Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.
Late in January, the Bank of Canada boosted rates by another 0.25% and signalled that they will now pause and evaluate. I’ve been calling that the rate hike hiatus. As I touched on in mid-January, inflation is moving in the right direction and the consumer is holding up quite well. It’s a Goldilocks scenario, for now. That said, the rate hikes have not worked their way through the economy. In fact, many suggest that we’ve felt almost no economic damage from the rate hikes. There is a lag affect; it can take a year or two for hikes to be felt in full. But let’s call the rate hike hiatus good news.
The big news last month was the announced rate hike hiatus in Canada. Of course, markets are forward “thinking” and they are pricing in a soft landing and rate cuts in 2023. That Yahoo!Finance post suggest that cuts are likely not on the table this year. That would only happen if something breaks and we get a serious-enough recession. Also, inflation would have to be completly under control. The Bank of Canada is not likely to cut rates if inflation is not close to that 2% target.
Rate guesses, not so good …
The consensus appears to be the call that there will be no rate cuts in 2023, though there is a sprinkling of calls for cuts in late 2023. And all said, we should remember the rate predictions from March. Not even close.
Inflation is so unpredicatable. And inflation might still be driving the bus in 2023.
Coming in for a landing
Lance Roberts looks at the history of soft landing and hard landings. There were 3 past soft landing scenarios, but none in an inflationary environment. The affect of rate hikes have largely not been felt, and likely have had little push on inflation. But that will come over time of course.
Here’s the chart that shows the positive effect of a weak U.S. Dollar for international equities. With bonds looking better and the potential for international markets, the traditional balanced portfolio might ‘be back’ one day soon.
For U.S. stocks, my wife and I hold 17 Dividend Achievers, plus 3 stock picks. In Canada, I hold the Canadian Wide Moat 7, while my wife holds a Canadian High Dividend ETF – Vanguard’s VDY. There is also a modest position in the TSX 60 – XIU. The U.S. and Canadian stocks both outperform their respective stock market index benchmarks. Working together, the U.S. and Canadian stocks form an all-weather portfolio base.
In this post I’ll offer up charts on our U.S. stock portfolio and the Canadian stock portfolio. And I’ll put them together so that we can see how they work together. The total portfolio was designed to be retirement-ready. The fact that it beats the market benchmarks is a welcome surprise. At the core of the portfolio is wonderful Canadian dividend payers – the U.S. dividend achievers and 3 picks fill in some portfolio holes. We will also take a look at how these stocks can be arranged to provide an all-weather stock portfolio base.
When I write ‘our portfolio,” I am referring to the retirement portfolios for my wife and me. As for ‘backgrounders’ on the portfolios please have a read of our U.S. stock portfolio and the Canadian Wide Moat 7 performance update.
The stock portfolios
In early 2015 I skimmed 15 of the largest-cap dividend achievers. What does skim mean? After extensive research into the portfolio “idea” I simply bought 15 of the largest-cap dividend achievers. For more info on the index, have a look at the U.S. Dividend Appreciation Index ETF (VIG) from Vanguard. That is a U.S. dollar ETF. Canadian investors can also look to Vanguard Canada for Canadian dollar offerings (VGG.TO).
You’ll find the dividend acheivers and Canadian high dividend stocks in the ETF portfolio for retirees post. Both indices are superior for retirement funding, compared to core stock indices.
Dividend growth plus quality
At the core of the index is a meaningful dividend growth history (10 years or more) working in concert with financial health screens. It leads to a high quality skew. Given those parameters the dividend achievers index will certainly hold many dividend aristocrats (NOBL).
The 15 companies that I purchased in early 2015 are 3M (MMM), PepsiCo (PEP), CVS Health Corporation (CVS), Walmart (WMT), Johnson & Johnson (JNJ), Qualcomm (QCOM), United Technologies, Lowe’s (LOW), Walgreens Boots Alliance (WBA), Medtronic (MDT), Nike (NKE), Abbott Labs (ABT), Colgate-Palmolive (CL), Texas Instruments (TXN) and Microsoft (MSFT).
United Technologies merged with Raytheon (RTX) and then spun off Carrier Global Corporation (CARR) and Otis Worldwide (OTIS). We continue to hold all three and they have been wonderful additions to the portfolio. Given that those stocks are not available for the full period, they are not a part of this evaluation. That said, the United Technologies spin-offs added to the outperformance.
Previous to 2015 we had three picks by way of Apple (AAPL), BlackRock (BLK) and Berkshire Hathaway (BRK.B). Those stocks are overweighted in the portfolio. As you might expect, Apple has contributed greatly to the portfolio outperformance. Though the achievers also outperform the market with less volatility.
In total it is a portfolio of 20 U.S. stocks.
The Canadians
I hold a concentrated portfolio of Canadian stocks. What I give up in greater diversification, I gain in the business strength and potential for the companies that I own to not fail. They have wide moats or exist in an oligopoly situation. For the majority of the Canadian component of my RRSP account I own 7 companies in the banking, telco and pipeline space. I like to call it the Canadian wide moat portfolio. They also provide very generous and growing dividends. These days, they’d combine to offer a starting yield in the 6% range.
Here are the stocks:
Canadian banking
Royal Bank of Canada (RY), Toronto-Dominion Bank (TD) and Scotiabank (BNS).
Telco space
Bell Canada (BCE) and Telus (T).
Pipelines
Canada’s two big pipelines are Enbridge (ENB) and TC Energy (TRP).
*Total performance would be improved by holding the greater wide moat portfolio that includes grocers and railway stocks. That is a consideration for those in retirment and in the accumulation stage.
The Canadian mix outperforms the market, the TSX Composite. You’ll also find that outperformance in the Beat The TSX Portfolio. That BTSX strategy (like the Wide Moat 7) finds big dividends, strong profitability and value.
Once again, my wife holds an ETF – the Vanguard High Dividend (VDY) and a modest position in XIU. I did not want to expose her portfolio to concentration risk.
The charts
Here’s the returns of the U.S. and Canadian portfolios, plus a 50/50 U.S/CAD mix as the total portfolio. The period is January of 2015 to end of September 2022. Please keep in mind the returns are not adjusted for currency fluctuations. A Canadian investor has received a boost thanks to the strong U.S. dollar. U.S. investors owning Canadian stocks would experience a negative currency experience. Continue Reading…
Some time ago on this site I wrote one of the biggest retirement questions is: how much is enough?
What might be our income sources, needs and wants be in retirement?
The answer to such questions are usually: it depends.
This updated post will share those details and outline how such needs and wants might be funded in our upcoming semi-retirement days – planned for sometime in 2024.
Read on and let me know your thoughts, questions or comments!
What are your income needs and wants in retirement?
It largely depends on what you’ll spend in retirement.
That’s always been step #1 in our book.
Whether you’re 35, 45 or 55, I believe it’s essential to figure out what retirement might look like to you.
Here are a few questions we’ve been working through:
1. When do we want to retire or semi-retire?
Math is helpful but I also believe we want to retire to something.
Both of my parents stopped all form of work around age 60. That may or may not work for me – literally. I like to be busy and instead of stopping work cold-turkey per se I would rather glide into semi-retirement/work on own terms and then slowly ease off the gas pedal per se whenever I want. At least that is my thinking now …
Sure, math helps: the later you retire from full time work, the longer you have to accumulate that retirement nest egg. But I believe there is also the work-optional option of part-time work in our 50s when the debt is gone and most of the assets needed for full-on retirement spending have already been accumulated.
Your mileage may vary. :-)
2. Where do we want to live in retirement or semi-retirement?
Likely Ottawa, as a home base still.
Our family is here. Most of our good friends are here or in the immediate area.
We don’t aspire to own a second home in the sunny south – too many liabilities.
We do however want to travel more/live some time abroad.
Our thinking could always change but it will be nice to have our condo bought and paid for without any debt on the books very soon and maintain it as a home base.
This means all income we do intend to make, including during semi-retirement, is for us to spend as we please.
3. What will our expenses be?
The general wisdom is that you will need somewhere between 70-80% of your current salary for living expensses in retirement. That means, if you make $100,000 combined per year, you should plan to have $70,000 to $80,000 in combined retirement income spending, as an example.
This general wisdom includes the logic that you are likely to spend less as a retiree – since you’re not commuting to work, you might have downsized your home, and/or you’re not supporting dependents.
I think these rules of thumb (like the 4% safe withdrawal rate/rule while valuable to a point) don’t make much sense when you dig further into your personal details, needs and wants. Rules of thumb are a starting point – only.
I far prefer to calculate what our fixed expenses will continue to be, during retirement, including inflationary spending, adding in some variable spending needs and wants as well.
Here is a snapshot on the former:
Key expenses
Monthly
Annually
Semi-retirement comments ~ end of 2024???
Mortgage
$2,240
$26,880
We anticipate the mortgage “dead” before the end of 2024.
Groceries/food
$800
$9,600
Although can vary month-to-month!
Dining/takeout
$100
$1,200
Home maintenance/expenses
$700
$8,400
Represents 1% home value per year, increasing by inflation.
Home property taxes
$500
$6,000
Ottawa is not cheap, increasing by inflation or more.
Home utilities + internet/TV/cell phones, subscriptions, etc.
$400
$4,800
Transportation – x1 car (gas, maintenance, licensing)
$150
$1,800
May or may not own a car long-term!
Insurance, including term life
$250
$3,000
Term life ends in 2030, will self-insure after that without life insurance.
Totals with Mortgage
$5,140
$61,680
Totals without Mortgage
$2,900
$34,800
As you can see, once the debt is gone, we’ll be in a much better place for financial independence!
Add in other spending/miscellaneous spending to the tune of $1,000 per month and that’s our base budget. Continue Reading…
Close Friend: My wife and I are just a year away from being able to start our CPP benefits when we turn 60. I’m not sure if we should start them right away or wait until we’re older to get bigger benefits.
Michael James: I don’t usually get involved with giving this kind of advice about people’s specific situations, but you’re a close enough friend that I’ll try to help. Let’s go through a standard checklist of questions to help you decide.
CF: Fire away!
Do you need the money?
MJ: The first question is “Do you need the money?”
CF: Of course I need money. What kind of question is that?
MJ: Hmmm. You’re right. That question isn’t very clear. I think the idea is whether you need CPP benefits to be able to maintain your standard of living.
CF: Well, I’m retiring in a few months, and I don’t really know what standard of living I can afford.
MJ: Another good point. Let’s try to make the question more precise. If you don’t start your CPP until you’re 65 or 70, will you have less money available to spend before CPP starts than you’ll have after CPP starts?
CF: I’m not sure. My wife and I have $600,000 saved in our RRSPs that we could live on during our 60s.
MJ: That’s more than enough to live on while you wait for larger CPP benefits at 65 or 70.
CF: Okay, next question.
Life expectancy
MJ: Do you have a shorter than normal life expectancy?
CF: My dad died at 82, but my mother and both my wife’s parents are still kicking. One of my uncles died in his 60s. Maybe I should take CPP now in case that happens to me.
MJ: We can all imagine dying young, but it’s more important to make sure you don’t run out of money if you live a long life. Maybe a better way to phrase the question is “Are you willing to spend down all your savings before you turn 80 because you’re sure you won’t live that long?”
CF: No, I’m not.
MJ: So, even though you don’t know how long you’ll live, you’re going to have to use your savings sparingly in case you live a long life.
CF: Does that mean I should take CPP at 60 so that I won’t spend as much of my savings in my 60s?
MJ: No, it means the opposite. When you spend some savings in your 60s, you’re buying a larger guaranteed CPP payment that is indexed to inflation. You’re taking part of your savings that you spend over exactly 10 years and turn it into an income stream that could last for decades. By making this choice, you’ll be able to safely spend more money each month starting today.
CF: I’m starting to see a trend toward taking CPP at 70.
More money while young
MJ: Let’s see. The next question here is “Do you want more income available to spend while you’re young?”
CF: I suppose so. But can’t I just spend extra from the RRSPs during my 60s to boost my income over the next decade? Continue Reading…
When we started our financial independence journey back in 2011, we didn’t set a specific FI date or number. In our minds, we do not doubt whether we could become financially independent or not. We knew we’d become financially independent in the future. It was just a question of time. We simply needed to have patience and let our investments compound over time.
A few years into our FI journey, our FI plan started to evolve. Rather than having a specific liquid net worth and utilizing the 4% safe withdrawal rule, we decided to have enough dividend income to cover our expenses. Looking at the calendar, we randomly set a target of reaching this milestone by 2025 or earlier.
It’s funny how ten years seemed to have gone by in the blink of an eye. At the same time, a lot has happened in our lives…
Getting engaged and married
Having two kids
Moving from an apartment in Vancouver to a house in the suburb
Me having different job titles, going from engineering to project managing to product marketing to engineering
Starting my photography business ( I’ve been on a bit of break the last few years)
Starting this blog, writing articles, learning new things, and connecting with other like-minded people
One thing I’ve realized is that life is never static. It’s always dynamic. Although we can do as many projections and make as many plans as we possibly can, projections and plans do and will change. Therefore, with three years to go before 2025, I thought it would be a good time to re-examine our financial independence plans and see if we need to make any adjustments.
Our FI numbers
Since starting our FI journey, we have tracked our expenses meticulously. Here are our annual expenses since 2012:
Total Necessities
Total Annual Spending
2012
$26,210.52
$44,603.76
2013
$26,343.00
$45,260.88
2014
$29,058.96
$47,391.96
2015
$31,256.88
$47,270.16
2016
$29,831.40
$47,566.96
2017
$33,887.68
$51,144.77
2018
$31,840.75
$57,231.99
2019
$33,199.98
$54,906.02
2020
$35,511.60
$48,908.74
2021
$38,950.66
$71,852.02
Necessities cover core expenses like food, insurance, housing, clothing, utilities, car, etc. Other expenses are considered as non-core expenses which include things like dining out, skiing, camping, travel, charitable donations, gifts, etc.
The last two years have been abnormal in terms of spending. Due to the pandemic, our spending was much lower than usual in 2020. Then last year we had unplanned expenses of around $16,500 on our cat and our house. If we take this amount out, it’d put our 2021 annual spending to around $55,000.
Based on our historical spending trend, I would estimate that we need somewhere between $50,000 to $60,000 in dividend income annually to cover our expenses. To be on the safe side, I’d use $60,000 annual spending for any FI plans because we need to have inherent built-in flexibility on variables outside of our control, like major purchases, emergencies, etc.
The $60k annual spending estimate, of course, assumes that we continue to live in Vancouver and do not have many significant changes in our spending habits.
One thing to keep in mind is our spending can drastically come down if we decide to geo-arbitrage by moving to a smaller Canadian town or somewhere in South East Asia with a lower cost of living than Vancouver. On the flip side, the spending number can increase if we move to Denmark and live there for a few years (I’m ignoring the tax consequences for now).
How much do we need in our dividend portfolio?
How much do we need in our dividend portfolio to generate $60,000 in dividend income? Let’s do a quick math exercise, shall we?
For $60,000 dividend income per year, at 3% dividend yield, we’d need a dividend portfolio worth $2 million; at 4% dividend yield, we’d need a dividend portfolio worth $1.5 million. In other words, we need a portfolio valued between $1.5 million to $2 million. That’s certainly not a small chunk of change.
Now, if we take a middle-of-the-road approach and use a portfolio dividend yield of 3.5%, that means a portfolio value of around $1.714 million.
One thing is clear – we need to continue to save and invest money in our dividend portfolio. We also need to find the right mix between high-yield low-dividend growth stocks and low-yield high-dividend growth stocks.
With three years remaining in our FI timeline, it might be tempting to start buying more very-high-yield dividend stocks to make sure we can reach our FI target. But it is very important to make sure our dividend income is safe and remains sustainable over time. We definitely don’t want to hit $60,000 in dividend income one year only to see that amount slashed by 20% or more the next year.
The stability of our dividend income is extremely vital.
We also want to make sure the portfolio value continues to appreciate over time. The rationale is simple – total returns matter. Having a stable and safe dividend income and a portfolio that increases value over time will give us more options.
By 2025, both Mrs. T and I will be in our early 40s. With decades ahead of us, we need to ensure our dividend income can grow organically over time and inflation doesn’t eat into our dividend income’s buying power. It will be necessary to have some low-yield high-dividend growth stocks in our portfolio to allow for organic dividend growth.
The plan of living off dividends
Living off dividends is an amazing idea. Based on my dividend income projection, we should receive $51,000 in dividend income in 2025. However, when we compare that number with the $60,000 annual spending target, it doesn’t take a rocket scientist to realize that we are short by several thousand dollars. Continue Reading…
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