Financial Independence Update – April 2021
Realizing financial independence takes time. Welcome to our financial independence update – April 2021 edition.
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.
I prefer Financial Independence Work On Own Terms (FIWOOT) versus FIRE
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 financial independence 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 Financial Independence Update 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.
This is my definitive answer to paying down your mortgage or investing.
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…
Here are our projected major assets in the coming years 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 and I’m likely to commute my pension.
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).
You can read up about a LIRA including how I invest in my own LIRA here.
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.
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.
Financial Independence Update – April 2021 summary
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):
We want to semi-retire in the coming years because life can be short.
For some, saving too much and/or working too long for retirement can be a big mistake
We are very fortunate to date. We have our health and good jobs. Health is wealth.
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.
Here is what goes into a great financial plan if you need some help.
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.
Awesome and another wonderful report, Mark! And I am impressed by your wife and yours pension. Impressive! Question, is that a government pension or you mean the regular RRSP contribution (or maybe a mixed)? The only thing we have is my RRSP.
You are very much on track! Keep inspiring 🙂
Thanks very much. Years in the making!! We are very fortunate but even then these are not gold-plated government pensions. Those values would be even higher than ours!!
To clarify, we have one pension each and we have RRSP assets as well. We have always saved on our own and will continue to do so.
I will be over to see your site this week for some Weekend Reading 🙂 I enjoyed that massive Crypto post!
Years of hard work and wise decisions. Very well played. I wish future generations be less of blind consumers and learn the basics of financial. Maybe you should start working on writing a book!
It is amazing to have both the pension and RRSP contributions. Bravo!
Thank you! Yes, the Crypto post took some extensive research and I had to update it twice since posting just 2 days ago. The Crypto world changes constantly.
Will work on a mini ebook this year – related to blog 🙂 That’s my plan so stay tuned!
Yes, we are very fortunate but we’ve also made some of our own breaks.
No doubt. That Crypto post was a monster. I will be highlighting it this weekend for you!!
Fantastic my friend. Thanks for sharing and how exciting as you approach exercising some options in the future. The power of planning is evident.
I will contend that people actually save more for their future then they realize. Here’s an example.
Person has $100K in pre tax salary.
Pension/RRPS contributions $13 000
CPP contributions $ 3166 (2021)
Mortgage (Principle) $12 000
TFSA (500/month) $ 6 000
Total $34 166 That’s 34.166 percent of their 100K income.
CPP is saving for the future. House payments are forced savings. Pension/RRSP/TFSA – it all counts as you build up that nest egg.
I think many focus on savings from net income and not pre tax income when they should do the opposite.
I always feel if one can just max out all the registered accounts, that’s already a high enough savings rate. For a couple both working and with kids, that’s two RRSPs which are 18% of their pre tax income, two TFSA at $6000 each, and RESP at $2500 times number of children. Not every family can acomplish this.
Thanks very much.
Yes, true, you can make those assumptions if you’re paying into CPP, pension, etc. = forms of saving for sure. Just that in the article I was focused on after-tax income – what you keep after CPP, pension, EI, benefits, etc. are paid. Some folks are able to save 50% or higher on the FIRE journey. I feel that’s incredible but those decisions/choices always come with sacrifices. That’s never been our approach. Maybe it should have been. We would have been done working full-time by now but it was never the plan to just retire early and do little else.
I can appreciate that approach is great for some. Not for us. Overall, we’ve been very fortunate but we’ve also made some choices that have helped.
Thanks for the kind words Gruff. I’ll keep you posted on this site as we get closer!
Yes, Mark’s plan and how he executes are excellent.
I agree with what you wrote other than paying off house principle as forced savings. It’s paying off debt. Your PR doesn’t generate income unless its leveraged again for investing and you manage to net positive and/or you’re counting on capital gains??? for retirement expenses; and have a cheaper accommodation alternative. I won’t, I don’t, I won’t… again!
LOL. I thought most seniors eventually will downsize, right? We count on that assets for things like e.g. long-term care if needed. Also, in case there are other big expenses we cannot cover, e.g. my kids are actually accepted by Harvard or Oxford, instead of Canadian universities, we might downsize early to get the educational fund ready.
While paying off mortgage, I think one is also building assets in their PR. With that assets, there are many ways one could benefit from it.
I am always thinking to leverage that assets to invest so that the house assets can at least generate enough income to cover the house cost. ITOH, feel that might be risk I don’t need to take. Still debating with myself.
LOL. My comment was directed at Gruff.
Its interesting how times have changed and people consider their homes an investment asset class now. I guess crazy low rates and crazy high prices have done that. I see it as a place to live and an expense. Even though in hindsight leveraging it the past 10 years could have paid off. Who knew? What will the next 10 years bring? But I have zero interest in doing it. I have no idea if I will downsize, but if I do I imagine it will pay for rent or for a few years at a seniors home. I downsized from my last house but this one cost me a lot more. My folks are 85 and still live in their big place out of the city, with no plans to move. In time possibly due to the upkeep.
Having kids and planning to pay for very expensive educations would make a difference, yes.
Leverage can certainly work for higher-income earners May. I won’t be surprised if we do a bit of that ourselves once the mortgage is paid or near paid to accelerate any asset growth in our taxable account.
I would not advise any lower-income earners for much leverage. The math wouldn’t support it but there is nothing wrong with some debt – it much however be manageable and managed well. Too many folks have no idea what that means. (Not you of course – you are well on your way to financial freedom and flexibility.)
Great overview Mark and you and your wife are totally on track. It’s nice that both of you have a pension you can rely on. 🙂
Having an investment portfolio beyond $1M will empower you to do a lot of stuff.
We hope so! It’s been a long journey Bob but we’re not done yet 🙂
Fantastic overview Mark. To say you’re set is an understatement. Awesome job.
The only minor quibble I would have is return assumptions shown for your wife’s DC pension > LIF. IMHO while within recent historical ranges they seem aggressive for a 70/30 portfolio looking ahead. I’ve read numerous sources projecting lower number going forward due to the incredible long runup and interest rates. You mentioned being conservative with the value of yours. ~4%??? for DC pension?
In any case you’re in a great place now and that should improve in the years to come. Wow.
Quibble away! Yes, there is likely no way her DC pension will return near 10% in the coming years. Not banking on it. If we get 5%+ I will be happy.
If (rather when…) we move her money out it will likely go to VBAL, XBAL, HBAL, etc. and keep her DC plan/LIRA/LIF very pension-like in a mix of mostly stocks with some bonds = a balanced fund. I won’t want to be too aggressive with that. That’s an interesting lesson unto itself. Amazing how a boring, balanced mix of stocks and bonds have done for the last 20 years even paying some money management fees. 7% in a pension is decent I thought. We could have earned more if we were all equity but I didn’t want to take those risks with her plan and we’re already very aggressive with equities in our personal portfolio so I never thought it made much risk-sense.
Coming along. I just try and stay out of my own way!
Very smart approach- stay balanced on that portion of retirement funding and stay out of your own way!
Yes, its absolutely an amazing result for a balanced fund that also probably has higher fees.
All the best.
I would certainly hope we could get 4% real return in our retirement. Although we should be OK with 3% real return, but 1% more will make a big difference.
Well, we will see what happens when the future becomes present.
And I am pretty sure Mark will manage just fine no matter what is the return on the DC pension. Actually, I am pretty sure he will have more than enough being aggressive on saving and conservative on planning.
I would be happy with 3-4% real return (i.e., after inflation). I have assumed between 2-3% inflation for our semi-retirement, hence the need to work part-time for a few years and earn some income beyond the portfolio – but inflation is going higher. I feel it almost has to with government debt burdens and the ability to just print money to solve a problem. I don’t agree with it.
That said, I’ve always feared the first 5 years in retirement due to sequence of return risks and inflation. Working part-time or at something will help us see those years through without touching any capital from our portfolio “just in case”. That’s the idea anyhow.
You are correct that I tend to be more aggressive with saving at time and very conservative with returns. I’m hoping that combination will serve me well but the future is always very cloudy!
I’m hoping for that too. But, I chuckle a little at the conservative comments here. Perhaps I am the conservative one on here. lol
The VPW return #’s I work with and have posted on here various times are using:
70/30 split = 2.95% nominal return
Inflation 2%??? = .95% real return. If we do better I’m good. If we don’t we’ll still be fine. So far in 7 years we’re blowing those away of course and the nest egg grows but that will change.
I have recently downloaded the VPW worksheet and the default return value there is 5% equity, 1.9% bonds and 2% inflation. You are definitely the conservative one here, LOL. I have put in your very low return number into that sheet and figured I could still survive. But I certainly hope that won’t be our future.
I update both the default and my conservative one.
I also update the default one with accumulation and retirement mostly because it adds other income sources ie work pension, oas, cpp for a total income potential for spending and taxes. Very useful.
It also provides the same as above but with a 50% drop in equities to model that scenario too.
Ya, conservative I guess. When things are good it makes no real difference. When we have a dump is when its more important. Good to read you can make it with very low return expectations. I certainly hope that won’t be our future either, but it won’t surprise me after so long with unusually good ones.
The software we use at Cashflows & Portfolios (fyi) has the following defaults we input (fyi):
Equities = 6.5%
Bonds = 2%
Cash = 1.5%.
We typically use 2-3% for inflation. I use 3% inflation for our own future projections.
I think 5% equities would be low over the next 10 or 20 years personally 🙂