Financial Independence Update – May 2020

Financial Independence Update – May 2020

In recent years, I’ve become more passionate to eventually work on my own terms. This doesn’t mean I want to leave my current job by any stretch now. I enjoy what I do and working with my current team.

But I do see a day whereby I can be financially independent, to work on my own terms. FIWOOT if you will!

I prefer Financial Independence Work On Own Terms (FIWOOT) versus FIRE

Small changes can lead to big success

I’ve been a dividend investor and a low-cost ETF investor for over 10 years now. As a result of my approach, a get wealthy eventually path to financial independence, even during this COVID-19 market crisis, the positive results are starting to show.

Here are some examples of how some small investing habits can lead to big success over time:

  1. We’ve been fortunate to max out our Tax Free Savings Accounts (TFSAs) every year since inception (effective 2009). Those accounts combined now churn out over $9,000 per year in tax-free dividend income, even after accounting for recent dividend cuts to companies like Inter Pipeline (IPL) and H&R REIT (HR.UN).
  2. Thanks to dividend reinvestment plans to earn more shares and ETF units commission-free every month and quarter, our portfolio is now earning almost 600 more shares or units via DRIPs. To put that compounding power in perspective, assuming even just $25 per share or cost per ETF unit, those 600 more shares or units equate to $15,000 more in equity every single year doing nothing. 
  3. We increased our mortgage payments, albeit slightly, after we moved into this condo last summer. Assuming we can negotiate another great rate and set of prepayment privileges for our next and final mortgage term starting in 2021, we should be mortgage-free in another five years.

Our two major financial goals have always been 1) become debt-free and 2) own a $1 M portfolio to start semi-retirement with.

As timing might have it, we might just realize both goals (debt repayments and markets willing) around the same time but our stretch target date is to realize both goals by age 50. 

Financial Independence Updates

So, if our long-term game plan is 1) no debt and 2) to own a modest personal investment portfolio for semi-retirement then where are we at?

Here’s where we are trending…

Liabilities

Since our last mortgage update, we’ve lowered our balance from $136,000 to $126,800 at the time of this post.

Readers continue to ask me should I invest or pay down my mortgage?

This is my definitive answer to paying down your mortgage or investing.

Assets

The following are estimates since in some cases, I don’t have the actual figures related to my defined benefit pension nor have I bothered to calculate any condo values closely. When it comes to the value of our home, I really don’t fret over it. I have to live somewhere.

Projected key assets by the end of 2023 (age 50)

Our key assets can be summarized as follows for net worth calculations:

  1. Condo ownership
  2. My pension
  3. My wife’s pension
  4. Our personal investments.

1. Principal residence age 50 ~ $700,000 value

Same as last year; I kept the condo value the same even though I suspect this value is much higher from fall 2019.

So far, we really enjoy condo living again. While there remains post-move fixes by the builder to work through this year we’ve really enjoyed the convenience and proximity to walk to groceries, restaurants (eventually, coming out of the COVID-19 restrictions) and parks.

I’m not sure how you feel but regardless of what our condo value might or might not be in the coming years we’re not counting on our house for any retirement plan. Our condo is a place to live and enjoy. We need other assets to fund our retirement.

Terrace time

2. My defined benefit pension age 50 ~ $450,000 value

I’m very grateful for this pension and I’m probably very conservative when it comes to the value of it. 

I’ve been contributing to this plan for almost 19 years now, with the following formula:

1.6% x your Best Average Earnings x years of pensionable service.

Based on the pension terms:

  • I can receive a deferred pension from the plan payable at age 65, no penalties,

OR

  • I can receive a reduced immediate pension from the plan payable the first of any month prior to age 65 – but no sooner than age 55.

While the pension benefit can be received as early as age 55 with a reduction, (reduced by 0.4% per month prior to age 60; reduced by 0.3% per month between ages 60-65), I’m leaning on keeping my assets invested within the plan until age 65. 

By the end of this 2020 year assuming all continues to go well with my employer, the pension value will be worth almost $34,000 per year, indexed to 75% of CPI. 

I figure this fixed income will come in handy in my 60s and beyond. 

Thoughts from readers: would you defer this pension until age 65 to avoid early withdrawal penalties? Why or why not?

3. My wife’s defined contribution pension age 50 ~ $400,000 value

My wife is very grateful for her pension as well.  She has been contributing to her defined contribution plan for almost 20 years as well. Her plan is a contributory plan.

I decided to invest her assets in the available menu of low-cost indexed mutual funds. Her portfolio is currently structured as follows at the time of this post:

  • 31% Canadian bond index fund.
  • 34% Canadian equity fund (lowest cost one I could find).
  • 35% BlackRock U.S. equity index fund.

Since inception, based on this boring but predictable mix of funds her returns have been 6.4% since inception until the end of December 2019. Certainly those returns will be lower now. 

Thoughts from readers: would you keep this asset mix for the coming few years? Would you increase the bond component over time? Why or why not?

My current thinking is we take my wife’s pension assets at age 55 (when she plans to stop working full-time) and convert that DC pension to a LIRA.

You can read more about Locked-In Retirement Accounts (LIRAs) here.

4. Personal investments $1 M

How do we invest?

Via a simple two-pronged approach:

  1. We invest in mainly Canadian dividend paying stocks for passive income. I own what the big mutual funds and ETFs own directly.  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 if we keep doing these things in the coming years, market returns willing, we will achieve this goal:

  1. Stay invested regardless of what the market and/or our stocks do short-term.
  2. Maximize contributions to our TFSAs every year, in January.
  3. Maximize our available RRSP contribution room every year.
  4. Rinse and repeat.

We believe financial independence is on our horizon. We hope to live off distributions or dividends yielding 3-4% in semi-retirement. 

Once the mortgage debt is killed off, our biggest questions in the coming years are the following:

  1. What order do we draw down our portfolio to be tax-efficient?
  2. When should we draw down our TFSAs?
  3. How should we invest my wife’s LIRA for income and growth?

This is my thinking now:

a. RRSPs

  • In our 50s and 60s, start withdrawing assets from RRSP when not working and/or working part-time to cover some retirement or semi-retirement expenses. This will start reducing the deferred tax liability that is our RRSPs before my workplace pension kicks in at minimum.
  • Before age 70; exhaust all RRSP and/or RRIF assets.
  • In our mid-60s, consider taking CPP and/or OAS government benefits. There is the real potential for us to delay our CPP and/or OAS until age 70.

This financial expert hinted this is when to take your Canada Pension Plan (CPP) benefit.

Here are some OAS facts you need to know and consider:

Little known facts about Old Age Security you need to know

b. Taxable Investing

  • I’m thinking I stop all DRIPs running inside this account around age 50 when I start considering working part-time. I will take all dividends inside this account as cash. With dividends rising over time, I’m optimistic we can realize this goal:

April 2020 Dividend Income Update

  • After our all RRSP and/or RRIF assets are gone, we will wind down the tax liability that is our non-registered investments in our senior years.
  • By our early 70s, this will leave workplace pensions, government benefits, and our TFSAs “until the end”.

c. TFSAs

  • For as long as we can, we hope to contribute to each TFSA we own and let the dividend income compound tax-free. 
  • By our early 70s, our plan is to live off income from our workplace pensions, government benefits and TFSA income. If we continue to maximize contributions to this account like we have been doing, every year since inception, it’s not unrealistic that in 30 years our TFSAs will be earning tens of thousands of dollars per year; money that can be withdrawn tax-free

How should we invest my wife’s LIRA for income and growth?

Since the blend of dividend stocks and low-cost ETFs is plenty for me to handle right now, I’m thinking I would simplify my wife’s LIRA once created to invest in an all-in-one ETF like XBAL or VBAL.

Designed as a “traditional” balanced fund of ~ 60% stocks, 40% fixed income I figure this fund would be perfect for both income and growth while we sell units periodically in retirement. 

Thoughts from readers: would you keep this account simple? Would you go more conservative with more fixed income over time?

Financial Independence Summary

I continue to have no idea when exactly we’ll reach our financial independence numbers but I know I’m enjoying the process of getting there and using this blog to chronicle it.

I’ll certainly keep you informed along the way. 🙂

What are your thoughts on our journey as a couple in our 40s striving for financial independence in the coming years?

What am I missing when it comes to putting any semi-retirement dreams in place – folks that have been there and done that before us? 

I look forward to your comments and feedback about any improvements I should consider. 

Mark

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

37 Responses to "Financial Independence Update – May 2020"

  1. “it’s not unrealistic that in 30 years our TFSAs will be earning tens of thousands of dollars per year; money that can be withdrawn tax-free”.
    Anyone who maxes out their TFSA and a spousal TFSA for 25 to 30 years, and invests for Income, should be able to generate enough tax-free income to almost live of the dividends.
    Good work Mark.

    Reply
    1. Thanks very much Henry. In savings mode very soon for 2021 TFSA contribution room. Want to have our $12K ready to go for January 1, 2021.

      Mark

      Reply
  2. I think that someone in their 40’s has a lot of years left before they start to collapse their RRSP’s. On that basis I believe that 40% in fixed income is too high and would lean towards lowering that percentage. Equities, especially dividend payers, can out perform fixed income, especially given the low interest rates currently. Just my opinion.

    Reply
    1. Fair thoughts Roger. Really not sure when exactly will I tap my RRSPs. Thinking early 50s at the earliest.

      For the LIRA, would you suggest more of 80% equities and 20% bonds?

      Thanks for your comments,
      Mark

      Reply
  3. I would put your wife’s DC pension into an 80% equity and 20% fixed income now and when converting it into a LIRA would increase the fixed income component to closer to 30% and eventually to 40% over time. As long as you have enough cash-like investments to pay out the minimum yearly withdrawals required for a couple of years ahead, you should be okay into the future and get better returns. The key is to not have to be forced to sell equities into a down market like we have today.

    Reply
    1. Roger that! Kidding aside, I think at least 60% equities for my wife’s LIRA is smart. Maybe 80% but we’ll see in a few years when I need to make that decision and the market climate.

      How are you investing these days Roger?
      Mark

      Reply
      1. My wife and I are both retired. She has a DB pension plan with cost of living adjustments. I have variable royalty income with no pension. I consider these the “fixed income” component of our portfolio. We are invested 100% in equities in non-registered and registered investments. I am comfortable picking Canadian equity stocks (overwhelmingly dividend paying stocks) but for US and International I use mainly US Vanguard index ETF’s, most in our RRSPs to eliminate withholding tax. Vanguard has low MER’s on their ETF’s. We could withstand a 50% drop in equity markets and still be okay since our spending is always less than our total income and dividend income continues through the downturns. Have been through many market up and downs in the last 30 investing years and have always held on with little selling. Despite being retired for over 9 years our net worth continues to go up every year. I enjoy donating securities with large capital gains to charities we support every year to avoid cap gains taxes on them. Own the six large Canadian banks and current market values are still higher than my ACB. I guess my motto is keep frictional costs low (MERs, trading costs, etc.) and invest in the index if you are not confident in stock picking.

        Reply
        1. Your portfolio sounds like my path:

          “We are invested 100% in equities in non-registered and registered investments.” Same.

          “I am comfortable picking Canadian equity stocks (overwhelmingly dividend paying stocks) but for US and International I use mainly US Vanguard index ETF’s, most in our RRSPs to eliminate withholding tax.” I have decided to own CDN stocks directly (30 of them) + 11 U.S. stocks directly then ETFs like ITOT and VYM for low cost investing.

          That is incredible…. re: “could withstand a 50% drop in equity markets and still be okay since our spending is always less than our total income and dividend income continues through the downturns.”

          Seems very smart to me and based on your approach a big reason why your “net worth continues to go up every year.”

          Kudos on the donations. Seems like a life well lived and good on you to give back. I hope to do the same. 🙂

          Mark

          Reply
  4. Mark, what are your thoughts, we’ve spoken before, I’m 59, an early retiree… so this year I plan on transferring in-kind from my Spousal RRSP to non-registered (with tax hold-back of course) and continuing to do so going forward. We will need the help of our IT person to decide how much to keep income tax low. Do you think this is the right thing to do? My husband is still working, 3 years to go and a good pension at 62. Should we keep the DRPP on our RRSP going forward? Also, what do you think about IPL, will it recover? We need to top-up our TFSA, would you hold on this right now due to market conditions? I love reading your posts, links and all the comments. Wished we were taught these valuable topics in high school.

    Reply
    1. I wouldn’t know without doing the number crunching myself Sandra but there are some free calculators to try on this page:
      https://www.myownadvisor.ca/helpful-sites/

      Having a “good pension” at age 62 is a blessing. Kudos.

      Personally, I intend to run my DRIPs/reinvest all dividends paid for any stocks or ETFs until I need to sell such stocks or ETFs.

      I think IPL will recover but it might take a few years. Hard to say!

      I would always top-up the TFSA and try and max out contributions to that account personally. That’s our plan for what it’s worth.

      All the best Sandra,
      Mark

      Reply
  5. Wow! The real question is how you are going to spend the money you make when you start the financial strategy lecture circuit! The FIWOOT tour. Fantastic job positioning your financial future.
    If your wife wants to work until 55 so should you and then take pension your pension at 55. Even with the reduced pension you will likely have a minimum of $1.75 Million in personal assets to work with. How much do you want?
    When you convert your wife’s LIRA I would consider decreasing or eliminating the bond portion. Why? Your pension can be the bond portion. We think alike re: pension=bond. When you have pensions the options are slightly different.
    I’m not a fan of delaying CPP or OAS to 70. Take the money and enjoy it vs delaying to make more when you don’t really need it and run the risk of getting sick or accidents. I have seen to many pass early (family and friends). When you stop work early it seems better to create more income early and enjoy it. Well done and thanks for all you do.

    Reply
    1. LOL. The FIWOOT tour. I like that.

      I have always considered my pension “a big bond” so potentially I can take higher equity risk with her LIRA? Say up to 80% equities in VGRO or XGRO or something? I want to keep that fund simple for sure.

      I’m leaning on taking CPP at 65 and OAS at the same time. I’m not sure we’ll really defer either until age 70 but we’ll see. It really depends how fast we must exhaust RRSP assets and if we continue to work throughout our 50s. The goal would be part-time work for about 10 years ideally up until age 60.

      Mark

      Reply
    2. It’s very likely we will defer CPP, probably also OAS. According to my original plan, I will retire in 2.5 years. But now I feel quite good with my job after the job change, I am thinking to work maybe a few years more than my original plan. So both my husband and I might have a good size of RRSP, and less number of years to draw it down. We certainly want to reduce the size of our RRSP first.

      Of course, the only certainty regarding to this is uncertainty. Have to be agile with the plan. We will see what happens 2.5 years from now.

      Reply
      1. Have you considered part-time work in 2.5 years May? Could be a great option for some income and some mental stimulus. Or, can you not do that in your professional role?

        Mark

        Reply
  6. I see you and your wife being very rich at the age of 50.

    I was hit pretty hard with HR.UN cut with more than 1000 shares. I was planning to sell it actually as it didn’t increase the dividend for quite a long time but didn’t do it fast enough. Well, one of the couple hard lessons I have learned from this crisis. Hopefully, I will survive this to be a more disciplined investor.

    Reply
    1. Well, I think we’re a long ways off that May but thanks very much. We’ve tried to find good jobs, keep them, and save and invest as well.

      I have a few hundred shares of HR.UN. I will continue to hold and DRIP all shares of it going-forward even after the dividend cut.

      Hope you are keeping well.
      Mark

      Reply
  7. Hi Mark, your a true inspiration and I’ve been following your financial journey the last couple years while applying a page or two from your experiences to my family finances.

    I am invested through Wealthsimple Invest for my RRSPs and plan to move all mine and my spouse’s holdings to Wealthsimple Trade and invest into VBAL. I spoke to a WS advisor this morning and she pointed me to how WS Invest recently made changes to their portfolio that apparently has helped their clients better weather the recent lows in the markets. Here’s a link to their recent blogpost tooting their horn on this “move” of theirs: shorturl.at/bipZ7

    I am very apprehensive of such claims from FIs and my basis of skepticism is that their comparative “benchmarks” are certainly not the same composition/geographic allocations of what WS might hold within their portfolios. End of day, I feel this may only be a coincidental blip otherwise the world would have been filled with financial rainbows and unicorns of smart people!

    What are your thoughts on this?

    Best regards!

    Rick

    Reply
    1. We’re trying our best to save and invest for tomorrow while striving to life our lives for today Rick.

      Thanks for those kind words…

      I tried your short URL but it took me to WhatsApp. Can you send the link again?

      I think it’s hard to go wrong with VBAL. I have a deep passion for dividend investing but should anything ever happen to me I told my wife to invest in VBAL for her RRSP or LIRA should I pass. I hope that doesn’t happen for many decades of course.

      WS has a lot to gain by keeping investor portfolios simple so I wouldn’t be surprised if they don’t focus on just a handful of funds for investors. That’s all folks really need is maybe three or four ETFs at the most and when in doubt an all-in-one fund like you have is more than great.

      Cheers,
      Mark

      Reply
      1. Hi Mark,

        I think the Wealthsimple reference is the same point that is being made here:
        https://twitter.com/wealthsimple/status/1259848082197549057?s=21

        Basically, they have recently moved to factor-based portfolios. In particular, they now hold a number of low-volatility ETFs, which have, unsurprisingly, done well during the recent downturn.

        WS’s rationale for the change in their portfolios is that these factor-based portfolios will outperform the broad market over the long term. There is a lot of research showing that these factors have outperformed in the past but no guarantee that these premiums will persists going forward. These funds also have lower diversification and higher MERs.

        Reply
        1. Yes, the low-vol. stocks are utilities, groceries, other which is not surprising during COVID-19.

          That’s the thing eh – there is really no way of knowing what the future holds until the returns show up in the rear view mirror. Then it’s too late to capitalize on any returns 🙂

          Happy investing and thanks for your comments,
          Mark

          Reply
  8. I love the “FIWOOT” line. I’ve been writing and reading a fair amount on FIRE lately and, as we’ve discussed before, am not all that interested in the “RE” component of the concept. It’s all about having those options to decide what to do and far less about trying to simply to escape a dire situation.

    Great idea to bump your mortgage payments even a little bit. Every bit helps you avoid paying further interest and accelerates the timelines. Given the environment we’re in, you’re likely to also be able to get your final mortgage term at a great rate as well. The nice thing will be that even if you’re not at $1M when you’re debt free, the ability to refocus the former mortgage payments in your portfolio will supercharge your final leg toward the end zone.

    Take care,
    Ryan

    Reply
    1. The entire cheer leading stuff around RE in FIRE bothers me a bit. I don’t know of any 30- or 40-something that calls themselves “retired” and doesn’t have a blog, book, get paid for speaking engagements, other to make some side money. That is not retired. They are working for income. 🙂

      I expect our mortgage term to be close to 2% at renewal for our final 4 or 5-years to slay the debt dragon. Then, life will really begin!

      Thanks for the encouragement Ryan!
      Mark

      Reply
  9. There is a difference between working because one enjoys the work and working because one has to work. For the young 30s and 40s who are already retired, they are doing things that they enjoy which incidentally brings money. Good for them. It’s really the best of both worlds. We all have little projects that we want to embark on but are just too busy with our full time daily work to do anything about it. Hopefully we don’t put off these personal life projects for too long. Life passes by so quickly.

    Reply
    1. That’s a great point and something I aspire to…it is my hope my employer will like to keep me in another 5 years after I do want to work part-time; still contribute. We’ll see!

      Reply
  10. Hi Mark, it was great to read the numbers in your pension accounts… Great job in contributing and building that. I think I might have about 70K in my pension account which I’ll convert to LIRA when I move to another company. The pension they’ll pay me at 65 seems less than the dividends I’ll get today if I invest it myself.

    I have a question for you.. I dont know exactly where I read this, but the general advice seems to be no DRIPS for taxable accounts as calculating capital gain and tax owed might get very convoluted. But you seem to have set it up as a DRIP. What am I missing here? Is there a way to calculate it easily, even with DRIP?

    Reply
    1. Ya, I’m really not sure about mine (likely higher) given a DB plan but the values are tricky to calculate. I do know by the end of this 2020 calendar year assuming all continues to go well with my employer, the pension value will be worth almost $34,000 per year when I turn age 65. That’s a good chunk of fixed income I won’t need to worry about.

      I go back and forth on my DRIPs (turning them on and off from time to time) in my taxable account since you are correct, you need to keep track of the ACB (adjusted cost base) for any potential gains incurred when you sell the asset. This is a great free tool to use:
      https://www.adjustedcostbase.ca/

      Once you have a small system set up, it’s not that bad actually but if in doubt, keep DRIPs off and just leave your stocks or ETFs be!

      Hope all is well during this COVID-19 mess. Wild times we’re living in.
      Mark

      Reply
  11. It’s so awesome to see you rise on your financial independence journey. Financial Independence is a dream for everybody but very few achieve it. Great going! These updates will inspire thousands of young souls, myself included. Keep sharing!

    Reply
  12. Hey Mark,
    I think your approach makes a lot of sense. For me, retirement is about 3 months away – just turn 60. I’m thinking we’ll whittle away at our RRSP’s just enough to keep our payable taxes low (~20k each) and supplement with cash in savings from the sale of our house 2 years ago to get to our $72k annual target. I suspect our RRSP’s will actually continue to grow each year through appreciation and dividends. I guess that’s not the worst problem one could have, but we’ll make adjustments as we go. Also agree with you to leave TFSA’s alone as long as possible.
    PS. Your balcony looks great.

    Reply
    1. Thanks Dave – re: balcony!

      Ya, the more I think about it and the more I see prospective retirees (like yourself) map out your plans, it gives me a good idea of what I should do or at least strongly consider. So, the draw down of RRSPs before taxable before TFSAs makes a great deal of sense to me.

      Certainly not the worst problem to have for you for sure!
      Mark

      Reply

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