Financial Freedom Target: Age 50 – July 2018 Update
Long-time readers of this site know we take a two-pronged approach to investing – as we work towards some form of financial freedom.
- We own (at the time of this post) 32 Canadian dividend paying stocks for income (and long-term growth). We put those stocks in our non-registered account and Tax Free Savings Accounts (TFSAs) which are part of these updates here.
- Beyond our Canadian stocks we also own a few U.S. dividend paying stocks for income and growth, and a couple of low-cost U.S.-listed ETFs in our RRSPs for greater diversification beyond those stocks. You can read about those holdings here and here.
I like dividend investing in general because it’s tangible money I/we see flowing into our accounts.
Here is some information about dividends I presented during a Canadian MoneySaver webinar with my partners from 5iResearch some time ago:
When a corporation declares a dividend, the company’s retained earnings decrease and its current liabilities increase. When the cash dividend is paid, the corporation’s cash account decreases. Dividend payments directly reduce a company’s earnings, so only stable, well-established companies tend to make regular dividend payments.
Here are some reasons, not all, why companies pay a dividend:
- Reason #1 – it is core to company strategy. Potentially there are no current companies to acquire, maybe company debt is under control, and/or there is already a healthy stream of cash to begin funding new company products or services. Thus, as part of company strategy to reward shareholders – the board of directors feels it’s simply one of the best things to do with company profits over time.
- Reason #2 – the company is on sound financial ground. Most companies that pay a dividend, especially long-term (as in decades) have a stable business model. You really can’t fake dividend payments for very long. Companies that grow their dividend tend to have great cash flow – profits. As an investor, it’s to your advantage to own shares in a company that makes large profits, consistently, with time. A reliable dividend is essentially one very good sign of business strength. This is because unstable companies cannot divert profits directly to shareholders for very long.
- Reason #3 – they want to attract investors.This is akin to company strategy. Some investors are more speculative and like risks (note: this is not me). Dividend-paying companies can attract a certain type of investor; one who prefers cash in hand versus the hope of capital gains. Such investors like the idea of earning income from their investments the same way people go to work to earn an income – it’s dependable. Over time the work is performed by their portfolio. The portfolio will pay out MORE income over time if you reinvest dividends and/or you hold such dividend paying companies long enough whereby dividends are increased by the company every year or so. Companies know there are investors out there who put a bias on income generated from their portfolio over growth.
- Reason #4 – companies know investors like optionality. You see, in a perfect world, all businesses would allocate capital in a way to perfectly maximizethe return on that capital. This would be done so reinvested money would go back into the business in way that pays off immensely for the shareholder (by increasing returns over time AND by continually reducing the company’s tax burden). But you should know by now we don’t live in a perfect world. This means shareholders have over time demanded a dividend – for the purposes of “optionality”. That old link I provided above tells us shareholders like optionality – and dividends provide that optionality – to give investors the choice to increase or decrease their exposure to the business. Reinvested dividends therefore, take advantage of that optionality, to increase exposure. Dividends taken as cash, do not.
Dividends can therefore be one important part of an investor’s total return – our return. Those returns are helping us reach our financial freedom target.
Financial Freedom Update
A couple of years ago, I got inspired to share more details about our financial goals here. They are admittedly very lofty goals but like most things in life I figure if you don’t dream a little you’ll never realize your potential.
In that post I shared where I believe we might be at age 50 (5+ years away for me) with respect to realizing some early retirement goals. The following is an update on that journey:
Projected assets by the end of 2023:
- Principle residence = $600,000 (conservative value). This was part of my last update. I assumed our house value (condo value) will be worth this amount in the coming years. I believe it will be higher given the purchase price of the condo. Regardless, we are not counting on our house for a retirement plan. If the condo appreciates substantially in value over time – great. If not, we will enjoy it anyhow as a place to live. I’m optimistic we can be mortgage free in another 5 years. If we do become debt-free in this timeframe I am very confident my wife and I can start part-time work going forward. Debt is our biggest anchor now.
- Defined benefit pension (mine) = $450,000 (estimated commuted value). This value was part of my last update. Calculating commuted defined benefit pension values is not straightforward but for the sake of this post I’ll say my pension will be worth quite a bit more than that in 2023. In my last update I told you I was very grateful for this pension; I still feel that way. Based on my 2017 pension update, the pension should payout > $20,000 per year for life, indexed to 75% of Consumer Price Index inflationary costs, at age 65 with no reduced penalties. I hope to work at my current place of employment for another 5 years, which should increase this pension amount. However, nothing is ever guaranteed.
- Defined contribution pension (wife) = $400,000 (max value). This value was part of my last update. Her defined contribution (DC) pension plan is not as lucrative as mine but remains very valuable and we are also very thankful for it. Assuming my wife will continue to work full-time for another 5 years; contributing to her DC pension, it might be close to this value. We’ll see if markets are kind to her pension. Market returns are never guaranteed.
- Personal investments = $1,000,000 (big hairy audacious goal). We have recognized for the last decade that keeping a modest and consistent savings rate is our key to financial freedom. This is not to say that returns aren’t important but I’ve learned throughout my investing career that time invested is far more valuable that timing your investments. In fact, our boring approach to money management is working far better than I thought it would years ago. For one, we max out contributions to our TFSAs every year. Second, we strive to max out contributions to our RRSPs after TFSAs are filled up. With any money left over, we kill debt by putting lump sum payments on our mortgage.
Financial Freedom Reflections and Going Forward
Years ago, in my 20s, I remembered playing with some newly minted financial calculators on this thing called the internet to see what it would take to realize such a far-off personal portfolio goal. Using the super simple RRSP calculator from this page a 25-year-old (who knew far less about investing that he does today) who contributed $5,000 per year into their RRSP, for 25 dedicated years, earning 7% on average over that timeframe would own a portfolio worth $343,000 by age 50.
Assuming some couples might share the same saving and investing discipline, that means some couples might own close to $700,000 between their RRSPs by age 50. Not trivial.
It’s cool to reflect upon those days and see where we are now. We haven’t reached this RRSP value nor have we realized our big hairy audacious portfolio goal but we are getting there…slowly…thanks to years of good investing habits and decisions these calculators assumed we should have:
- Maintain modest, steady, monthly contributions to registered accounts (e.g., RRSPs, TFSAs) and don’t stop contributing.
- Make low-cost investment choices. Avoid high-fee products that will eat into your retirement nest egg and make other people wealthy (instead of you).
- Don’t tinker with the portfolio. I used to do that and have since stopped.
- Celebrate falling stock prices as a reason to buy more (not sell).
- Diversify assets beyond Canada’s borders to own equity growth opportunities from around the world.
My lessons to date can be summarized in one of the best financial books I’ve read over the years – designed for millennials – but investing principles are applicable to all investors. By the way this is a FREE ebook!
I have no idea if we’ll actually reach these financial freedom targets in another 5+ years but we have an outside shot because we put a plan in place many years ago. I’ll keep you posted as we march towards this any financial freedom age 50 dream.
What saving and investing goals do you have? What goals did you actually realize? What path did you take and is it similar to ours? Share in a comment. I’d like to hear your journey and learn from it.