Financial Independence Update – November 2019
My thinking has evolved during my financial independence journey…
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. Far from it. I’ve taken on a new role at work in the last couple of months and I’m really enjoying it along with the new team. The team is passionate, bright and outcome-oriented. It’s been a great, positive change for me.
Rather, I foresee a place and time whereby around age 50 I could at least have the choice to remain working full-time because I enjoy it, I could go part-time because I have other interests, I could consider seasonal work (because it might be more fun to travel abroad), or maybe I do a combination of these things.
The thing is…financial independence will offer some choices.
I simply don’t believe in the “retire early” part of FIRE.
Doing lots of little things well leads to big changes over time
A concept I try to share at my workplace is striving to do lots of little things very well in the near term. In doing so, this often lends itself to delivering major changes and results over time.
The reason I practice and influence this approach is both intuitive and simple:
- Breaking work down into smaller deliverables is easier to manage.
- Smaller tasks consume less stress and anxiety for all.
- Accomplishing smaller tasks are arguably easier to define, easier to achieve than larger, more complex objectives.
- Success breeds success.
When it comes to our personal finances, we take the same approach. Instead of focusing on big hairy audacious goals that seem impossible years or decades into the future, we break down those goals into bite-sized milestones that we can reasonably manage.
Having these two major financial goals 1) debt-free and 2) owning a 7-figure investment portfolio while desirable seem totally unrealistic at the onset.
Our Joffre mountain hike a few years ago.
Instead of dwelling on those unscalable goals we’ve consistently broken down our goals into more manageable actions over the years…see a 2019 example here…and while our results are never perfect they are paying off.
Forget age-related goals – focus on you
A reader recently emailed me about what I thought about various age-related financial goals. You know, the CNBC crap about “you should have $100,000 in net worth by age 30” or “you should have x3 your annual salary saved up for retirement by age 40”.
Seriously, forget what these channels say you should have. I think you should throw these targets clearly out the window.
I say that because we wouldn’t be where we are today if we always followed what other people thought we should do in life…
November 2019 Update
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…
For the first time on this site, I mean in almost 10 years of running this site, I’m sharing our debt.
Our mortgage balance is about $136,000. Not great but not terrible given where we started 8 years ago owing a couple of hundred thousand more…
We have no other debt. Our credit cards are paid in full every month. We don’t have any car loan nor consumer debt. We hope to keep it that way as the mortgage is paid down more every two weeks.
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.
Projected key assets by the end of 2023 (age 50)
- Principle residence age 50 = >$700,000
A lot has changed in the last couple of years. We sold our bungalow south of the city this year and we downsized to a condo.
While moving was stressful, I’ve embraced the change and I’ve come to appreciate the convenience of walking to groceries, restaurants, and entertainment – no more than 30 minutes in any direction. Simplification of our lifestyle was always going to happen, we just accelerated that plan with this move this year.
While our condo value has gone up about $100,000 since we purchased our home, I don’t really consider this an asset in many respects – since I have to live somewhere.
In fact, regardless of what our condo value might or might not be in the coming years as condo and home values continue to rise faster than inflation in Ottawa, I should inform you it’s not part of our semi-retirement plan. We’re not counting on our house for any retirement plan. Our condo is a place to live. We need other assets to fund our retirement.
- Defined benefit pension (mine) age 50 = $450,000 (value?)
I’m very grateful for this pension.
I’ve been contributing to this plan for almost 18 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. I would draw my pension after that age. I haven’t made up my mind yet.
By the end of this year, the pension value will be worth almost $32,000 per year, indexed to 75% of CPI less 2%, to a maximum of 5.5%. There is a 66.6% survivor benefit.
Thoughts from readers??
- Defined contribution pension (wife) age 50 = $400,000 (maybe?)
My wife is very grateful for her pension as well. She has been contributing to her defined contribution plan for about 18 years as well, but this is a contributory plan.
I’m confident based on the assets available to invest in (mainly low-cost indexed mutual funds = 30% Canadian bonds, 30% Canadian equity, and 40% U.S. equities)), her portfolio value might be worth this much when she’s 50. Who knows…the bond and equity markets will return what they will return…
Since inception, her pension as part of this asset mix has returned just over 6%. Not great, not horrible either. I suspect this is likely due to my investment choice for her in ~35% Canadian bonds. I wanted to take a balanced approach with this part of her retirement fund since I have her invested in 100% equities inside her TFSA and RRSP; a number of Canadian dividend paying stocks and some U.S. ETFs.
Yet, when I compare her returns with investing only in the S&P 500 (via low-cost iShares ETF IVV), which has returned about 6% over a similar period (since May 2000) and maybe that’s not so bad at all.
My current thinking is we take my wife’s pension assets at age 55 and convert that DC pension to a LIRA.
Again, thoughts from readers??
The locked-in nature of such LIRAs means you can’t take withdrawals until usually age 55; annual withdrawals have a maximum amount. This helps ensure your golden-goose pension lasts throughout your retirement.
- Personal investments, $1 M at age 50?
Long before I started my blog (hard to believe it’s been almost 10 years…), my wife and I recognized with good paying jobs, maintaining our health, and keeping a modest, consistent savings rate for investment purposes would be our biggest tickets to financial independence by age 50.
Time in the market versus worrying about when to invest in the market has been our friend.
Market returns willing, we figure maxing out contributions to our TFSAs and RRSPs, every year in the coming years should realize this goal less than four years away.
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.
- I’ve learned to embrace U.S. diversification more. We invest in a couple of low-cost, U.S.-listed Exchange Traded Funds (ETFs) inside our RRSPs. This way, I don’t have to worry about stock selection and I simply ride the returns of whatever these U.S. ETFs deliver.
Our Crossover Point is coming…
Our Crossover Point is getting very close: when financial security is realized thanks to investment income > basic expenses.
Financial independence is the final phase of our journey. It will provide some stress-free living where we could live off distributions or dividends yielding 3-4% in perpetuity.
How are we going to draw down our portfolio?
No idea. I’m in my asset accumulation phase still but I think the following seems to make the most sense:
When it comes to our 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 any workplace pensions kick in.
- In our 60s, 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.
A reminder these are some of the key reasons for taking your CPP and OAS as late as possible:
- you don’t necessarily need the money to live on now (consider exhausting RRSP assets before age 65 or 70);
- you have good reason to believe that you have a longer-than-average life expectancy (we hope so!);
- you are concerned about market risk to your savings portfolio (yes, as we get older in our 50s, 60s and 70s, I don’t want to deal with finances as much since this shouldn’t be the time to worry about money);
- you aren’t concerned about leaving a large estate – so you use up some or all personal assets before taking government benefits (correct).
Regarding the non-registered account:
- In our 50s and 60s, spend income from this taxable account to cover retirement or semi-retirement expenses.
- After our all RRSP and/or RRIF assets are gone, wind down the tax liability that is our non-registered investments.
- By our early 70s, exhaust all non-registered assets – leaving workplace pensions, government benefits, and our TFSAs “until the end”.
What about TFSAs?
- In our 50s and 60s, exhaust all other accounts except TFSAs. Contribute to these accounts 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.
The path to FI is unpredictable but remains a goal
I 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? What am I missing when it comes to the saving and investing part? Here are some other overlooked retirement income planning considerations in this post here. I look forward to your comments!