Category Archives: Investing

Managing Your Retirement Money

I’ve noticed something since being retired that doesn’t get discussed that much among personal fiance bloggers. Prior to early retirement we tend to focus exclusively on growing our net worth. It’s all about the increasing balance of our investment accounts and paying off debt. Yet after hitting my ‘number’ and going into my semi-early retirement I have noticed the worries and concerns don’t even really look at my net worth so much. Instead I’m now focusing on my cash flow.

Which when you think about it makes sense.  After all if your income from your investments and other sources continues to exceed your spending over the long term you likely won’t ever run out of money. So while I still worry about living within my means it is now more focused  on managing our cash flows. Of course if your cash flow is constantly negative then you may see your net worth declining if that negative cash flow exceeds your investment growth.  But in short if you are constantly in a positive cash flow you rarely need to look at your net worth anymore.

So this is the game I as playing right now. Can our dividend, interest and small business income exceed what we spend on average over a year?  With that in mind I thought I would explain a bit how I plan to manage our money going forward.

First off let me state that I don’t plan to look at my accounts daily or do anything stupid like day trading.  Our portfolios are designed to require very little management from us on a day to day basis and I want to keep it that way.  But of course this doesn’t exclude you from doing some work on the investments, it should keep the amount of time required to a low level of an hour or two per month with one notable exception.

That exception is that each year around the start of November I would do a little maintenance on our accounts and move money around as required to rebalance the RRSP accounts which are all invested in index funds (but I only do that when the gains are around 20% or so and then shift a chunk from equity to bonds).  Why late fall/early winter?  Well because that allows me to take money out of the RRSPs if required with a fairly accurate estimate of any earnings we have made for the calendar year.   This is important as any RRSP withdrawals are subject to a withholding tax which is used as an estimate of our income tax owing on the withdrawal.  So by doing near the end of the year we only give the money to the government until we file our taxes the following spring and we will typically get most of that money back as a tax refund since our actually income tax bill should be very low.  Please note for 2017 I didn’t actually do this since I have pre-saved our expenses for 2018.

On a day to day basis we normally use our cash in the high interest savings account to cover expenses.  To simulate a pay cheque we have setup auto transfers twice a month to the main chequing account.  For now I’ve defaulted that amount to $1000 twice per month.  If I don’t use the money in a given month I just push it back over the high interest savings account when I calculate our net worth at the end of the month (and write a blog post about that).  Also keep in mind that our cash position in our high interest savings account when I left work in the fall of 2017 was at over $50,000 which is a bit larger than normal.  This is because it was also holding our 2018 TFSA contributions of $11,000 in that account.

In addition,  twice a year we drain off the cash sitting in our TFSA and taxable accounts and put that into the high interest savings account to pay for our day to day spending.  We don’t reinvest our dividends and distributions, but rather just let them accumulate in those accounts during the year.  I plan to take the money out at roughly six months apart.  One will be in November during my annual financial RRSP balancing session and the other will be in May.  At the moment those dividends are just under $10,500 per year (this recently just went up since Husky Energy just started paying their dividend again).

Meanwhile my wife’s daycare business transfers a monthly amount over to house once a month ( this is currently $550/month).  Then towards the end of the year she also does a lump some payment to cover the cost of her Rough Rider season tickets.  I had previously offered her the option to retire with me but she decided she wanted to work for a bit longer.  With that extra income in mind I left work about a year earlier since I didn’t need the capital to cover off her income right away.

Meanwhile any cash I earn (from writing or what ever I do that happens to generate some income) I’m putting that into our slush fund for vacations, house renovations and car replacement.  I retired with a $20K slush fund balance in that which is also stored in our high interest savings account.  So with our current draft taxes of 2017, I should see a refund of over $4000.  I’ve already decided to put 90% of that towards the slush fund and put the other 10% to buying some equipment to set me up for all grain beer brewing.

While we are currently getting some Child Tax Benefit cash each month that is currently moved directly to the kids’ RESP account.  That will end this year after the RESP account gets to around $80,000 (which is our overall savings goal for that account).  At which point we will stop the transfers and just roll that cash into our monthly spending on the kids (currently this is mainly clothes for my 13 year old who seems to be getting taller each week (don’t get me started on what he is doing to our grocery bill) and then activities like swimming lessons).

Of course all of the above is more or less my planned framework.  Reality will be different.  Case in point, after I file my taxes for the 2018 tax year I fully expect our Child Tax Benefit to increase dramatically in July 2019.  This will allow us the odd situation of really not having to touch the RRSP at all if we so choose.  So even when I go to take some money out of my RRSP this November I really won’t need all that much.  This is part of our longer term plan to account for my wife’s retirement in the future.  By not touching that RRSP accounts for a few years they should grow enough to cover off my wife’s business income to the house (at least that is the plan).

This of course then brings into the eternal debate do you take money out of your RRSP up to your basic deduction each year even if you don’t really need the money?  Why would that be a good idea?  Well because that money will effectively be a ‘tax free’ withdrawal from your RRSP.  Yes you will have the withholding tax applied initially but after you file your taxes you will get the money back.  But if you don’t need the cash you will likely put some into your TFSA but that amount is less than the basic deduction amount.  So then you end up with having to start a taxable account and potentially have a tax liability with that.  Which then leads you to wonder if you should just take out your TFSA contribution plus any cash you need to live on in the next year and quit at that.  To be honest, I haven’t fully decided on this yet.  I’m currently leaning towards taking less than from my RRSP and dealing with slowly melting the RRSP down and moving it into the TFSA.  In my wife’s case, this gets even more messy because of your business income will likely be much higher than mine and closer the the total basic tax deduction.  And we won’t touch her spousal RRSP until 2019 at the earliest to ensure any money we pull from that account is not attributed back to me  – you need to wait three years from the last deposit to make sure that doesn’t occur which is why I stopped putting money into her spousal account literally years ago.  I know it is confusing, but those are the rules so I just work within them.

So hopefully all of that helped you understand how we manage to pay for our expenses now that I don’t have a job.  I suspect that I haven’t been clear on everything so please do ask any questions in the comments.

The Money Panic

The other day for no apparent reason I sudden had a shock of fear go down my spine that I didn’t have enough money for my retirement.  I worried that I had made a horrible mistake and that I should have worked longer  and saved more money before quitting. There was no particularly logical trigger for the feeling of mild panic that passed through me and the feeling left me shortly afterwards.  Yet it did make me double check a few numbers to prove to myself (again) that we had enough money for years.

So as I looked at my account balances and faced the fact that I am in fact fine for the next few years then I relaxed back to my usual state of calm.  In reality nothing had changed about our situation during this episode, it was merely a bit of doubt stuck in my brain and likely the result of me adjusting to our changing sources of income.

Previously with my old job, I knew there was risks with a job as your major source of income.  I knew you could get laid off, shifted to another job, or have a rollback in wages or cut in benefits (I honestly had experienced all of those during my career at some point).  Yet I understood those risks because I had been living with them for a long time.  So oddly comfortable with those risks.

Now that we are mostly living off our investments I have a different set of risks.  We could see a stock market correction, cuts in dividends from companies we own or drops in our bond portion of our investment portfolio.  These aren’t new risks but I honestly didn’t pay as much attention to them in the past because with my old job we had other sources of income to cover expense when those events occurred.  Now I’m feeling those risks more acutely than in the past.

The reality is you don’t have less risk once you retire.  You just changed which risks you are managing.  Yet oddly some of the same principles  you learned getting to retirement still apply such as it is better to have multiple sources of income (not just investments or  just a job).  Which is why partly my wife continues to run her daycare from our home and I continue to run my little publishing business.  Neither produces much income but it does help balance out the risks of sudden investment swings.  Also both businesses give us something to do and provide options for socialization with others.  We do them because we like to and less because of the income they produce.

One other things that hit me during my little panic feeling was I asked myself the following question: what is the worst thing that could happen?  This is a great question to force yourself to face what you are fearing.  And in my case the answer was simple: get a job.  Notice the word ‘job’.  I don’t have to go back to my old career or employer begging for a job.  I can find something, somewhere that I might enjoy a bit and brings in some money.  Honestly with our relatively low expenses making even $10 to $15K a year makes a huge difference to balancing out our spending.  And if that truly became required it isn’t really the horrible of a fate…hell it’s sort of normal for most people my age (including myself until recently).

In the end, I’ve come to realize these little flares of panic or worry are just me adjusting to my new normal.  Nothing on a fundamental level has changed in my situation other than my thoughts and luckily those can be changed rather easily.

So do you think you would have problems living just off your investments?  What would you do to help balance your risks?

The Master Retirement Plan

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:

  1. 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).
  2. 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.
  3. 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.