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.
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:
- 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 a decade+ now). High-price funds pad the pockets of the people that sell these products.
- 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.
- 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.
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.
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 Life; retirement 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 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?
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).
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.
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.
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:
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!
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:
- Max out TFSAs every year.
- Max out RRSPs every year.
- 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 look forward to keeping you updated as semi-retire draws 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?
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.
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.