Category Archives: Investing

Life After FIRE – One Year Review – Part II

Well welcome to part II of my series on my one year of early retirement.  Today, we get into some of the nuts of bolts of how this entire idea of early retirement works: let’s talk about the money.

So in the interest of a proper review let’s look at where I was at during the end of Sept 2017.

  • Investments: $595,030
  • Net Worth:$990,030
  • Spending Previous 12 months (less renovations):$35,305

Meanwhile, my end of August 2018 numbers were:

  • Investments: $619,850 (increase of 4.2%)
  • Net Worth:$1,014,850 (increase of 2.5%)
  • Spending Previous 12 months :$35,814 (increase of 1.4%)

Of course keep in mind I was officially on vacation for my first six weeks of early retirement and getting paid and still saving so the comparison to exactly one year ago is a bit off.  But overall the investments and net worth went up even with the choppy stock market of the last  12 months.  Of course I was sort of hoping to see my spending go down a bit not up during the first year but such is life.

A good part of our family’s income for the year was my wife’s daycare business which she has chosen to keep doing for a few more years (roughly $8000 for the year).  Then the rest came from cash we had pre-saved for the year and dividend income (roughly $10,000).

Now according to my last net worth update I’ve exceeded my goal for the year as our money in from investment gains and income was 108% of our spending. This was even with our spending being a bit higher than predicted and our investment returns did lower than expected. Of course this is somewhat of an illusion because in fact it is only because without my tax refund of just under $4000 this won’t have occurred, with out that I would have been under my target. And of course going forward that large of a tax refund isn’t like to happen again as it was somewhat a left over from my previous job. So am I screwed going forward? Not really.

Why? Well there are two items that come into play. First the low investment returns, had those been closer to my expected long term average of 4.5% we would have still covered our spending without the tax refund. I purposely left some slack in the numbers to cover this very scenario. The second reason I’m not really screw going forward is I’m expecting some additional income in the future.

The two main increasing sources of income will be when I actually like publish a book or two (or take on some other ‘fun’ work which pays) and our Child Tax Benefit is set to swell dramatically in 2019 (estimates have it increasing from around $340/month to closer to $1000/month).  Also we have stopped adding money to our kids’ RESP account as of this summer so know we can actually use our current Child Tax Benefit for our kids day to day expenses.  We stopped adding money to the RESP because we broke our $80,000 target (the actual account balance is closer to $80,500 if you want to know).  Of course a concern would be changing of the Federal government in the 2019 election, which even if they did roll things back to the old program amount we would still get around $730/month.

So going forward we should definitely have more income coming in even if our spending stays at the current level.  Later this year I’ll take some cash from my RRSP account to fill up our high interest savings account which we use to help ‘pay’ ourselves an income twice a month.  I use automatic transfers twice a month to simulate a paycheque.

So short term, I really don’t expect any problems for the next year or two.  But with the long term we do have a potential issue that if our investments continue to perform below our planned long term average for the next five years my wife’s full retirement might get delayed.  Yet even if that did occur we do have options like me doing some part time work to help boost savings and/or downsizing the house or any of my other back up plans.

The point is we will deal with that if it occurs in the future.  Life never goes according the plan.  You just adjust as you go which is honestly how we go to this point in our lives.  We adjust as things happened.

Any questions on the money side of things?  Or any other questions you would like to know about? If so, please ask in the comments.

ETFs and RRSPs

I sometimes take it for granted you the reader understand the alphabet soup of abbreviations that I use on this blog and while I do try to remember to define them in most posts I know I fail to do that once in a while.

So today I’m going to go discuss the basics of how we use Exchange Traded Funds (ETF) in our Registered Retirement Savings Plans(RRSP).  But before we dig into the specifics I should do a quick over view of what those both are.

First the RRSP is just an type of investing account. The RRSP is basically a glass you can put different investments into such as bonds, stocks, mutual funds or just cash as a savings deposit.  So you don’t buy an RRSP, instead you buy an investment to put in an RRSP.

The RRSP account is nice because of two main features: it gives you a tax refund and it allows your money to grow tax free.  The first point most people understand in basic terms. You put money in an RRSP during the year and when you file your income tax return you let the government know about that deduction and they give you a refund on your taxes for the amount contributed.  In short, if you put in $1000 into an RRSP the government pretends you earned $1000 less that year and gives you back the income tax you paid on that $1000.  The rate they use is the rate you paid on your last dollar of income (other wise know as your marginal rate).  If you are not sure what your rate is look it up on these tables.   After the money is inside the RRSP account it then grows tax free while in there, but that is a bit of catch with RRSPs that few people understand when it come to taking the money out.  When you pull the money out of the RRSP you then owe income tax on that money.  Why? Basically when the RRSP allows you to defer income tax to a later time (it doesn’t let you avoid it) which is why they give you the tax refund after you put money in.

A quick aside, the Tax Free Saving Account (TFSA) is similar to an RRSP in the respect the money grows tax free.  The big difference is there is no tax refund on a TFSA contribution because you don’t pay income tax when you take the money out.  You don’t defer the income tax because you already paid that before you put the money inside the TFSA.

Now putting that aside, what the hell is the ETF?  Basically an ETF is exactly as the name implies it is an Exchanged Traded Fund, which doesn’t make a lot of sense to most people. So in short form I tell people image a company stock and an index mutual fund had a baby, the results would be a ETF.  A lot of ETFs are index based mutual funds that happened to be traded on the stock exchange like a stock.  So they have a ticker symbol assigned to them and you can buy them via any self directed investment account either at a bank or a discount broker and you pay a transaction fee to do so.  Of course you pay that fee each time you buy some or sell some of the ETF.

So why are ETFs things so great?  In two words: low fees.  I mean like VERY low in some cases.  I think most Canadians understand we pay some high mutual fund management fees.  Over 2% per year is common.   While Vanguard’s Canadian Index (symbol VCN) management fee is a mere 0.06%.  No that isn’t a typo.  Yes some ETFs are higher and around 0.25% but that is still a LOT less than than 2% or higher.  So by keeping your fund fees very low you end up with more money in your accounts each year and they grow faster than a typical mutual fund.  The downside is the transaction fees to buy the ETF.  So often people suggest you wait to change over to ETF investing until you have $25,000 to $50,000 to invest in total so your transaction fees costs don’t exceed your savings on your lower management fees.  The amount you need depends somewhat how often you contribute to the account (if only once a year you can get away with the lower amount).

ETF also come in fixed income types so it is entirely possible to have your entire portfolio in ETF with rock bottom fees which is exactly what my wife and I did with our RRSP accounts.  Our portfolios are dead simple and only consist of four funds.  One for the Canadian stock market, one for the US stock market, one for international stocks and finally one for fixed income.  We aim for 40% fixed with 20% in each of the other funds.  So overall more of our money stays in our self directed accounts due to low fees and they allows them to grow a bit faster than most people.

So I hope that helps explain a bit more of how our RRSPs work with ETFs.  Let me know if you have any questions.

How to Build a $100K TFSA

Okay by popular request I’m going to dive a bit deeper into how on I managed to build my TFSA to almost $100K balance since I started it back in 2009 despite only contributing $57,500. My annual return has been 10.5% since 2012 (I would have to dig in my archive to pull out the earlier years but you get the idea).

Honestly the first thing you should do to get an high TFSA balance is to use your full contribution limit each and every year as soon as possible.  Letting the contribution room build up is like letting dust bunnies grow behind your furniture.  It doesn’t help anyone.  If you don’t use it it won’t have compounding growth which keeps the balance growing.

You also have to decide what exactly your TFSA is going to be for your overall financial plan.  You can use it to park your emergency savings but that will result in your having less growth.  In my case, both my wife and I decided that the TFSA would be for income purposes.  We wanted to generate a steady stream of income from our accounts to help fund our retirement.  So while it grew fairly quickly since 2009 we do expect it to slow down going forward as we start to take money out of the accounts.

Now the third key thing to is to accept that if you want a big balance you are going to have to take some risks.  Using your TFSA as a high interest savings account or GICs is dooming your balance to stay low.  There is nothing wrong with those investments depending on your objectives for your money just don’t be so conservative that you are losing to inflation each year.  As I mentioned above our objective was income so we started off with individual stocks of dividend paying companies.

To find the companies that we would end up investing in we looked at our own bills we paid each month and bought in similar sectors.  After all monthly bills often mean long term clients that pay regularly into the business which gives the company cash to pay out dividends.  So we ended up looking at banking, insurance, telecommunications, utilities,  oil and gas, and real estate income trusts.  We then looked to have at least two different companies for each sector we invested in as we didn’t want to have all our eggs in one basket.  Also we tend to look towards higher yield companies as we planned the TFSAs as our highest risk accounts so we expected to be compensated for that risk (we typically looked at companies with about a 5% or higher yield).  Please note yield for a stock is just the dividend payout annually divided by the share price shown in percentage.  A high yield can be the result from a company having a period of bad news that temporarily drives down the share price.

Once we identified a potential company in a sector by yield we would then pull open its last annual report and flip to its asset and debt balance sheet and look for its retained earnings.  A good value here usually indicates the company is sitting on some cash so in event of a downturn in their business they can keep paying their dividend.  If the retained earnings were low and the debt levels were high we would often avoid buying the company.  Also at this time we would take a look at how long has the company been paying a dividend and how often they increase it.  Steady dividend growth often means a decent growth in the company overall which is good for the share price in the long term (and your TFSA balance if you buy shares in the company).

Later on we added an ETF of preferred shares to our TFSAs instead of bonds to give a bit more balance to the risk profile of the accounts but still focus on producing income.

Then the last factor in getting a high TFSA balance is: luck.  You occasionally will pick a company that does REALLY well the spikes your balance.  For me it was AQN (Algonquin Power & Utilities Corp) which I managed to buy when it was under a cloud of doubt due its debt level but the overall numbers looked fairly good and utilities have very dependable cash flows. My yield based on my purchase price is somewhere above 10% now.  For my wife, she bought MFC (Manulife Financial Corp) and the share priced increased by around 30%.  So yes, that is hard to predict but it does occasionally happen.

So what do you use your TFSA for and are you happy with your return?