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.