Decumulate & Downsize

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.

How one Tawcan reader lives on $360,000 a year of dividends almost tax-free

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By Bob Lai, Tawcan

Special to the Financial Independence Hub

Long time readers will know that my wife and I are deploying a hybrid investing strategy – we invest in both dividend paying stocks and index ETFs. It is our goal to have our portfolio generating enough dividend income to cover our expenses. When this happens, we can call ourselves financially independent and live off dividends. By constructing our portfolio and selecting stocks that grow dividends each year organically, we believe our dividend income will continue to grow organically and keep up with inflation so we don’t have to ever touch our principal.

In the past, I have done a few simulations showing that living of dividends is possible and that dividend income is very tax-efficient in Canada. But simulations are full of assumptions and the numbers can change. Wouldn’t it be nice to showcase someone that is living off dividends already?

As luck would have it, Reader B, a fellow Canadian, recently mentioned that he retired in 2004 at age 55 and has been living off dividends since. I was very intrigued by B’s story when he told me that he worked as a civil engineer and his wife worked as an administrator.

I fell off the chair when he told me that he and his wife started investing with $10,000 and have amassed a dividend portfolio that generates over $360,000 in dividends each year! 

That’s $30,000 a month! Holy cow! 

While working, they had above average salary (B made ~$110k and B’s wife made ~$90k in today’s money). The high household income has certainly helped them build the dividend portfolio. But I believe a lot of it is due to B and his wife’s living modestly – not a lavish lifestyle but not penny pinching either.

After a bit of emailing exchanges, he agreed to answer my questions about his experience with living off dividends (it took a bit of convincing haha!). I truly believe B’s knowledge will help a lot of dividend growth investors.

Note: B’s original reply was over 11,000 words not including my comments (our email exchanges were very long too). I went through his answers and edited some parts out. For ease of reading, I have decided to split the post into two posts.

I hope you’ll enjoy this Q&A as much as I did.

Living off dividends – How I’m receiving $360k dividends a year and paying almost no taxes

Q1:  First of all, B, thank you for participating. It’s wonderful to learn that you and your wife have been retired since 2004 and have been dividend investors for over 36 years.

A: Thank you, Bob, for giving me the opportunity to share my 36 plus years of dividend investing experience and results with you and your readers. After following your blog, I realized that we and many others were on the same dividend investing path. The only difference being that I was a few more years along in the investing journey. I felt others might benefit from my experience with dividend investing.

You’re on the right path, Bob, and given your rate of progress to date by the time you reach my age (72) you will certainly attain your dividend income goals and likely well beyond. So I wanted to encourage you to continue along the dividend investing path. It’s a very sound and profitable strategy.

I’m more than happy to share with others a few of my ideas on dividend investing and how it can be done in a tax-effective manner.

Q2:  How long have you been investing in dividend paying stocks?

A: I started investing in stocks in 1985. After the initial period of learning the ropes and finding my way in the investing and stock market world, it was only in 1990 after subscribing to a weekly investing newsletter that I finally saw the investing light and found that dividend investing was right for us.

So I guess you could say I’ve been traveling along the dividend paying stock road for some 31 years now. And we’ve been comfortably supplementing our lifestyle with an ever increasing stream of dividends since we retired in 2004 to the present day.

Diving into the dividend portfolio

Q3:  How much dividend income are you getting each year? Can you provide a detailed breakdown across non-registered and registered accounts? 

A: As of April 30, 2021, my wife and I are receiving $360,000 in combined pre-tax dividend income annually – that’s $30,000 per month – and still growing.

Our combined assets are distributed as follows:

  • RRIFs: 8.2%
  • TFSAs: 1.9%
  • Non-Reg Dividend Income Accounts: 85.5%
  • Other Short-Term Liquid Assets: 4.4%

So the amount we have in registered tax-sheltered plans totals 10.1% and is decreasing annually in compliance with RRIF mandatory withdrawal requirements.

These figures illustrate a problem that can develop gradually over time – a severe imbalance between registered and non-registered  accounts caused by the low contribution limits governing registered savings plans. Allowable contributions to registered plans are capped.

If one’s savings levels exceed the cap limits by a significant amount, then the balance between registered and non-registered accounts can tilt heavily towards the latter. The effect is that registered plans then become less and less significant in the overall account mix. This unbalanced effect means that we now have only 10.1% of our assets in tax sheltered accounts while 85.5% is held in “unsheltered” non-registered accounts.

So that makes it critical to find ways to ensure that holdings in non-registered accounts are as tax efficient as possible. The most optimum way to achieve tax-efficiency under such conditions is to focus on buying and holding Canadian dividend paying stocks in non-registered accounts.

We will continue to shift portions of our “other” assets toward Canadian dividend income as we go forward.

Our non-registered accounts are producing the entire $360K dividend income stream referenced above. The annual yield on market value is 4.2%. The actual yield on cost is much higher than the market yield. Our portfolio has returned nicely over the years.

Our annual mandatory RRIF withdrawals are the minimum required by age and proceeds are immediately re-invested in more dividend stocks and held in our non-registered accounts. We do not touch our TFSAs and contribute the maximum allowable amount each year.

Tawcan: My jaw dropped when you told me about your $360k a year dividend income. That is absolutely amazing! 

At 4.2% yield that means the market value of your portfolio is over $8.5M! Obviously your yield on cost would be much higher than that given you have invested over 30 years. Regardless, I’m betting that the cost basis of your non-registered portfolio is in the multi-million dollars range. It is very impressive considering you and your wife only made around $200k a year in today’s money.  

The Dividend Investing Philosophy

Q4:  Can you give us an idea of your general approach to dividend investing?

A: My dividend investment philosophy can be summed up as: “To buy gradually over time, high-quality Canadian tax-efficient dividend paying stocks and hold them indefinitely.”

I buy stocks gradually in roughly equal amounts and spread the purchases over time. I never invest large lump sums all at once. I’ll take an initial position in a stock, usually in the $10K value range, and then return again at an opportune price point and buy some more (i.e. dollar cost-averaging).

High quality stocks are selected – conservative large cap stocks – most often dividend aristocrats – minimum 2% yield with the odd exception for superior growth stocks or those with growth potential. Great focus is placed on buying dividend aristocrats and stocks in the TSX Composite 60 Index with a nod toward following the Beat the TSX strategy.

Tawcan: Funny B mentioned the BTSX strategy. Check out Matt, the brain behind Beating the TSX strategy, and his family’s amazing story about traveling the world with 4 kids. 

I exclusively buy only Canadian stocks – no USA stocks – none – no exceptions. The only US stocks I would consider are those that have a TSX listing and can be purchased in Canadian dollars for tax efficiency reasons.

Tawcan: It’s interesting that you only hold top Canadian dividend stocks and no US or international dividend paying stocks or ETFs. 

All our stock buys must be held in non-registered accounts – contributions can not be made to RRIFs and our TFSA contribution room is maxed out. My wife and I also invest in REITs and they require special attention (more on that later).

All stocks we buy must pay a dividend. As mentioned, I usually insist on a 2% yield or higher – but not too high. One never wants to over-reach for yield, which is often the warning sign for an impending dividend cut. If a stock does eliminate its dividend, then it’s automatically gone from our portfolios and we move on to another stock that does pay a reliable dividend.

On very rare occasions, it may be advisable/necessary to sell a stock for the following reasons:

  1. When a stock’s prospects have taken a downward turn.
  2. In the event of a takeover bid – friendly or otherwise – one often has little choice but to sell.
  3. For tax-loss selling purposes. We seldom pay any capital gains income tax at all. When we do realize a capital gain from a stock sale, then we’ll sell another stock (or partially sell) to realize an offsetting capital loss. But tax-loss selling is not usually done at year-end along with “the herd.” After waiting the mandatory 30 days and if the stock remains a solid investment, then we will often buy the stock back – hopefully at a lower price.

Under a buy and hold strategy, there is not a lot of opportunity for capital gains. By not selling, no capital gain is realized and so capital gains tax can be deferred indefinitely.

On the other hand, dividend income can be extremely tax efficient when you are income splitting between two people. We’ll get into the specifics a bit later.

Q5:  You mentioned that REITs require special attention. What did you mean by that?

A: Not all REITs are equal in terms of tax efficiency when held in a non-registered account where taxes on REIT distributions can vary from 0% to 53.53% (in Ontario). Therefore, the most tax-efficient place to hold a REIT is in a registered account. Continue Reading…

Mexico: US-style Living at one third the Cost

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Chacala Beach, Nayarit, Mexico. Photo credit Billy Kaderli.

By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

Mexico, that constantly media-bashed country to the south of the US, might be your better option for retirement.

One million Americans already call Mexico their home and it’s amazingly easy to obtain your residency visa for full-time living, most receiving theirs in a matter of days.

Snowbirds could easily add another million visitors to this number and can stay 6 months on a no-cost visitors visa!

With its proximity to the United States, both US and Mexican airlines offer non-stop flights to and from many destinations in the US. Or, of course, you could drive. So, visiting family or utilizing Medicare is much easier than if you were to live elsewhere overseas.

There are lots of reasons why Mexico is a great choice for retirement, so let’s list some:

Cost of Living

Mexico has everything that the US offers – along with a better lifestyle – at a fraction of the cost.

The Dollar exchange rate makes for attractive affordability.

The cost of a beer is 30 Pesos or about $1.50 at a bar. A lakeside lunch of grilled salmon with wine or margarita as your beverage plus a generous tip runs about $11USD per person.

Commonly used medicines at pharmacies won’t break the bank, and a consultation with a cardiologist or a surgeon is less than $40USD.

More on Medical Care

Many US doctors train in major Mexican hospitals where the “care” is still part of the healthcare industry.

Most doctors here – including specialists – are easily available through phone, WhatsApp or email and most speak English. Highly skilled dentists are abundant with oral surgeons performing teeth implants for a price less than your dental copay back home.

Assisted Living options run the gamut. Pricing for private rooms in a traditional Mexican mansion with gardens, comfort dogs, meals included, internet, laundry service and social activities and a driver to take you to appointments are about $2,000USD per month.

Housing

Here in Chapala, Mexico, all price ranges are available for both rentals and home ownership. For as little as $300 USD a month you can rent a one-bedroom furnished apartment or you can purchase a house in any of the towns which dot the lake for many times that amount.

Maids and gardeners are commonplace, and the price for plumbers, carpenters and electricians run about the same as a Lakeside lunch. Continue Reading…

Q&A on VRIF: Vanguard’s new Retirement Income ETF Portfolio

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Vanguard Canada

Special to the Financial Independence Hub

Republished with permission of Vanguard Canada

Late last year we launched a new all-in-one ETF solution, VRIF, to complement our existing line up of popular asset allocation ETFs.

VRIF, or the Vanguard Retirement Income ETF Portfolio, provides steady and predictable income to help investors meet their monthly expenses. It is made up of eight underlying Canadian Vanguard ETFs and will make an annual payout (currently 4% of the portfolio) split across equal payments each month.

The product has generated interest from investors and advisors along with several industry observers helping it become one of our top selling ETFs over the past few months and generating $150 million in assets (as of February 8, 2021).

It has also led to some questions on how it works and what it hopes to achieve. I wanted to collect some of those common questions and provide a few answers about VRIF.

1) What makes VRIF different from other similar monthly income funds and ETFs?

VRIF is unique in a few different ways. It incorporates a total return approach, meaning the portfolio is constructed to ensure it can help meet the daily living expenses of investors. There is an annual payout (currently 4% of the portfolio) split across equal payments each month. This is appropriate for investors and retirees looking for regular income as well as helping RRIF account withdrawals. For example, if you hold $30,000 in VRIF at the start of the year, that equates to $100 a month, for $1,200 over the year.

You also get a fully diversified portfolio with a mix of stocks and bonds, global diversification and a low-cost management fee of 0.29%*, which is currently about one-third of other similar retirement income products across the industry.

Another advantage to VRIF is that investors can rely on Vanguard’s global investment experts to monitor and assess the portfolio to meet the return target, along with providing regular rebalancing to help simplify the monthly income component. It really is a single ticket solution for investors to access monthly income.

* The management fee is equal to the fee paid by the ETF to Vanguard Investments Canada Inc. and does not include applicable taxes or other fees and expenses of the ETF.

2) How can VRIF help retirees and investors looking for income?

Managing income in retirement is not an easy task. There are a lot of ETFs and mutual funds for building up your retirement savings but not many for people who are looking to use those savings for their retirement spending.

With 30% of Canada’s population being 55 or older, the need for income has never been greater among investors. VRIF gives you a regular consistent payout each month (currently 4% of the total portfolio) and readjusts it once per year. Each year we set a dollar amount and it’s the same for every month in that year. The outcome is a simple and low-cost investment option that can help people enjoy their retirement.

3) How does VRIF expect to achieve the annual payout for investors given the current low-yield environment and where does that payout come from?

Within VRIF, we use a well-diversified total return approach to achieve a tax-friendly annual payout, (currently 4% of the portfolio) split across equal payments each month, that includes income from the portfolio and capital appreciation. Continue Reading…

Bonds are back but what did they just say?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Bonds are the adult in the room. And when they speak, we should probably hear them out. This week [late June] bonds went on a tear. What were bonds trying to say? They were listening to the ‘Fed Speak’ in the U.S. that left many confused. Of course, the Federal Reserve and the Federal Reserve Chairman set the overnight rates that affect bond markets and our borrowing costs. It’s an economic lever. Maybe the adults in the room are suggesting that inflation is not a threat? We’ll see deflation in the near future? Or maybe a recession is closer than we think?

Here’s a good barometer for the bond market and economic sentiment – long term U.S. treasuries.

They’ve had a good month (and more) and they had an explosive week. The index ETF was up about 3% over the last two days. Long term treasuries are known as some of the best stock market risk managers. They punch above their weight.

Must read: Bonds are the adult in the room.

Recently I suggested that the stock and bond markets are buying the transitory inflation argument.

And in my most recent MoneySense weekly I had a look at some of the economic data for Canada and the U.S., including that recent Fed Speak and reaction.

Perhaps the bond market is going well beyond saying ‘inflation is transitory’. Let’s have a listen to what a few experts say about this weeks stock and bond activity.

David Rosenberg says look out below.

In a recent Globe and Mail piece Mr. Rosenberg suggested that inflation jitters will turn into deflation fear by year end. (pay wall) Of course bonds like deflation. And that’s one reason why we hold bonds right? Even though almost no one thinks that we could enter a long period of economic contraction and deflation. From Mr. Rosenberg …

“When these temporary disturbances fall out of the data, people are going to be surprised at how low the readings are going to be on these official inflation statistics,” the famed Canadian economist said in an interview Friday.

“I think we’re going to go back to talking about disinflation and deflation [by] the end of the year.”

The boring balanced portfolio is having its way these days. Stocks for growth and bonds for ballast and no-growth scenarios. Readers will know that I am also a fan of covering off inflation as well, you’ll read about that in the new balanced portfolio.

Investing is like a box of chocolates.

To quote Forrest Gump, you just never know what you’re going to get. This past week gave us that big and important reminder. Who would have thought that bond investors would have a such a sweet week? I’m happy to hold long term treasuries and that TLT and the BMO Canadian dollar version in ZTL.

Mike Philbrick at ReSolve Asset Management offered via Twitter …

No one knows the future price of any asset class so diversification is incredibly important as the first line of defense.

And as an example, pick your poison of inflation or deflation or economic shocks of any variety. More from Mike …

Another great example, why making sure investors are always exposed to inflation shocks rather than trying to time it … Money and mindshare piled in recently but all the returns came months before that, when investors were not noticing.

Perhaps there is no real economic growth?

Perhaps the bond markets echo Lance Roberts (no relation), CIO and partner at RIA Advisors, with respect to what is real and sustainable economic growth?

The reason that rates are discounting the current “economic growth” story is that artificial stimulus does not create sustainable organic economic activity.

And on the inflation front from Lance, you can’t create real inflation from artificial growth. From that post …

Yes, we see that word “deflation” again.

Rethinking the 60/40 portfolio?

That has been a hot topic for quite some time given the low yield environment. Many suggest tweaking up your equity exposure to the 70% level or so, if you have the risk tolerance. That was certainly covered in this post on the Horizons one ticket ETFs. Those portfolios employ U.S. Treasuries that help dampen the volatility of increasing equity exposure. Continue Reading…

Financial knowledge of Canada’s retirement system isn’t improving, study shows

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Financial knowledge about the Canadian retirement system fell from 2020 to 2021, says the Retirement Savings Institute.

The financial literacy of average Canadians is still low when it comes to understanding our Retirement system, says a survey being released Tuesday. The third edition of the Retirement Savings Institute (RSI) surveyed 3,002 Canadians aged 35 to 54 and found the overall RSI index measuring knowledge of the retirement income system slipped from 38% in 2020 to 37% in 2021. This, it says, is “still showing a significant lack of knowledge among Canadians.”

The RSI Index is the share (stated as a percentage) of correct answers to  29 questions posed in the survey.

The best-understood subjects continue to be CPP/QPP and RRSPs/TFSAs. Canadians still find it tougher to understand employer sponsored pension plans and Old Age Security, where the average respondents “didn’t know” the answer to half the questions.

In a backgrounder, the RSI team at HEC Montreal [a business school] says the scientific literature in several countries has established a link between general financial literacy and preparation for Retirement. However, “the level  of general financial literacy among Canadians is fairly low, although comparable to what is observed elsewhere in industrialized countries.” It also finds knowlege about narrower topics like taxes to be “rather limited.”

Starting in 2018, the RSI started to measure on an annual basis the financial literacy of Canadians in their “years of strong asset accumulation in preparation for retirement.” Those younger than 35 tend to have “other concerns and financial priorities than retirement,” the RSI says.

Knowledge rises with education and income, and as retirement nears

Not surprisingly, the closer to Retirement age one is, the more knowledgeable of related financial matters we tend to become. The RSI score was 33.9% for the youngest in the survey aged 35 to 39, rising to 36.6% for the 40 to 44 cohort, then to 37.8% for the 45-49 group, and a high of 39.5% for those 50 to 54.

Also as one would expect, the more schooling the higher the score: those with high school or less had an RSI score of 31.5%, while those with college or equivalent scored 36.9%, and those with a Bachelor’s degree or higher scored on average 45.3%. Similarly, the higher the household income, the better knowledge. Thus, those with household income of $30,000 or less scored just 26.1%, compared to $60,000 to $90,000 families scoring 37.3% and at the highest, families making $120,000 or more scored 45.6%.

Equally unsurprising is the fact that higher earners are more knowledgeable about RRSPs and TFSAs, especially when it comes to contribution room and withdrawal rules. They are less knowledgeable about investment returns in those vehicles, and score a low 12.6% on penalties for over contributions and other rules related to taxes.

Many confused about Employer Pensions

Employer pension plans seems to be an issue. At all ages, Canadians found it difficult to know the difference between Defined Benefit (DB) and Defined Contribution (DC) pension plans. In particular, they tend to be confused about which one reduces longevity risk (DB) and which depends on returns generated by financial markets (DC). Low-income individuals are even less knowledgeable.

Workers who are contributing employer pension plans had significantly higher scores (41%) than those who were not enrolled in such plans (32.9%).

The older and richer understand CPP/QPP better

Also as you’d expect, older people and more well-off people understand the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) better. As the chart below illustrates, most Canadians are now well aware that taking early CPP/QPP benefits results in lower monthly benefits (shown in the “Penalty” bar), but there is still a lot of confusion about whether CPP/QPP recipients can collect benefits while still working (only 25% correctly answer this.)

Most Canadians know there is a penalty for taking CPP/QPP benefits early but there is much confusion about collecting while still working.

Older people also know OAS and GIS better. As the chart below shows, most people know you have to be at least 65 years old to receive OAS, but knowledge about technical matters like the OAS clawback, the Guaranteed Income Supplement to the OAS, and taxation of these benefits tends to be much scantier.

Basic OAS timing seems well understood but many are murky when it comes to clawbacks and eligibility and taxation of GIS benefits.

Mortgages well understood, bonds and debt not so much

When it comes to major financial products, Canadians are quite knowledgeable about compound interest, but as less so about debt doubling and quite ill-informed about Bonds, as the chart below indicates. ( Continue Reading…