Category Archives: Investing

The Money Machine

“Have I got a deal for you?” He said with a glint in his eye. “This little machine will change your life.”  It was a small machine just bigger than his hand covered in gold paint with lots of gears.

“What is it?”

“Why it’s s money machine? It will produce a new dollar every three months forever.”

“Oh, that sound cool.  How much?”

“It’s only $100.”

“Pardon?  You want me to pay $100 for something that makes only $4 a year.  Why that would take like 25 years for me to get my money back.  Are you crazy?”

He frowns, “No, but with enough of these machines you won’t have to work.”

I frown and do the math in my head “Ya, if I buy like 10,000 of them. That would take like forever. No thanks.”

While the above story is a complete fabrication, it does point out something very key about people: they don’t like to wait.  Of course the real irony of it all is the money machine is real.  It just goes by another name called “investing.”

I suppose that is why so few people actively try to reach an early retirement, they aren’t willing to put in the effort into buying their money machines and keep them running.  Or they do buy one and then freak out when it fails for some reason and assume all other money machines are bad and should be avoided.  Goodness knows that I’ve had a few failures myself, but I keep buying.  Actually, most of them run just fine with little work required by yourself.

My personal money machines comes in two types: index funds and dividend paying stocks.  Neither takes that much time after I got them up and running.   The index funds are in our RRSP accounts in index exchange traded funds (ETF) take 15 minutes a year of work to keep up.

The dividend paying stocks are mostly in our TFSA accounts and after the initial research to buy the stock it really only takes me a few hours a year to skim the annual reports and do the occasionally adjustment (like sell one of my bad picks and buy something else).

Yet in the end, our investing has paid off.  It does take a LONG time and it will feel like you are going no where until you break the $100,000 barrier in investments but then it all gets better.  The compounding starts to work for you and you realize that after you have 100 money machines, it will buy the next one for you with no further money required from you.  So hence my point early, if you can wait a bit and get the ball rolling with compounding buying money machines (or investing) can pay off.

So what’s your favorite type of money machine?  Real estate, stocks, bonds….really they do come in a rainbow of colour options? 😉

Taking Money Out – The Breakdown

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

Asset Allocation Drift

As part of my pre-retire to do list I started to take a good hard look at my investments and evaluate if I need to change anything.  So I started pulling together the numbers for my asset allocation (just fixed income vs equities) and got a bit of shock.  I had drifted off course by more than a little bit, in fact my target is 60% equities and 40% fixed and I was at 34% fixed and 66% equity. Yikes!

How did this happen?  Well I fell victim to the tendency to compartmentalize things. You see I knew my pension was about 50/50  and I knew my RRSPs were a bit off at 35% fixed income, but not too bad.  Yet I failed to realize in the last few years that the majority of our money has been going into the TFSA and taxable accounts which is almost all equities.  So without really meaning to I drifted off target because in my head I was fine in some of my accounts and I don’t run a total of the entire portfolio all that often for calculating my overall asset allocation.  It is a bit of work to look up the split by each account and then roll it up to the total portfolio amount and often doesn’t change that much, so I got lazy about checking it.

But rather than be mad at myself I decided to have a look on ways to fix the issue.  One of the first and easy ones was shift my risk profile in my pension.  I have always planned on that account to be a bit heavy in fixed income and so I moved a step in my pension options from ‘moderate’ down to ‘conservative’.  In a practical sense that shifted the pension money from a 50%/50% split to 70% fixed income and 30% equities.  The net result was to shift ~$40,000 from equities to fixed income in one mouse click in a single day which was completed two weeks ago.  With that I should be around 40% fixed if I put all the cash in the various accounts into fixed income.

So the that is what I started doing.  First up was the fixing the heavy equity weighting in the TFSA and taxable accounts by investing their cash into fixed income.  In those accounts my wife and I choose to expand our investing wings a bit and try out a preferred share ETF (stock symbol CPD), so yes it isn’t a bond, but it isn’t fully equity either.  A bit of hybrid which works well to boost the cash flow of the fixed income portion of our portfolio.  After all the current trailing yield is around 5%, which is a lot higher than a straight bond fund.  But to keep things in check we only plan to keep the that ETF to no more than 10% of the entire investment portfolio.  So that was just finished up this last week.

The next phase is to re-balance our RRSP accounts to the 40% fixed income weighting via bond ETFs, which shouldn’t require much of an adjustment, but I figure it will be done by the end of next week at the latest.  With that we should be sitting around target of 40% fixed income.

Beyond that our final part of the investment plan is actually really boring…cash.  Lots of cash.  Why?  Well there are several reasons including: an emergency fund in the event our investments drop badly, starting cash for our early retirement period and finally a bit of savings for a few expenses we plan in the next year or two (vacations and renovations).

So did you ever drift badly on your asset allocation?  If so, how much and how did you fix it?