Financial Independence Update
The key to our financial independence update and overall plan has always been our disciplined savings rate for investing.
If you (or I) are spending 100% of our available income, we’ll never get to where we want to be financially.
Read on about our path to semi-retirement in this latest and refreshed 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.
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 dividend 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’ve been a landlord and really didn’t like it. Private equity seemed like too much of a risk. Instead, we have chosen maybe a more traditional path: buy and pay off our home/condo and call it “home base”. We want the flexibility to travel while keeping a small environmental footprint. To fund our lifestyle, we do however want some passive income from our investments to reduce the burden or need to work full-time.
At the time of this post, we’ve been on this financial path for over 15 years.
Because of this long-term path, our semi-retirement dreams are very close to reality.
Why Asset Accumulation is Easy Street
Our path to asset accumulation has been rather easy to explain and follow, an approach most Canadians can likely replicate should they choose:
- We save early and often. We strive to max out contributions to our TFSAs and RRSPs every year.
- We keep our investing costs low. We don’t own any high priced funds (and haven’t for almost 15 years). High-price funds and products pad the pockets of the people that sell these products.
- We diversify our equity investments. We own many dividend growth stocks from Canada and the U.S. We’ve decided to own some low-cost ETFs for extra diversification.
- We stay invested. Markets rise and fall. So, we stay invested. If anything, we tend to buy more stocks and/or ETFs tank in price.
That’s essentially it.
Why Asset Decumulation is a Tougher Road
While the process of asset accumulation has served us well, I have been seriously thinking about asset decumulation in recent years. This means, how the portfolio we’ve constructed will help us fulfill those semi-retirement dreams we had years ago.
Asset decumulation objectives and having a plan are very 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 Life; retirement expert.
The asset decumulation puzzle can be complex for some:
|Asset Accumulation Principles||Asset Decumulation Questions|
|1. Save early, save often||1. When should I take my workplace pension?|
|2. Keep your investing costs low||2. If I have no pension, how do I know I have saved enough money?|
|3. Consider asset diversification to reduce losses||3. How much money should I have to retire?|
|4. Stay invested||4. How do I avoiding outliving my money? |
5. What do I do if my investments drop and I’m no longer working to recover?
6. How much cash should I have or keep during 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, will that asset mix be enough?
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 you dear reader, we’ve been working towards answers to all these asset decumulation questions and much more.
Today’s post will provide updated answers to many of these questions below and what you might want to consider.
Financial Independence Update Q&A
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. I can receive pension benefits as early as age 55, but with penalties in the form of reductions. I’ve been contributing to this plan with the following formula:
1.6% x your Best Average Earnings x years of pensionable service.
Here are my pension terms, word-for-word:
My pension is reduced by 0.4% per month prior to age 60 or reduced by 4.8% per year.
My pension is also reduced by 0.3% per month between ages 60-65 or reduced by 3.6% per year.
I thought years ago about keeping my assets invested within the plan until age 65. I am seriously considering commuting my pension.
I will make a final decision in the coming year or so on that given the other assets we own – including when my pension administrator will run the financial math for me (they won’t do it yet despite asking multiple times, it’s only a function they do when the employee is leaving the organization). All this to say, commuting my pension is an option for me and that might apply to you as well.
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 this approximate 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 in the form of a LIRA (Locked-In Retirement Account) without any reductions. Her assets are vested.
We’ll unlock her LIRA to a LIF at age 55 and start taking the minimum income stream from that account then. This is likely when any part-time work will stop.
Q3. How much money should I have to retire?
To answer this question, you need to know where you are starting from.
I’ve/we’ve calculated ours.
We figure we’ll spend an average of about $75,000 per year. Our base spending, money needed to cover the basics of food, shelter and transportation expenses is about $50,000 per year.
I’ll come back to how we’re going to fund this, and in what order as part of a drawdown strategy later in this post.
Q6. How much cash should I have or keep in retirement?
I believe there is no one right answer.
I do believe it should be a risk-based decision.
Our plan calls for keeping ~ 1-years’ worth of cash at the time of semi-retirement – to cover all basics. So, that’s about $50k in cash. Keeping such cash means effectively we could live for an entire year, on cash, without touching portfolio income, pension income, or needing to work at all. It’s a sleep-at-night factor that’s very hard to quantify and ignore.
One reason to keep cash on hand, beyond near-term spending plans or to cover an emergency, is to help manage market volatility at any age and this is especially important to us since we’ll have a bias to owning mostly equities in retirement. Your mileage may vary.
Q8. When should I take my government benefits like Canada Pension Plan (CPP) and Old Age Security (OAS)?
I know my answer now for now.
Our plan is to take OAS at age 65 but likely defer CPP benefits at age 70.
These are our key reasons:
- OAS does not offer survivorship benefits. CPP does. Unlike the CPP, OAS payments do not transfer over to a surviving spouse. If the surviving spouse is also receiving OAS, that continues; however, the payments being made to the deceased spouse stop.
- CPP incentivizes retirees who delay their payments past age 65 by 0.7% each month or 8.4% per year. This translates to a 42% income boost in CPP payments at the age of 70 compared to age 65 (and for life!). Where else are you going to find inflation-protected, fixed income, rising by 8.4% per year for doing nothing?
- When we hit age 65, we’ll already have other income streams: taxable dividend income, LIRA turned to LIF income, RRSP/RRIF withdrawls, and potentially, still, some small hobby or part-time work. Delaying CPP to age 70 will allow us to “smooth out taxes” where possible while getting the most from our CPP government benefits.
Q11. How can I generate income from my retirement portfolio?
Via dividends of course!
Kidding, only a bit.
But look at this chart? It’s a thing of beauty!
While dividends are great, there are just part of our total return. Meaning for retirement, we will of course sell assets and drawdown our portfolio over time.
Assuming all goes well in the coming years, we hope to start this drawdown order while working part-time.
“NRT” = Non-Registered (N) then RRSPs (R) then TFSAs (T).
What does that mean?
N – Regarding non-registered accounts
- We intend to work part-time in our 50s and “live off dividends” to some degree from this account.
R – Regarding RRSPs/RRIFs
- In our 50s and 60s, we’re going to do something unconventional – we’ll start withdrawing assets, slowly, from our RRSPs. This will help smooth out taxes over a period of decades given other assets we hold. Based on account values now, our RRSP assets should last into our early 70s.
T – 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/RRIF 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!
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!
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 and U.S. dividend paying stocks for ever growing dividend income.
2. We also invest in low-cost ETFs for extra diversification.
We’re confident that if we keep investing this way (something I coined our “hybrid investing” approach over a decade ago), we should be able to realize our semi-retirement financial independence dreams.
To realize semi-retirement and work on own terms in the coming years we’ll do the following in the coming 18-24 months from the date of this post:
- Max out TFSAs every year (including 2023 and 2024 contribution room).
- Max out RRSPs every year (same years as above).
- Build our cash wedge/emergency fund to cover 1-years’ worth of expenses.
I look forward to keeping you updated as semi-retirement draws very, very close.
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?
Do they have enough for FIRE at age 52? With $800k invested and a workplace pension? Find out.
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.