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.

8 thoughts on “The Master Retirement Plan”

  1. Excellent plans for your retirement. I made it to 66.5 before they asked me to pull the plug. Looks like you are doing great in figuring out cash flows and expenditures. I guesestimated a budget before retirement and then boosted it a bit to cover the inevitable increases in the years to come. I was in sales and on the road with a company car so meals and car expenses were covered by the company. I am just two months in to retirement so I am keeping track of my expenses to see how it all pans out. For two months it looks OK.
    I am selling off some stocks to bring my debt to zero and then plan to live off the remaining equity (plus OAS, RRQ and a small DB pension) for approx. two years before I have to tap my RRSP which will be converted to an RRIF. The bank advisors all say I have enough funds to go to 95. The unfortunate thing is I am hoping for 200. LOL You have to be an optimist.
    Take care. Lucky you to be able to enjoy life as you see fit at a younger (than me) age.

    RICARDO

  2. Hi Tim, I have enjoyed reading your blog for awhile now. I have a couple of questions for you:

    1. How does it actually work when you withdraw from your RSP, in terms of the withholding tax? Is there any way to side-step this, and does it need to be factored in somehow to your plan?

    2. It seems your plan is really to reach FI and then to continue working (mostly to pay for wants rather than needs) and to be able to choose what work you do. I really like that idea as it fits well with the ERE question of, “how little do I need to retire?”

    3. I hadn’t considered the increase in the child benefit, as it seems odd that it should increase given your financial situation. I suppose it is just income-based, so that you must be correct here.

    Thanks!

  3. @David Crausen – Regarding your #1. When you pull money out of the RRSP there is no way around the withholding tax, but that is only used as a rough estimate of the tax you own on the money you took out. So when you file your that tax year you will potentially get some of it back if your amount owing is less than your withholding tax that was taken off. If you want to minimize the time your money is in the feds hands the put off your withdrawal until the later part of the year and file your taxes as soon as possible the following year.

  4. Thanks Tim, that makes sense!

    I wondered if you have a post on home maintenance costs? This seems to be one area that is relatively difficult to predict in terms of budgeting for the future. Of course, if you have lived in the same house for awhile you will have a good handle on it. I would be interested in hearing how you plan for this.

    Thanks again,

  5. Good overall summary Tim. Thanks for posting it. Sounds like you have it all worked out with good back up plans. I think I will still wait until kids are done school. As much as we hope that we teach them to be self dependent and give them a good head start, you never know what can happen with them….lol. Good luck!! Curious to see how it works out for you. Cheers and Enjoy!!

Leave a Reply

Your email address will not be published. Required fields are marked *