Financial Independence Update
Hard to believe another year has almost gone by…time to provide this update: our financial independence update.
I look forward to your comments…as always.
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. I know I do.
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 (and still feels like) too much risk.
Our path instead has been basically a simple one-two debt reduction and investing punch:
- Buy and pay off our home/condo and call it “home base”. More on that in a bit.
- To fund our lifestyle, we want to rely on 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, very close.
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 nutual funds and we ditched our financial advisor 15 years ago.
- We diversify our equity investments. We own many dividend growth stocks from Canada and a few from the U.S. Beyond that, we’ve decided to own some low-cost ETFs for extra diversification including a NASDAQ ETF that is up 45% year to date. Go figure!
- We stay invested. We know markets rise and fall. So, if we stay invested, we’ll avoid being out the market when big gains do happen.
That’s essentially it. You can replicate that as you wish. Just four easy steps.
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 – posting lots of articles on this site.
Here are a few of them:
In October 2023:
Simply put: 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 as of fall 2023 and what you might want to consider as well to tailor your own path.
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.
Until this year, I thought about commuting my pension.
Well, I was fortunate to get a bit of information about this estimated commuted value this year and suffice to say, commuting is not worth it. I am very likely to keep my DB pension and activate it when I turn age 65.
My wife is very fortunate to have a defined contribution (DC) pension from work. With her 21+ years of contributions into that DC plan, my wife will keep her portfolio in low-cost indexed funds as much as our employer and pension administrator can provide. When she leaves her organization, she will take her DC pension assets in the form of a LIRA (Locked-In Retirement Account) without any reductions and turn her LIRA into a LIF at age 55.
Q3. How much money should I have to retire?
To answer this question, I always believe you need to know where you are starting from.
I’ve/we’ve calculated ours.
We figure we’ll spend an average of about $70,000 to $75,000 per year, increasing year-over-year with inflation.
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. That could be as soon as next year towards the latter part of 2024.
Keeping such cash means effectively we could live for an entire year, on cash, to fund food, clothing and shelter without touching our portfolio income let alone no work at all…although we intend to work part-time in the coming years.
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!
In fact, we’re now earning more than this chart since I focus on our taxable accounts and our RRSP accounts in our monthly dividend income updates.
While dividends are great, they 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.
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 most of our RRSP/RRIF assets likely gone, 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 some very important 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:
- We invest in many Canadian and some U.S. dividend paying stocks for ever growing dividend income.
- 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 very soon.
On that note:
- Our mortgage will be dead in another 5-6 months. We will own our condo!
- Our cash wedge (to have ~ 1-years’ worth of basic expenses covered in cash) should be in place by May 2024.
- Our TFSAs should be maxed out again in early 2024, we’re close to saving up all 2024 TFSA contribution room to deploy in another 6 weeks.
If we simply keep doing what we are doing, I’m very confident we can spend our desired $70,000 to $75,000 per year with 3% sustained inflation for the coming decades, once we are mortgage free.
Image: from Cashflows & Portfolios projections work.
That’s going to feel very liberating and I look forward to sharing more milestones as they occur.
Related Financial Independence Reading
What are my Top-5 stocks that deliver income and growth? Read on.
This is how your part-time job can support your retirement dreams:
How much do you need to retire on $6,000 per month? I have a clear answer:
What about $7,000 per month? This is another answer for that spending need:
Do they have enough for FIRE at age 52? With $800k invested and a workplace pension? Find out.
Thanks for reading.