According to Jonathon Chevreau’s article in the Financial Post, the “magic age for the ideal retirement in Canada is 63, according to a CIBC poll out Thursday, although baby boomers are less optimistic they’ll be able to pull it off.”
“Boomers aged 55 to 64 are less likely to believe they could retire based just on their savings (21%), while 31% believe they would carry some debt into retirement.”
Do you find these numbers surprising?
As a 30-something saving and investing his way to financial freedom, I can say I do not want to carry any debt into retirement; zero, zilch, bagel, na-da, nothing. To match my optimism with reality, we’re putting $200 per month in lump sum payments on our mortgage. These extra mortgage payments are helping us pay off our home a few years earlier. Hopefully in our late-forties, we’ll have a paid off home.
That’s the plan friends!
While a paid off home will be nice, we’ll still need to heat it in the winter, cool it in the summer, put electricity and gas through it, and maintain it year round. Those costs are not going anywhere, anytime soon. If anything, those costs will rise over time. Maybe those costs will rise with inflation (who knows) but paying off our debts prior to retirement is only a part of the financial freedom equation. We’ll need income and maybe lots of it based on a demographic shift well underway.
In 2001, I read the median age of the workforce was about 41 years old. By the end of this year, it is projected to be 44. There are currently about 19 retirees for every 100 workers. By 2030, that ratio will be 39 retirees for every 100 workers. Demographic changes will have macroeconomic as well as microeconomic impacts. In the future, with fewer people of working age, maybe wages will rise as employers fight to retain the small pool of labour available. Maybe they won’t fight at all. Hopefully unemployment will be low. Then again, you never know. What about taxes? Do you think they’ll be low? What about the costs of goods and services?
Confession: I don’t have any answers to these questions. I mean, I could offer some but I won’t know if I’m correct until the future comes and goes. I don’t know anyone who does. If you do, please comment or use my Contact page, I’d like to get to know you dear prophet!
So what I am doing about this uncertainly?
Well, I’m paying down debt like I told you. That’s definitely a priority around our house. My second priority is saving and investing those savings in predominantly ETFs for my RRSP and in my other accounts, buying and holding dividend-paying stocks.
Although actuaries and economists have stated our Canada Pension Plan and other financial programs are well funded, I’m not taking any chances. Not that I don’t trust these fine people, rather I want to be in control of my destiny; I’m putting my retirement plan on my back because it’s what I have the most control over. Who knows what the government will do. Who knows how the economy will perform. Nobody can predict the weather accurately for a day in advance let alone 30 years of market certainty. I do however have a great belief in the companies that heat our homes, companies that are responsible for gas and electricity through our home and companies that provide us entertainment in it. I’ll probably always need a phone or if I don’t, surely some technology that connects me to family and friends across in Ontario and beyond will be needed. I also have confidence in companies that provide us with insurance; for the “what ifs” in life. All of these companies will at minimum, have workers that employ them who will need financing for their homes and cars of the day, even if I don’t someday. For these reasons and many, many more, I think dividend-paying stocks from certain sectors make sense to help us fund part of our retirement plan. It’s not the only way to invest but a good method for us.
I think one of the best kept secrets in retirement investing is dividend-paying stocks; you get passive income from hard-working companies. As long as the company can grow its earnings over time, dividend investors with ownership in multiple companies don’t need to care too much about the stock market. A diversified dividend-investor doesn’t have to worry too much about 4% retirement rules. Dividend-investors also don’t have to worry much about selling their assets when markets crash – if anything they should rejoice because they can buy more of these great companies at cheaper prices while their dividends keep rolling in. Your income should rise over time as dividends are paid by companies who grow their earnings over time. More earnings, more dividends.
Of course, there are risks with dividend-paying stocks. Not all dividend-paying stocks are created equal; dividends are not the same as company fundamentals, although they are a good indicator. Even companies that have a decent history of paying dividends could cut their dividends. Worse still, companies rise and fall. But many blue-chip companies in the industries I’ve suggested above are as stable as they come. They are considerations for your portfolio. They’re already holdings in mine.
I’ve said this before, I’m no financial expert. I’m a regular guy trying to build some retirement income and financial security like everyone else. But I’m onto something that’s working very well so far. My passive dividend income is rising, month after month after month even if I don’t buy any more new stocks. At least ten of the stocks I own are buying more stock every quarter through reinvested shares that will pay more dividends next month or next quarter. After 4 years of building and engineering, my dividend income retirement machine is finally at work so some day I don’t have to.
Who knows what will happen tomorrow, next week, let alone 20 or 30 years from now. What I do know is I stand a much better chance of retiring without debt if I stick to my extra mortgage payment plan. I also stand a great chance of being financially free if I compliment my lazy ETF investing approach with buying and owning a diversified set of great companies that pay me in good times and in bad. I’m confident in my two-pronged investing approach is gaining more armour every quarter to fight anything the markets have in store. Bring it on Mr. Market.
I’ll leave you today with two quotes that summarize my thoughts today, from two totally different eras but when written in succession, offer some interesting food for thought:
Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window – Peter Drucker
Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present – Marcus Aurelius
What about you? Are dividend-paying stocks part of your retirement strategy?
If not, what approach are you using to achieve your financial freedom?
Share your comments, I’d like to hear what you have to say!
What I am currently looking at is Evertz Technologies (TSX-ET).
Interesting. I don’t know much about that one!?
Great plan MOA! I’m pretty much doing the same thing minus the ETFs. I’m 100% in dividend paying stocks (except for BRK) and have no plans to change in the future.
Thanks Kanwal! I always appreciate your comments and support on my blog!
Anything you’re looking at buying; U.S. or CDN?
Thanks! No ETFs at all? 100% dividend-payers, although some risk, is very impressive! Do you hold SLF like I do? 🙂
@My Own Advisor
Most of my friends are diversified, but some are not. I have no current plans to not be 100% in stocks, but I have been in bonds in the past.
I invested in the 1970 and 1980 and you could get Canadian Savings bonds with 19% plus interest rates. Great rates with no risk. Of course inflation was high, so I do not know if you make real progress at these rates. Once safe bond rates went below 10%, I got out of bonds. My last one was a 30 year CIBC bond at 9.75% (I think). The thing is, it is hard to make that much money in stocks.
What I saw with high inflation was that bonds were paying lots more than stocks, although I did buy some stocks at that time too.
Yeah, those were the days eh? I remember my parents talking about that at the kitchen table actually, when I was younger.
Geez, I can’t see how our generation or the next, will ever make 9% return on anything, unless you really pick a winning stock; a true diamond in the rough. I don’t have the patience nor the brains for that stuff, analyzing metrics until I am blue in the face. I’d rather buy what I understand, from established companies, that pay shareholders for being an owner in their business and take the steady, passive income from that.
I don’t think I’ll ever get rid of my broad-market ETFs, but I will add more dividend-paying stocks to my portfolio over time.
I’ve been watching RUS, BRC.UN and FCR for my TFSA in 2012. In my RRSP, considering ED:US or DUK:US. I don’t have a U.S. utility yet.
Thanks as always for your comments Susan. It’s great to chat and share experiences.
MOA, I am totally on your side when it comes to paying the mortgage, it is my number 1 priority. I hope to have mine paid off in 2015 at most which translates into paying down 200k in 7 years or less. Not bad if you ask me as I would not even be 40 yet!
By 40? Wow. $200 K paid off in 7 years would be amazing. I look forward to watching that progress, it will be some inspiration for us to get our mortgage paid off faster as well!
I would like to address Dr. Dale Rathgeber’s post. Greying Baby-boomers are like other people. Some are conservative and some are not. You do not become risk averse with age; at least I know none who have. I have lots of friends in the greying baby-boomer category and they are like they have always been. Some are risk averse, but they have always been that way. Some are not and have never been.
Ones that I know that only use fixed income investments have always only used fixed income investments. The ones that use the stock market have always used the stock market. You do not become a certain age and switch how you invest. The only thing that I see is that they are spending their dividends and interest, not saving them. However, some are still savings part of their dividend and interest income. Maybe a lifetime of savings does not change easily.
Interesting points you raise about folks you know, who have not changed their risk profile as they age. I don’t know if I will or not, although I could see myself owning more bonds as I get older in my RRSP anyhow. I wonder if your friends are more “exceptional” than others Susan, meaning, they’ve always been very diversified investors? Maybe they’ve always had great heads on their shoulders?
I can see how some people, once they find a strategy that is working for them, using fixed-income investments just as one example, may not change their ways too much. We humans after all, are creatures of habit.
Will your own strategy ever change? You’re still all (100%) stocks right?
Thanks for your comment!
Great post! Both of our articles touch on paying down the mortgage; great minds think alike I suppose 😉
I really like your overall approach to investing and how you manage your wealth. With your current plan to pay down your mortgage at a faster rate, while at the same time place an emphasis on dividend stocks and broad-based index funds, you’ve got a lot of angles covered man.
From a personal standpoint, a large percentage of stocks I hold are large-cap, dividend-paying stock; however, there is still a smaller, yet sizable chunk that I own to which are dedicated to riskier plays, such as CGX-T, BPF-UN-T, CLC-T, SCU-T, AW.UN-T, ENF-T, and BA-T to name a few.
These stocks have paid me handsome distributions and dividends over the past years, but they also come with additional risk, an element within my portfolio I’m willing to take. I suppose for many it boils down to risk tolerance.
Dividend-paying stocks will always occupy an important place within my portfolio, and most of the positions I have are in non-registered accounts. Taking advantage of the dividend tax credit is a great option to have during retirement.
I don’t think I’ll ever see myself stop working completely. I find that when you have more control of your time, you tend to gravitate toward projects and jobs that you know you will enjoy, and won’t mind earning less to do so.
Great post! 🙂
I appreciate the support on the overall approach, reinforcement is always good but you know, even if some folks who comment or stop by the blog and say “I wouldn’t do that”, that’s OK with me because I’m gaining more and more convinction in what I’m learning, from you, other great bloggers, reading articles, and then applying that learning to our needs and objectives.
I’m sure not everyone would think some of the smaller payers you’ve mentioned above are a great idea, since too many of those, and you’re putting that dividend income in jeopardy. I don’t see it that way, I think a balanced portfolio is just that, a blend of risk and reward; amongst sectors, size of companies, established and young organizations.
I too, think dividend-paying stocks will always have a place in my portfolio. At the end of the day, I hope to own about 30 Canadian companies and about 10 U.S. companies. I’ll index everything else 😉
Nice detailed comment TWC, I appreciate the contribution as always!
I don’t think we’ll see a ton of people get out of equities. With people living longer it makes no sense to go 100% GICs at 55 or 60. Plus any downturn we see from demographics will easily be balanced out by a rising middle class around the world.
Regardless, I agree with everything you were saying about paying down debt and investing in broadly diversified companies as well as diverse ETFs/Index Funds. I look at retirement a little different, instead of setting a date where I will be completely financially independent, I hope to be able to work part-time starting at 45. As a teacher, an ideal role would have me travelling the world teaching English. I’m currently 23, I hope to have my house paid off by the time I’m 30 (benefits of living rural) and have a great savings rate due to a low cost of living.
Hard to say though. Some experts are predicting an exodus, others, nothing at all and more of the same from equity markets in the future. I agree with folks living longer, all-in for GICs doesn’t make any sense but then again, some people are doing that now, fearful of another pending global crisis. You seem well-versed, the markets will always toy with investors’ emotions…the key is to avoid Mr. Market’s game as much as possible.
Thanks for the support, I appreciate that.
Working part-time at 45 would be great, I’d love to do it but definitely won’t because of our mortgage. We won’t have that paid off until our late-40s. That’s still not too bad, but certainly nowhere near as good as your goal: by 30! Wow. I can’t wait to follow that progress. Sure, you have some benefits of living in a rural area, but life is about choices isn’t it? 🙂
Keep up the great work on your blog, stay in touch often!
About the Yankees I mean 🙂
Seriously though, less demand for equities could mean lower returns but wouldn’t that same argument be used across all equity markets? This would make equities on the whole depressed compared to today, but companies that pay dividends should continue to pay them. At least that’s my thesis but who knows if I’m right. That is why I’m using a two-pronged investing approach, I get the best of both worlds or I can mitigate the worst of one world.
What will happen if these boomers decide to withdraw billions of dollars from retirement stock accounts and put their money into different investments? GICs? Bond ETFs?
To your thesis, I read this article, which was interesting: