Retirement Plan Modifications – Part III

Welcome to my three part series on modifications to my retirement plan.  If you haven’t previous read them I suggest you read my series “How Much Do I Need to Retire” for some of the background of the numbers.

Well this year Canadian’s were introduced to our new friend the Tax Free Savings Account (TFSA) which is similar to the Roth IRA, but better. The money we put is in is after tax dollars without a tax refund.  Yet as we don’t have to wait for a certain age to use the money and it doesn’t count as income in your taxes or trigger any reduction of benefits for government programs it’s a great thing.

Previously I had stated I wasn’t sure what I was going to do with the TFSA and my retirement plans.  Well I think I have decided.  I’m going to maximize my contributions these accounts out for my wife and I for the next 15 years.  My investment choices won’t be cash based but rather (at first ) distribution paying stocks we already own in a taxable account to help reduce our current tax bill.  Then we will start buying other income producing investments.  The long term goal of these accounts is to try and have these accounts produce about $7000/year in tax free income between the two of us (today’s dollars).

So why $7000/year?  Because the current basic income tax deduction is $10,100 per person.  If you add it up then I can get $27,200 per year with no tax in retirement.  Yep, I’m going for the classic “don’t pay a dime in tax” retirement.  Thanks to the TFSA’s that is now much more of a realistic goal.

So in addition to that change I’ve also decided to break down the next few years into saving goals.  They are:

  • Phase 1 (2009 till 2012):  Buy investments like crazy while the prices are still cheap.  My initial focus will be maxing the TFSA’s in a given year, but after that I’ll be looking a dividend paying stocks.  In addition I have a backlog of contribution room in my RRSP I want finish maxing out over the next few years (which again will use index funds).
  • Phase 2 (2013 to 2018): Shift focus and pour savings into paying off the mortgage.  I want that beast dead by the time I turn 40.  Why?  I want the flexibility to leave work earlier than 45 if things change over the next decade (ie: If change my mind and pull off a semi-retirement).  Also during this time I’ll move as much taxable investments as I can into the TFSA accounts.
  • Phase 3 (2018 to 2023): At time point I will start stabilizing investments.  I don’t want a stock market crash screwing up my savings.  So I’ll alter the mix in my pension plan and my RRSP to a larger amount of bond exposure (perhaps around 70 to 75% in each, keep in mind the TFSA will have a large amount of my overall equity exposure).  Also during this time I’ll build up a good size cash reserve (three to five years of spending) and make sure to either replace any longer term goods (ie: car, fridge, etc) or ensure I have a cash fund to buy a replacement later on.

The end goal of these phases is to give me focus during each period.  That way I won’t ever be thinking ‘Ok, but what do I do now?’  Instead I’ll be just going ahead with the plan.

So what do you think?  Nuts or not bad or wow?  Let me know what you think with a comment.  I’m open to ideas.

5 thoughts on “Retirement Plan Modifications – Part III”

  1. This sounds like a good plan. However, can you pay off your mortgage and invest (maybe buy a little less?) I guess you have to figure out how much in interest you will save if you pay it off sooner rather than later.

    Also, are you going to use both your wife’s TFSA and yours as stock accounts? My husband and I split it…our emergency savings are in my TFSA (high interest rate account) and his are going to be mainly in dividend paying stocks.

  2. that’s a great plan, I’m working on something similar for myself, and hoping to get the girlfriend on board soon.

    I opened up a TFSA at Questrade.com and bought some stocks in BMO when it was down at $29.60 on the TSX. I’m planning to max out that account on Questrade for the full $5000 for sure.

  3. The stock markets have the potential to go a great deal lower. Another 50 % cut from here is not out of the question. Do you really want to take on that risk? The Bear is still “in play”.

    Consider waiting and take on the risk of missing out on the early part of the next Bull Market. Thinks don’t go up the fast. It is not a great risk. Check the market history. There is no need to take my word for it. It took 25 years for the 1929 recovery to happen.

    You can easily miss the first 3-6 months of the best Bull Market in history and still be better off long run.

    The “Buy and Hold for the long term” is a fatally flawed thesis.

    CM

  4. CM: “The “Buy and Hold for the long term” is a fatally flawed thesis.”

    Is this personal opinion? Research has shown that there is not a 30 year period in history with a return of less than 8%. Source: intelligent asset allocator.

  5. Mintycake,

    Yes I still will be investing during the mortgage paydown phase. My pension will continue and the RRSP’s will still be maxed out. I will be holding off on taxable and TFSA contributions.

    Yes, both TFSA’s are going to be investing accounts. Why? At most I have $3000 in savings typically so at 3% I’m only saving $32 a year in taxes. It’s not worth doing compared to keeping the investments tax free.

    CM,

    Oh I agree the bear is still here and will be for some time. Actually I’m planning on it.

    I think your idea of another 50% down may be excessive. Besides in my stock picking case I’m looking for income streams. I’m not so concerned on return on capital (other than not losing all the capital and the income).

    Tim

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