Financial Independence Update – October 2020
The ability to eventually work on my own terms. Welcome to my latest financial independence update.
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.
- 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 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.
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 ~ future $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 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.
3. My wife’s defined contribution pension ~ future $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 a few indexed funds.
Since her 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 at age 55.
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:
(Note: September 2020 dividend income update coming soon!)
2. We use our RRSP accounts to invest in a few stocks but mostly low-cost ETFs.
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 late-40s.
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.
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 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 but I will likely, permanently, turn off all DRIPs from my taxable account in the coming years. Meaning, instead of reinvesting dividends within our taxable account, I will take all dividends paid as cash moving forward 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.
For as long as we can, we hope to contribute to each TFSA we own and let the dividend income compound tax-free. 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.
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!
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.
I want to start keeping track of our Net Worth but I am unsure of how to value my DB pension. How did you determine your valuation? My contributions, mine and employers combined or the commuted value? Any help would be appreciated and thanks for the great articles.
Hi Mike, here is a good article on that. A good rule of thumb, although not perfect, is in this post:
I have asked my DB administrator at work, no less than 20 times, what my commuted value might be. They won’t give it to me unless I voluntary or involuntarily leave. Rather annoying since it’s my money.
I was very conservative in my post, it might be higher now but who really knows.
If I find a good calculator for that, I will let you know!
I’ve been following you for a little under a year now and really enjoy your work/writing. I’ve been interested the FI/RE movement in general for about 3-4 years now but I’ve certainly struggled a little bit with regards to a lack of Canadian content (in contrast to American content, naturally).
I’ve learnt a lot from you, keep it up! 🙂
Incredible achievement by you and your wife along your journey to financial independence. You both should be very proud of your remarkable achievement. I am fully confident you will even exceed your own expectations and get at the top before you knew it. Everyone can learn from your well disciplined approach and what you can offer in terms of great advice, etc. Well done and I share in your happiness.
Wow, kind words Ken – thanks very much!
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?
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!
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.
P.S. I still have not been able to convince the CRA to let withdraw only 4%
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,
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.
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.
Thanks for reading.
Question pertaining to the statement “have no choice to take CCP at 60 due to many no contribution years”. Is this due to requiring the access to this monthly income or due to the calculation on the drop put years? I aim to retire next year before I turn 51. I’m having a hard time understanding the impact of the drop out years on my CPP payments when you retire quite early. (ie in excess of minimum nine years) I fully understand the benefit of delaying payments of CPP and OAS for increased percentages when retiring at a more “normal” retirement age. I wonder if you could shed some light on the impact when retiring early as someone who is living the process currently. My investments of stocks, rental income and downsizing to access principal home equity will, as per my calculations, make the CPP and OAS payments as purely icing on the cake. It will be my objective to access my harder to collapse equity in my LIRA and RRSP before they cause me a taxation problem when CPP and OAS start to be taken. Accumulation of assets versus the decumulation stages seems to be a much relatively easier process. Especially when you want to deny the Canadian government further opportunity to stick their hand in your pocket. Lol!
Purely due to the calculation on the drop out years. Eight between 52 and 60 and another 6 from 18-24 while in school plus 5 years where I did not reach max contribution after school. I know there is the mantra that you will get smaller amount but from a bigger slice of the pie if one waits but I can’t see how adding another 5-10 years of non contributions to wait to 65 or 70 can get me more!
My father, who collects a pension took his CPP at 60, so he received his bridge benefit and CPP from 60-65, his break even point was 74. He is now 82 and absolutely no regrets taking CPP early. He says I really enjoyed that extra money from 60-74 while he was fit and active, he took all three grandkids to Disney by himself with his CPP money which was one of his best memories. He said you really slow down once you hit 70. Now at 82 his biggest desire is to upgrade his 65″ TV to 82″!
My plan is to take CPP at 60, withdraw from my RRSPs to zero that before taking OAS at 70. My pension and CPP should just come in under the OAS clawback and if I do mess that up it will be a tolerable problem to have compared to the vast majority out there.
“He says I really enjoyed that extra money from 60-74 while he was fit and active, he took all three grandkids to Disney by himself with his CPP money which was one of his best memories.”
And herein lies why some folks take CPP early. Because they can. This is not wrong or right but rather a personal decision that should be informed about what you can and/or do need the money for. We’re not here forever.
I’ve always considered any OAS clawback in retirement a great thing all other things being considered. It means I worked hard and definitely saved enough money. Kudos to others in this financial position who have their health.
That TV size sounds very nice 🙂
FWIW, the way I see it, taking CPP early is not bad nor good. If you need the money, then definitely take CPP. If not, I think it can make great sense to defer to age 65 or ideally age 70 due to higher income and built-in inflation protection benefits at ages where you don’t want to worry about cashflow.
I would have to agree the accumulation of assets is very easy relatively speaking to asset decumulation. The latter is something I’m going to be writing about more and more on this site 🙂
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.
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! 🙂
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.
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?
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
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.
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.
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:
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.
Nicely done Mark, you and your wife are definitely doing quite well. 🙂
Coming along Bob. We’ll see where we are in a few short months. Lots can change with the stock market and economy.
I hope all is well!
Very impressive work you’ve completed towards your goals. I like the planning that has clearly gone on behind the scenes for many years to get you to where you are today.
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!
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.
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! 🙂