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!
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:
- 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).
- 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.
- 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…
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?
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:
- Condo ownership
- My pension
- My wife’s pension
- 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.
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,
- 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.
4. Personal investments $1 M
How do we invest?
Via a simple two-pronged approach:
- 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.
- 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:
- Stay invested regardless of what the market and/or our stocks do short-term.
- Maximize contributions to our TFSAs every year, in January.
- Maximize our available RRSP contribution room every year.
- 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:
- What order do we draw down our portfolio to be tax-efficient?
- When should we draw down our TFSAs?
- How should we invest my wife’s LIRA for income and growth?
This is my thinking now:
- 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.
Here are some OAS facts you need to know and consider:
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:
- 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”.
- 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.