My Financial Independence Plan
I think this is always worth repeating: plans may be helpful but it’s the process of planning and re-planning that’s important for success.
This includes your financial independence plan and for today’s post – my own!
Over the years of running this blog and looking at my personal finances with it, I’ve seen some tremendous gains. I can only hope the next decade will be as good as the last…
But we all have blind spots.
We all have biases to overcome.
Some could argue my love of dividend paying stocks and the pursuit of passive dividend income is a huge bias. It might be. Maybe time-wise and wealth-wise I could be better off if I just owned a simple all-in-one financial product.
But, I do know my approach is helping me stay engaged and it’s delivering results.
Our dividend income is rising over time. Heck, I want to live off dividends to a degree.
But passive income and asset accumulation is only part of the equation.
Asset Accumulation vs. Asset Decumulation
“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.
Although saving and investing is simple but not always easy, one could certainly argue asset accumulation is still far easier than how to draw down one’s portfolio in retirement.
|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!!
Suffice to say, I think you see my point!
Although I have a number of tools available to me to run some financial projections (a link to them here and all of them are FREE!) I don’t pretend to know it all nor have all the answers above.
I bet you feel the same way.
So, to get past any biases, mistakes, or simply to double-check some pieces of my financial independence puzzle, I’ve enlisted some help this fall to run some projections, to see if our goals for semi-retirement are on-track.
Help from PlanEasy
I’ve had the good fortune of working with fee-for-service financial planner (QAFP) and founder of PlanEasy.ca good guy Owen Winkelmolen a few times.
You can see some of the posts we’ve worked on with readers below.
Owen specializes in budgeting, cashflow, taxes & benefits, and retirement planning – working with both individuals and young families to help them with comprehensive financial plans from today to age 100.
Owen, before my plan, a few answers if you don’t mind?
I shared some big retirement questions above that come to mind, what are some other things prospective retirees and semi-retirees should consider?
Every situation is unique, but in addition to your list above one important factor in everyone’s plan is spending. Retirement spending is a key assumption and deserves some additional thought. We want to ensure we’re planning for infrequent expenses like vehicle upgrades, vehicle repairs, and home repairs. Missing expenses like these can cause an unpleasant surprise when assets are being drawn down faster than expected in retirement.
We also want to ensure there is a healthy amount of discretionary spending within the plan. A good retirement plan will have some flexibility to increase spending if investment returns are good in early retirement or decrease spending if investment returns are poor in early retirement. Those first 10-15 years are critical and if there was a series of poor investment returns it would require some spending flexibility.
Lastly, in addition to your list, its important to consider government benefits like GIS and similar provincial benefits. Nearly 1 in 3 seniors receive GIS benefits and they come with steep clawback rates of 50% to 75%. It’s not a factor within your plan you’ll share Mark, but there are many retirees who could have additional net income after retirement if they just did a little bit of planning before retirement.
Well said Owen. Now for some fun, anything that surprised you about our semi-retirement goals?
Having read your blog for many years nothing was too surprising : )
Your plan reflects many early retirement plans. A healthy retirement budget, time for travel and hobbies, the occasional vehicle upgrade, plus the possibility of some part-time income (but it’s not guaranteed).
Retiring or rather financial independence and working on your own terms (FIWOOT!) in the coming years is going to be tricky.
What I mean is, it’s just far enough from the start of your expected pensions/CPP/OAS that there is significant sequence of returns risk. With a late 40’s or early 50’s retirement plan, withdrawal rates drop into the 3% range after CPP/OAS/pensions begin, but for the first 10-15 years the withdrawal rate is typically above the often quoted 4% rule. (I know you’ve written about the 4% rule!) This can cause some risk if an early retiree faces some poor investment returns over those first 10-15 years.
Any finally Owen, how early is too early to run any projections? Was I too eager to look at my financial independence plan even though I’m not ready to retire yet?!
It’s never too early to look at your financial plan. The peace of mind alone is extremely valuable. You don’t want the last few years before retirement to be full of worry.
Retirement (and your financial independence) is something to look forward to, not be worried about.
For many people there are also certain things we want to do in preparation for retirement. This could be paying down debt more aggressively, toping up RRSPs or TFSAs, or for couples, utilizing income splitting opportunities (especially when retiring early and the typical after-65 income splitting isn’t an option yet). Planning earlier also gives us time to set up best practices like emergency funds and saving for infrequent expenses.
Future income tax and government benefits clawbacks are the single largest expense in any retirement plan, so we want to plan well in advance. Starting a retirement planning too late can eliminate some tax & benefit opportunities and can increase this expense unnecessarily. The ideal time to plan is 5-10 years before retirement so that we can avoid unnecessary income tax and government benefit clawbacks (like income splitting for couples, GIS clawbacks for low-income, OAS clawbacks for high-income etc. etc).
Every situation is unique, but we’ve unfortunately worked with many clients who started their plan too late and were stuck paying additional income tax or triggering extra government benefit clawbacks. This directly impacted how much they could spend in retirement and the success rate of their plan.
Plans can be helpful but planning is everything
In the coming posts, I’m looking forward to sharing some of our actual retirement goals, our actual foundational assumptions for semi-retirement including annual target spending. I will dive deeper into these elements than I’ve ever shared before.
I will do so to answer my own question about “are we there yet?” and in doing so, I hope to help you too.
Plans can change
To quote Mr. Mike Tyson once again on my site:
“Everybody has a plan until they get punched in the mouth.”
-Mike Tyson, former heavyweight boxing champion.
I love that quote.
Like Mike tells us, while plans are sometimes good, plans can and will change. As a follow-up the conversations I started with Owen above, while I’ve posted many goals on this site over the years, the goals fundamentally don’t change very much year-over-year.
Essentially our goals are:
- Saving early and often – striving to max out contributions to our TFSAs and RRSPs every year.
- Keeping our investing costs low – I don’t own any high priced funds (and haven’t for a decade now).
- Diversifying our investments – I own many stocks from Canada and the U.S., and I own low-cost ETFs that hold hundreds of stocks that earn money around the world.
- Staying invested – in fact, I tend to buy more stocks or ETFs when markets tank.
So, while the process of asset accumulation has served us well, I am now seriously thinking about asset decumulation – how I’m/we’re going to earn income and draw down our portfolio in semi-retirement.
When it comes to some semi-retirement goals, here are the ones I shared with Owen in support of our plan:
- We’re planning for financial independence/early retirement in a few years – say age 50.
- We expect/want to work part-time after age 50 for a few years, to see if we like that and can afford semi-retirement between the ages of 50-55. We’ll want to keep our bodies and minds active.
- We believe we have a solid base of assets – this plan will say how far we are away from any secure income goals to combat any sequence of returns risk. This is why the 4% rule may or may not make any sense!
- We will own our condo (but we’ll need to work on the mortgage until it is dead).
- We feel we have a good understanding of our spending needs and wants – so let’s build on that.
- I am fortunate to have a defined benefit pension plan – when should we best use this asset?
- My wife is fortunate to have a defined contribution pension plan – when should we best draw down this asset?
- And so on…
Clear assumptions help
Given that plans are only good for a point in time, Owen and I also worked on some assumptions to help build the plan.
- We assumed there will be no changes to my defined benefit pension plan and it will remain partially indexed to inflation.
- We assumed I will not commute my pension – although that option/scenario could definitely be on the table in the future.
3. We assumed the mortgage debt will be dead in the coming years. We’ll have no other debt in semi-retirement.
4. We assumed there will be a one (1) vehicle upgrade about every 10 years.
5. We assumed based on some needs (and many wants) we would start semi-retirement spending between $85,000-$75,000 CDN per year – rising with modest inflation over time. Admittedly, we could spend much less and/or inflation could be much higher.
6. We assumed it will be best to take my CPP and OAS after age 65, potentially at age 70. Same for my wife.
You can see some of our estimates below assuming I work full-time until age 50 at my current salary as does my wife. Assuming that, here is our CPP and OAS income projections at various ages:
7. We assumed there is some part-time work after age 50, earning at least $20,000 per year each before taxes, until about age 55.
A good income foundation is the hallmark of a good plan
Assuming we ever got to our lofty $1 M personal investment portfolio, coupled with the fact that we both have some workplace pensions we could spend from in our financial future, I’ve always been very confident in our financial independence plan.
You can see even if many Canadians can aspire to reach $500,000 in assets by the time they are aged 65 (no workplace pension at all) assuming they own their home/have no debt, AND they’ve worked or lived in Canada for many years, you can see from some quick math they would still have a decent retirement without any other income.
Image thanks to TaxTips.ca
|1 adult – average CPP monthly payment||$710|
|1 adult – full OAS monthly payment||$614|
|$500,000 invested assets||$2,000 per month|
|*Still have the option of selling the home, renting, moving to a lower cost of living city, other for longer-term care not to mention working if they really wanted to!||Total = $3,324|
A quick Google search will always give you the average or full CPP or OAS payments available. I have used these numbers for illustrative purposes.
My Financial Independence Plan – and what you can learn from it!
By now you should know no two financial plans may be exactly alike.
That said, I do believe there are some common elements that can apply to many financial independence plans.
Let’s take passive dividend income as an example.
I’ve been mocked by folks in the past that tell me “dividends don’t matter” or “dividends are not relevant” or other.
Some common complaints about my investing approach have sounded like this:
- Mark, the trouble with your “live off the dividends” approach is that you’d need to save too much to generate your desired income.
- Dividends are not magical Mark – there is nothing special about them. They are part of total return.
- Mark, your stock picking (with dividend stocks) is fraught with under performance of the index long-term.
- And more and more and more…
Well, for the record, I’ve always known that dividends are part of total return and I don’t just strive to have a portfolio that yields any 4% rule above.
But you know what? I don’t care what other people think about our approach.
In fact, if I did, it wouldn’t have gotten us to where we are today.
Our Financial Independence Plan revealed
With dividends nicely compounding away in our registered accounts as part of total return, I feel we’ve been very fortunate to get to where we are.
We should be able to semi-retire far earlier than most. In fact, we could have retired already had we made many frugal choices.
But that’s not our plan.
To recap, here is our approach to investing that could be beneficial to you too:
Approach #1 – we own a number of Canadian dividend paying stocks for income and growth.
We own Canadian banks, utility companies and pipelines in our taxable account, and beyond that, a few Canadian REITs with other assets inside our Tax Free Savings Accounts (TFSAs).
Approach #2 – we own a few U.S. dividend paying stocks and low-cost ETFs in our RRSP.
We invest this way for extra diversification and we believe investments outside of Canada may deliver gains that outpace our domestic performance in the coming decades.
You can find some of my favourite stocks on this standing Dividends page.
You can see some of my favourite low-cost ETFs on this dedicated ETFs page here.
With help from fee-for-service financial planner Owen Winkelmolen to help me validate my assumptions and projections for any semi-retirement needs and wants, he concludes we’re well on-track to realize our dreams in the coming years.
He concludes we can safely spend $75,000 per year as a couple, adjusted to inflation over time, after a few more years of full-time work and assuming no debt.
First up, here are our success factors to realize that goal – things we were intending to do long before Owen solidified them in our written plan:
When it comes to our retirement income plan, this is what our plans says:
We therefore intend to draw down our portfolio in the following way:
- Strategic RRSP withdrawals over the coming decades (in our 50s and 60s). RRSPs are likely fully exhausted by our early 70s when CPP and OAS benefits begin.
- “Live off dividends” from the taxable account and/or make small strategic withdrawals from this account over the coming decades until our 70s or 80s.
- I may or may not take my DB pension early – but there is a higher retirement “success rate” if I do due to the fixed income security it will provide starting in my 50s. See Owen’s bias above.
- We will draw down my wife’s DC pension slowly in our 50s and 60s. Those assets are likely exhausted in our 70s shortly after CPP and OAS benefits begin.
- We intend to take CPP no earlier than age 65 and are likely to take OAS at age 65 – taking advantage of the fixed income and built-in inflation protection benefits those programs will provide.
- We will keep TFSAs intact until “near the end” striving to max out contributions to those accounts in the coming decades thanks to any combination of part-time work, additional RRSPs withdrawals or moving taxable income to tax-free sheltered income.
- There is always a “nuclear option” to free up cash from our soon to be paid off condo in the latter years to fund any senior living or assisted care needs.
Our success rate???
Very good. Assuming our plan comes together!
Our Financial Independence Plan is designed around flexibility – so should yours
At the end of the day, I can’t tell you if you really need $50,000 per year, $75,000 per year and much more to meet your retirement needs and wants.
I can tell you that any decent retirement plan starts with cashflow projections about how much you intend to spend, when, and where that money must come from. Such projections must also include base spending needs but also buffer to account for contingencies or infrequent but potentially major capital outlays like newer cars, new roofs or other major home maintenance every 10-20 years.
As I wrap up this FI plan, I’ll leave you with some quotes directly from our document:
“It’s important to realize that plans can often change, and we need to have some flexibility within our plans to absorb these changes without significantly impacting our long-term goals. Changes can be both positive and negative. There may be new expenses for health care, or disability, or there may be an exciting opportunity that affects some of our assumptions.”
For you Mark: “Your plan has flexibility in several different areas. You have the flexibility to reduce spending or draw upon investments if necessary. You also have flexibility to extend your working years or bring in extra income.”
“It’s important to highlight (these) and consider where you’re comfortable making changes if new circumstances arise.”
Drawing down one’s savings may not be psychologically nor financially easy. Semi-retirement let alone full-on retirement brings many changes in an unknown, unpredictable future. It is my hope you learned something from my financial independence plan so you can leverage the themes of diligent savings, having options, and getting some financial projections run on a periodic basis to see if you’re on track too.
A thank you to Owen Winkelmolen (no affiliation) who is a fee-for-service financial planner (QAFP) and founder of PlanEasy.ca for running some numbers and talking through our plan for the purposes of this detailed post.
I’m sure we’ll have more case studies to share in the future on this site.
Disclosure: I (My Own Advisor) along with Owen, have provided this information for illustrative purposes. My FI plan may not be ideal for other investors. How I invest is not investing advice but an example of the possibilities for you! If you have some specific questions, I’m here to help and I could consider your case study in the future. Happy Investing!