I talk a lot on this blog about my plans for retirement, but it occurs to me I usually discuss just parts of the plan and I rarely if ever tie all the parts together. So I decided to spell it all out in a master plan post, which by the way may get a wee bit long.
Part 1 – Debts
My plan has always had one important part I almost never discuss anymore: we have no debt and don’t plan on getting any after I leave my day job. So we paid off the mortgage back in 2012 and we pay off our credit card bill every month in full. Yet this doesn’t mean I don’t have access to some debt if required. For example, we kept a line of credit for $100,000 on the house. Why? Debt can be used for some additional flexibility to manage your cash flow. For example, if we get a unexpected expense for $10,000 I could sell some investments to pay it off at once, but if the investments are making more than I can borrow the money for I would consider using debt to initially pay off the $10,000 and then slowly reduce the debt. As interest rates increase this may not be a good idea, but flexibility is useful if nothing else.
Part 2 – Expenses
We have always had rather low expenses around $30k to $32k per year for the day to day costs. This might seem low for a family of four to you but keep in mind we don’t have a mortgage payment and we have a very optimized spending towards what matters most to us. Then on top of that we have had some odd one time expenses like our big trips to Hawaii (~$5k) or our month long tour of the Maritimes (~$8K). I haven’t put money aside to fund all of those forever, but rather I built in a slush fund of money ($20k) to initially cover trips, car replacement costs and non-regular house maintenance items.
Part 3 – Work
So that last statement of not funding trips might seem odd until you realize for me that early retirement isn’t about leaving work forever, but rather the ability to choose work that I will enjoy and the hours I want (around half time or less). My hobby of writing even manages to make me some money every once in a while. So every dime of money I make post leaving my full time day will feed our slush fund. Therefore if I want to travel more I know exactly what I will be working towards.
The other major part of this is my wife fully plans to keep running her daycare for the first five years. She likes her job and doesn’t feel the need to quit so when she committed to that I added that to our plan which makes our withdrawals from our investments lower for the first five years.
Part 4 – Investments
Beyond having a paid for house we will have about $600,000 in investments (we also have another $75,000 we have in an RESP for our kids’ educations not included in that total).
The investments are basically in three main buckets:
- My Work Pension – This is mainly concentrated in bonds and has really low fees, but I can’t access most of it until I turn 50. But I can unlock about 30% of this when I leave work and move it an RRSP (which I plan to do).
- The RRSPs – These accounts are setup to invest in Exchange Traded Funds (ETFs) which has low fees because they are index funds that mirror major stock indexes. It’s called the Potato Portfolio and it takes me 15 minutes a year to manage. So it has a low amount work to manage and provides a reasonable return and balances risk nicely. We plan to use some of this money to make up the shortfall from the next bucket.
- TFSA and Taxable – These are the highest risk accounts because they invest directly in individual company stocks and an ETF for preferred shares. Yet those companies are dividend paying ones so the plan here is to avoid selling the stocks to provide income and instead just use the dividends and distributions from the companies to fund our spending.
Part 5 – Cash Flows
So the fall out of our investing choices and my wife’s plan to keep working are our cash flow plans for the next five years. We expect my wife’s business to provide about $8000 a year of income to the house accounts while our dividends and distributions should provide another $9,500 per year. So in total that is $17,500 which would be about 54% of our budget spending (assuming the $32k spending level).
Then on top of that I’ve saved an additional $16,000 in cash to initially fund our spending after I leave work. So this should cover at least the first year year off combined with the above.
Then finally because our income will be so low, we will get a substantial increase to our Child Tax Benefit about 20 months after I leave work to the tune of roughly $12,000/year. This won’t be for long but does mean our initial withdrawals from our investments will be minimal (ie: average of around 2% of the portfolio) for the first three to five years. So the plan is basically don’t touch most of the investments and let them keep growing until I’m 45 or so.
Part 6 – Income Tax
With my day job, I currently make over $100,000 a year and I provide the majority of our current household income. Of course, this means I pay a LOT of income tax. Like over $22,000 in income tax last year. So going forward that number should drop to less than $500 a year or if I do my planning right it should hover around $0.
How? Simple, the basic deduction for each adult is around $11,600. So between that for both my wife and I and the tax free income from our TFSAs we should be able to reduce our tax bill to almost zero and thereby removing my single biggest expense right now.
Part 7 – Withdrawal Methodology
Of having investments is nice, but most people want to know how do you turn them into income? Well in my case, someone on the blog pointed me this source which I have decided to adopt for my method to take out funds (which I can’t seem to find the link for so when I do I will add it). So the plan is to avoid selling the TFSA investments and only use the dividend and distribution income from those accounts. Then we will sell our bonds first to fuel any additional income requirements up to a total of 4.5% of the overall investments in a given year (if you want to know why 4.5% rather than 4% read this). Then as the stock part of the portfolio grows I will sell off the gains (when they exceed 20%) and buy back some bonds. The point of this is to avoid selling your stock side of the portfolio when the market is down.
Of course, if our slush fund gets too big from any additional income I get from my hobbies then I would also break off a chunk and also buy some bonds.
Part 8 – Purpose
A number of retirees will fail to properly plan their time after they leave work and can end up bored without their day jobs. So to combat this I’ve already considered what is more important to me and I have decided my primary purpose on leaving my day job will be writing. I don’t have to make much money at it, but if I do that is nice. I will also focus on supporting my kids in school to ensure they get any help they need and down the road helping out in organizations that I care about.
Part 9 – Hobbies
Beyond the obvious writing hobby I also expect to pursue these items which should leave me with the same problem I have now: not enough time to do it all.
Part 10 – Back Up Plans
Of course like all things in life, it never really goes according to plan. So that is why I insist on keeping several backup plans. A few of them are:
- Downsize the house and move the excess money into the investments (up to $75K).
- I will likely get a decent size inheritance despite my plan has assumed a value of $0.
- We will qualify for OAS and some CPP so I actually don’t need my money to last for 50 years, but rather until I turn 65 or so. Then we can reduce the investment withdrawals if needed.
- Finally, I can go back to full time work for a while if things are going REALLY bad.
So I think the covers the majority of the items about my plan, but if I have missed something do let me know and I’ll add it in.