Category Archives: Investing

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?

Canada Child Benefit – Update

As you may recall I have a long history of taking any government issued money for my kids and putting it into their RESP account.  Yet as we started to make more income over the years and the kids got older, we slowly got less money and I just decided to top up our monthly investments of $334 to their RESP account to make up the short fall.

Yet now the Federal government has revamped the old Child Tax Benefit and Universal Child Care Benefit into the Canada Child Benefit and everyone found out this week our new amounts and I have to admit I was a bit surprised to see our go up and be higher than I thought it would be.  We previously got just slightly over $200 per month combined on the old system and I had used the online calculator to estimate our new benefit to be only a bit higher at $220 per month.  Of course even if it had been slightly less we would be a bit better off since the new payment is now tax free.  Needless to say I was a bit shocked to see our official letter come in stating the new amount would be just over $350/month.

So what the heck went wrong?  So I went back to the online calculator and read the fine print at the bottom to notice it says “A different definition of income (adjusted family net income) is used to calculate actual entitlement, and would generally be lower than household income.”  So basically, everyone who previously used the calculator got a low ball estimate and got more than they were expecting.  Nice surprise.

This also means that I likely won’t have to put any money aside to top off my kids’ RESP account going forward as I previously thought I would have to do for the initial year after I left my job.  Instead the amount we get from the Canada Child Benefit should be enough to cover the entire $334 to their RESP account every month and even have some leftover to cover other kid related costs.

The side benefit of using tax free money to pay for the RESP contributions is they also get topped up by 30% (10% is from the Saskatchewan government and the other 20% is from the federal). So with very little money from us over the years my kids have over $60,000 put aside for their post secondary education already and we should easily be able to hit my $80,000 target in just a few years and then with investment returns exceed that amount.

Overall the new Canada Child Benefit was a nice surprise for us.  Did anyone else notice the same issue of under estimating how much they would get?