Financial Independence Update

Financial Independence Update

The key to our financial independence update and overall plan has been our disciplined savings rate for investing.

If you are spending 100% (or more via credit card debt) of your available income, you will never be prepared to retire. On the flipside, it’s not quite possible to live for free. So, between these extremes, you can decide how much of your savings can be diverted to investing for wealth-building. 

Read on about our path to semi-retirement in this latest financial independence update.

Asset Accumulation vs. Asset Decumulation

The path to wealth-building can take many roads for many people.

Some investors enjoy wealth-building via real estate.

Others are into private equity.

Still others are entrepreneurs and enjoy building and growing a business. 

There is no one right path. 

When it comes to our financial independence plans, I/we have chosen to invest in common stocks that deliver growing income and low-cost Exchange Traded Funds (ETFs) that deliver primarily capital gains. We have landed on this approach largely because it aligns with our long-term financial goals and lifestyle choices. For example, we don’t want to engage in the risks that come with owning multiple properties – we want a paid-off  home/condo for any “home base” – we want the flexbility to travel near or far as we please. We do however want some passive income from our investments to fund any desired lifestyle, to reduce the burden or need to work full-time.

We’ve been on this path for well over 15 years now and our financial independence dreams are taking shape.

Our path to asset accumulation has been rather easy to explain, an approach most can likely replicate:

  1. We save early and often. We strive to max out contributions to our TFSAs and RRSPs every year.
  2. We keep our investing costs low. We don’t own any high priced funds (and haven’t for a decade+ now). High-price funds pad the pockets of the people that sell these products. 
  3. We diversify our equity investments. We own many stocks from Canada and the U.S., along with some low-cost ETFs that hold hundreds of stocks from around the world. 
  4. We stay invested. Market rise and fall and tend to rise agai – so we stay invested to avoid timing the market. If anything, we tend to buy more stocks and/or ETFs when markets tank.

That’s essentially it.

Further Reading:

The answer to any RRSP vs. TFSA debate is here.

The best low-cost Exchange Traded Funds to own.

Why you need to stay invested.

This simplifed but very powerful 4-step process above has yielded some amazing results over time. See chart below highlighting our taxable and TFSA accounts alone. I’m confident with continued savings and investing across all our accounts in the coming years we will realize some of our long-term financial goals.

My Own Advisor Dividend Income Update

Source: Dividends page. 

While the process of asset accumulation has served us well, I have been seriously thinking about asset decumulation in recent years, or at least how much income our portfolio along with part-time work can reasonably generate to cover semi-retirement expenses. 

Asset decumulation objectives are important. You don’t have to take my word for it!

“Drawing down one’s savings in retirement is something very few retirees do well, even with the help of professional advisors.” – Fred Vettese, author: Retirement Income for Liferetirement expert, chief actuary at Morneau Shepell, and more. 

Fortunately, I’ve been using some software tools of late to figure out my draw down approach in semi-retirement. (I’ll provide some links in this post in case you want to contact me if you want some support too.)

The asset decumulation puzzle can be complex for some:

Asset Accumulation PrinciplesAsset Decumulation Questions
1.       Save early, save often1.       When should I take my workplace pension?
2.       Keep your investing costs low2.       If I have no pension, how do I know I have saved enough money?
3.       Consider asset diversification to reduce losses3.       How much money should I have to retire?
4.       Stay invested4.       How do I avoiding outliving my money? 

5.       What do I do if my investments drop?

6.       How much cash should I have in retirement?

7.       How do I fight inflation in retirement?

8.       When should I take my government benefits like Canada Pension Plan (CPP) and Old Age Security (OAS)?

9.       What mix of stocks and bonds should I keep in retirement?

10.   Should I keep an emergency fund in retirement?

11.   How can I generate income from my retirement portfolio?

12.   What accounts should I draw on first?

13.   And more and more and more!!

The good news is, for this financial independence update, we’ve been working towards answers to all these asset decumulation questions and much more. Today’s post will answer some of those questions above!

Q1. When should I take my workplace pension (or our workplace pensions)?

I’m very grateful I have a defined benefit (DB) pension from work. While my pension benefit can be received as early as age 55 with some significant reductions over age 65, (reduced by 0.4% per month prior to age 60 or 4.8% per year; reduced by 0.3% per month between ages 60-65 or 3.6% reduction for every year), I used to lean on keeping my assets invested within the plan until age 65. Pension payments to me would begin thereafter when I also take Old Age Security (OAS).

That was the plan…

However in recent years my thinking has evolved. Our taxable account balance has grown. So has our TFSA and RRSP values to help fund semi-retirement. So, while commuting a pension was always an option for me, commuting my pension is now the leading option if I leave the full-time workforce like I intend to before age 55.

If you ever want to consider your math and considerations behind taking the commuted value of your pension, check out this post:

My wife is very fortunate to have a defined contribution (DC) pension from work. With 20 years and change invested in this plan, she’s accumulated some good savings. Based on my knowledge of low-cost indexed funds over the last decade-plus, we continue to keep 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.

Like my DB plan, my current thinking is we take my wife’s pension assets before age 55. When she leaves her organization, she’ll be forced to move her DC pension assets into a Locked-In Retirement Account (LIRA).

You can read up about a LIRA including how I invest in my own LIRA here.

It is our intention to draw on our LIRAs (via a Life Income Fund (LIF)) and our RRSP assets in our 50s for early retirement income. More on that in a bit. 

Q3. How much money should I have to retire?

To answer this question, you need to know where you are starting from.

You need know what you intend to spend for your “enough” number. 

Consider what you spend for your enough number

Here are some very quick (and FREE) ways to find your financial independence number. 

I’ve/we’ve calculated ours.

We figure we’ll spend an average of about $75,000 per year to retire how we want, including some international travel and some extras. Our base spending is likely close to half of that. 

To cover these desired expenses, that amount of money will need to come from our investment portfolio and/or part-time work and/or government benefits like CPP and OAS. In fact, we’ll be too young (when we retire) to accept CPP or OAS benefits. So, our portfolio draw down options must consider that as part of the overall plan. 

Q6. How much cash should I have in retirement?

No one right answer here but we intend to employ some form of cash wedge in semi-retirement. Our plan is to have ~ 1-years’ worth of cash to cover most expenses at the time of retirement. We’ll be building that cash wedge in another year or so and that goal might make my 2022 financial goals list. 

There are many reasons to keep cash on hand in retirement or even semi-retirement. One reason to keep cash is to help manage market volatility at any age but this is especially important for us since we’ll have a bias to owning mostly equities in retirement. Your mileage may vary.

The Cash Wedge – Managing market volatility

Q8. When should I take my government benefits like Canada Pension Plan (CPP) and Old Age Security (OAS)?

I know my answer now but that could always change. Our plan is to take CPP benefits at age 70 and likely OAS at age 65. Why?

CPP incentivizes retirees who delay their payments past age 65 by 0.7 percent each month or 8.4 percent a year. This translates to a 42% income boost in CPP payments at the age of 70 compared to age 65 (and for life!).

In dollar terms, take even average CPP payments at the time of this post – at just over $700 per month at the time of this post for the average benefit to new beneficiaries – a 70-year-old would earn 42% more or a total of $994 per month. That’s a difference approaching $300 per month.

Based on our most recent financial independence report we can expect the following:

My Financial Independence Plan with CPP and OAS Table

So, combined, we’re looking at earning about $44,000 per year from our government benefits in the future (CPP x2 + OAS x2). 

Q11. How can I generate income from my retirement portfolio?

Via dividends of course!

Kidding, only a bit.

We will however sell assets/draw down our portfolio as well.

Assuming all goes well in the coming years, we hope to start this draw down order while working part-time.

“NRT” = Non-Registered (N) then RRSPs (R) then TFSAs (T).

Generally speaking for that draw down order:

A. Regarding non-registered accounts

  • We intend to work part-time in our 50s and “live off dividends” to some degree, while making some strategic taxable account withdrawals from time to time. 

B. Regarding RRSPs/RRIFs

  • In our 50s and 60s, we’re going to do something unconventional – we’ll start withdrawing assets from our RRSPs. This will help smooth out taxes given other assets we hold. Based on account values now, our RRSP assets should last into our early 70s.   

C. Regarding TFSAs

  • We don’t intend to touch our TFSA assets in any early retirement.
  • We will let our TFSA assets compound over time.
  • By our early 70s, with part-time work done, with taxable assets likely sold, and most of our RRSP assets likely depleted as well, our plan is to live off income from mainly any government benefits (CPP and OAS) and TFSA income/withdrawals. The latter will be tax-free!
  • If we continue to maximize contributions to this account like we have been doing even the next few years, and simply leave those assets alone – 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. Our TFSAs might be worth about $1 million in a few decades to draw down tax-free. 

This is a great time to remind you I run a very Helpful Site called Cashflows & Portfolios that can help answer retirement income planning and cashflow management questions.

Subscribe for free and hit me up with a comment on one of our case studies!

Cashflows & Portfolios

Financial Independence Update Summary

As subscribers to this site may know for well over a decade now, we invest this way:

1. We invest 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. At the time of this update we’re almost 75% towards realizing this goal!

2. We use our RRSP accounts to invest in mainly a couple of low-cost, U.S.-listed Exchange Traded Funds (ETFs) along with some U.S. blue chip stocks.

We’re confident that if we keep investing this way (something I coined our “hybrid investing” approach well over ten years ago now), we should be able to realize our financial independence dreams.

To realize FI in the coming years we’ll do the following until the end of 2024:

  1. Max out TFSAs every year.
  2. Max out RRSPs every year. 
  3. Build our cash wedge/emergency fund to cover 1-years’ worth of expenses.

With 2022 around the corner, and about three full years to go, financial independence and therefore work on own terms is really not that far away…

I prefer Financial Independence Work On Own Terms (FIWOOT) versus FIRE

I look forward to keeping you updated as semi-retire draws close.

Mark

Related Financial Independence Reading

Can you retire early on a lower income? Yes. Read on in this case study about what this reader can do.

This newcomer to Canada wants to achieve financial independence with his family by age 50. Is he on track? What will it take based on his desired spending?

These millennials want to FIRE at age 50. Can they do it? What will it take?

Do they have enough for FIRE at age 52?  With $800k invested and a workplace pension? Find out.

What is a financial plan? Read on in this comprehensive post about the elements of a financial plan.

Here’s when you should consider taking your Canada Pension Plan (CPP).

Should you consider deferring your Canada Pension Plan?

Although I have a number of tools available to me to run some financial projections here is a link to them here and all of them are FREE!

Thanks for reading.

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

17 Responses to "Financial Independence Update"

  1. Great info not on this article but I find most articles informative and somewhat Applicable to our situation thank you. One thing you should research and be prepared for is our generation will not get OAS at 65 it’s been moved to 67 starting in I think 2029. Have a look.

    Reply
    1. Thanks Stu. No, OAS is at age 65 now, but to your point – eligibility for the OAS pension and the GIS benefit will, over a six-year period, gradually increase from the age of 65 to 67, and be fully implemented by January 2029. This change affects people born on April 1, 1958 or later. The government will do what the government will do!

      Reply
      1. That OAS change was proposed by the Harper Conservatives in a 2012 budget and scrapped by the Trudeau Liberals in 2016. At this point we are back to age 65 for everyone but who knows what future governments will do. I am one of those born in 1962 so have followed this closely.

        Reply
  2. I am one of the few who aren’t DIY investors. I have my investments run by Betterment, Personal Capital and Vanguard. They do the rebalancing, tax loss harvesting, etc. Betterment and Vanguard use Index ETF’s. Personal Capital uses individual stocks evenly weighted across a whole bunch of sectors. They are higher fee than the others at 0.79% for million dollar plus accounts. But I like having some diversity in investment approach. Betterment is like 0.14% and Vanguard is around 0.3%. I’m too lazy and don’t want to make a costly careless mistake so I’m willing to pay some fees. Plus I have surplus of invested assets compared to what we need. Social Security uses the 35 highest paid years of work in their benefit calcs. I started my first year at the maximum contribution and exceeded the amount that is taxable every year for 38 years. So that results in the maximum benefit. My wife worked fewer years at lower pay so while she is taking hers now she will switch to half of mine when I start taking my benefit. (Not half of what I’ll get at 70 but half of what I would have gotten at FRA) I did have a pretty highly paid job as a chemical engineer and later as a corporate executive. I admit we live pretty large on six figures but we only spent a fraction of my pay, maybe 25% of it my last year. We also always gave more than 10% of our gross to nonprofits. I could have retired much earlier than I did but I liked my job a lot, until I didn’t and then retired.

    Reply
    1. That’s awesome. Yes, I recall SS uses the 35 highest paid years of work so if you’re at the max for those years – amazing!!

      No interest in becoming DIY? I suppose Betterment does a fine job in keeping you in low-cost funds 🙂 Nothing wrong with paying for investing support when there is value-added to the investor.

      Cheers,
      Mark

      Reply
  3. Congratulations Mark. The most valuable take away is that you have created options for your financial future.

    Re: Commuting Pension: I think in your case that is a smart move. You have the knowledge and experience to handle it where most people don’t. I didn’t commute (came close), but I could qualify for a pension at 55. Not sure it’s worth waiting until 65 and the penalties are heavy for taking it early. If you can manage your wife’s LIRA why couldn’t you also manage your own? (rhetorical) Of course you can.

    Re: CPP I love presenting alternative views – not to create discourse but discussion. Glad you said you could change your answer when to take CPP. These comments are on taking CPP at 65 vs 70 using $714 CPP average at age 65, but the same logic holds true for any age combination. At least I hope it’s logical!

    Thought 1 – If you both take CPP at 65 that represents 20 763/75 000 = 0.277 27.7% of your income is bond like inflation protected going forward and takes some of the strain off of personal assets. If you delay you have to create the same fixed income portion from you personal assets for another five years. Is it not better to create more fixed income earlier then later in retirement?

    Thought 2 – I think the more important metric is how do you make up the potential income lost by taking CPP early? Do you really need too? The cross over point (65 vs 70) is in your 79th year. If you live to 85 you leave about 30K on table. If you live to 90 you leave about 60K on the table.
    If you take just a portion of your monthly CPP and invest it you can close that gap significantly. $200 invested monthly at 4.5% should create about 29K in 20 years (age 85) and 49K in 30 years (age 90). That almost wipes out the shortfalls and I would suggest makes them insignificant. You don’t have to invest to beat the the 8.4% annual CPP return, you have to invest to create enough income to make up the shortfall from age 79 to death.
    I think that everyone should consider the delay CPP strategy. When it comes time to make that decision get as accurate numbers as possible and know how much you could potentially leave on the table.

    Reply
    1. Thanks Gruff. It’s great to see that financial flexibility shine through in my posts – it’s exactly what I’ve been working so hard for all these years.

      We hope to have a post on Cashflows & Portfolios coming soon about CPP. It’s not an easy decision. I believe, and the math will prove this of course, but before taxes are considered I think you have to earn something like 7-8% YoY / every year, if taking CPP at age 60 or age 65 to “catch up” to what your fixed income, inflation-protected income would be at age 70.

      Of course, to your point, the decision in taking CPP I believe comes down to two very important factors if known:
      1. Do you need the money, to live from, and/or
      2. How long might you expect to live?

      If you need #1 – then you can’t take CPP and invest it, you need the money to live from first and foremost.
      #2 is a massive wildcard but I totally get the break-even stuff 🙂

      I’m of the mindset that you should really consider deferring CPP to age 70 unless you need the income for living expenses. There is no other way that I know of whereby you can get a 8.4% annual income increase on fixed income by deferring CPP.

      When it comes to my DB pension, I don’t think I have any choice at my workplace. I must commute if I leave my employer before age 55 in my case so I figure that’s a decision that might already be made for me!! We’ll see.

      When you are taking CPP? 🙂
      Mark

      Reply
      1. I am taking CPP at 60. Cross over 60 vs 65 is in my 76th year. Money left on table at age 80 death is $17K, age 90 is $57K. I plan to take a portion of my CPP and invest in TFSA to close that gap. Our target income at age 60 will be >80K and almost 85% of that comes from inflation protected fixed income type assets like pensions.

        My factors became:
        1. When am I the mostly likely to make the best use of CPP money?
        2. How much money was I willing to leave on the table?
        3. Wife is older (5 years)
        4. We spend less as we age, not more. I want to spend more early in retirement. ( the go go years)
        5. Seen too many people die young (parent, cousin, students, colleagues, friends)
        6. I stopped contributing to CPP mid 50’s and had used up all my drop out years.
        7. We have a secure DB pension
        8. Taking CPP at 60 gives a 14% boost to income.
        9. I’ll pay less tax on the money when I can split CPP early and more tax when one of us passes. We were a single income family. Two people pay substantially less tax on 80K income vs a single person.
        10. I still have a mortgage. Even though we have enough income to meet living expenses in retirement, I would like to lower the debt over time.

        Had Doug run my numbers 60 vs 65. I never had any intention of delaying CPP to 70.
        Keep up the fantastic work.

        Reply
        1. Doug is a sharp guy. I need to have him back on my site 🙂

          When I think of taking CPP at age 60 vs. 65 vs. 70, I think of the following:

          1. Do you need the money to support living expenses? (If so, must take!)… If you’re going to invest the money, that’s good, but that means you’ll need to earn at least 7-8% per year on average to get ahead.

          2. What is your current health, family health history or any disabilities to work through? (If concerns to fight longevity, defer. If you believe you will die in your 70s or even early 80s, take the money.)

          The crossover point sounds about right.
          https://www.myownadvisor.ca/when-to-take-your-canada-pension-plan-benefit/

          “If you believe your genes are good, and you have a strong chance to live beyond age 85, then depending if you need the cash it may be beneficial to defer CPP until age 70. This is only if you can afford to defer the income until age 70.
          If not, if you can’t afford to defer and you need the money of course then take CPP when you can at age 60.”

          Investing your CPP income is a totally different game since you’re taking bond-like income and converting that to more % equities. So, it can make sense to take CPP and invest the money but you need to make a decent return. I suspect a secure pension has made this decision an easy one for you – which is awesome of course my friend!

          Reply
          1. Trust me the decision was not easy and only time will determine if it was the best decision! Having the DB pension does change the thought process.

            If you need the money absolutely take it, but what if you don’t?

            Investing all or part of the CPP does move a portion from bond like income to equities exposing some of it to market risk. You are however still receiving bond like income for the rest of your life, perhaps just a smaller amount. That somewhat negates the longevity risk (outliving your money) advantage. By delaying from age 60 to 70 are you now not taking on the unpredictability of life risk before collecting CPP? That’s 10 years of avoiding the wife not murdering me in my sleep because I’m home so much.

            Depending what investment vehicle I use also determines the amount of equity exposure. I don’t believe you need 7-8% annual return YOY to make up the shortfall. I think it’s much lower.

            I’ll refer to my earlier example using average CPP at 65 of $714/month. I also used the taxtips CPP calculator.
            Assuming a 15% tax deduction that would leave $607 to invest.
            If I die at 90 and take CPP at 60 I leave 140K behind, take CPP at 65 and that is 60K left behind vs delaying and taking CPP at 70.
            If I invest all $607 of the after tax money monthly I only need an average annual return of 3.1% to make up the 140K shortfall over 30 years. This might be because the advantage of delaying stops at age 70 yet I continue to feed the investment pile for an additional 20 years. Lots of investment instruments can beat 3.1%.
            If I invest half of the CPP ($300), I then only need 5.1% annualized return over 30 years.

            I recognize that not everyone has the privilege of being able to be flexible with what to do with CPP. I also appreciate the validity of delaying CPP by using your personal assets, especially if you have large RRSP’s. I’m just not convinced that delaying CPP to age 70 is that big of an advantage. Life is just way to unpredictable.

            As always personal finance is personal. I learned that from you.
            With respect – Gruff

            Reply
            1. Ha, I almost spit out my beer when I read this!
              “That’s 10 years of avoiding the wife not murdering me in my sleep because I’m home so much.”

              LOL

              You might be interested in this – just published today thanks to your inputs 🙂
              https://www.cashflowsandportfolios.com/when-is-the-best-time-to-start-collecting-cpp/

              Of course, we made a number of assumptions but you can see that delay does have some advantages for sure.

              You bet my friend, personal finance is personal. Time will tell if I too make the right decision. Heck, I might just take CPP at the traditional age of 65 to “have fun”. I’ve earned it 🙂

              Much respect,
              Mark

              Reply
            2. That is both a humorous post, and fresh way to look at this. I always say, it’s usually quite easy to create a simple savings portfolio, in whatever way you are personally comfortable. In the end if one persons strategy gets them 2% more than another’s, it really isn’t the end of the world. However IMO, solid tax strategy going into retirement, or thinking out of the box like you have here, is even more important. If you have a nice sized portfolio and you don’t start dealing with it a few years pre retirement, you could lose more money then you have to, to taxes, just from ignorance of tax laws and legal strategies that you may miss utilizing.

              Reply
  4. Great post as always Mark. Sounds like we’re on a similar trajectory… you’re aiming for 2024 while we’re aiming for 2025. Having DB and DC pensions from work will make the planning and transition a bit easier.

    It would certainly be nice to get the $10k TFSA contribution limit again but I don’t see that ever happening.

    What’s your plan with the 1-year worth of expense saving? Put the money in a high savings account or are you planning to utilize the GIC ladder?

    Reply
    1. Thanks very much my friend. We’re trending 🙂

      Ya, I don’t think we’ll see a TFSA contribution bump to that, they didn’t even increase it by inflation this year like they said they would.
      The government will do what the government will do!!

      The plan for 1-years’ worth of cash savings is just that – keep that $$ in my corporation or in something like EQ Bank and draw on if/when needed. Not entirely sure what account I will use, could be a mix of personal and corporation cash but it will be cash, no GICs, no GIC-ladder, no bonds, no bond ETFs, etc. since I don’t want to worry about redemptions or other. Simply, if I want the cash for an emergency or other during my part-time life, I have it.

      Thoughts?

      Reply
  5. Great plan, not unlike ours but yours is more sophisticated and I suspect also better than mine. Upon retirement we withdrew zero income from our portfolio because I could do about one day a week of light consulting to fund our $100K pre-tax annual spending. That worked great for the first five years and we stayed in balance with our income and spending. Starting this year I’m fully retired and we have Vanguard send us $5,000 each month from my IRA and Personal Capital send us $4,000 from our taxable brokerage account. So far that’s too much money so we may need to trim it back. In four years we’ll cut it back a bunch because our Social Security benefits will start at $72,000 a year (in 2021 dollars). We’ll then be at a less than one percent withdrawal rate. I haven’t done any tax optimization but do plan to do some ROTH conversions starting next year when my earned income will be very low.

    Reply
    1. Thanks Steve!

      That’s impressive to have any $100K pre-tax annual spending.

      Are you using exclusively broad-market funds or ETFs to help keep growth alive in retirement? VTI/VOO or other?

      I’m way too young for any social security/old age security in Canada so I will need to rely on my portfolio to fund semi-retirement for the next 20 years or thereabouts.

      If your Social Security benefits are $72,000 per year, my goodness, that is good. What did you do to earn that?? 🙂 I suspect you would have had to have a high-paying job for many years for that since SS is a combination of max. income to a threshold and years of high income service.

      Kudos 🙂
      Mark

      Reply

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