Financial Independence Update – October 2020

Financial Independence Update – October 2020

The ability to eventually work on my own terms. 

Definitely something to look forward to…

Until then, save, invest and have some fun. Work hard but stay balanced. Stay the course too.

Enjoy the journey.

Financial Goals Update

Time flies when you’re…

Hard to believe I’ve been a dividend investor and a low-cost ETF investor for over 10 years now. I’ve been buying and holding many of my Canadian dividend paying stocks for years. You can see an example here. 

As a result of my approach, what I consider a get wealthy eventually path to financial independence, the results continue to show we’re doing a few things right.

  1. We’ve been very fortunate to have good paying, stable jobs for the last decade. So, we use this to our advantage to max out our Tax Free Savings Accounts (TFSAs) every year since inception (effective 2009). Our TFSAs combined now churn out over $9,500 per year in tax-free dividend income. I expect after our TFSAs are maxed out with 2021 contribution room, we will easily cross the $10,000 mark in tax-free income earned per year from these accounts. 
  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. 
  3. We increased our mortgage payments, albeit slightly earlier this year, and those extra payments have the mortgage dead in just over 5 years at our current payments. 

Big goals in mind…

Our two major financial goals have always been:

  1. Become debt-free, own our condo, and
  2. Own a $1 M portfolio to start semi-retirement with.

Here is an update on those major milestones. 

Liabilities

Since our last FI update, we’ve lowered our mortgage balance from $126,800 to $118,000 at the time of this post.

Readers ask me from time to time: should I invest or pay down the mortgage?

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

This fall, we are ready to enter our final mortgage term. With fixed rates so damn low right now, I believe it would be very difficult to pass up a 4- or 5-year fixed term at about 1.7% borrowing costs from our lender. That’s our offer on the table. That seems pretty awesome to me and we’ll likely grab that rate very soon. 

Beyond our mortgage we have no other debt. We hope to keep it that way after our mortgage debt dragon is slayed. 

Assets

The following are estimates because 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)

Our projected major assets can be summarized as follows for general net worth calculations:

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

1. Principal residence >$700,000 value

I’m not sure how you feel about home ownership but I figure we have to live somewhere. That means, we do not and will not count on our house/condo for any retirement plan. Our condo is a place to live in and enjoy. We need other assets to fund our retirement. See below for what we need and want. 

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

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

I hope to stay with my current employer for the coming years. I enjoy my role and my team right now. 

That said, life can be unpredictable. Companies change. Our healthcare system is under tremendous pressure. Simply put, there are no guarantees.

So, commuting a pension is always an option for me in the future. Maybe that is an option for you as well. 

Here are some considerations for you if you are leaving your employer voluntarily or involuntarily in the coming years. 

Should I take the commuted value of my pension?

I’m leaning on keeping my pension inside the plan. Again, time will tell when it comes to my decision.

3. My wife’s defined contribution pension ~ $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. Her plan is a contributory plan.

Based on my knowledge of low-cost indexed funds over the last decade-plus, we have 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, her returns have been close to 7%. 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 (the latest when she plans to stop working full-time) and convert that DC pension to a LIRA and then eventually a LIF. We would then withdraw up to the LIF maximums going forward and use this money for everyday expenses. In the first year, that should deliver some decent income. I’ve shared some very rough estimates for that income 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. 

$400K LIF at 55 provides $26K per year

Image courtesy of TaxTips.ca.

Source RBC - LIF Min and Max

Image courtesy of RBC.

These assumptions above also currently ignore the ability to “unlock” part of her LIRA as well. Anyhow, lots of considerations for sure and much more to think about in the coming years regarding how to best manage this pension asset. 

You can read more about Locked-In Retirement Accounts (LIRAs) here including any need to turn that into a LIF.

4. Personal investments $1 million portfolio – we’re working on it!

As readers may know for 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.

You can see our latest income journey report here:

August 2020 Dividend Income Update

(Note: September 2020 dividend income update coming soon!)

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.

Why?

Extra diversification.

We’re confident if we keep investing this way, our 1-2 hybrid approach, maxing out contributions to our TFSAs and RRSPs, we will absolutely achieve this major dream-like portfolio goal in our 40s. 

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

  1. Do we start working part-time? Can we stay with our current employer for that?
  2. What order do we draw down our portfolio to be tax-efficient?
  3. How should we invest my wife’s LIRA for future income?

Regarding our FI funding for expenses this is my thinking now…

a. RRSPs

In our 50s, assuming we work part-time, we’ll make strategic withdrawals from our RRSPs. We will likely strive to “live off dividends and distributions” and not touch our capital for the first 5-10 years of semi-retirement. This will help us reduce any sequence of returns risk.

You can read more about sequence of returns risk in this post below, why you shouldn’t follow any 4% rule without some caution and understanding first. 

Does the 4% safe withdraw rate still make any sense?

OK, more importantly, why draw down our RRSPs in our 50s and 60s?

Our RRSP withdrawals prior to age 71 will start reducing the deferred tax liability that is our RRSPs before my workplace pension kicks in. It will also allow us to consider delaying CPP and/or OAS for the inflation-fighting fixed income benefits those government programs provide. This way, by getting rid of our RRSPs in our 50s and 60s I have effectively transferred some of my investment risk to our government programs. 

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

Beyond that, here are some OAS facts you need to know and consider:

b. Taxable Investing

I highlighted this before within various dividend income updates on my site but I have now stopping running all DRIPs for investments inside my taxable account. I will continue to run DRIPs for all registered accounts going-forward.

Instead of reinvesting dividends within our taxable account, I will take all dividends paid as cash in 2021 and use any dividends paid to start building up our desired, modest cash fund to start-retirement with.

I believe any early retiree or even retirees in general should consider keeping at least 1-years’ worth of cash available for unforeseen expenses when you’re not working. That is our goal in fact. 

How much cash should you keep?

Again, in semi-retirement our plan is to “live off dividends” from the taxable account and not sell stock shares early on. Being optimistic in the coming years, those dividends from our taxable account should pay for our monthly condo fees and our annual property taxes every year. Those are by far beyond groceries our biggest expenses. 

We’ll eventually draw down the capital from this taxable account after our RRSP assets are gone.

This means by our early 70s, health willing, while the taxable account is done as will the RRSPs – that will leave assets related to our workplace pensions, government benefits (CPP and OAS), and our TFSA assets “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. Even in semi-retirement, I plan on contributing to our TFSAs and maxing out those accounts every year. We’ve been saving money for the upcoming 2021 contribution for the entire year. 

In our early 70s, our plan is to live off income related to workplace pensions, take CPP and OAS government benefits and spend any tax-free (TFSA) income as we please. I’ve calculated that if we continue to maximize contributions to our TFSAs (like we have been doing), it’s not unrealistic that in 30 years our TFSAs will be generating tens of thousands of tax-free dollars per year.  

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

Since the DC pension is really a blend of 70% stocks and 30% bonds right now, I’m thinking I will try and replicate that via an all-in-one ETF like XBAL or VBAL in a LIRA or LIF eventually.

You can read about some great all-in-one low cost funds here.

My wife is likely to stop working full-time around age 55 or sooner.

Designed as a “traditional” balanced fund of ~ 60% stocks, 40% fixed income I figure something like XBAL or VBAL would be perfect for both income and growth while we sell units periodically in retirement as per LIF rules above. 

Thoughts from readers: would you keep this account simple? Would you go more conservative with more fixed income over time? How do you invest in your LIRA or LIF now?

Financial Independence Summary

We are very fortunate to have lots of moving parts in the coming years as we trend towards financial independence. I’m confident if we stick to our plan things should work out just fine. 

I’ll be back to provide another update in a few months, maybe towards the end of this year or as part of any early January 2021 update. Until then, I’ve got lots of ideas for new content in between. Thanks for reading.

Mark

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 a good plan – those folks that have been there and done that before us? 

As always, I welcome your comments. 

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, join the journey to learn how I'm getting there and how you can get there too! Follow my on Twitter @myownadvisor.

20 Responses to "Financial Independence Update – October 2020"

  1. Inspiring journey Mark. I’ve found that keeping emergency funds is important, but really depends more upon the security of ones income than just saying put 1 year or more or income set aside. Other factors like age, employment skills, health, dependants, insurance, etc, should also be factored in.

    Reply
    1. Thanks cannew. We believe, at least now, that having 1-years’ worth of cash in case for emergencies when we’re not working, without any debt, should be enough and then we can keep our stocks invested for the long-run.

      Those are also good factors to consider for sure.

      I hope all is well and slowly getting through your new book! 🙂
      Mark

      Reply
    1. Thanks very much. Just noticed your Tweet – appreciated 🙂

      Clearly you are doing very well on your investing terms as well. Glad to hear those real estate ventures are doing well during this trying time. Well done. With a couple of rentals + a nice income stream from stocks you will be set!

      Stay in touch!
      Mark

      Reply
  2. Hi Mark,
    I am very close to retirement and have been working towards very similar goals that you are. My goal is for dvidends to contribute about 50% of my retirement income.
    My only different viewpoint is using home for part of planning. I believe you are referring to reverse mortgages, and I agree to not use them as part of the plan but not having any children I realized when the time comes to sell we would have the proceeds to help pay our living expenses at that time. That frees up some of my savings that otherwise had to be set aside for later in in life. Thoughts? And keep up the great articles.
    Keep Well

    Reply
    1. Having dividends deliver 50% of your income is impressive Blaine. I hope you nail that goal.

      Yes, I’m not a fan of any reverse mortgage or any home-equity nuclear retirement plan from that perspective. I know actuary and well-known author Fred Vettese thinks differently and has written as much – that reverse mortgages can be an option for some. I prefer never to use that option myself. That’s option #5 from his list below:
      https://www.myownadvisor.ca/retirement-income-for-life-review-and-giveaway/

      It is our goal to own a number of assets and cash flow for income and simply enjoy the condo debt-free.

      Thanks for the kind words.

      Reply
  3. Hi Mark

    I retired from mandatory work a little while ago, in my fifties.

    I think your account of your target\journey is a great way to keep the goal in sight.

    But, does your workplace know about your Blog and do you think it impacts any career aspirations or projects you are assigned?

    I know for me it would be a kiss of career death if they knew I was thinking I could leave, lack of commitment and all that. (that workplace culture is one reason I was motived to be able to leave.)
    When people hear I am FI in my 50’s with work optional they are “like goats staring at lightening” and a few are noticeably miffed. Even now in my part time my situation is viewed askance from some neighbors relatives and coworkers.

    Reply
    1. Thanks very much BK.

      Actually, I believe my boss reads my blog. 🙂 But I look at it this way if/when I had staff that had other aspirations: “go for it”. If any of my staff had a passion for investing or anything else for that matter I would encourage them. The reason being – happy staff are more productive staff.

      The way I see it, if I enjoy my job, there is no real reason to “retire” per se. I will at least have options. I figure that’s what FI is all about.

      Congrats on your retirement. I enjoy learning from others. Are you still working part-time? Maybe a bigger question is: how do you achieve FI yourself?

      Cheers,
      Mark

      Reply
      1. Yes work a couple of days a week at a Community fitness organization (paid, not much but it is engaging and keeps me moving).

        My career workplace had leadership not mature in outlook as yours, escalating internal politicking, eccentric boss demanding “personal loyalty” – like something out of a feudal system, disengaged co-workers …I ended up having to fire my boss, earlier than planed but I had the means.

        How I did it;
        – Scarcity Mindset
        – Stable marriage
        – No kids
        – Brother in Law whom did it before me (as an example of possibility)
        – 2 x DB pensions
        – Steady investing with ups and downs

        Reply
        1. Those mindsets and disciplines are ideal as you know BK and many of those we are practicing as well.

          I suspect our organization will evolve, it has too, but they are trying to move in the right direction by focusing on their most important asset – people – and ensuring they have the tools, environment and support to be successful. I’ve always felt that is ultimately management’s #1 role: hire good and work hard to retain good people. They rest of the job becomes easier if you follow rule #1 of management.

          All the best, thanks for reading and congrats on realizing your goals.

          Reply
  4. Fantastic job Mark. I agree with Blaine that having the ability to tap into the home equity to support FI is not a bad way to go. You have to do something with the asset at some point. Since we have income security, we decided to use the equity now. As long as the asset value is greater than the debt there is no problem. I realize this is not for everyone it’s just how we do it.
    I agree with you that Reverse Mortgages are a poor choice. I use my HELOC as both my emergency fund and to cover occasional living expenses.
    Are you not better off to keep the DRIPS on in your unregistered account and consider using a HELOC to access extra funds? If you allow the dividends to accumulate for five years to build up your cash fund is that not five years of lost opportunity to build up more secure cashflow? All the best and either way you are fantastic shape going forward. Hard work, planning and discipline have definitely paid off.

    Reply
    1. That’s fair, re: home equity. I guess in my 40s now I don’t see any reason to tap the home equity for the coming decades. Just keep debt at $0 and if I can continue to max out the TFSA in semi-retirement and slowly draw down the RRSP in my 50s and 60s – that seems pretty ideal to me.

      I don’t think I’m comfortable using the HELOC as my emergency fund, too conservative (!), but I do see your point and in your case, if you can easily pay off the line as needed then not too much worry.

      I have considered keeping DRIP taps “on” in taxable account but turning them “off” will now simplify any adjusted cost base calculations (less work for me), I can move money strategically to buy more dividend assets as cash builds up (I want to buy more renewable energy stocks there, AQN, INE, Brookfield companies), I can use that money to max out my TFSA in 2022 (with dividends paid throughout the year), and I can start building up my larger semi-retirement “what if” emergency fund as well.

      Thanks for the kind words. Seems things are coming together! 🙂

      Reply
  5. Retired at 52 with a full pension and own my house with no mortgage. Have always maxed out RRSP and TFSA. Have no choice but to take CCP at 60 due to many no contribution years (8). Will postpone OAS until 70. By far my biggest surprise was taxes! Feds don’t take enough off my military pension, which I have since rectified. I have had to pay taxes quarterly since my release which has been a pain. Taxes from my GICs and investments have been large and a pain to sort out. Have no means to save on taxes, only deduction is my $2000 pension deduction. I pay way more taxes now then when I was working. My taxes will only increase when I take CCP and OAS, plus start downsizing my RRSP (did not plan on a RRSP, actually only contributed to a spousal during my.career,, but a divorce saddled me with an unplanned RRSP which will be costly to draw down due to my pension) Not much I can do about this except to come up with the quarterly payments to CRA. Still we have more than we need to live very comfortably in the best country in the world even though those taxes are high and about to go higher to pay for Covid.

    Reply
    1. Congratulations James and thanks very much for your military service.

      The thing is, and I know it’s painful per se, but having a “tax problem” in retirement is a good problem to have. If you have to pay quarterly installments it means you’re making good income and doing more things right than not.

      I assume you’re trying to wind-down your RRSP first, now, before taking OAS? You can always move some of that money into the TFSA every year and move RRSP assets from tax-deferred to taxable now too.

      Thoughts?
      Thanks for reading.

      Reply
  6. As my uncle once said “If you are paying taxes it is because you are making money”
    Having said that, no one likes paying taxes especially once you are retired.
    Looks like you will be well over the $2 million portfolio(s) by the time you call it quits Mark. Good for you and the missus.
    You will be in the fortunate position of trying to maintain a lower tax bracket with the various revenues you will be deriving from your own investments as well as the government pension(s) along with CPP and OAS. Doubt you will qualify for GIS.
    One thing to keep in mind with a LIRA. Once you convert to a LIF it is subject to the usual minimum withdrawal rates AS WELL as a maximum withdrawal rate. So I take the max out of my LIF withdrawal and adjust the RRIF to maximize my tax bracket while keeping under the next step up bracket. The RRIF is still subject to minimum withdrawal percentages but you can adjust up so as to lower the principal for the following year.
    Monies in excess to your needs can be shipped off to your TFSA or if need be in to a taxable investment account.
    Again, if we are so lucky they are nice problems to have.

    RICARDO

    P.S. I still have not been able to convince the CRA to let withdraw only 4%

    Reply
    1. Thanks Ricardo! Net worth doesn’t really mean too much unless you know how to derive meaningful income from your portfolio. That’s been my goal all along and it’s coming together thanks to many years of staying the course.

      I like your call on the LIF. It is my hope to wind that down (DC pension for my wife once converted) since it’s just another account to deal with and so we’ll try and live off that for a few years without RRSP withdrawals. This way, monies in excess to your point go from RRSP to TFSA. Eventually I see us left with taxable dividend income, TFSAs to tap, government benefits (CPP and OAS) and my pension in our 60s and 70s and beyond.

      All things considered…I just want my health by then!
      All the best,
      Mark

      Reply
  7. Mark, you said: “I will try and replicate that [current DC asset allocation] via an all-in-one ETF like XBAL or VBAL in a LIRA or LIF eventually.”

    A few weeks ago we converted my wife’s LIRA to a LIF, and then transferred 50% of the LIF to a prescribed RRIF (all in Questrade). We replicated the LIRA asset allocation (VCN, VIU, VUN, ZAG) in the LIF and PRRIF. I’ve been considering switching these accounts to VEQT and ZAG in preference to the all-in-one ETFs. My thinking is that I can easily dial up or down the equity/fixed income ratio as desired, but more importantly to me, I can see exactly how much fixed income cushion we have and can draw on exclusively in a mother-of-all market meltdowns. What are your thoughts on this half-way allocation between multiple ETFs and the all-in-one solutions?

    Reply
    1. I think what you have done Bob, low-cost funds for CDN, international, U.S., bonds, etc. is of course very smart. I guess my slight bias to an all-in-one XBAL or VBAL or other was that I have “enough” going on to follow my stocks and I was simply thinking of replicating my wife’s 60-40 or closer to 70-30 stock to bond allocation via an all-in-one if/when we need to move it into a LIRA.

      The beauty of the all-in-one is that rebalancing within that fund of course is done by the fund manager, and not you (or me). So, effectively, whatever you want to draw on the fixed income cushion is effectively designed in.

      It’s really one of these 6-of-one, half-a-dozen of the other conversations since as long as you don’t mind following those 4 ETFs and selling whatever fund has gone up in price to rebalance, get your LIF income, then you’re good. Should really only be bothering selling x1 or at best x2 times per year and letting the market do it’s thing as you know.

      Happy investing in retirement, I hope to join you in a few years!
      Mark

      Reply

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