For a few years now, I’ve been inspired and motivated by early retirement. We’re far from realizing that but I’d like to think we’re getting there, slowly. Using this site to chronicle our financial freedom journey I’ve been fortunate to meet a number of fine folks who are willing to share their financial independence financial stories with me. Today’s post is one of those stories….
- Name: pwm, from Canadian Money Forum
- Age: 66
- Family status: Married
- Retired since: 2005
- Retirement plans: Be retired as long as I worked
- Retirement worries: none whatsoever
Thanks for taking the time to chat with me pwm. How did you get started in investing?
My father was an investor. As a child, I remember hearing him talk about stocks such as BrasCan, and TransCanada Pipelines as early as 1958. We bought our first new house in 1972 when I was 23. When I sold that place in 1979 I had some cash which I could not immediately apply to my new mortgage so I opened an account with Richardson Greenshields and bought some stocks. That was in the days of $49 commissions on stock trades. What I soon found out was that my broker was mostly interested in churning my account to generate commissions, rather than improving my situation, and every time she called me with another of her schemes I lost money. She was fired, and another person took over my account that was somewhat better, but my overall experience with a full service broker left me completely discouraged. I was still convinced however, that in the long run, being an investor was the only way to achieve financial independence, and the experience with the stock broker was actually a good thing in a way. It was a very good learning experience for a young pup and it taught me a good lesson. I decided at that time that I would never again make an investment decision based on someone else’s recommendation. When you make a decision based on your own research and it goes wrong, you feel badly, but at least you learned something. If you made that same decision just because your broker suggested it, then you feel even worse. Not long after that, TD started its Green Line Investor Service which was the first discount broker in Canada so I moved my account to TD and have been there ever since. I make all my investment decisions based on my own research which includes reading financial articles, watching BNN, using online tools at TD Direct Investing (TDDI) and other web sites. I have no desire to talk to a financial advisor ever again. I’m a DIY type of individual in all aspects of my life; it’s just how I roll.
Sounds like you’ve learned a lot over the years. May I ask what your savings rate was prior to retirement?
After I paid off the mortgage on my second house in 1984 I started saving for retirement in earnest. It was probably around 20% of my gross salary.
That’s a good savings rate. What was your investing journey and approach? What did you invest in and why?
My wife quit work to raise our children and I had a huge aversion to debt, so I wanted to be mortgage free as soon as possible. Because of my bad experience with the brokerage, I concentrated on using GICs to save, so that I would be certain to have the required cash every year to pay down the principal on the mortgage. In those days GIC rates were in the 10% range.
(Mark: wow, not anymore!)
When I was debt free at age 35, from that point onward, all my available cash went into mutual funds, with TD funds, but also with Dynamic, Trimark, Templeton, Altamira and PH&N. I began to build a diversified portfolio of mostly equity funds, both foreign and domestic, as well as some bond funds. Around 1990 my company started an employee stock purchase plan. The company added ½ to your contribution and bought shares every month for you and the dividends were reinvested commission free every quarter. I signed up for the maximum payroll deduction of 5%. It seemed that it was likely to be a good bet going forward and it turned out to be the best financial decision of my life. 15 years later the stock had split 3 times and my shares were worth around $500k. It was the main reason I was able to retire at age 55. I worked in IT tech support, and was on call 24 X 7 X 365 with a pager for 25 years, worked almost every weekend, and couldn’t take holidays because I was the sole support for certain critical systems. I really would have preferred to work until at least age 60, but I just couldn’t take the stress any longer.
I don’t blame you for leaving early. Switching topics a bit, index investing using low-cost Exchange Traded Funds (ETFs) seems to be a sensible way to invest. What’s your take on that?
I completely agree with that premise. During the last several years I’ve sold off almost all of my mutual funds and have switched the money to ETFs. I still hold two mutual funds with low MERs that I consider to be worth keeping. All new money goes into ETFs.
What are your current income streams in retirement?
My company pension, Canada Pension Plan (CPP), and my wife’s Old Age Security (OAS) provide enough cash to live on. I’m delaying my OAS till age 70 while I reduce the size of my RRIF. If I were to take OAS now, I would have to pay back about 2/3 of it and my calculations show that delaying OAS will pay off if I live to at least an average age. The investment income is mostly dividends, so with the gross up my income is way over the OAS claw back threshold. My investment income is just reinvested, because we don’t really want anything we don’t already have. I suppose that living a frugal lifestyle for 45 years just becomes a way of life and remains the same in retirement. My children and grandchildren will enjoy a large inheritance someday.
You might already know from my site I’m a hybrid investor: and for extra diversification. What are your thoughts on my game plan?
It’s a good plan. I have a similar breakdown in my accounts. I own both common and preferred shares as well as ETFs. There’s zero MER when you own shares directly, but ETFs give you an inexpensive way to diversify outside Canada.
There is lots of debate in the personal finance community on investing using the TFSA first vs. RRSP first vs. simply paying down your mortgage. As someone who was financially free, what’s your take?
That’s an interesting question. I’ve read articles lately that suggest with interest rates at all-time lows, it makes sense to invest instead of paying off the mortgage. There may be some validity to that argument from a purely mathematical perspective, but it’s hard to quantify the non-financial value of being debt free and owning your own home. The security in knowing you always have a place to live regardless of unknown future events was worth a lot to me. In my case, with my wife not working and the entire financial responsibility of supporting my family resting on me, I made it my top priority to become debt free and pay down the principal on my mortgage before doing any serious long term investing. I just hated the idea of being in debt. It’s just how I was raised I suppose.
Regarding TFSA versus RRSP, it depends on your expected post retirement marginal tax rate and there are situations where the TFSA would be more advantageous. I started to max out my RRSPs after I was debt free, and have maxed out both our TFSAs of course. The only thing I would have done differently is to have made all my RRSP contributions to my wife’s spousal RRSP instead of splitting it evenly with my RRSP. That way all our RRIF withdrawals would be on her tax return. Even so, as it is with income splitting I can get 75% on her return, thanks to Jim Flaherty.
As I have said before, I don’t need to withdraw any capital and my dividends are strictly surplus money. My pensions are enough to live on and we have no debts of any kind. If I had to sell securities to live on, I would not exceed the 4% per year rule of thumb.
Any retirement worries? Anything about the market that keeps you up at night?
No worries. I’m almost 100% equities in my investment accounts and the swings in stock prices don’t bother me because I have no reason to have to sell anything. I look for bargains when prices are low. There will come a time when we will have to pay for healthcare but that’s why I’m increasing my investment accounts rather than draining my capital. My attitude is to first make plans for the worst possible situation, then having done that, there’s no point in worrying.
You’ve got things well in control, kudos to you. Any final words of wisdom for readers?
Yes I would like to share this thought. Two years ago I had a medical emergency, and had to have surgery. I was in the hospital for 16 days and it took two months to fully recover. While I was in the hospital I never once gave a single thought to my investments. The only thing that mattered to me at that time was getting better and being able to go home. It gave me a whole new perspective on what really matters in life. I realized how blessed I am to have a loving wife of 45 years, and 2 grown children who have been successful in their lives and are raising children of their own. I’m trying to experience every day to the fullest and appreciate the things I have rather than yearning for the next new toy. If you have food and shelter and security then your basic needs are being met and anything else is just a bonus. Good health is not just an important thing, it’s the only thing. I know it may sound trite, but I would urge people to remember the best things in life truly are free.
A big thanks for pwm from Canadian Money Forum for sharing this retirement essay. What do you make of his story and what questions do you have for him?