Financial Independence Update – November 2019
My thinking has evolved during my financial independence journey…so I’ll be more forward and transparent in sharing those thoughts about our journey in this first financial independence update.
I hope to update this series every year moving forward until we reach our goals.
Financial Independence Update – November 2019
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 with the new team. 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’ve coined this my FIWOOT journey versus any FIRE (Financial Independence Retire Early) journey.
You can read in that post that I simply don’t believe in the “retire early” (RE) part.
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.
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…
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…
This is the definitive answer to paying down your mortgage or investing.
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)
- Principal 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.
Why you certainly don’t need to follow what we did, you should at least consider the merits of downsizing that I wrote about here.
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.
- My defined benefit pension ~ $450,000 value???
I’m very grateful for this pension. I’ve been contributing to this plan for almost 18 years now at the time of this post.
While my pension benefit can be received as early as age 55 with a reduction, I’m leaning on keeping my assets invested within the plan until age 65 – for the income security it could very well provide.
- My wife’s defined contribution pension ~ $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.
Since inception, her pension has returned just over 6% at the time this post. 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.
You can find some of the top dividend ETFs to own here.
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, then to a LIF.
You can read more about Locked-In Retirement Accounts (LIRAs) here.
- 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.
How do we invest?
Via a simple two-pronged approach:
- We invest in mainly Canadian dividend paying stocks for passive income. 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.
These are the six phases to financial independence.
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:
Regarding our RRSPs/RRIFs:
- 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 mid-60s, consider taking CPP and/or OAS government benefits. We might delay CPP 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”.
Regarding our 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 any 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!
I’m definitely in the take OAS as soon as possible camp. I did that as soon as I turned 65 and my wife will as well (in 2 years). Part of the rational is that the gov’t is such a mess that I suspect the rules will have to change (lower payout or lower clawback net income or ??).
The other part is that we’ve tried to draw our RRSP/RRIF down but taking larger withdrawals but their value keeps increasing faster than we can draw them down. (granted this is a very nice problem to have and I am definitely not complaining 🙂 ).
Anyway, taking OAS right away means that we can manage our investments in such a way as to avoid any clawbacks until my wife has to convert her RRSP to a RRIF. At that point, I can’t see how we can avoid at least a partial clawback. Collecting OAS right away means that we will have those extra bonus years of no clawback.
I can see that angle Don, re: government mess. It is. I don’t think it will get better anytime soon. So, as a Boomer, I see your point about taking that money now. I might do the same when I get there too 🙂
Congratulations to both of you for creating an amazing future for yourselves. Well planned and well executed and you will soon reap the benefits. Well done! Personally I am now leaning towards taking CPP earlier rather than later. I don’t think there is really a wrong answer there as each of us have a different personal financial plan with different income streams. Do what you think is best for you at the time and live on. Only in hindsight do we really see if that was a good move.
Question: Do you get a choice of your DB pension payout percentages? Mine is 100% for both my wife and I should one of us pass but we get a smaller monthly amount. I did have the option of taking a decrease by 1/3 if one of us passes which would give us a bit more money now. My buddy is considering doing this and using the extra monthly income to purchase life insurance to more than make up the difference.
Great post Mark. Our drawdown plan is very similar to your plan, but we won’t be delaying our CPP or OAS, and will most likely start CPP at age 60.
One of our goals is to balance our taxable income to the penny throughout retirement, so as to minimize all clawbacks (OAS, and pension and age credits). By age 65 we will have drained our RRSPs, except for a small LIF, having pulled enough from them annually to utilize our TFSA contribution room. During our retirement we’ll barely have to touch the money in our TFSAs.
Five years ago I added a sheet to my investment tracking spreadsheet called “Retire Today”. The sheet takes the value of our investments, projected pensions, taxes, tax bands, inflation, pension and age credits etc. and it shows me how much will we have to live on, and still have significant funds in reserve, if we retired/quite our jobs today. This brought the problem of knowing that I didn’t need to work anymore, yet I didn’t want to change my job – it’s a fulfilling work, just quite stressful.
You’re on your way to being in the top percentiles of retirees with money. Congrats. And, it’s not by luck. As I read your posts, you and your wife have been frugal and wise. There may be things that you can do to maximize your income and reduce taxes, but won’t make a huge difference. You’ll be comfortable either way. When the time comes, you’ll have to train yourself to spend! Wish you many, many years of relaxed retirement.
Obviously a DB pension is a boon in *any* form in this day and age, but I am curious about the inflation protection in yours.
You stated “indexed to 75% of CPI less 2%, to a maximum of 5.5%.”.
Does this mean that if CPI is 4%, your pension indexes by 1%? I.e. three quarters of 4 = 3, less 2. Or am I misunderstanding that?
Fine print may also tell you about whether or not it indexes *at all* between the time you retire and the time you ask it to be paid. Which could, for example, be 10 years from 55 to 65.
If this is the formula, and/or there is the additional fine print weakness in your plan for early retirees, you really have little inflation protection in this particular DB. CPI often underestinates the true personalized inflation (my opinion) that people experience over time.
So you are going to find the purchasing power of your 32K sliping and sliding downhill. My personal thoughts on your case (if I understood the formula well) is that the DB pension will be effectively halved in usefulness in just 20 years.
Still a boon, and many Canadians have nothing, but maybe not everything you expected after contributing for 18 years.
You may want to do some modeling and think about additional inflation protection in your equity portfolio (real assets for sxample) as well as the typical dividend growth stocks people select.
Just my 2 cents, probably worth only 1 by the time you read this,
I generally agree with your income stream strategy in future years (delay CPP, wind down RRSP early). Ironically, when I asked my Financial Advisor for a planned income stream to replace my current employment income, he produced a plan which is almost the opposite approach. This includes taking CPP early, receiving return of capital from taxable accounts and exhausting all taxable accounts plus the TFSA before withdrawing from the RRSP (although 2k would be withdrawn every year). The rationale with this approach is my tax bill would be reduced by 75% (of current employment income) enabling full employment replacement until all my savings are used up in 30 years, leaving only CPP, OAS and a small DB pension. That said, I would still contribute to my TFSA every year so my savings should extend a few years longer. I’ll likely take an approach closer to yours. Also, I’m going to take OAS asap as the govt can and has changed the rules at any time.
Thanks Puurfect and interesting to hear about your financial advisor.
Who knows, maybe I will take out taxable money first but given it’s tax efficient with dividend paying stocks I’m not sure (yet) that’s a wise move.
I do know based on various projections that if I leave CPP + OAS + pension + TFSAs as my main sources of income in my 70s that will both tax-efficient and pretty much bulletproof when it comes to market risk since most of those assets will be fixed income and I will still have equity growth inside my TFSA.
There is certainly a case to be made about taking OAS at any time.
Forget to congrats you on your new role. That’s really big. While we are still working full time, we spend half of our waking time in the office, so it’s really important we could enjoy that time.
My job also has a very stressful part which I don’t like. I am in the process to change it. It’s not final yet, but I already saw the light at the end of the tunnel so I am sitting put for the change to happen. When I went to my boss to talk about this I was not sure what will be the outcome and ready to quit if things don’t work out. Fortunately so far looks like things changing in the right direction. This also confirms that my work here is really being appreciated and I am pretty happy about that.
May, that’s encouraging for you. It’s so nice to be able to phase down a bit before full stop retirement and help reduce stress. It’s also great to have an employer value you and work with your request.
Thanks May! Glad to hear there are changes for you as well. Stress is very bad for all of us…
Have you shared what your job is with us?
I am an engineer. 🙂
Gotcha – that’s why you’re focused on optimization of things! Makes sense! 🙂
First off a hearty congratulations on your new role at work. That’s a fantastic development and sounds perfect for you. A motivated team is an incredible prize for a team leader.
Secondly you’ve done a great job planning for your financial future, and actually executing that plan with a large chunk of assets and future pension income.
Re your comments/questions:
1. Condo. Agree. Its a place to live – an expense and likely doesn’t generate income although at some point you may choose to pursue that given your location and desire to travel yourself. Exchange homes might be something interesting to look into. I consider our home that way, and if we want or need to move it will simply pay all or a good part for the next place or rent. Your investment and pension assets are substantial already and growing. I think your balanced approach of saving plus attacking mortgage aggresively at these low rates makes sense.
2. work pension. No doubt you’ll have to crunch the actual numbers closer to decision time re delay, take penalty, or even commuted value to determine your best route. However right now I would also lean the way you are – take at 65 and use your own assets (plenty) /employment income in the meantime.
3. wifes DC pension. You probably can take your wifes pension whenever she leaves that employer and convert to a LIRA you manage, or perhaps half can be moved to her RRSP. Then convert all or remainder to a LIF or equivalent at 55 or when you want to access funds/set up withdrawals (set mine up at age 58 and take minimum payments), along with other withdrawals from your RRSPs. You didn’t include the DC pension as part of your future income stream/withdrawals.
-Your own investable assets. Fantastic! Not mentioned is RRSP balances.
-Drawing down your portolio. Totally agree with your ideas right now, and assessing again as the time comes.
Very nice work by you and your partner so far. Your forecast above is understated. I forsee a very enriching FIWOOT soon.
Great job on chronicling your journey and on education through your blog. Keep it up!
Thanks very much. The new team is great and good at what they do – happy to support them…
As for the financial planning, things are coming along and really bolstered by >20% gains this year – although I care about the income the portfolio can generate and not the portfolio value. The latter means little to me…
Yes, potentially some home exchanges might be good in the coming years. Travel for a few months and then come home. We’ll see. Our condo is too new so we’re very protective of it 🙂
I haven’t ruled out commuted value but that would need to be substantial to replace $32k per year in another 20 years. I figure even right now, I’d need a portfolio of about $750k to generate that much “safely”.
Correct re: wife’s pension to LIRA. We just can’t access at least 50% until she is age 50 re: unlock the LIRA. I figure her DC pension/LIRA should churn out about >$15k per year for 20+ years. Again, once we have no debt, we’ll consider some options around age 50 or so.
Well, RRSP balance is included in $1 M portfolio goal.
Thanks again for the support and readership!
By age 50 you will be a multi-millionaire, great job. Your assets list doesn’t include your RRSP and I assume that won’t be a small amount either.
I am thinking back what was our net worth back 5 years and could not figure that out. Anyway, there is no use to cry over poured milk, I try just to look forward.
Right now I am focusing on dividend growth investing. But I am ready to switch the direction any time in the future depending on things like tax optimization etc. One thing for sure is that I will max TFSA every year and won’t touch them before we exhausted RRSPs and taxable accounts.
I figure our RRSP assets will be ~ 50% of the $1 M portfolio excluding workplace pensions May.
I like your call on dividend investing. I believe this approach will provide tremendous merits when markets tank.
Smart: “One thing for sure is that I will max TFSA every year and won’t touch them before we exhausted RRSPs and taxable accounts.” 🙂
Another good piece, Mark. I completely agree with delaying CPP as long as possible. Never take it early if you can avoid it, especially if you have a government pension; nasty things happen when you reach 65, and you should look into this. Also, I do not see reference to your or your wife’s severance pay on retirement. It can be a nice little sum, much or all of which can be flipped into your RRSP. If you are made redundant, there may well be an additional lump sum that can actually induce you to retire early. This is just to caution you that unexpected things can happen in the future, and some of them are actually beneficial. Press on!
Wise advice and I’m hearing more and more folks thinking of delaying CPP and/or OAS to push the risk to the government and away from a personal portfolio. Also helps with estate planning.
As for the severance, both of us will be entitled to that if that time comes but we hope we can leave work on our own terms. That said, you never know what a company has in store for that so if that happens, I believe all our debt would be gone with both severance payments and we’d be close to realizing our $1 M goal anyhow. So, all that to say, we’ll keep working hard, saving and investing and having fun in the meantime!
I will press on Doug – thanks for sharing and supporting!
Hi…just interested in the comments on delaying CPP. My husband and I both have good DB pensions, no debt and have significant investments (maxed our rrsp,tfsa and non registered portfolio). We won’t have to rely on CPP to meet our spend requirements when we retire at age 55 so we are figuring we may as well take them as early as we can at 60. When we do that, we will reduce what we draw from our investments…what would be the advantage of waiting longer besides an increased monthly benefit?
Thanks for visiting the site.
Here is a post I wrote about when it comes to CPP:
Another one here:
A big reason actually to delay CPP is in doing so you’re transferring the investment risk from you to the government. Then again, you can always “take the money” as soon as you’re eligible since who know how governments may change policies and regulations over time.
Always pros and cons – hope that helps!
Mark, I have to disagree somewhat – there are circumstances where delaying CPP is not the best approach – it depends (always) on the personal scenario – in my case delaying CPP would have resulted in an increase in the drop out years which would have resulted in a decreased CPP therefore I took it as early as possible.
Very fair. The personal finance is very personal thing – I always stand by that. That said, I think many investors could benefit from delaying CPP who are in good health and don’t need the income.
Drop out years is an important factor.
If you are “only” 47 years of wisdom presently it sounds to me that you and the missus will have plenty of moulah to make ends meet.
Best advice to ascertain your monetary situation is to make a budget from what you presently spend, cash burn, and then you could add close to 20% just to take care of inflation and whatever you miscalculated.
As I was a road warrior I under calculated food expenses as most of my meals were paid for. Also had a company car so it was difficult to guestimate car related expenses, hence the boosted budget.
If you will both be pulling CPP, OAS and company pensions then the RRSP/LIRA (future RRIF) will just bolster your income. Sounds like you may get an OAS clawback.
I consider my TFSA as a back up for some really bad catastrophe that I am unaware of and trust will not occur, whatever it is.
I think you and the wife are in an ‘enviable’ position – but this is not so much due to luck as it has been to personal choices, prioritising and diligent planning. Kudos to you for starting this in your mid 30’s and ahead of the majority. From what I have seen on your site, finances will not be a concern – you are well covered in personal savings, modest and defined pensions, and then eventually CPP and OAS. Not using your condo equity as part of your retirement plan is a wise one. You also often mention that you want to continue working PT…which will fill in any gaps, etc.
You’ve worked hard on the financial side of things – good left brain workout. Now may be the time to focus more on the psychological aspects of retiring early and all that entails. When we’ve had our daily routines controlled by our work, it is an interesting shift to experience so much ‘free’ time. I saw a few colleagues count the years, months and days to retirement, and then found themselves lost in the retired abyss…and then return to work they despised. Reinventing oneself after having had one’s head to the proverbial grindstone for so long can be a challenge… but it’s a good one to have…;)
Thanks Karen. I’m simply not a fan of cashing in on our condo and living somewhere else, even if this small place might be worth closer to $800k or $900k in a few years. (It might be worth closer to $800k now. I have a habit of being overly conservative with my numbers as a few readers already call me out on it :))
I have worked very diligently on the financial side and it’s funny you talk about the emotional side of things because since the move to the condo – that has been on my mind a great deal.
Meaning – what does semi-retirement mean to me? What identity do I want to have? How might I want to give back and volunteer my time? All these things are starting to swirl in my head. This year has been a major year of reflection for me and I suspect 2020 will be even more so since I can emotionally feel myself starting to prepare for “what’s next” in another < 5 years. All good stuff. I've worked hard to get here....so I want to take advantage of my hard work. A good challenge to have! Mark
Thanks Ricardo. Always appreciate your objective insights.
I suspect we won’t have OAS clawback issues because we intend to drain all RRSP/RRIF assets before age 65 or so and simply rely on CPP + OAS to replace those income assets from RRSP/RRIF once depleted. I will however have a workplace pension and some dividend income to enjoy but after age 65 I can pension split and do various other things to lower taxation.
I mean who knows, maybe someone in Ottawa will eventually be smart enough to remove all RRIF minimum withdrawals and people can do as they please.
I don’t suspect our politicians are that smart though to improve and simplify our tax code 🙂
One can always dream but I somehow doubt that the governments will let you walk away form the debt you owe them (RRSP deductions while working).
If I were a lot younger I would be more worried about them drooling all over the huge balances that will get built up in the TFSA accounts over the next 20/30 yrs. Some smart a$$ed politician will proclaim that it is unfair to not spread your wealth to those that have not or were not wise enough to put some money away for that rainy day. Fable of the grasshopper and the ant comes to mind.
Very relevant worry, re: TFSA. Who knows what they will do eh? I know I wish they would simplify the tax code. It’s a mess.
Simplifying the tax code would remove too much bureaucracy. Can you imagine how many people they would have to lay off from the CRA.
That would be perfect!!!
Mark, I hope you’re not looking for the extremely simplified tax code:
1) how much did you make?
2) how much is left?
3) send it in!
Ideally, yes 🙂