Category Archives: Investing

The Oddity of Inheritance

As some of you may know from my various posts over the years that I haven’t included any inheritance in my early retirement plans except as a back up plan. Why? Well on the surface a windfall of money later on in your life could be very helpful for your funding your own retirement but it sucks from a planning perspective.

Why? Well in short you can’t control the amount of money you will end up with and you also have no control on when you might ever get it.  So both of those uncertainties makes an inheritance nearly useless for you to be able to depend on for planning your retirement. As an example for discussion let’s say I may end up inheriting $100,000 when I turn 50 or $25,000 when I turn 60. In either case that would have vastly different effects on the math of your withdrawal rates (if you feel so inclined you can play with your own retirement numbers to see what I mean).  Yet you really can’t know when or how much you will end up with the inheritance as there are too many variables involved.   So in short I really don’t recommended including it at all when you are doing your planning for your early retirement.

Yet now we have a bit of an oddity. Depending on how good your own parents or your spouses parents are with money you might end up with a significant amount of money one day out of the blue.  After all a $100,000 dollars (or what ever amount you get) is nice regardless of when you get it. But what should you do with it if you are already financially independent and don’t need the money for day to day expenses. Now there is two main options that spring to mind: enjoy the money or use it for the next generation.

The first option of enjoying it is, of course, the easiest. You can invest the money and use the extra funds to take a few extra trips or do a renovation on your house because you want to. In effect it becomes fun money to do what every you like.

The second option of using the money for the next generation also has interesting potential because if you invest the money and you can either hand it over in lump sums at key points in their lives or gift the entire portfolio to them when you feel they are ready for it. This has some significant advantages depending on the amount of money per child.  For example, they could graduate post secondary with no debt and have some seed money to have them save towards a house down payment. Or you can boost your own children’s retirement savings when they are young they could give them a leg up on working towards being financially independent or using it to fund their own business or further their education or what ever you deem important.

Or another option, if you prefer, is you can save the money and play the really long game of investing your your actual or future grandchildren’s education and seed money for their retirement savings.  Thus building the capacity of your family line to continue to be ahead of the curve of most people when it comes to student debt and retirement savings.  The major problem of planning this long game is there is no guarantees that your grandchildren will continue the tradition to their kids.

For me personally I sort of hate to choose and might end up doing a bit of everything.  It all depends on the circumstances of how old I am and where my kids are at in their lives when my parents die (not that I’m looking forward to this but as I turned 40 this year I’m aware it will happen at some point regardless of when I’m ready for it).

So have you given any thoughts to your legacy?  What would you like to see your children do with their inheritance? Or what would you do if you received an inheritance?

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?