I also have confidence in companies that provide us with insurance; for the “what ifs” in life. All of these companies will at minimum, have workers that employ them who will need financing for their homes and cars of the day, even if I don’t someday. For these reasons and many, many more, I think dividend-paying stocks from certain sectors make sense to help us fund part of our retirement plan. It’s not the only way to invest but a good method for us.
I think one of the best kept secrets in retirement investing is dividend-paying stocks; you get passive income from hard-working companies. As long as the company can grow its earnings over time, dividend investors with ownership in multiple companies don’t need to care too much about the stock market. A diversified dividend-investor doesn’t have to worry too much about 4% retirement rules. Dividend-investors also don’t have to worry much about selling their assets when markets crash – if anything they should rejoice because they can buy more of these great companies at cheaper prices while their dividends keep rolling in. Your income should rise over time as dividends are paid by companies who grow their earnings over time. More earnings, more dividends.
Of course, there are risks with dividend-paying stocks. Not all dividend-paying stocks are created equal; dividends are not the same as company fundamentals, although they are a good indicator. Even companies that have a decent history of paying dividends could cut their dividends. I own a company right now that might just do that. Worse still, companies rise and fall. But many blue-chip companies in the industries I’ve suggested above are as stable as they come. They are considerations for your portfolio. They’re already holdings in mine.
I’ve said this before, I’m no financial expert. I’m a regular guy trying to build some retirement income and financial security like everyone else. But I’m onto something that’s working very well so far. My passive dividend income is rising, month after month after month even if I don’t buy any more new stocks. At least ten of the stocks I own are buying more stock every quarter through reinvested shares that will pay more dividends next month or next quarter. After 4 years of building and engineering, my dividend income retirement machine is finally at work so some day I don’t have to.
Who knows what will happen tomorrow, next week, let alone 20 or 30 years from now. What I do know is I stand a much better chance of retiring without debt if I stick to my extra mortgage payment plan. I also stand a great chance of being financially free if I compliment my lazy ETF investing approach with buying and owning a diversified set of great companies that pay me in good times and in bad. I’m confident in my two-pronged investing approach is gaining more armour every quarter to fight anything the markets have in store. Bring it on Mr. Market.
I’ll leave you today with two quotes that summarize my thoughts today, from two totally different eras but when written in succession, offer some interesting food for thought:
Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window – Peter Drucker
Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present – Marcus Aurelius
What about you? Are dividend-paying stocks part of your retirement strategy?
If not, what approach are you using to achieve your financial freedom?
Share your comments, I’d like to hear what you have to say!