Financial Independence Update – April 2021
Realizing financial independence can be hard. Yes, there are posts out there related to some shockingly simple math behind early retirement but let’s face it – it takes years of saving and investing hard work (bolstered by any good returns) to realize financial independence.
That’s been our path. It has taken a couple of decades of investing to get to where we are.
We’ve been on our financial independence / work on our own terms journey (#FIWOOT) for many years now.
Thanks to some disciplined savings and some market-like returns over the last two decades, we’re getting much closer to our FI goal. I’ve always mentioned on this site my/our journey is more like a get wealthy eventually plan. We’ve never had a 50% savings rate and I suspect the same goes for you.
This post will update you on our path to FI, making various assumptions for the future along the way, and highlight our general saving and investing plans for the coming months – read on!
The fuel to FI is your savings rate
The higher your savings rate, the shorter your journey to FI.
Using some of the great free calculators on my site – via my dedicated Helpful Sites page – you can see how your savings rate may help you realize your FI goals.
A fictional example:
Unlike some FIRE (Financial Independence, Retire Early) zealots, the reality is it’s not feasible for most people to maintain a savings rate of 50% or more for years on end to achieve FIRE. Even saving 26% of your income (which is quite good) will take you 20.9 years to achieve FIRE based on that calculator above.
Life gets in the way. Needs and circumstances change. Some people just don’t have the means or proper environment to save money. Further, all savings and no spending can make for a boring life. Not only do you usually need a high income to achieve an after-tax 50% savings rate, you must also be consistently ruthless with expenses. With any sustained high savings rate you’re probably not travelling, not dining-out, nor making any discretionary/fun purchases. You are likely living a very scarce existence. If that type of game plan sounds great to you – go for it. It’s your journey. That type of lifestyle never appealed to me.
Please don’t be discouraged if you’re not saving 50% or even 26% of your after-tax income consistently. Most people don’t or can’t. Come up with a plan that works for you.
On that note, I/we have always preferred a much more balanced approach. We’ve been fortunate to have good jobs and good health throughout our careers. That has been key. We could certainly spend more or save more but we’ve largely taken the middle road. Our approach has always been to save first, then spend the rest as we please guilt-free. We’ve done that for years and will continue to do so. That’s been our better way to budget that can work for you too.
Whatever your approach or savings rate may be, 5%, 10%, 26% or 50%+, real financial planning must be about your journey.
Our big FI goals
Without any debt, therefore owning our condo free and clear, we’ll be in a great position to continue working full-time or part-time or whatever those working terms may be in the coming years. To recap, these have always been our big FI lifetime goals for years on end:
- Become debt-free / own our condo, and
- Own a $1 M portfolio to start semi-retirement with.
Here is a new update on those major FI milestones.
Since our last FI update from 2020, we’ve lowered our mortgage balance yet again. We’re now into the 5-figures for any debt. Although we make some additional mortgage payments from time-to-time, we FAR prefer to invest our money in recent years – so that’s been our priority over killing the mortgage aggressively.
Last fall, we started what we believe is our final mortgage term. Our borrowing costs are just under 1.7%.
Beyond our mortgage we have no other debt. We should be mortgage free in less than 3.5 years.
The following are estimates because I don’t have the actual figures related to my defined benefit pension value nor have I bothered to calculate any condo values closely. I don’t care too much about our condo value since I figure we have to live somewhere. It’s not like we can use the equity unless we sell.
Unless you live in Toronto or Vancouver, I certainly wouldn’t rely on your house for your retirement nest egg. Best to save and invest on your own. That mindset has worked well for us…
Projected key assets by the end of 2023 (age 50)
Our projected major assets are highlighted below:
- Condo ownership
- My pension
- My wife’s pension
- Our personal investments.
1. Principal residence >$700,000 value
Our condo remains a place to live and enjoy. We have considered selling and renting but it won’t happen right now. This means we’ll need other assets to fund any semi-retirement dreams, which is fine by us.
2. My defined benefit pension ~ $450,000 value
I’m very grateful for this pension. I remain too conservative when it comes to the commuted value of it. That’s fine. Again, we are more focused on our personal investment values at this time. The pension will be what the pension will be.
If you ever want to consider the math and considerations behind taking the commuted value of your pension, check out this post:
While my pension benefit can be received as early as age 55 with some significant reductions over age 65, (reduced by 0.4% per month prior to age 60 or 4.8% per year; reduced by 0.3% per month between ages 60-65 or 3.6% reduction for every year), I’ve always leaned on keeping my assets invested within the plan until age 65. Pension payments to me would begin thereafter when I also take Old Age Security (OAS).
That was the plan…
That said, life remains unpredictable. Companies change. Our governments are going to struggle with balancing the books increasingly in the coming years (or decades). Inflation will be higher. Interest rates will rise a bit again. Simply put, there are no guarantees when it comes to employment nor the financial future.
So, commuting a pension is always an option for me in the future so I won’t close that door. With bond yields and interest rates so low now, commuting a pension is actually more attractive now. Recall, low interest rates for long-standing employees can add hundreds of thousands of dollars to a pension value over higher interest rates. As interest rates rise, the commuted pension value gets smaller.
I’ll liberate a good example I found on the Ontario Teachers’ Pension Plan site.
Think of a pension income stream like a mortgage obligation you owe. You go to the bank and tell them you’re comfortable with paying them $2,000 a month, at 4% borrowing costs for your mortgage. If however the interest rate goes to 5%, you could afford less because your mortgage obligation would be higher. With lower rates, the more comfortable you are with the payment obligation, the higher value you can afford.
3. My wife’s defined contribution pension ~ $400,000 value
My wife is very grateful for her pension as well however she is in a contributory (defined contribution (DC)) plan.
Based on my knowledge of low-cost indexed funds over the last decade-plus, we continue to keep her portfolio in the following available funds and allocation:
- 30% Canadian bond index fund.
- 35% Canadian equity fund (lowest cost one I could find).
- 35% BlackRock U.S. equity index fund.
Since pension inception, for about 20 years, her returns have been close to 7%. In the last 10 years, thanks to 35% in that U.S. index fund primarily, her returns have been well over 9%. For a pension, with consistently ~ 30-35% bond component, that’s pretty good.
My current thinking is we take my wife’s pension assets at age 55. At that time, the process will be to convert her DC pension to a LIRA (Locked-In Retirement Account), and then to a LIF (Life Income Fund).
My wife’s pension should deliver meaningful income in our 50s.
I’ve shared some very rough estimates for that income stream below since LIF maximums end at 6.51% for Ontario at age 55. (6.51% of $400,000 is actually $26,040 pre-tax.) Those payments should last about 25 years or up to age 80 taking out the LIF maximums every year and assuming a 7% rate of portfolio return over that time period.
Image above courtesy of TaxTips.ca.
Image courtesy of RBC.
These assumptions above also currently ignore the ability to “unlock” part of her LIRA as well. We’ll figure that out in the years to come…
4. Personal investments beyond $1 million portfolio
As readers may know for well over a decade now, we invest this way:
1. In many Canadian dividend paying stocks for passive income. We hold these stocks in our taxable account and TFSAs. Our long-term goal is to earn $30,000 per year from Canadian companies in taxable and tax-free accounts.
2. We use our RRSP accounts to invest in a couple of low-cost, U.S.-listed Exchange Traded Funds (ETFs) along with some U.S. blue chip stocks.
We’re confident that if we keep investing this way (something I’ve coined our “hybrid investing” approach well over ten years ago now) we should exceed this goal even with a major market correction.
Investing plans for 2021?
To get to our 50s in a few years with financial health, we’ll continue to max out contributions to our Tax Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs).
We consistently place a priority in investing in our tax-free (TFSA) and tax-deferred (RRSP) accounts before taxable investing. It just makes sense to me to minimize taxation as much as possible for as long as possible.
In fact, those contributions are big keys to our overall Financial Independence Plan (extract below from my plan):
Inside these accounts, we’ll focus on a few key investments such as these stocks and ETFs in particular:
As any money permits, we’ll consider making some purchases inside our taxable account later this year as well but I can’t see that happening very much given the extent of these goals above. Besides, life is for the living. We might want to travel, if we can, in 2022 quite a bit…
Financial Independence Summary
We are very fortunate to date. We have our health and good jobs. Health is wealth. But life throws curves so we try and live in balance. We’ve never had a sustained 50% savings rate but we’ve also never aspired to have one.
With our balanced approach to saving and spending, that works for us, I believe we’ll still realize some great FI goals in the coming years. I suspect you can with your personal journey too.
I’ll be back to provide another FI update later this year. Until then, there is much more content to come.
Thanks for reading. Stay well!
What are your thoughts on our journey as a couple in our 40s striving for financial independence in the coming years? Do you agree or disagree with our decisions? What would you do? As always, I welcome your comments.