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Monday, January 23, 2017

Taking Money Out – The Breakdown

Posted by Tim Stobbs on November 24, 2016

Well I think it is finally time for me to walk you all through my plan to take money out of our investing accounts.  After building them up for years, reversing the flow is going to feel very odd but at the same time I do have to get used to it.

Now in passing I mentioned that I’m using a mixed approach to funding our lifestyle with our investments.  We aren’t going to depending on just part-time work, government benefits, dividends  or capital gains but rather all of them.  I want a diverse flows of money coming in to provide some buffer in the event the stock or bond markets tank in a given year or if a given company stops paying their dividend.  The other somewhat complicating factor to this is the amounts we take out from each of those accounts will vary through time as I have previously discussed.

Overall our annual goal is to have $30,000/year for spending. Of that I expect my wife’s work will cover $7200/year of the target. Then our current TFSA and taxable portfolio is producing around $9100/year in dividends.  Both of those I expect to be stable inputs for the next five years which gives us $16,300/year in total or 54% of our spending target.

Next up is the Canada Child Benefit (CCP), which for the first 24 months or so won’t be a big deal since that money will be invested in the the family RESP account (as per what happens right now).  Our target is to hit around $80,000 in the RESP and so far it is currently at $68,000, so that 24 month estimate might even be shorter than that.  For the first 20 months or so after I leave my job that won’t be a big deal since the amount will be just around our RESP investing amount, but after our first full year of low income our CCP will increase dramatically the following July.  Combined with GST/PST rebate it will jump to around $12,000/year.  Yes THAT high, so after finishing topping up the RESP account that money will flow into the general income for the household and another 40% of our spending target for a few years when the kids are around.

So for you keeping score you might realize that between the CCP, the dividends and my wife’s work that accounts for $28,300/year of our target or 94.3%.  Yet that period of time won’t last that long as our oldest son will hit 17 and that income will drop off, but that does give us a nice two or three year window for the investments to keep growing which should help us bridge to my wife being able to quit (when she is ready).

Now anything not funded from the above will be taken out of capital gains from our RRSP accounts.  And due to the basic tax deduction, if I don’t use it for work in a given year or even if we don’t need the money, we still plan to take the money out.  Why?  Because it will end up being a tax free withdrawal from our RRSP and if we don’t need the money it will just get flipped over to the TFSA account if there is room.  The amount we need to take from here will shift up and down depending on the other items above.

Then finally on top of all of this is our slush fund which is money put aside for vacations, home renos and car replacement.  We plan to start with $20,000 in that account and then any work I end up doing will fill it back up.  In the event the slush fund starts getting too big we may just make a lump sum contribution to our TFSA accounts and boost our dividend payout.  Yet somehow I don’t think that will happen, but who knows what I end up doing to earn money.

So in summary that $30,000 spending target comes from:

  • Dividend income $9,100
  • Wife’s job $7,200
  • CCP benefit varies from $0 to $12,000
  • RRSPs varies from $1,700 to $13,700

And the above doesn’t include vacations, house renos or car replacement which I will fund via my work and our $20,000 slush fund.  Then of course all of the above doesn’t include the $12,000 I’m putting aside to pay for the first six months so I can have a completely guilt free detox period after leaving work.  And long term as the CCP payments increase we will let the investments grow to replace my wife’s income and allow us to bridge into full retirement (if we want to).  Oh and we will adjust our spending to our actual inflation rather than the CPI (as long as it doesn’t exceed my 4.5% withdrawal from our investments overall target). And we still have that $15,000 emergency fund beyond all of the above.

To help you visualize all of this here is my projected investment net worth for the next few years based on 4.5% real return on investments (click to make bigger).  That little dip early on is me taking out the $12,000 detox money all at once.

Investment Projection Nov 2016

Comments

18 Responses to “Taking Money Out – The Breakdown”
  1. RICARDO says:

    Hi Tim;
    Nice to get out of the rat race and just stroll along.
    Have you considered using your non-registered funds to top up your TFSA every year? Unless there is a capital gain when you transfer the equities over there would be little to no tax and then monies taken out of the TFSA are tax free

    RICARDO

  2. Phil says:

    Hi Tim,

    Another great way to get money out of your non registered investments is to set up your TFSA exclusively with dividend paying stocks. Each December, withdraw the accrued dividends accumulated in your TFSA during the year. This withdrawal will be added to your TFSA contribution limit the following year. For example, let’s say your TFSA is $100K and accrues $4K in dividends per year. Each December, draw out the $4K, which gives you at today’s TFSA limit a $9.5K contribution limit the following January. You can then sell non registered investments and use the proceeds to contribute to your TFSA. Lets say you have a stock with a book value of $6K in the non registered account and it’s market value is $9K, or a $3K capital gain. The first 50% is tax free, so you pay tax on $1,500 of the capital gain, which based on your tax situation would be $0. The $9K in proceeds can now be used to fund your TFSA and replace the stock sold in your non registered account. You have now eliminated a future taxable gain in your non registered account and effectively replaced the same holding in your TFSA which is now fully tax free, both dividends and future capital gains. Effectively, an annual wind down of your non registered holdings to your TFSA on a tax free basis.

  3. GV says:

    Hi Tim, I’ve been a loyal part time reader of your site for several years. I enjoy your perspective… not the same one I have but certainly good to see someone else with similar financial literacy and objectives… mind you I’m 45 and have more than enough to retire. I enjoy work and enjoy the lifestyle it provides for my family and me.
    My problem is that I built a portfolio that generates about 50k a year in income but I’m still working and the extra tax it generates is a challenge. But better to have to pay taxes than have no income.
    I always appreciate the insights you share.

    I do wonder about your work and whether or not you would want to work more or longer if you were doing something you felt more passion for. I think I’ll never stop “working” as I have so many interests and passions. I’ll always have my hands in something.

  4. Bob says:

    Hi Tim,

    I personally feel it is very wrong for you to collect the Canada child benefit in your situation. This benefit is funded via tax payer dollars. Why should someone go to work and pay to raise their own kids and have to also pay to raise your child (via the taxes they pay to fund the Ccb you receive)? If you make a choice not to work, that is fine, but it should not come at someone else’s expense.

    Bob

  5. Dim says:

    @Bob. He invest Canada Child Benefit in the RESP which is a very good choice. And his kids will study, pay taxes for the future generations.

  6. Dim says:

    @Bob. He invests Canada Child Benefit in the RESP which is a very good choice. And his kids will study, pay taxes for the future generations.

  7. scott says:

    @ Bob. Disagree with your comment completely. He has every right to collect that, its based on income, not net worth. How Tim chooses to earn that income, whether through investments, his own business, a job, or a combination of some or all of the above is up to him.

    In Canada, you can choose to work a low pay, low stress easy job and collect additional CCB over someone who works a demanding, high stress job, pays more taxes, but gets less CCB.

    I have worked a very high stress job for 20 years and plan on doing the same – my kids should not have to take a hit because I need to step down from my job and live on my investments or take a lower paying, low stress job.

    Thats the way the system works.

  8. bob says:

    Hi Scott,

    I understand that is how the system works, but why should I go to work my high stress job, receive no CCB for my child, yet have to pay lots of taxes to fund the CCB for your child based on a decision you made, not a decision I made.

    And your kids should suffer if you choose to take a lower paying job. It is your responsibility to raise your kids, not the state.

  9. bob says:

    continuing with the above point…

    This is about the right choices, not about how the system works. I understand that some people are not in a position to earn a decent income, and for these people, their children should not suffer. This is the whole point of the CCB. To enable the government and society to step in and help those who are not in a position to do so.

    If on the other hand, you have the ability to earn a decent income, but choose not to, you should not be in a position to receive the CCB. You have made a choice, and should live with the consequences of your choice. The person who needs the help has not made a choice, but you have. This is my point. You should not do something because that is how the system works. Their should be some sort of moral compass. No?

  10. Scott says:

    Bob, you are making assumptions that (1) A person with a high paying job is mentally and physically able to work at that level for a long period of time. That’s often not the case. (2) That people who work lower paying jobs have no choice.

  11. bob says:

    Yes, I am making assumptions. But I don’t believe Tim is mentally or physically unable to work. He is making a choice and will be funding 40% of this annual income via the CCB. Would he be retiring if he did not have the $12,000 in extra income to rely on.

    For what it is worth, I am 41 and retired. I support myself and my wife and my 6 year daughter through my investment income. I have no mortgage so my expenses are low and hence don’t need or show a lot of income. Because of this, I will qualify for CCB next year, but I am having a lot of indigestion with the thought of receiving it. Should I really be taking these funds? I understand the system is income based, but it should be needs based. I don’t need it. Tim should not need it. Should we take it?

  12. Wiggle room says:

    Bob, why not take the CCB and donate it to someone who *truly* needs it, in a country less wealthy than Canada? Or increase your regular charitable donations by that amount?

    We are very fortunate to live in a wealthy country with access to clean water, good food, and education. If you don’t need the money, then share the wealth.

  13. Scott says:

    @ Bob

    Technically we can say that about other social benefits too, such as health care. I don’t think that’s a path we want to go down.

  14. bob says:

    Sorry Scott, but I don’t understand your comment, “technically we can say that about other social benefits too, such as health care”. What are we saying?

  15. Tim Stobbs says:

    Ugh, I got write a novel for most of the month and miss all these comments. Yikes, I ‘ll try to cover them.

    @RICARDO – Yes, I considered the idea but it won’t happen unless we don’t take much out of the RRSPs for a given year. I will be using that for next year to fund the TFSA as I’m focusing on saving up cash for now.

    @Phil – Yes I did consider that, but thanks for the excellent example. Like above I will reduce the RRSP likely first, but if I do too much work in a year I’ll switch to the taxable accounts to fund the TFSA accounts.

    @GV – Good question. Yes actually part of the reason I’m leaving my full time work is to find something I enjoy on a part time basis. So I plan on a good detox period of ~6 months but after that I’m likely to get my hands into something. I’m just open to what exactly that ends up being.

    @Bob – Is it wrong to get your tax refund when you file taxes? Or was it wrong when I got the Universal Child Tax Benefit? Technically I don’t need those either but I take them and use them as I see fit. Honestly its just money, besides think about it from the other side. How would you design an asset based system…so I family in Vancouver that bought before the boom won’t get their CCB? There is always cracks in any policy where those that will get it don’t really need it. Rather than fight that I’m using it to fund our kids RESP now. Later on I’ll use for general expense for a few years, which honestly will include feeding the kids when their teenagers…there not might be much left. ;) It’s nice to have money and I wasn’t really depending on it. Besides it only takes one government change to flip a policy so I might not actually ever see much of the money. I agree with Scott’s point, if you don’t need it feel free to give it away. It’s your money do what you feel is right with it.

  16. bob says:

    Hi Tim,

    I guess this comes down to more of a liberal vs conservative viewpoint. I am not as bothered with the former UCCB as it was received by everyone, unlike the CCB which is received by certain families and not others. You could not purposely decide to lower your income under the UCCB and receive more funds as you can under the CCB. I suppose this is my issue as it creates the wrong incentives. Take is a step further, if you did not work but the government gave you $100K, how many people would go to work? People on mass would stop going to work and it would break down because no one would be working to pay income taxes. This is an extreme example, but I think it gets my point across.

  17. Tim Stobbs says:

    @Bob – I think you are correct, it is partly a political viewpoint issue. After all there are very few of us that have a high degree of control on our taxable income. For most people, it is purely set by their job. I read an article the other day that pointed out only 9% of the population has more than $500K in invest-able assets in Canada. So it might have a wrong incentive but only apply to a small portion of the population (likely 1 to 2% overall). My early point was this ‘free rider’ issue comes up all the time in policy work. It is nearly impossible to design something that won’t have some of it but in general help the majority as it is supposed to do. I personally am okay with it as I consider my taxes paid in over my career will well exceed what extra money I pulling out due to this loop hole. As to your extreme point, perhaps I should point out a counter view point…is having a job and paying taxes the only way people contribute? Or what is the value of volunteer work or unpaid child care. They don’t contribute taxes, but they also keep the world turning too. Anyway, thanks so much for the discussion. It’s been interesting to understand your point of view.

  18. bob says:

    Hi Tim,

    A lot of very good points. I hate to say I was looking for the “right” answer, but you did provide it when you said “I am personally okay with it as I consider my taxes paid in over my career will well exceed what extra money i pull out die to this loop hole”. This is often what I come back to when I debate whether or not to take the CCB next year when I am eligible. I often had years where I paid $50K in income taxes and come tax time still owed $5K more. I guess in some respect I am a little bitter as I worked a job I despised for many years, but did so because I had a light at the end of the tunnel so to speak (early retirement). I guess I just don’t like people (and I do know some of these people) who either the husband or wife are quitting their jobs in order to maximize their CCB payments. With 2 kids under 6 this can be a sizable amount of money. As you mentioned, the system is not perfect and it’s impossible to design perfectly to stop the “free rider”.

    That said, early retirement typically works because of low expenses (not high income), which usually means a paid off house. The people I know that “free ride” so to speak are renters, have debt and no investments to speak of. In other words, even with 2x the CCB payments they have a lot of expenses – life is still a struggle for them financially. Then again, even if they had $100K more, they would most likely simply add $100K in expenses. For the most part they would have more income, but not better lives.

    All the best,

    Phil

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