The Dividend Retirement Myth

It seems to me that several people are planning retirements using at least some dividends to provide part of their income. This is a good idea, the problem becomes when you take it too far and try to pull off a Derek Foster and live off only dividends.

Let me say I do like dividends. They get great tax treatment from the government if you are lower income (see here) and if you pick good companies they will provide a nice raise and likely keep up with inflation. Yet people tend to ignore their dark side, the low yield.

You see in this over inflated market of nearly continuous record breaking highs for the TSX index the actual yield on most dividend paying stocks is very low. When most dividends are around 1 to 4% yield you end up needing a lot of cash to generate your retirement income. Let me provide an example.

Let’s say you need about $25,000/year in retirement income for a couple. If you buy all dividend paying stocks and manage to get an average yield of 2.5% you would need $1,000,000 to get your income since you are paying no tax. Yet if you use a more balance portfolio and get your income half from capital gains and half from interest income and pull off a 7% yield you need $475,950 to generate $25,000/year after taxes or $28,500 before taxes between the two of you.

So in the end you need about half the total amount of money. So remember not to get so hung up on tax advantages that you lose sight of the overall picture. The point is to retire early and to get there you need a higher yield than 1 or 2%.

Update

Well folks I did have the best intentions of writing a proper post today. My airline had other thoughts, since I ended up suck in an airport for five hours yesterday waiting for my second flight of the day. Therefore last night I got in and ate some supper and went to sleep.

So here is the deal. I did get some reading done during my exile in the airport, so I will be writing a couple of posts tonight and will publish an extra post either later today or tomorrow morning.

Thanks for your patience,
CD

Getting Things Done

To be honest I'm not the most motivated person at times. If I deem a task as non-critical it can languish on my To Do list for months. Yet in the last month I've been very good about cleaning up various personal finance issues.

For example, my pension from my previously employer has now been transfered to a Lock-In RRSP at my bank. I just filled out the paper work to increase my life insurance for my wife and myself so I can finally drop my mortgage insurance in the next few weeks. I also increased the deductible from $500 to $1000 on my home insurance renewal to save $123/year. Then I also just took advantage of RBC's new rebate program and will drop my bank fees from $6/month to approximately $6 per year.

So what spurred this burst of energy? Nothing specific other than the feeling of I should just stop pushing off everything and just get it done. To deal with all of the above issues took perhaps a total of 2 hours of my time and have a cost savings of approximately $223/year. So if you know you have things to do and have been pushing them off I highly encourage you to just suck it up and get it done. You might find it a bit easier than you thought.

Please note that I've had a very unexpected situation come up which will result in me being away for the next 3 to 6 weeks. I will have access to the internet during most of this time, but since I'm unsure of my schedule my frequency of posts will vary heavily. For example a post on Monday is highly unlikely, but it still may happen if your lucky. Have a good weekend - CD

Wandering Reading #3

Welcome to my weekly summary of links. I hope you enjoy a few of the following items.

1. Investoid looks at the implications of the Bank of Canada raising interest rates soon and he also has a contest for anyone who wants to win a subscription to the National Post online (deadline to enter is Friday).
2. JD over at Get Rich Slowly found a great tool about determining your class (lower, middle, upper) which I found very amusing, since according to it I'm in the upper class. So where's my maid then?
3. The Money Gardener takes a look at his saving rate and is off to a great start.
4. The Canadian Capitalist is again rolling out another list of new blogs and has a great post on the research on the financial circumstances of retirees which is just full of interesting information.
5. The Dividend Guy has a great post of the implications of Walmart offering brokerage services.

Emotional Retirement

Retirement itself can be a funny thing emotionally. Suddenly your entire world is turn upside down and shook a few times. For some people it's a great feeling like riding a roller coaster, for others it makes them feel a bit sick or detached from it all. Overall retirees actually share quiet a bit in common emotionally with high school students leaving their final year (as a reference point for anyone who isn't retired).

I've spend a few weeks digging around message boards to see how everyone reacts to it all, as well as talk to several people my parents age about people who have recently retired and how they feel about it. In general there appears to be a few different patterns around it.

First it is very common to actually miss your co-workers a bit. After all these are the people whom you spent most of your days with for years and depending what you do in retirement you will have very little contact with them and suddenly a lot less in common if you retire early and they remain working.

Then there is the decompression stage where waking up each morning is like a vacation. Your end up drunk on the absolute freedom to do what you want. Many early retirees’ caution about making any series decisions at this stage since you are still evolving into your retirement lifestyle for the first six months to a year.

After that two main profiles of people tend to emerge. Type 1 tends to have issues adapting to retirement. They often can feel bored by it all and often have feelings of regret around their retirement. This type is much more common in those who were forced into a retirement by a company downsizing or medical reason.

Type 2 tends to take to retirement like a fish to water. They are happy and engaged in the community and/or their families and almost never feel bored or regret their decision to retire.

Strangely enough between these two types income doesn't seem to be a huge factor. I've never really noticed a pattern of type 2 having more money than type 1. So what's the difference? Type 2 people tend to have a wide range of interests and set themselves specific goals or focuses in retirement. In the end they just prepared to fill in that suddenly huge block of 40 hours (or more) of your week with other things to do than work.

If you end up being a type 1 don't panic you can still turn into a type 2. I've personally seen someone pull this off. To change over you just have to sit back and develop some more interests and expand your hobbies a bit. Also setting a few goals or a focus to your retirement can help. Some examples include focuses in on the grandkids, learning a new language, visit family/friends around the world or even just in your own city/town. Most important of all is to do what you like. After all retirement is all about the freedom.

The Water War - Part I

As I mentioned a while back I'm currently updating some items in my house to see how much money I can save on my water bill. My average bill use to be about $50/month. Last month my bill came in at $43.48, so what changed? Nothing but my attitude and a few minor habits.

I basically just became aware of when I was using water in the day and trying to reduce that amount. So when brushing my teeth I fill up my rinse cup with 1/3 full of water and that's all I use to brush my teeth. I also stopped running the water while washing my hands. I just fill the sink with a bit of water and then proceed to wash my hands and then let the water out. I'm down to perhaps two cups of water to wash my hands now. Then when washing the dishes I start with a small amount in the sink and during rinsing of objects I end up with a larger volume at the end to wash the big dirty pots and pans. I'm also letting my grass grow longer so it needs less frequent watering over the summer. That's all I changed during that time.

I've also picked up a few new things just this last weekend so I will get to see the results on the next bill. I bought a few sink aerators to reduce the flow at my taps from 2.2 gal per minute to 1.7 gal per minute. These things are a good deal. I spend about $4 on the item and install it in two minutes with no tools. For the one tap I've put in I estimated it will save me $0.47/month just on my water bill. That doesn't include the natural gas savings for using less hot water. So I will have a pay back period of around 8 months.

Another project I'm starting in the next week or two is making some rain barrels. I've picked up two 98L-garbage cans, which I'm going to convert over to rain barrels. I still need to pick up a few items to finish the project, but I'm hoping to be able to do it for about $50 for two barrels. I'll let you know the final cost and how to build your own once I'm done.

The Early Retirement Portfolio

It occurs to me that I need to do some more planning about how my portfolio is going to look in early retirement. I specifically need to be conservative with that money that is going to bridge the gap between 45 to 65.

Currently most of this money is in index funds with the following allocation:

25% Bond index
25% TSX index (Canada)
25% SP 500 index (US)
25% International index

This is what I'm thinking about using when I turn 45:

60% bond index or other fixed income
15% Real Estate Income Trust or similar
10% TSX index (Canada)
10% S&P 500 index (US)
5% Cash

At the same time I'm unsure about dropping the international portion of the portfolio. Despite being subject shifts in the currency exchange international markets does offer some diversification outside of North America just in case there is an economic slow down just in our local markets.

Another issue I'm a bit unsure on is how do I convert the one portfolio over to the other? Do I just wait until I'm a few years out and start to slowly pull back from the markets into bonds? Or do you just wait until I'm three or two years out and change over the entire thing?

I'm still a bit unsure on the international idea, but I think I've got a way to handle the portfolio conversion. I would use that old rule of thumb of having your age as your percentage of bonds in your portfolio. Therefore on Jan 1, 2008 I should rebalance my current portfolio to have 29% bond index.

I'm still working all this out so any ideas on how to handle all this would be appreciated.

70 Is The New 50

I was reading this interesting article the other day on 70 is the new 50 for retirees. It was a great read because it pointed out a few interesting facts like of those in retirement only 16% over 60 actually retired early. Perhaps what is more interesting is a fifth to a half of the population still works in their sixties with a huge amount (71%) saying they are because they want to, not because they have to.

Beyond anything that just shows me that the old idea of retirement is time to just sit and relax is long dead with more Canadian retirees doing work or volunteer work which combined contribute a staggering $5.3 billion dollars to our economy. Also Canadians on average are a healthy group with most reporting good or very good health in their seventies.

So semi-retirement seems to be a poplar option overall which is a nice blend of paid work and still having the time to chase your own interests. This agrees a bit with my own views. I'm planning on a early retirement, but I would be willing to do a semi-early retirement as well.

Have a good weekend,
CD

Wander Reading #2

It's been a busy week of reading for me. I've been having a bit of a problem narrowing down the field, but here is what I like this week. Enjoy.

1. Canadian Capitalist has a great post on spending habits in retirement which shows it actually goes down.
2. Crunch Money has an interesting idea on creating a social network for us personal finance addicts.
3. Here is a great article on why my house price keeps going up.
   
4. The Money Diva talks about how to deal with a huge expense (like an over sized tax bill).
5. Financial Jungle talks about Exotic Retirements and their cheap price tag.
6. JD over at Get Rich Slowly takes a look at a rain barrel and if it will save you money, which I've been thinking about installing myself.
   

Juggling Priorities

Let's face it saving money itself is fairly easy to do, the problem is what am I going to do with those savings? You can pay down debts, invest in your kid's future, save for retirement, save for buying/starting a small business, save for a second property or save to buy something you REALLY want (car, trip, shoes, TV, computer...).

So how do you balance all those issues or juggle those priorities? You have to have a plan and then stick to it. Here's how I do it.

1) Pay off all non mortgage debts - Debt is just a dead weight you have to carry around so the sooner you get rid of it the easy things become for the rest of your savings.

2) Save for a rainy day - Once you are out of debt having a small amount of savings for when things go wrong is typically a good idea. Start small like $1000 and then play around to find the amount that works for you. (I personally don't do this, but I run my finances with a large amount of spare cash).

3) Save for retirement - You know the best thing you can do for your kids beyond loving them is making sure you are not a dead weight to them when you are older. So save the base amount for your regular retirement first.

4) Save for the kid's future - Now you can save something for those RESP accounts. It doesn't have to be a huge amount, but try to save at least $2000/year to get the maximum education savings grant from the federal government.

5) Save for yourself - Now this doesn't have to be the last thing you save for. It depends on what you are saving for and how good you have been about everything else. I tend to treat myself once in a while if nothing else to keep the rest of my saving in perspective. I would also classify my early retirement savings as saving for myself since it is more of a personal goal than a socially responsible thing to do for my kid.

So what would your savings order be? If you feel like sharing leave a comment.

Planning Plan B

Despite my best planning and research I am aware that my plan to retire at 45 can go up in smoke due to any number of different variables such as inflation or investment performance. So it occurs to me that perhaps a Plan B would be in order. So let's look at my options.

1) Push off retirement

This is the easiest of the options to put into place. If I'm checking my numbers when I'm five years out and things are not looking good I can always push back the date by a year or two. This would allow for some additional savings and if I'm lucky a bit more time to get the kid out the front door for good.

2) Scale back retirement

In my particular case I'm not putting a lot of fat into my retirement plans anyways so I'm not comfortable cutting back on anything. Yet this is an option for some people if you are close to your goal and you have a fair amount of padding in your retirement plan calculations (for example you have 10% extra spending per year and you are using a 4% inflation rate).

3) Change plans to a semi-early retirement

In this case I would do the calculations to determine my absolute minimum required for basic living and then pick up any work I would like to fund the extras like a trip. This option has the most appeal personally, since I was thinking of doing something like 'work' when I'm retired anyways. In this case, the extra money I would earn would just be targeted towards the luxury items. The draw back to this option is the increased requirement for doing something to earn some extra income rather than being able to do work without any requirement for extra income in a true early retirement.

Those are perhaps the more obvious options, but if you have another idea please share by leaving a comment.

Long Weekend Plans

Today finally marks the start of the long weekend here in Canada. More importantly it marks the beginning of gardening season. So this weekend I'll start planting the garden in hopes of getting lots of nearly free organic food starting in a month or so. Afterward I intend to sit down and do a lot of nothing for at least one day this long weekend (with the exception of turning on the BBQ and finding a cold beer).

So regardless of what you have planned I highly recommend you put down that calculator and make sure you get outside and enjoy yourself. After all we spend so much time here discussing money that at times I think we forget about making sure we have some fun too.

A quick reminder that I will not be posting on Monday due to the holiday. Have a great long weekend.

CD

Wandering Reading #1

Today marks our first Wandering Reading post. I was thinking about posting the entire Problogger Top 5 list, but instead I've included a summary list (from Grad Money Matters) and here is the main list if you would like to keep busy for the entire long weekend.

1. The Top 5 Ways to Become a Millionaire by Jeremy


2. The Top Five Steps to Grow Your Net Worth by FMF


3. Top 5 Ways To Save Money Without Noticing by jim


4. Top 5 Reasons Personal Finance Blogs Are Better Than The Media by Canadian Dream


5. Top 5 Reasons To Save For Retirement Now! by Retire Happy


6. Top 5 Reasons I Started and Continue A Personal Finance Blog by Sun


7. Top 5 Good Reasons to Sell a Stock by Q


8. Why Your Mom is the Engine of Growth in the Global Economy by Ben


9. Top 5 Financial Tips for Recent Graduates by Elizabeth


10. Five Reasons That Credit Cards Rock and Debit Cards Suck by nickel


11. 5 ways to reduce your car’s fuel consumption (and save you money) by Scott Bird


12. Top 5 Obsessions Of A Finance Blogger: Stuff I Like And How It Affects My Wallet by Silicon Valley Blogger


13. How to Budget for a New Baby - 5 Top Tips by Maria Crickett


14. Top 5 Ways to Save Money While in School by Brett McKay


15. Top five ways to kill your retirement dreams by mbhunter


16. More Money: 5 Ways to Earn Extra Cash in Your Spare Time by J.D. Roth


17. 5 Steps To Improve Your Credit Score by derek


18. Top Five Reasons to Index Your Portfolio by Canadian Capitalist


19. The 5 Smart Things To Do When You Purchase An Item With A Warranty by Dana


20. Top 5 Paths to a Million Dollars by Lazy Man and Money


21. Top 5 Mistakes Made By Real Estate Investors During the Housing Bubble by Joshua Dorkin


22. Top 5 Ways To Go Broke by Nirav Desai


23. A simple Top 5 trading/investing checklist by Falkor


24. Top 5 Wealth Secrets by Chee Kui


25. Top 5 Tips for the College Grad by Kim Roach (Not really “personal finance”, but great advice for recent grads!)

Living Below Your Means (LBYM)

Getting rich is very easy to do. It involves the simplest math and the most fundamental rules of the universe: conservation of mass and energy (or in this case money).

It basically works like this, if money in equals money out then you are getting by. If money in is less than money out, you are going to be in trouble since your living beyond your means. Yet is money in is more than money out you are on the right path since you can now accumulating more money.

The problem with this idea is it is so simple that sometimes it doesn't sink in how easy it is to use it. So let's give an example. Suppose your a middle class family taking in $64,000/year, so after tax/CPP/EI in SK they would have $45,657 (use this handy calculator from Taxtips.ca to find out your after tax income). If you are only spending $31,635/year, that means you are living on a pretax income of approximately $43,000. So on a before tax and deductions basis you are saving $21,000/year or 33% of your income.

Now beyond the obvious cash flow for savings benefit of living this way there are a few additional benefits. First off you usually have cash saved up so what someone just getting by would consider an emergency, such as a furnace needing to be replaced, would be easy to deal with. Also if your find yourself on Employment Insurance between jobs some time you should be easily be able to maintain your standard of living even on lower income.

Yet the real crown jewel to LBYM is retirement planning. Since if your use to living on $31,635/year after tax and then you pay off your mortgage you would then be living off $21,495/year after tax. You can generate that kind of income in retirement a lot easier than someone else who is use to living off of the full $45,657, which in return means you can retire a lot earlier than someone that is just getting by.

Composting - Is it worth it?

Composting is often presented as once of those things good environmentalists or serious gardeners do in their backyard . But from the purely economic perspective does it really pay?

Composting contrary to popular belief doesn't have to be hard. In is basic form you putting your vegetables/fruits/coffee grounds and some yard waste into a pile with some dirt and then you let the entire thing decay into a black/brown mess which is just full of nutrients for your soil. You can take the lazy route where you just pile it up and ignore it except for the occasional turn with a pitch fork and wait up to a year to get your compost. Or you can give it some more attention and balance nitrogen/carbon/moisture and air flow to get your compost in as little as three months (for more details see here).

On the economic side you are spending around $20 for a small pitch fork as all the basic equipment you need. Then after that your spending your time to turn the pile to produce a bag or two of composted material per year (at least) saving yourself perhaps at most $8 per year. So yes you can save a tiny amount of money, but if you value your time at all you are likely losing money on the deal.

So if you aren't doing it for money, you are basically just doing it for environmental reasons. I personally do it because it is fairly easy to do and it makes my wife's garden produce veggies like mad. Who said you can't save the planet and still be selfish?

Passive Income

During some point in every retirement plan someone comes up with the idea that passive income is king and it should be strive to the exclusion of everything else. The unfortunate thing about this is it often doesn't work for most retirement plans without some series drawbacks.

Passive income classically comes from the following main sources: investment income (interest, dividends and income trust distributions), real estate (a rental apartment or house), and a business in which you own a portion or completely (yet you don't handle the day to day operations of).

Generally I do believe passive income can be a significant portion of your retirement savings, but I don't typically suggest you plan your entire retirement around it. Why? It ties up a significant amount of capital to generate its cash flow which often results in people saving too much money for retirement. Yes if your truly paranoid about dying broke or wanting to pass along your entire savings to your children it can be useful. The other obvious exception to this guideline is if you have a low income and your all your investment income from dividends. In this case you have a significant tax advantage that makes it worth while to use.

To demonstrate what I'm getting at I'm going to use an example. Let's say I've got two people, A and B, who both want to retire 10 years early at 55 and need an income of $25,000/year. Person A wants to use passive income to pay for those years while person B isn't going to.

Person A is a adequate investor and manages to assemble a portfolio that pays a 5% yield to generate his $25,000/year (which is actually a fairly high amount of yield given the current dividend yield of most blue chip stocks). So total portfolio value should be $500,000 ($25,000 x 20).

Person B on the other hand is going to draw down his savings to cover those ten years. After that a combination of government benefits and pension income should cover the rest of his retirement. In his case he earns a 6% yield on his portfolio but his is also drawing down on the principle. So using this calculator he plays around and determines how much he needs to generate that savings by inputing a negative monthly savings rate of $2083.33 (or $25,000 per year). Overall $200,000 should provide 10 years of income and still have about $22,500 left over to cover an poor investment return years.

So overall person B can do the same thing as person A (ie: leave work ten years early) on $300,000 less in savings. Obviously more detailed analysis is required to account for taxes and changes to other parameters like yield, but generally I think more people are planning something like person B rather than person A.

Procrastination Pays?

Most of the time in personal finance issues it doesn't pay to procrastinate on anything. If you want to pay down your debt, save for your child's future or even save for a vacation it is almost always better to start right now rather than waiting.

I recently had an experience where it paid to procrastinate. Literally. I mentioned earlier this week that I had started transferring my old pension over to a locked in RRSP. What I didn't touch on was the fact that my estimated worth of the transfer amount was dead wrong. The original amount of the pension transfer was around $10,000, so I had estimated about a 5% rate of return for the last 3/4 of a year (so hence the $10,500 estimate in my net worth). When I called to get the new amount I almost dropped the phone. My rate of return for the last 3/4 of a year was 17% (or 25.5% in an annualized rate).

So the point of all this is for every 'rule' in personal finance, there is always going to be exceptions where it either doesn't apply to your specific circumstances or you just get lucky. The trick of coarse is to being able to recognize dumb luck over a shrewd decision. In my case, it was merely dumb luck.

Have a good weekend,
CD

New Schedule

First off thanks for everyone's comments yesterday. The advice was good and the words of support were most welcome. Thank you I needed that.

I've decided to make a few changes around here. The good news is most weeks you will still have five posts a week. Here is the new format I'll start using:

Monday- Regular Post
Tuesday -Wildcard Post
Wednesday - Regular Post
Thursday -Link Post
Friday- Regular Post

The link post starting next week will be similar to some of the other PF link posts you normally see like Canadian Capitalist's This and That posts or Million Dollar Journey's Weekend Reading posts. The wildcard post on Tuesday will be just what the title suggests an outstanding wildcard. Some days it will be a guest post, others a special feature, others a off topic post, others a humour post and sometimes just nothing at all.

The above structure is two fold. First it will provide some order to my regular postings and second it will introduce two important outlets for me. The link post will provide you with some interesting items from around the net and any new blogs that I'm reading. While the wildcard post will provide an outlet for my creative side and yours. Yes that's right, I want you the reader to provide input on topic ideas, jokes, or a guest post about anything. So I don't care if you have never had a blog before or even if you failed your high school English class if you have a topic you want some feedback on send me an email (candian.dream.free.at.45@gmail.com). I'll be happy to be your editor for your guest post (by the way I'm about 100% better editor of other people's material than my own).

So everyone what do you think?

Blogging Burnout

Perhaps it is just me, but lately I'm seeing signs of burnout in myself with this blog. My post quality is dropping off and my attention to my usual topics is wandering. My passion for my writing is getting weaker and I'm finding the mornings harder to face when I get up to write a post. I've had mini-burnouts before this, but they don't really compare to what I'm seeing this time.

So what I need from everyone is some advice. For those bloggers that have been going for a year or two how often did you face this? Does it just come and go? For everyone else, any ideas on facing burnout in general?

Basically I don't want to stop blogging at this point, but I am considering a cut back in posts.

Thanks for your help,
CD

Top 5 Reasons Personal Finance Blogs Are Better Than The Media

Over at Problogger they are having a little contest where you can win $1001 in cash for posting your own top five list. Since I won't mind winning and I already had an idea on this post I put together this list on the top 5 reasons personal finance blogs are better than the media.

Reason #5: Reading Level

Most newspapers and magazines are unfortunately written to a grade 6 to grade 8 reading level, meaning that your supposed to avoid big words and break down somewhat complicated ideas into tiny little pieces so your children can understand them. Blogs are not chained to this level and can tackle more complicated issues and provide a deeper analysis of the issues.

Reason #4: Objectivity

Unfortunately in the personal finance world many newspaper and magazine ads are thinly dressed advertisements for products or services. How often have you read an article about retirement where all the people quoted in the story sell mutual funds? How can that possibly be objective? Bloggers are a different breed, we often don't have anything to sell you other than the post you are reading. Also since we are not chained to our advertisers we can be totally objectivity on an issue without fear of costing ourselves revenue.

Reason #3: Discussion

In traditional media it takes days if not weeks for letters to the editor to be posted providing a painfully slow forum for discussion on an issue. Blogs can provide feedback within hours and can take a post in entirely new directions which can lead to new posts by the next day. This provides a truly interactive method of discussing an issue.

Reason#2: Details

Typically in the traditional media you will never see anyone publish their net worth of tell you what they spent last month. Personal finance bloggers can be different. By using a pseudonym a blogger is free to discuss their real numbers so you can really understand the choices being faced by other people just like you.

Reason#1: Making Personal Finance Truly Personal

The best reason by far on why personal finance bloggers are better than the media is they make it personal. They discuss what they are feeling and all the other irrational thoughts that go through their heads about money. A debt blogger will show their progress and discuss their temptations and failures. A investment blogger can provide technical analysis and still post their gut feeling on something. This allows them to truly connect with their readers who can often see bits of themselves in what they are reading.