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.
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.
- 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.
- 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.
- 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:
- Become debt-free, own our condo, and
- Own a $1 M portfolio to start semi-retirement with.
Here is an update on those major milestones.
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 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.
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:
- Condo ownership
- My pension
- My wife’s pension
- 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,
- 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.
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.
Image courtesy of TaxTips.ca.
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.
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:
(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.
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:
- Do we start working part-time? Can we stay with our current employer for that?
- What order do we draw down our portfolio to be tax-efficient?
- How should we invest my wife’s LIRA for future income?
Regarding our FI funding for expenses this is my thinking now…
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.
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.
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.
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”.
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.
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.
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.