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How to Boost Your RRSP Contributions

January 18, 2021 / / 4 Comments

Those who’ve read my article called Why I Will No Longer Contribute To My RRSP may raise an eyebrow at this article’s title. 😉

Please be aware that my RRSP game plan does not apply to everyone. For most people, maximizing their RRSP is a great idea.

So I wanted to share this tip to help optimize RRSP contributions for those who still have unused contributions.

Although I really don’t encourage going into debt, this method could require the use of an RRSP loan, a personal loan, a line of credit or any other form of borrowing. When done properly, it is possible to pay little or no interest while boosting your RRSP contributions.

So, if you contributed to your RRSP this year without reaching your maximum contribution, this article will probably be useful. 🙂

RRSP Season

That’s what many financial institutions like to call the first 60 days of the year. In fact, it is the last sprint to contribute to your RRSP to reduce taxes for the previous year.

Generally speaking, some people neglect their RRSPs all year round. Once RRSP season knocks at their door, these people rush to put money into their RRSP (sometimes with the help of a loan), to ensure they get a tax refund (in order to pay for the next trip down south).

Reminds you of someone you know? 😉

A much sounder way to save is to do it automatically and regularly throughout the year. This is an excellent financial habit to take to ensure a good retirement (early or not).

What’s more, once you’ve saved throughout the year, you’re in an excellent position to boost your contributions thanks to the RRSP loan, for example, which your financial institution may even have already offered you.

The Classic Method

I usually like to show you examples using my own numbers. However, as of today, my RRSP is already fully maxed out. I will therefore take my sister’s example to show you the classic method used to contribute to an RRSP.

In 2020, my sister contributed $11,780 to her RRSP. This will be used to reduce her taxes for the same year. Congratulations! I wonder who she takes after. 🙂 However, for the sake of a better understanding, I will round it up to $10,000.

She has about $12,000 left in unused contributions. So she could continue to contribute without any problem. However, she has decided to focus her savings in her TFSA, for now.

Using Wealthsimple’s calculator, I can get the details about her marginal tax rate and her estimated tax refund.

She can therefore expect a tax refund of approximately $3,270. Wonderful!

This is where good savers are already planning to reinvest this refund directly into their RRSPs to reduce their 2021 taxes. That’s exactly what my sister was planning to do.

This is where I came in. Because by using the RRSP loan, or any other form of borrowing, there is a way to boost RRSP contributions for the year 2020 without really paying more out of pocket.

The Optimized Method

If my sister got a loan for the same amount as the expected tax refund ($3,270), and contributed that amount within the first 60 days of 2021, she would then increase her total contributions to $13,270 in order to reduce her 2020 taxes.

As a result, her tax refund will no longer be $3,720. It will increase to $4,171.

With this amount, she’d have plenty of money to quickly repay the loan in full and avoid paying interest. There would even be enough left over to contribute to the RRSP again in order to reduce her 2021 taxes.

However, if you understood the method, you may see where I’m going with this.

If my sister can now expect to receive $4,171, then why not borrow that amount instead and add it into the RRSP within the first 60 days of 2021?

Her total contribution to reduce her 2020 taxes would then be $14,171, which would then generate a tax refund of $4,419.

You can keep going until you reach the point of intersection.

Ideally, one does not want to borrow more than the expected tax refunds, since it will be used to repay the loan. This way, you avoid paying interests. Of course, some RRSP loans have such low interest rates that it could still be interesting to borrow a little more and accept to pay some very minimal interests.

Ultimately, it’s up to you to decide how comfortable you are with borrowing to invest.

The Point of Intersection

In my sister’s example, the sweet spot is about $4,512 that she’d need to borrow.

Indeed, that means she’d contribute a total of $14,512 in her RRSP and get $4,512 in tax refunds. This refund would then be equal to the amount borrowed.

It could be simpler for you to use this calculator to find out the total contribution you would have to make. Simply enter the amount you have already contributed to date and your tax rate.

Upon receipt of the tax refund, my sister will repay the loan in full. She’d then be able to start fresh with regular (automated) RRSP contributions for 2021.

Finally, instead of a non-optimized tax refund of $3,700 to reduce her 2021 taxes, she will have added $4,512 to her contributions to reduce her 2020 taxes.

By doing so, she advances future contributions to her RRSP.  If she keeps doing that every year, she’ll max out her RRSP in no time and reap off the benefits of compound interest a bit earlier. 😉

A Debt That’s Worth Its Weight in Gold

Of course, the idea is to advance future contributions. It doesn’t necessarily have to be through an RRSP loan. The money can come from a line of credit or a loan from a friend, for example. You can be creative.

Personally, when I still had unused contributions, I borrowed the money from myself, or more specifically from my emergency fund. I had a zero-dollar emergency fund for a couple of weeks or months, but I was willing to take the risk. It also allowed me to pay no interest on a loan, besides the opportunity cost of the interest (1-2%) the money in my emergency fund would have generated.

If you are able to find interest-free money, it may be interesting to borrow more than the expected tax refunds. That’s entirely up to you. 🙂

In addition, for those who contribute to labour-sponsored funds such as FTQ or Fondaction, 30% or 35% tax credits increase tax refunds considerably and make the method even more efficient!

That’s precisely what I did back in 2018 and 2019, when I had not yet maxed out my RRSP. It really increased my savings and helped max out my RRSP sooner!

Keep in mind that you need to have the discipline to use the tax refund to pay off the loan in full, rather than using it to pay for an all-inclusive vacation. 😉

Bonus

Of course, anyone who optimizes their RRSP contributions will see their taxable income decrease. This could have the effect of giving access to or increasing GST and solidarity (or other provincial) tax credit refunds.

This is also a very interesting for families. By reducing their taxable income even further, parents who make use of this method will be able to increase their child benefits.

If these refunds and benefits are then added to the RRSP throughout the year, this will set the stage for the next RRSP season. At least, until the RRSP is maxed out. 🙂

Yes, More Tax Optimization

I’m really that boring. However, anyone who is able to use the method described in this article will benefit from it. 🙂

I’m curious to know if you have tricks like that to optimize your registered accounts or your taxes in general. Do you have any tips on how to make the most of RRSP season? Feel free to leave a comment!

In the meantime, I’m looking forward to my favourite season. I’m talking, of course… about tax season. 😉

2020 Review

January 11, 2021 / / 0 Comments

I’m not gonna lie. I’m not at all mad 2020 is over! A year that felt like ten, but also sort of flew by, in retrospect. A year that made history, for sure.

I like to think that this year will also have made my history. It was truly the year that allowed me to take the reins of my financial life. And now that this unique year is behind us, it’s time to do a full review! I’ll be true to myself and I’ll present a lot of numbers. 🙂

My FIRE number

As you already know, I am aiming to reach financial independence by building a nest egg of $375,000 that would generate $15,000 in passive income, according to the 4% rule.

So where do I stand exactly with regards to my goal?

I had $125,500 in personal investments at the end of the year. To this, I add the estimated commuted value of my DB pension of $26,000. I can therefore say that my nest egg reached $151,500. Therefore, I’m at about 40% of my goal.

Another way to put things into perspective is to apply 4% to what I already have. Right now, my nest egg would provide me with an annual passive income of $6,060. I am $8,940 of passive income away from my goal.

If we take a closer look, we can also conclude that at $6,060 per year, it would currently pay my rent. In fact, that would give me $505 per month in passive income and my rent costs me $497.50 per month. 🙂

In comparison, I had $73,000 in personal investments and $14,000 in my DB pension plan, for a total of $87,000 as of December 31, 2019. That’s an increase of $64,500 (or 74%) in twelve months! I am extremely pleased with those results!

Now, I have to be realistic and adjust my target with inflation. So I’ll add 2% to my goal. That means $15,300 in annual expenses or a FIRE number of $382,500 in 2021 dollars. 🙂

Net Worth

You’re already quite familiar with this part, thanks to My Net Worth page, in addition to my December 2020 monthly review.

All the same, I am proud and happy to repeat that in 2020, I reached a net worth of $117,805.

By comparison, my net worth as of December 31, 2019, was $55,444. This is an increase of 112%.

What a year!

Returns

The year 2020 will certainly have been full of twists and turns in the stock markets. Let’s just take a look at the S&P 500 or the S&P/TSX 60 over the last twelve months. Since I only invest in index ETFs, this has had a direct (and positive) impact on my returns.

Indeed, Passiv allows me to see the (relatively minimal) impact that the stock market jolts have had on my portfolio over the last twelve months:

The top line represents the value of my portfolio while the bottom line represents my total contributions.

This clearly shows the importance of staying the course. Just keep saving and investing on a regular basis, regardless of the ups and downs.

For all of my personal investments, I have earned the following returns according to Questrade :

If only it could always be like this. 🙂

Switching Strategies

I have to say that I have had some strokes of luck during the year. At the time of the March 2020 drop, I had a sort of hybrid portfolio that combined the old Canadian Couch Potato portfolio model and Ray Dalio’s All Weather Portfolio. While I most certainly felt the drop, it wasn’t as bad as if I had been 100 % stocks.

On top of that, I had a lot of money coming in at the time, including a large tax refund, a bonus and refunds for a cancelled trip. I invested all of it at the right time and clearly benefited from that afterwards.

Also, I later decided to make some changes to my portfolio after hearing about the all-in-one ETFs. I changed most of my portfolio for XEQT. By doing so, I took advantage of another happy coincidence. Indeed, I sold a considerable amount of MNT (gold) while it was at its peak during the summer.

In the end, my portfolio will have increased by $20,544 in return alone. I still find it a little hard to believe that this amount accumulated on its own! I’m starting to see the benefits of making my money work for me, rather than working for it.

Dividends

Although my investment style is not focused on dividends, some of the ETFs I held, or still hold, do pay dividends. It’s no big deal, but I received $1,200 in dividends in 2020. By comparison, I received $1,056 in 2019. The difference is rather small, considering the difference in value of my portfolio over the last twelve months. This is mostly due to the changes in ETFs I’ve made in the past year.

One thing is certain: I’m not going to say no to money that’s deposited in my account. Also, all of it has been reinvested.

Expenses

Although every personal finance book in the world explains how important it is to track your expenses, I only started doing so this past August. So I don’t have the information for the whole year, but here is the detail from August to December regarding my expenses :

This amounts to a monthly average of $2,138, or an annualized total of $25,654.

Also, I would like to do the same exercise, but without accounting for my car loan repayments. Since this loan will not follow me into retirement, I wanted to get an idea of my current spending level without this cumbersome (and unrepresentative) expense.

  • August: $1,090
  • September: $1,761
  • October: $1,042
  • November: $1,599
  • December: $1,396

That’s much better, isn’t it? This means an average monthly amount of $1,377, or an annualized total of $16,529.

Considering that I estimated $15,000 in annual retirement expenses (in 2020 dollars) and that my current expenses are not yet completely optimized (notably through geographic arbitrage), I find that I’m not that far off the mark. 🙂

Income

My final pay stub confirms I earned a gross amount of $78,050 in employment income. In comparison, I earned $63,288 in 2019. That’s a 24% increase! I did have 27 pays in 2020 instead of 26 and a nice raise. That helps. 🙂

Worth mentioning, although nothing major : I got $340 in Amazon gift cards through Swagbucks and $260 by doing jobs through Field Agent (mostly before the pandemic and during the summer). By the way, thanks to everyone who signed up for Swagbucks using my referral link!

Savings

I am more than happy with my savings rate in 2020, which is 50%!

As I explained here, I prefer to use a very simple formula:

(Amount saved / net income) * 100

Indeed, I saved a whopping $27,055 on a net employment income of $49,371, to which I also add my $5,000 tax refund, for a total of $54,371. I want to make it clear that this is my personal savings only. It does not include contributions to my DB pension plan, or any other form of forced savings.

I wasn’t tracking every cent at the time, but I estimate my savings rate in 2019 to have been around 27%, based on the same formula. At that time I was not yet aiming for FI, so I wasn’t saving as aggressively as I am now. It was still a good savings rate compared to the average person. With 50% in 2020, now we’re talking! 😉

Travel Hacking

I started looking into Travel Hacking this year after reading Quit Like a Millionaire, which praised its benefits in lowering travel expenses.

I started simply with the TD Aeroplan Visa Infinite back in March (for 30,000 Aeroplan bonus points). I later took the CIBC Visa Infinite Aeroplan in July (for 20,000 Aeroplan bonus points).

I studied more about travel hacking (thanks to Milesopedia), and in November, I applied for three more: American Express AIR MILES Platinum (for 3,000 bonus Air Miles), American Express Prestige Aeroplan (for 20,000 Aeroplan bonus points + a Buddy Pass) and BMO AIR MILES Mastercard (for 950 bonus Air Miles).

On top of all the sign-up bonuses, points are also earned based on expenses.

So, in just about 10 months, I managed to pile up the following points and miles for future trips :

  • Aeroplan: 72,212
  • Air Miles: 1,182

What I Can Buy With My Points

I still don’t have enough Air Miles to buy much of anything. Since I started collecting them pretty recently, I haven’t unlocked any sign-up bonuses yet.

On the other hand, I am starting to have an interesting number of Aeroplan points. You can take a look at this page for an idea of a flight’s cost in points. For example, I could currently pay for five short round-trip flights in North America (ex: Toronto, New York, Washington, DC) or three longer round-trip flights (ex: Mexico or California) with my points. I would only have to pay the taxes.

More specifically, my first travel destination post-COVID will be Hawaii (which I had to cancel this past April). Currently, a round trip (ex: YQB-KOA) with randomly picked dates would cost me 34,100 Aeroplan points and $189.66 in taxes. Once I get my Buddy Pass, I’ll even be able to bring someone with me (my sister, in this case) for the same number of points. Only the taxes would then be payable in double.

If I do the same search on Google Flights for the same random dates, I find that the cheapest tickets are $635.00 per person. By using my points, we’d be saving $445.34 per person!

Long story short, not taking advantage of Travel Hacking is leaving money on the table. 🙂

Blog

Finally, I wanted to mention that in only 3 months of blogging, I wrote (and translated) 14 articles. I must have something interesting to tell because I have had 3,741 visitors in 2020. My Facebook page is also now over 600 likes! Wow!

To be honest, I wasn’t expecting any real success. I just wanted to have a place where I could put my ideas in place and have some structure. Based on the positive feedback I get, I think people relate to me and I’m really thankful for that. It’s been a very rewarding experience to talk to some of you. I also love the complicity that comes naturally between FIRE bloggers.

All in all, it has been a very positive experience and I will do my best to continue bringing quality content. 🙂

Managing Your Personal Finances Like a Business

I know I may seem a little intense by doing such a detailed review, but I think you’re getting to know me a little bit. What can I say? I like numbers. It’s my Vulcan brain’s fault. By the way, I see that you like numbers too, judging by the traffic trend on the blog. 😉

Also, the fact that I put hard numbers on all this allows me to see my progression. That’s very encouraging.

I can’t help but think about Jean-Sébastien Pilotte’s (Jeune Retraité) book La retraite à 40 ans. The first chapter is called Devenir le PDG de sa vie (Becoming the CEO of Your Life). Here’s my rough translation of my favourite part:

The first step towards financial independence is the most decisive one to succeed. It is about having the will to take control of one’s finances. It’s time to go from being a janitor to becoming CEO. Take off your blue rubber gloves and put on your best tie. You are promoted! No one else applied for the job.

To begin your new position, you will need to understand and analyze your current financial situation. Where is your money going? What are your main expenses? What are your assets? So many questions that are essential to your financial health and, ultimately, to your quality of life. Like a CEO, you will have to peel the onion, layer by layer. And most of all, don’t cry! You will certainly have to get out of your comfort zone and make some unpleasant observations, but it’s time to get to the bottom of this.

I particularly liked this part. It’s really in synch with the way I see things. How can we hope to improve and move forward if we have no idea where we stand exactly?

Gratitude and Thanks

To say the least, 2020 has been a very special year. No matter how unpleasant the year has been, there is always a way to find something positive. I think this review shows that.

Financial review aside, I am also filled with gratitude for this blog and all that it brings me. In addition to discovering a certain talent for writing, my articles allow me to reach out to people and interact with them. I am so grateful for the opportunity to discuss with equally passionate people.

Thank you for reading my blog. Thank you for commenting (it’s sort of my pay!). I like to know what resonates with you in my writing. I love it when you share your own calculations or suggestions. Sincerely, don’t hesitate to contact me. I love discussing personal finances and FIRE.

I am ready to face whatever 2021 has in store for me. As you already know, I have already set goals for this year. Undoubtedly, I have a lot of work to do!

Perhaps the fact that it’s not easy is what makes it worthwhile.

– Odo (Star Trek Deep Space Nine)

Let’s stay the course. The best is yet to come.

 

December 2020 Review

January 4, 2021 / / 1 Comment

Hello there!

Finally, a new year has begun!

To all my readers, I wish you a very happy new year, full of wealth and prosperity, of course, but also happiness and, above all, good health. I hope that we’ll have as much fun learning and supporting each other on the road to financial independence.

Also, I hope that this ugly pandemic will fade away and that we’ll find a semblance of normalcy in our respective lives. And I don’t know about you, but I wouldn’t say no to a trip or two. 😉

Before completely turning the page, I want to do my usual monthly review of December 2020. In fact, these monthly reviews have helped track exactly where my money is going and assess how realistic my FIRE goals are.

I’ll keep doing those very enlightening reviews in the new year, as previously mentioned in my 2021 Goals article.

So without further ado, let’s get down to the juicy details.

Net Worth as of December 31, 2020

Assets
Checking Accounts:
Questrade TFSA
Questrade LIRA
Questrade RRSP
FTQ RRSP
Fondaction RRSP		$1,624
$29,608
$43,118
$33,679
$5,752
$13,427
Total assets:$127,208
Liabilities
Car Loan:
Line of Credit:
CIBC Aeroplan:
Tangerine Master Card:
Amex Air Miles:
BMO Air Miles:
Amex Aeroplan:		$9,403
$0
$0
$0
$0
$0
$0
Total liabilities:$9,403
Net Worth$117,805
Difference+$7,692

Full disclosure: I never dared hope to reach such a high net worth at the end of the year. I’m so grateful that I have been able to save so much throughout the year, in good times and bad. By following my automatic and regular savings plan (every two weeks on payday), I have been able to get exposure to different market prices throughout the year. This is what we call taking advantage of dollar-cost averaging.

I must admit I also made an effort to invest a little more than normal whenever the markets were down, too. 🙂

It wasn’t that long ago that I was hoping to end the year with $100,000 in net worth. I certainly wasn’t expecting to end with $117,805, which is 17.8% more than expected. Needless to say, I am extremely pleased with such results after a year like we had. I’d never have expected that back in March! So, there is something positive to come out of 2020. 🙂

I am ready to tackle a new month and a new year with those very motivating numbers!

Debt repayment

Finally, I also reached a new milestone on the debt front. My car loan went below $10,000! I can’t wait to see it disappear forever from my calculations.

In fact, some may wonder why I don’t pay off the balance in full and get rid of it once and for all. After all, I do have the money in my TFSA.

Ultimately, it’s a question of opportunity cost. If I take almost $10,000 out of my TFSA to pay off my balance, I’m turning my back on the return I could have earned on that investment. Of course, the return I could earn is hypothetical and cannot be predicted or guaranteed. However, I believe there is a good chance that the return will be higher than the interest rate on my car loan.

Believe it or not, the interest rate on my loan is 0.04%.

See the dilemma, here?

So while being debt-free is very appealing, I can’t possibly give up on the return I’d get on my TFSA to pay down a debt that costs me next to nothing in interest.

Nevertheless, I believe I made a compromise between the emotional side (being debt-free) and the rational side (getting a return on my TFSA) by increasing my regular payments to the maximum. I reduced the amortization by more than two years. The maturity date will be November 2021 instead of December 2023.

Additionally, I don’t rule out the possibility of making additional payments throughout the year. For example, I expect a tax refund in the spring, as well as a hypothetical bonus at work. If I use these to repay my loan, I’ll reduce the amortization even further.

However, selling investments to pay off my debt is the last thing I want to do.

Savings

Here are the details of my December savings:

  • December 2: $1,200 out of $2,148.84 net (56% savings)
  • December 16: $1,000 out of $1,892.52 (53% savings)
  • December 30: $1,000 out of $1,897.52 net (53% savings)
  • Total savings: $3,200 in December or 54% savings

Of the $3,200 I saved, I invested all of it in my TFSA. That leaves me with about $44,000 of unused contributions, in addition to the new $6,000 contribution limit for 2021.

I still managed to save a large portion of every pay, considering (yes, again) this never-ending lockdown and the low expenses associated with it. The fact that I was paid three times instead of two in December and that I did some overtime also helps a lot. I had 27 pays in 2020, instead of 26. Apparently, it happens once every 11 years!

Expense Report

DateAmountDescription
2020-12-01$497.50Rent
2020-12-01$99.84Groceries
2020-12-01$19.72Gas
2020-12-01$18.63SAQ
2020-12-02$7.15Spotify
2020-12-02$10.00Donation
2020-12-04$403.85Car Payment
2020-12-04$27.36Yarn
2020-12-05$6.79Starbucks
2020-12-07$14.39Home Insurance
2020-12-07$48.04Car Insurance
2020-12-09$7.70Netflix
2020-12-09$29.50Hydro-Québec
2020-12-12$4.37Dollarama
2020-12-14$109.33Groceries
2020-12-14$13.90Gas
2020-12-18$403,85Car Payment
2020-12-19$6.79Starbucks
2020-12-21$230.43Registration
2020-12-23$206.55Airbnb
2020-12-23$6.93Groceries
2020-12-25$3.40Starbucks
2020-12-29$27.60Home Internet
Total:$2,203.62

In December, I had $2,203.62 in total expenses, or $26,443.38 annualized. If we take out the car loan payments, it amounts to $1,395.92, or $16,750.98 annualized. I consider this very reasonable.

There is little difference from the past months again. There aren’t many opportunities to go splurge, after all! I spent the holidays with only my sister at our place, out of concern for the sanitary measures. For Christmas, we had already planned not to give each other presents. In fact, we both consider that we don’t need anything, and we really didn’t want to buy a useless thing just for the sake of it. Actually, we much prefer to offer each other experiences (tickets for shows, activities, travel) and these are rather limited nowadays. That was definitely the least expensive holiday season I’ve ever had! 🙂

My slightly more outlandish expenses are generally related to keeping me sane during the lockdown. So you’ll notice a few Starbucks coffee here and there, again, and even a visit to SAQ. I also used my travel account to book a small cottage for a few nights in January with my sister. After the last few months, we feel like seeing something other than our 2-bedroom apartment (and our noisy neighbours).

Finally, I still don’t have any charges on my cell phone plan this month. By the way, a huge thank you to those (two) who used my Fizz code (N5MMB) so far! I’m not going to say no to $50 applicable on my cellphone bill. That’s a great way to reduce both our expenses. 🙂

Here’s to 2021!

That’s it, that was my December monthly review. All in all, an unusually uneventful month, but also very beneficial for my savings goals. I’m sure we’ll get to celebrate with family and friends soon.

My next article will officially be the last one regarding 2020, as I will make a full review of the whole year, regarding various financial aspects. As you know, I love numbers and statistics, and I will have plenty to give you.

So, did you start tracking your expenses like I do, after reading my monthly reviews? Were you surprised to see where your money is really going? Have you noticed that simply tracking every expense makes you spend more consciously?

For me, it’s been more than beneficial! I hope it is for you as well, or that you will try it out soon. 🙂

See you next week!

Why I Will No Longer Contribute To My RRSP

December 21, 2020 / / 13 Comments

I am one of the privileged few benefitting from an employer-sponsored pension plan. It is becoming increasingly rare these days. Generally, when we tell people we have a pension plan, we’re told how lucky we are.

In addition, there are different types of pension plans. One of them is the mother all of pension plans. I’m talking, of course, about the defined benefit (DB) pension plan. That’s the one offered by my current employer.

For many, it’s an excellent advantage. In my case, it’ll bring me closer to my goal much more quickly. On top of my contributions, my employer’s contributions will be returned to me in part when I resign, through the transfer of the commuted value.

For others, who are not aiming for FI and are not saving anything by themselves, it’s more of a gilded cage than anything else. At least, that’s how I saw it back in the days when I wasn’t saving. But that’s a whole other discussion!

How It Relates to the RRSP

First, the maximum RRSP contribution is the lesser of $27,230 (for 2020) or 18% of the previous year’s earned income.

However, a person with a DB pension plan will not be able to contribute up to 18% of their salary to an RRSP of their own. That wouldn’t be fair to those who don’t have a pension plan.

So, to balance it out, employers must calculate the pension adjustment (PA). This factor must then be deducted from the RRSP contributions.

For those interested (or for nerds like me), the calculation of a PA for a DB pension plan goes as follows:

(9 x annual accrued benefit) – $600

The annual accrued benefit varies from one pension plan to another. It is established as follows:

Pension formula * Annual salary

To give you an idea, I used my December 31, 2019, statement numbers. For your information, the Maximum Pensionable Earnings (MPE) for 2019 was $57,400. My annual accrued benefit is calculated like this:

[(1.5% up to MPE) + (2% above MPE)] * $61,442 = $942

Thus, my PA was calculated as follows:

(9 x $942) – 600 = $7,877

So while my RRSP contributions for 2020 should have been $11,382 (18% of my 2019 salary), my PA brought it down to only $3,505 ($11,382 – $7,877). Then, I could only contribute $3,505 to my own RRSP.

Long story short, the PA significantly reduces a person’s RRSP contribution room for the following year.

Why Stop Contributing?

Let’s keep in mind that I’ll reach FI once I have accumulated 25 times my annual expenses. In fact, I intend to reach this magic number once I take my pension’s commuted value. This amount can be transferred to a Locked-In Retirement Account (LIRA) up to the maximum transfer value (MTV) allowed by the Income Tax Act.

The MTV is calculated like this:

Annual pension at age 65 * Present value factor

The present value factor is based on age.

As an example, here are the important numbers from my December 31, 2019, statement :

  • Pension value: $14,100
  • Annual pension at age 65: $1,370

By applying the above-mentioned formula, I understand the MTV would have been $12,330 ($1,370 * 9). However, the pension value was $14,100. Therefore, if I had decided to resign on December 31, 2019, there would have been an MTV of $12,330 and an excess of $1,770 ($14,100 – $12,330).

What could I have done with that excess? Either cash it in and pay taxes on it, or transfer it to an RRSP.

However, transferring the excess to an RRSP can only be done when you have enough unused contributions.

Therein Lies the Problem

In order to reach FI, I will take the commuted value when I resign, at the latest, in 2026.

Being the nerd that I am, I have made various projections to estimate the value of my DB pension plan in 2026, as well as what the excess could be. Based on various hypothetical returns and projected salary raises between now and 2026, I estimate my excess could be somewhere between $26,000 and $44,000.

So, if I have no unused contributions left when I take the commuted value, I will have to cash in the entire amount and pay taxes accordingly. With no other income, this means between $4,500 and $10,600 in taxes for someone living in Quebec (according to this calculator).

Even worse: if I earned, let’s say, $60,000 that year before resigning, the excess will be added to my employment income. Worst-case scenario: I would have $104,000 of taxable income at the end of the year. That means I reach a higher tax bracket!

We want to avoid that, don’t we?

So, contrary to what I said in a previous article about maximizing all registered accounts as soon as possible, I must hold off on contributing to my RRSP until I resign. I have to save any unused contributions for later.

Also, let’s not forget that the PA significantly reduces my RRSP contributions each year.

Considering this, and the fact that my RRSP is currently maximized as of 2020, I estimate I’ll barely have $20,000 in unused contributions in 2026. Thus, there’s still a risk of not having enough unused contributions to absorb the entire excess.

To make up for this, I could resign at the end of the year and receive the excess at the beginning of the following year. In that next year, I would have no employment income. I would also have new RRSP contributions to add to the previous years. Finally, what wouldn’t fit in the RRSP could be used as income for my first year of early retirement. I would probably only make a partial withdrawal (less than 4%!) of my investments to make up the difference in that first year.

With a little luck, the amount would still be less than the basic personal amount and then, I wouldn’t have any taxes to pay. 🙂

Other Options

So if I can’t touch my RRSP until 2026, what do I do in the meantime?

I use the very wonderful TFSA until it’s maximized, of course. As of today, I still have about $45,000 left in unused contributions. We can assume an increase of about $6,000 in contributions a year. Maybe more, if we’re lucky!

If I keep saving $25,000 a year on average, I should be able to catch up on my TFSA contributions by early 2023.

Once that happens, I’ll need to start investing in a non-registered account. This type of account has no limit, unlike registered accounts. At that point, I would contribute the $6,000 (or more) per year to the TFSA and all the rest of my savings would go in a non-registered account.

Deferred Pension or Commuted Value Transfer

Some may wonder if it would not be better to just take the deferred pension and not bother with all the calculations I have just explained.

It depends.

If you’ve been contributing to your pension plan for a long time, then the commuted value, as well as the excess, could be really significant. For example, if you have $100,000 in excess and no unused RRSP contribution, the tax bill would be huge!

In this article, the author explains in detail his strategy. In his case, the commuted value was $290,143. He was surprised to learn that the MTV he could put in a LIRA was only $134,028. That means he had an excess of $156,115. More than half of his commuted value would be taxable, at a rather high marginal tax rate! In any situation, there is little chance that unused RRSP contributions could absorb all of this.

A person living in Quebec would have to pay $59,798 in taxes on such an amount. That reduces the real commuted value by a lot, doesn’t it? In the end, out of his $290,143 commuted value, he would really only get $230,345. That can make a big difference in terms of FIRE. Personally, I wouldn’t be willing to sacrifice close to $60,000!

You understand that it is therefore very wise to do your calculations before making any decision.

Furthermore, are you a good enough investor to “beat” the deferred pension provided by the plan, if you invest the commuted value yourself? And how many years do you have left before you can take the deferred pension?

These are many factors to consider. For my part, I much prefer to proceed as I have detailed, because that is what will allow me to reach my number much earlier. I made a plan to optimize everything and make sure I pay as little tax as possible. But for someone else, the reality could be completely different.

My Own Personal Experience

When I left my former employer in 2018, I was promised an annual pension of $3,314 at age 65. Nothing to write home about, right?

The other option was to transfer the commuted value of $42,000, of which $12,000 was in excess. Fortunately, I had plenty unused contributions at the time to absorb it all. So, the decision was easy to make. 🙂

Two years later, I am more than happy to have taken the commuted value to a LIRA and the excess to my RRSP. It has given a huge boost to my personal investments. It makes even more sense now that I am aiming for FI.

In fact, I’ve had an excellent return on my commuted value by investing it myself so far. Thanks to Passiv, I can give you an overview of my LIRA return since I opened the account two years ago.

So, the boring answer to the initial question is: it depends. It’s up to you to do your calculations.

The Importance of Planning

If I’d never bothered doing calculations, I’d have continued to maximize my RRSP every year until I resign.  The result could have been a tax bill up to $10,000. It would be even worse if I were to receive the excess the same year I resign, as it would be added to any income already earned. I would then reach a higher tax bracket and the tax bill would be even higher!

That’d mean less money in my pockets, more in the pockets of the taxman. By planning everything in advance, I make sure that I maximize the money I will keep from my commuted value.

It’s always ideal to get as close as possible to 100% of our money. In other words: pay as little tax as possible. This applies just as much to the 4% rule, which indicates to have 25 times your annual expenses. To be realistic, this amount must be net of any taxes. If you haven’t planned for (or optimized) this important aspect and you end up sending a third or your passive income to the taxman, you’re going to run out of money. So you have two options:

  • plan for a larger amount to cover taxes; or
  • optimize your taxes.

I know which one I prefer. As Pierre-Yves McSween puts it:

As much as we hate taxes when we build our wealth, we can benefit from tax rules once we have enough.

When you know how things works, you can make the most of it.

For the Lucky Few

This article was certainly aimed at a somewhat smaller audience, namely people benefiting from a DB pension plan. Even for them, it may not have been the most exciting article! There were a lot of calculations, formulas and complex terminology. On top of that, the terminology seems to differ from one pension plan to another! I hope I managed to be coherent, under the circumstances.

However, it did allow me to put together all the information I gathered on the subject and it helped me refine my strategy. I hope my thoughts on the subject helped some of you.

Have you ever had a DB pension? Have you ever had to choose between a deferred pension and a commuted value transfer? What did you choose? Or are you currently one of the lucky few? If so, what’s your game plan for when you leave the rat race?

Feel free to leave a comment! Seriously, I want to know. I’m that much of a nerd.

2021 Goals

December 14, 2020 / / 7 Comments

I don’t know about you, but I’m all about goals. Could it be conditioning from work? Maybe it is. Even on weekends, I have to write to-do lists to clear my head and have the satisfaction of crossing things off.

Once retired, how many years of therapy will it take to get rid of this habit? All bets are off. 😂

My silly to-do lists aside, I still find it important to set small concrete goals in the pursuit of a bigger goal. On the path to FI, every action counts. In order to focus my efforts in 2021, I have established different precise goals. What better place to put them in writing than on my blog?

Then, at the end of 2021, I will be accountable to all of you, and not just to myself. Talk about extra accountability! 😉

How to Set Good Goals

To establish good, clear goals, you might have already heard of the SMART mnemonic acronym. Its indicators are as follows:

  • A Specific goal should be simple to understand, clear and precise.
  • A Measurable goal must be quantified and have a threshold to reach.
  • An Attainable goal must be large enough, ambitious enough to be challenging and motivating, yet reasonable.
  • A Realistic goal must be at a level where the challenge will be motivating, to avoid giving up.
  • A Time-related goal should be time-bound, including a deadline.

Therefore, I decided to set my 2021 goals based on these indicators.

My Goals

It seems appropriate to divide my goals into two categories: some goals are definitive, while others are hypothetical. The definitive ones depend mostly on me, my discipline and my will. The hypothetical ones depend on some external factors.

Definitive

Savings

In 2021, I’d like to say it would be prudent to set my savings goal at $20,000. That is considering a good part of my cash flow will still be allocated to my car loan until November. Over the entire year, this level of savings would average $769 per paycheck (every two weeks).

On the other hand, I’m an overachiever, and I want to give myself $25,000 as a goal. That’s actually what I’ll have approximately saved by the end of 2020. That would be an average of $961 per paycheck. Although it seems rather difficult considering I start paying QPP again in January, there will be other possible cash flow that could compensate, such as a tax refund or a possible bonus in March, for example.

Also, maybe it’ll lead me to actively look for alternatives to increase my income. I gotta walk the talk, right?

Debts

Oh, that goal sure is definitive! Currently, with my payments increased to the maximum allowed by the bank, my car loan will be all paid back by November 2021. Specifically, my last payment would be on November 18, 2021. After that, I will be debt-free! Woohoo!

I will then be able to allocate that part of my budget directly to my savings (and that’ll help me reach my previous goal). 🙂

House Sitting

Do you know about House Sitting? People from all over the world are looking for house sitters to take care of their pets and home while they are away. There are many websites that facilitate contact between these people, such as Trusted House Sitter, Nomador, House Sitters Canada, etc. To have access, there is an annual fee that goes around $50-$150.

In order to travel inexpensively, I would like to give it a try. Ideally, I could start by trying it out in our province. Once the pandemic gives us some breathing room, I could go and take care of someone’s pets in Montreal, for example. That way I could see how I feel about the experiment. In addition, house sitters get rated on the website. That would allow me to start building a reputation, so to speak.

Afterwards, I could use this method to travel the world at almost zero lodging fees (besides the annual site fee) in exchange for taking care of pets. Useful, both before and during retirement. 🙂

Corrective Eye Surgery

This may seem like an unrelated goal, but it will be useful to me from a long-term financial standpoint.

I’ve been wearing glasses since age 14, and have almost always needed to change glasses every 2-3 years. Rather than having to plan for this expense once I retire, I could use my current insurance coverage to address this problem once and for all!

In fact, my insurance does not provide any amount for this specific surgery. However, I do have a Health Spending Account that provides $500 per year. I didn’t use the 2020 amount, which will be added to the 2021 amount. I will therefore have $1,000 that I can use to reimburse part of the surgery. 🙂

I also asked my insurer about the possibility of using the $500 from 2022 and 2023, if I take the 24-month interest-free financing offered by Lasik MD, for example. I am waiting for a call back. If it is possible, then it will be $2,000 covered by my Health Spending Account!

Afterwards, I won’t have to plan any more expenses for glasses or contact lenses.

By the way, if you have any recommendations or suggestions on the subject, don’t hesitate to share them with me. I’m only just shopping around at this point.

Blog

Of course, continuing to write articles for this blog is on my list. I don’t want to commit on how often I will post articles. Currently, I manage to publish once a week. However, once the pandemic is a thing of the past, maybe I’ll want to write a little less. 😉

On the other hand, I am committed to continuing my monthly reviews. I find it really important to share with you such concrete information, like my expense report or net worth.

Tracking my expenses and publishing them forces me to think about the relevance of every expense. Being accountable really motivates me to stay the course!

Travel Hacking

I plan to continue subscribing to new credit cards every 3 months in order to accumulate points, especially Air Miles and Aeroplan. In particular, I would like to reach 10,000 Air Miles by the end of 2021, for a possible trip to Disney World in 2022. For Aeroplan, I don’t have a fixed goal. I just want as many as possible in order to pay for future flights. 🙂

Hypothetical

Real Estate

You may have noticed in my expense reports that I am currently renting my place. I’ve also already mentioned that I plan to take advantage of geographic arbitrage in retirement, i.e. living somewhere where the cost of living would be lower.

In fact, the easiest thing for me would be to buy my mother’s house. She and the rest of my extended family live in a very small village. I think it’d be ideal to keep roots in the province.

Besides, the house is appraised at $67,000. Can you imagine? A mortgage for a house like that would still be half of what I am currently paying for housing. That’s what geographic arbitration is all about. Yes, it still applies within our province. 🙂

Initially, I was considering this option for retirement. However, I’m now considering moving up the purchase date. The interest rates at historic lows and full-time teleworking (possibly even post-pandemic) are really starting to push me towards making a move in 2021.

Of course, if this is in the hypothetical category, it’s because I need to talk seriously about it with my mother first. We’ve talked about it in the past, but we didn’t bring it up recently. I’m going to have to put it back on the table. 🙂

Travel

No need to explain why this goal is hypothetical. I will therefore not quantify it. As soon as it is possible to do so, I want to travel as much as possible!

As far as the destination goes, I was supposed to spend two weeks in Hawaii in April 2020. That’ll be one of the first things I do, as soon as possible! Otherwise, I’m open to any opportunity. After all, I have to use my travel points. 🙂

Milestone

Here, no matter what my savings rate is, if the return is bad, it could be unattainable. However, if the return is good, my projections give me hope of reaching what some people call Half FI, or 12.5 times my annual expenses! 🙂

My target annual expenses for retirement in 2020 dollars are estimated at $15,000. Adjusted for 2% inflation for 2021 give me $15,300. So Half FI would be :

15 300 * 12,5 = 191 250 $

Considering my current investments, my pension plan’s estimate value and my projected savings, I think this could be realistic. I can’t wait to see! 🙂

From Small Goals to Big Goals

The SMART method can be applied to all types of goals. I can apply it to my small goals for 2021 and subsequent years, as well as to my ultimate goal of achieving financial independence.

Remember that a smart goal must be specific, measurable, attainable, realistic and time-related. Let’s see what I can come up with :

My goal is to achieve financial independence and early retirement, i.e. no longer depend on a salary and be able to do what I want, when I want. To do this, I will need to save and invest more than 50% of my income in order to accumulate 25 times my annual expenses by my 35th birthday, at the latest, or in 2026.

I must admit that my projections are starting to make me believe that 2025 is even possible. Of course, it’s mostly based on the return I’ll get in the next five years. I could save 80% of my income, but if we fall into a bear market during those five years, it could definitely put a wrench in my plan. Therefore, 2026 is more realistic.

2021 Is Just Around the Corner!

I don’t know about you, but I can’t wait to turn the page on 2020. I’m optimistic and I sincerely think 2021 will be a good one! So let’s take the bull by the horns and think ahead about what we want to accomplish! However, I can assure you that you don’t need to be as neurotic as I am about setting your goals. Just do it whatever way you prefer. 🙂

Looking back over the years and thinking about my current goals, I find that the more time you give yourself to do something, the more time you take to do it. We’ve all seen this in school. No matter when we needed to hand in a paper, we always ended up handing it in at the last minute. Curious how a paper you had three months to do ended up taking precisely three months to do.

Abraham Lincoln explained the phenomenon well:

Give me six hours to chop down a tree and I will spend the first four sharpening the axe.

Yes, you shouldn’t set goals that are too difficult to avoid giving up, but you shouldn’t set goals that are too easy either. It takes a bit of a challenge to be motivating enough.

Have you set goals for next year? Don’t hesitate to let me know!

November 2020 Review

December 7, 2020 / / 1 Comment

Hello there!

It’s already time to do the November monthly review! It’s fascinating how relative the perception of time is, especially this year. On one hand, I can’t believe that the year is nearly over. On the other, I have the impression that this pandemic is never ending and that each day of lockdown goes by at an indescribably slow pace.

But we’re not here to talk about that. It’s time for numbers! Nice numbers, by the way. 🙂

Net Worth as of November 30, 2020

Assets:

Checking Accounts:
Questrade TFSA
Questrade LIRA
Questrade RRSP
FTQ RRSP
Fondaction RRSP

Total assets:

$1,237
$25,950
$42,414
$33,063
$5,182
$12,015

$120,448
Liabilities:

Car Loan:
Line of Credit:
CIBC VISA:
Tangerine Master Card:
Amex:

Total liabilities:

$10,210
$0
$0
$0
$125

$10,335
Net Worth$110,113
Difference+ $11,697

Remember that $100K I didn’t quite officially reach at the end of October? Well, here it is, and then some! After two rather slow months in September and October, the stock markets went wild for most of November. This is partly due to a nice mix of good news about promising vaccines and a presidential election that seems to be making Wall Street happy!

Thus, between October 31 and November 30, there was a variation of + $11,697! Unbelievable, isn’t it? That’s 11. 8% in a single month! If every month was like that, it would be too easy, wouldn’t it? 🙂

Also, I realized by doing this review that I doubled my net worth in the last twelve months. Indeed, my net worth as of November 30, 2019, was $53,184. While I know I saved and invested a lot in the past year, I never expected such an impressive result! I am more than grateful for that. 🙂

Savings

Here are the details of my November savings:

  • November 4: $1,000 out of $1,892.51 net (52% savings)
  • November 10: $100 out of $110.82 (90% savings)
  • November 18: $1,000 out of $1,892.52 net (52% savings)
  • Total savings: $2,100 in November or 54% savings

November was another great month for savings. Lockdown keeps making it even easier to lower expenses, which has a direct impact on my savings rate. We can say whatever we want, but this pandemic has really boosted my savings. That is considering I was lucky enough to have no loss of income whatsoever throughout the year. It will allow me, in the long run, to reach my goal considerably faster!

The small amount I got on November 10th came from a small translation contract that sort of fell on my lap. While I don’t usually do this professionally, I do have a bachelor’s degree in translation. I couldn’t say no! 😉

Out of the $2,100 I saved, I invested $1,900 in my TFSA and $200 was added to my travel account.

As a matter of fact, some may be surprised to know I’m saving to travel while on the path to FI. It’s certainly quite expensive to travel after all. However, I absolutely want to do it. I love it, it makes me happy and it ironically helps me stay on track with my goals as well. Since I want to travel once I reach financial independence, I have to practise. Right? 😉

Expense Report

DateAmountDescription
2020-11-02$497.50Rent
2020-11-02$7.15Spotify
2020-11-02$10.00Donation
2020-11-04$96.22Groceries
2020-11-04$16.10Mondou
2020-11-06$403.85Car Payment
2020-11-08$14.39Home Insurance
2020-11-08$48.04Car Insurance
2020-11-09$2.78Amazon
2020-11-09$7.70Netflix
2020-11-11$31.46Fiverr
2020-11-14$1.09Amazon
2020-11-15$5.41Starbucks
2020-11-19$95.24Groceries
2020-11-20$403.85Car Payment
2020-11-21$27.36Yarn
2020-11-22$5.40Starbucks
2020-11-23$30.78Google Drive
2020-11-23$120.00American Express Annual Fees
2020-11-23$29.50Hydro-Québec
2020-11-28$468.99Air Canada
2020-11-29$27.60Fizz Home Internet
2020-11-30$55.94Mondou
Total$2,406.35

So in November, we are talking about $2,406.35 in total expenses, or $28,876.20 annualized.

That’s a large amount, even pretty far from what I’m aiming for, but it’s exceptional. I wanted to take advantage of Air Canada’s Black Friday offers! While it may seem like a big expense, the money was actually coming out of my travel account and would have been used for that at some point or another. I just decided to spend that amount in advance, in order to earn more Aeroplan points.

Otherwise, there is not much difference compared to previous months, outside fixed expenses. There are a few Starbucks coffee here and there, more out of a need to keep me sane and get out of my apartment, than anything else.  You gotta do what you gotta do to survive this lockdown (or to avoid noisy neighbours). 🙂

Also, I had no cell phone expenses this month, thanks to Fizz‘s referral bonuses. I had gotten $40 by subscribing with someone’s code and then $40 when my sister subscribed with my code. Since I took the $27/month plan, that’s three months covered. 🙂

If you are interested in subscribing, please enter my referral code N5MMB and we will both get $50. That’s right, they raised the bonus! This is valid for mobile plans as well as Home Internet plans.

Little Travel Hacking Lesson

Let me share my strategy when taking advantage of Air Canada’s Black Friday offers. The golden rule of Travel Hacking is not to spend more than normal to get points, otherwise it’s counterproductive. In my case, I was already accumulating money in my travel account for eventual plane ticket fees or other.

Air Canada had several Black Friday offers. The more offers you combined, the more points you got:

  • 2 offers = 500 bonus points
  • 3 offers = 1,000 bonus points
  • 4 offers = 5,000 bonus points

So I took advantage of a first offer by purchasing a gift card:

  • By buying an Air Canada gift card, I could accumulate 2 points per dollar spent.
  • By purchasing the gift card with my CIBC Visa Infinite Aeroplan credit card, I could accumulate 1.5 points per dollar spent.

I purchased a $400 gift card, and I was able to earn 1,400 Aeroplan points for this first offer.

Then I took advantage of a second offer by buying points:

  • The promotion offered a 50% bonus on the points purchased. The minimum possible was $60 for 2000 points + 1000 bonus points.
  • By purchasing the points again with my CIBC Aeroplan credit card, I could accumulate 1.5 points per dollar spent.

I paid the minimum possible of $60 to get 3,090 Aeroplan points.

Finally, I took advantage of a third offer by buying a product from a partner via the Aeroplan eBoutique :

  • Purchases at Amazon gave 2 points for every dollar spent.

I was already planning on buying running shoes in the near future. I actually had enough Amazon gift cards accumulated (thanks Swagbucks!) to get them for free. The shoes cost about $50, so that’s 100 Aeroplan points.

Since I used three offers, I get the 1,000 bonus points.

Result: 5,590 Aeroplan points.

The awesome part is that I get all those points for expenses I had already planned. It’s all a matter of timing.

Is Paying Annual Fees an Investment?

Additionally, you may have noticed in my expense report the $120 annual fee for my American Express AIR MILES Platinum Credit Card. Does it seem counterproductive to you to pay an annual fee?

The idea behind it is that I only signed up for this card to get the 3,000 Air Miles bonus, which can be worth up to about $600, if you play your cards right. I plan on cancelling the card before I am charged the annual fee again next year. So despite the annual fee, I’ll have made a profit. 🙂

I’m still a Travel Hacking beginner, but I’m already starting to accumulate nice amounts of points and miles. In a possible future where travelling will be more accessible, I’ll be more ready than ever to go at very low cost. 🙂

For those interested in the various Travel Hacking strategies, check out Milesopedia. It’s a real gold mine!

2020 is almost over!

I can’t wait to see what the stock markets have in store for us before the end of the year. Everything that goes up inevitably ends up going down, so who knows. One thing’s for sure, the markets have fully recovered from last March’s historic crash, and then some.

As far as I’m concerned, I think my income will be pretty good in December. In addition to being paid three times instead of two in December, I will also receive paid overtime. As for expenses, there is very little risk of splurging, except perhaps for food and drinks. My family and I had already agreed that we wouldn’t give each other Christmas presents, so no worries about that.

I’m already looking forward to my next monthly review. 🙂

See you next time!

I’ve Reached Coast FI!

November 30, 2020 / / 1 Comment

The FIRE (Financial Independence Retire Early) movement has a common desire for financial independence, but it is on early retirement that opinions differ. I notice on many blogs and podcasts that the acronym FIRE is beginning to be replaced by FI. It’s often the same story. People usually don’t like the idea of stopping work altogether. Working is healthy, they say. They prefer to dismiss the concept of retirement. Fair enough. To each their own battle. I’ve already shared my personal thoughts on this in my previous article on the importance of finding your why.

This seems to bring people to come up with all kinds of alternative concepts. There’s something for everyone: Lean FI, Flex FI, Slow FI, Barista FI, Coast FI, and so on. In addition to setting aside the early retirement portion, I notice that these concepts all have more moderate methods than the traditional FIRE movement. This probably makes it more accessible.

Among these many concepts, Coast FI particularly caught my attention. Although it’s not my goal, I was surprised to realize that I would already be in a position to do it.

What It Means

The Fioneers explain the concept like this:

Coast FI is when you have enough invested for a comfortable traditional retirement if you don’t touch it until then.

When someone reaches coast FI, this means that they only need to cover their actual costs of living until they retire.

So I understand that reaching Coast FI means no longer touching your portfolio and let compound interest work its magic by itself. In the meantime, there’s no need to save a single penny.

You’d need to earn an income only to cover your annual expenses. No need to put money aside for retirement anymore, since that’s already taken care of. You certainly don’t need a DB pension plan. Pretty amazing, right?

Of course,  you need to have already accumulated a certain amount of money, to then let it grow and never touch it again until you retire later in life.

The Calculation

Let’s see if it’s realistic with my current numbers. To start, I need to determine how much money I would need when I turn 65, in 2056. I need several things to make that calculation.

First, I need to estimate my annual retirement expenses in 2020 dollars. Theoretically, I’m aiming for about $15,000.

Second, I need to take inflation into account. The $15,000 I would spend now would not have the same purchasing power in 2056. The Bank of Canada aims to keep inflation at 2%. So I’ll take 2% for my projections. A quick calculation using the SmartAsset calculator projects my annual expenses at $30,598 in 2056 dollars.

Third, I’ll use the 4% rule (25 times our annual expenses) to obtain the invested amount needed to cover my annual expenses in 2056:

$30,598 * 25 = $764,950

I will therefore need $764,950 at age 65 to cover my annual retirement expenses at a safe withdrawal rate of 4%.

Now that we know that number, we need to consider my current portfolio and see if it could appreciate enough until 2056 to cover my future expenses.

As of today, I have $120,000 invested. If I really were to do Coast FI, then I would leave my current job and take my DB Pension Plan commuted value into a LIRA. I estimate a minimum value of $24,000 as of today. So, that’s a total portfolio of $144,000.

For my projections, I will use a hypothetical return of 6% until 2056, or for 36 years.

Considering all of this, can I do Coast FI until I turn 65, and never save another dollar until then?

The Result

With the help of the Get Smarter About Money Compound Interest Calculator, I get:

Amazing, isn’t it? The magic of compound interest at work. This is a clear example of how important it is to save massively, as early as possible, then let the money work for you afterwards.

I would therefore have $1,173,204 invested at age 65, which is more than enough for my retirement, without even considering QPP and OAS.

Moreover, these calculations are based on a 6% return. Imagine if the returns were higher? Considering that my portfolio is almost entirely made up of stocks, it would then be realistic to expect more than 6%.

So, just for fun, let’s calculate 7% :

Or 8% :

And that’s without adding a single dollar to my portfolio between now and age 65! Compound interest truly is the eighth wonder. 🙂

Wait, There’s More!

You may have noticed that even with conservative projections at 6%, I am well over the $764,950 required at age 65. This suggests that I’ll be able to retire even before the conventional retirement age. I put all the necessary data in a spreadsheet. Now, let’s see where the point of intersection really is:

The blue line represents the amount needed to pay for my expenses, which increases with inflation (2%) over the years. The red line represents my portfolio, which grows at a hypothetical rate of return (6%).

This graph shows that the point of intersection is at age 54. Therefore, with my portfolio as it is now, growing over time and without adding a single dollar to it between now and then, I could retire at age 54. That is 25 years from now.

Indeed, my annual expenses of $15,000, adjusted for inflation (2%) over 25 years would be $24,609 in 2045. Multiply that amount by 25 and I get $615,225  needed for retirement.

Next, let’s calculate my current portfolio of $144,000 over 25 years at a 6% return:

That’s it! My portfolio will have grown enough for a 4% withdrawal to fully cover my expenses at age 54.

It’s amazing what saving at an early age can do. 🙂

Again, this is considering a 6% return. If we consider 7% or 8%, retirement age gets even closer!

On a sad note, I find it distressing to think that many people spend every dollar they earn, and miss out on the best years of their lives to invest. They turn their backs on the magic of compound interest, and they’ll have a really hard time making up for it, unfortunately.

Coast FI Reached! What Do We Do?

So there you have it, the numbers don’t lie. I can officially say that I’ve reached Coast FI. My retirement at age 54 is already secured by my current portfolio. That’s without even considering that I would be eligibile to receive QPP only 6 years later!

This means that from now on, I could never save another dollar for retirement and earn the minimum amount necessary to cover my expenses until I retire. With annual expenses of $15,000, it wouldn’t be terribly difficult to do.

So, just imagine the scenario: I wouldn’t have to work full time or all year. I could work here and there, and enjoy life the rest of the time. I could be a digital nomad and work a little online, from another country, whenever I want.

It’s ironic to think that I’d even be considered below the poverty line in the eyes of the taxman. I’d get the maximum reimbursement from the GST/HST Credit and the Solidarity Tax Credit. Canadian taxes at its best! 😉

I would have no interest in choosing an employer in favour of another based on a pension plan, since I’d have no need for a pension plan.

While this is a very nice scenario, it’s not my goal. I aspire to reach the conventional FIRE. I want to never again have to depend on a salary to provide for my needs. I want to be completely self-sufficient. And if I decide to work anyway? Well, it’ll be for my own pleasure. Because I want to do it.

Appreciate the Journey

This brings us back to a similar conclusion to my previous post.

Sometimes the finish line can seem very far away. We put a lot of strategies in place, and once we have a well-oiled machine, well, we just need to wait. However, I find it particularly rewarding to stop for a while and appreciate how far I’ve come. After all, it’s not the destination that matters, it’s the journey. That’s what they say!

So, doing this little exercise really gave me a new perspective on my journey. I’ve already accomplished a lot. I haven’t reached FIRE, but it’s starting to feel a lot like freedom, don’t you think?

No matter what happens, I already have secured my retirement. Everything I add to my portfolio from now on only brings my retirement date closer. All that’s left to do is to move it from 54 to 35 now. 🙂

What about you? Have you reached Coast FI? Do the math, you might be surprised! Please do not hesitate to share. 🙂

The Importance of Finding your Why

November 23, 2020 / / 1 Comment

After reading my Steps to FIRE series, maybe you thought it was too much work, too many steps and too many changes. That it requires too much discipline. Many will say that we need to live in the moment and think about the consequences later.

If you feel the need to make excuses, then perhaps I have overlooked an important aspect of the process in my articles.

Before you make major changes in life, you need to have a reason to do so. Of course, I’m talking about reaching FI and maybe even retire early. But what about it? Why such a goal? Why go so far off the beaten path?

In order to make important changes and take such a path, you have to know what it means exactly for yourself. Once you understand what it would really be like in your life, you’ll be ready to go.

Why Financial Independence

I believe that FI does not necessarily mean the same thing for everyone. So it’s important to establish what it really means to us specifically.

For my part, I am a very passionate person. I’ve always said it: I’m incapable of enjoying something casually. When I like something, I love it. That’s all I can think about. I have an insatiable thirst for more and I learn everything I can about it. On the flip side, I tend to move on once I’ve covered everything. While the interest remains, it’s at a much lower level.

You see the conundrum? I don’t see how I could possibly do something I could be passionate about (and that is profitable enough) for 35 years.

Unfortunately, life typically works that way. You have to decide what you want to do for the rest of your life, at an age where judgment is not your strong suit. And I don’t know about you, but my interests have changed a million times since age 16.

Then you go to school based on that questionable choice. You start working, you climb the ladder, you overspecialize until you find yourself with fewer options than ever. But you have good  employee benefits and seniority, yay!

And that’s without talking about the opportunities that pass us up when we’re stuck in our gilded cage. Not taking a trip because our time off was not approved. Or only travelling for short periods of time because we don’t have more vacation time. Or not going to work elsewhere because the employee benefits are not as good. Damn you, DB pension plan!

Some will argue that self-employed workers have more freedom. They can afford this kind of thing, since they are their own boss. Wrong. Their clients are ultimately the bosses. Even the self-employed are accountable. If on top of that, they live above their means, then they’re equally stuck in the rat race.

When I see my uncle working 70-80 hours/week for his own company, I can see it’s not because it makes him happy. It’s all about paying the bills and affording a short vacation in Cuba once a year.

I’ve always felt like I didn’t fit into the mold.

I like to learn about anything and everything, for my own personal growth, not to get a good grade or to make a 9 to 5 job out of it. Doing the same thing until age 65 has never appealed to me. Switching careers every ten years is also not an option.

I want to be able to travel whenever I want, not when my boss says I can. I want to be able to work on what is important to me, not on what is most profitable. I want to have the time to do what I want to do when I want to do it.

I want to stop feeling guilty when I’m not being productive or feel like I’m running out of time (because a two-day weekend sure flies by). I want to stop wasting my time in meetings that should have been an email.

So for me, FI means having enough investments to pay for my lifestyle without having to be accountable to someone else. It means freedom. It means being able to use my time as I see fit.

Why Early Retirement

Personally, I have no problem with the notion of early retirement. I know that’s not the case for everyone. Many bloggers prefer to dissociate themselves from that notion. Many don’t see themselves stopping work completely. I completely understand. Some still want to have a sense of accomplishment and want to continue to “contribute to society”, so to speak.

Of course, I wouldn’t say that I intend to stop working forever. After all, I am young, smart and resourceful.

However, what 2020 has shown me is that I really enjoy the simple pleasures.

As you can imagine, I enjoy reading (very much), and learning about new things. I like to drink good coffee, cook and eat scrumptious meals, ride a bike, take walks, listen to podcasts and music, watch Netflix (especially Star Trek), knit, travel, lie in the sun, spend time with my family, etc. More recently, I discovered that I really love writing for this blog.

You probably noticed that these are all hobbies that are not very profitable. But it makes me happy! Ultimately, that’s what it’s all about?

Besides, if I feel the desire to “contribute to society” after a few months of indulging in the little things, then why not? The advantage will be that I’ll be able to do what I want, when I want and spend as much time as I desire. My monetary needs will already be taken care of.

Moreover, it’s important to remember that feeling fulfilled does not necessarily imply doing paid work. I could feel fulfilled by doing volunteer work or even simply by writing this blog. There are various ways to contribute to society besides paid work.

Although money is an infinite resource, let’s not forget that time is limited. In retirement, no one will be able to dictate how I get to spend every precious minute of my time.

Delaying Gratification

I understand very well how people advocate living in the moment. We don’t know what the future holds.

I have a friend who watched her brother die of skin cancer when he was only in his thirties. For her, maxing out her RRSPs is out of the question. She says she prefers to travel many times a year and live what her brother was unable to live during his short time on this earth. The rest of the time, her expenses are so high she can’t save for anything besides her next trip.

I get where she’s coming from.

In fact, I could have the very same attitude. My father died at 49 from an aggressive form of gallbladder cancer. He worked all his life and never got to enjoy life in retirement. In his name, I could say I’ll do everything I can to live in the moment, just in case genetics plays a trick on me.

However, the obituary section in the newspaper clearly shows life expectancy is only increasing. Nowadays, you have a better much chance of retiring than dying at 30.

I understand that I’m not immune to bad luck, but I’m an optimist. I prefer to think that I’ll live to be 110 years old and that it will have cost me only six years of intense savings, before enjoying the rest of my life. 🙂

And what if I were to die at 49, like my father? Well, I’ll have had 14 years to enjoy retirement! Much better than my dad! 🙂

The Expensive Instant Gratification

On the other hand, someone who’s lived in the moment and spent every dollar earned (and even more, thanks to credit!), will have a lot of catching up to do. It’s no fun realizing that you don’t have any savings, but you’re still perfectly healthy! Damn, cancer didn’t come looking for me, what do we do now?

Let’s see how much a person has to save to make up for lost time.

Let’s compare my situation to my friend’s, using hypothetical numbers. Just so we’re comparing apples to apples, we’ll take FI and withdrawals and out of the equation.

Let’s say I’ll save $5,000 a year from ages 20 to 35. My friend will do the same thing, but from ages 35 to 50. That’ll be a total of $75,000 saved over 15 years in both cases. Add to that 7% return.

AgeMeFriend
20$5,000$0
21$10,700$0
22$16,799$0
23$23,325$0
24$30,308$0
25$37,779$0
26$45,774$0
27$54,328$0
28$63,481$0
29$73,275$0
30$83,754$0
31$94,967$0
32$106,964$0
33$119,802$0
34$133,538$0
35$142,885$5,000
36$152,887$10,700
37$163,590$16,799
38$175,041$23,325
39$187,294$30,308
40$200,404$37,779
41$214,432$45,774
42$229,443$54,328
43$254,504$63,481
44$262,689$73,275
45$281,077$83,754
46$300,753$94,967
47$321,805$106,964
48$344,332$119,802
49$368,435$133,538
50$394,225$142,885
51$421,821$152,887
52$451,349$163,590
53$482,943$175,041
54$516,749$187,294
55$552,922$200,404
56$591,626214 432 $
57$633,040$229,443
58$677,353$245,504
59$724,767$262,689
60$775,501$281,077
61$829,786$300,753
62$887,871$321,805
63$950,022$344,332
64$1,016,524$368,435
65$1,087,680$394,225

See the magic of compound interest working at warp speed when you start saving early? I’ll have about three times my friend’s savings at age 65, even though we saved the same amount.

If my friend wants to reach the same amount I have, starting 15 years later, she’ll actually have to invest almost $200,000 over 15 years. That’s $125,000 more than I had to save.

Long story short, it’s really expensive to put off saving for later. It means more money, but also more time.

Enjoying the Journey

I would like to emphasize that it’s not necessary to reach FI to start reaping the benefits.

On the path to FI, we lower expenses, increase income, save and invest considerable amounts of money. Which means?

Financial security.

Personally, I’m about a third of the way to my FI number right now. What does that mean? I have accumulated about 8 times my annual expenses. It may not be enough to quit forever, but it gives me choices.

  • The choice not to put up with a crappy boss;
  • The choice to travel more often or for longer periods of time;
  • The choice to work fewer hours;
  • The choice to seize opportunities;
  • The choice to not care.

And the list goes on.

Disaster happens? No problem, I have enough to get through the storm. Social programs notwithstanding, I have accumulated 8 years of freedom.

Can the average Canadian say the same? I don’t think so.

Yes, sometimes the journey can seem difficult and mostly long. However, we must stop for a moment and be grateful for the progress and the benefits.

Dangle the Carrot

Ultimately, it’s all about finding your why and really want to work for it. Make it your carrot at the end of the stick and run for it. Having a clear goal in mind makes it easier to make the effort.

Remember, it’s not about money. Money is only the tool to reach your goal. I’m not here to teach you about saving money to become rich. Rather, I want you to become as free as possible.

Personally, once I understood that it was mathematically possible to become free in six years, I couldn’t go back. Six years of effort in order to be free until I’m 110 (minimum) is a good deal to me. Really, it makes perfect sense. In fact, I don’t see how I could want to do otherwise, now that I know it’s within my reach.

So what motivates you to pursue financial independence? Do you feel stuck in your 9 to 5? Are you tired of being accountable to a boss? Are you tired of those damn meetings that should have been an email? Do you want to pursue projects that aren’t necessarily profitable, but that sparks joy? Would you like to spend more time with your children? Would you like to spend more time with your parents? Do you want to do volunteer work? Would you like to travel around the world? Don’t hesitate to let me know! 🙂

Whatever your motivation is, the important thing is to have one. Find your why. Then the rest will fall into places naturally.

Live Off Passive Income

November 16, 2020 / / 3 Comments

Here we go. This is the fifth and final post about the Steps to FI. After all, there is a purpose to all this. After lowering our expenses, increasing our income, saving the balance and then investing our savings, we should be getting somewhere, right?

You probably guessed by now that this plan is not a get-rich-quick scheme. It’s a long-term plan. You must apply those principles and stay disciplined over several years to reach your goal. On the other hand, it will also be several years less as a 9 to 5 prisoner. It’s worth it, but you have to be patient and stay the course.

Eventually, your savings, time and the magic of compound interest will do their work. One day, you will reach the amount that will, according to the 4% rule (or another withdrawal rate of your choice), cover your annual expenses. You will no longer need to work.

If you do continue to work, it will be because you want to, not because you have to.

I Quit!

Probably no one handles this step the same way. However, three types of people stand out:

  • Eager people will not wait to reach exactly their magical number. They will quit as soon as possible and will find alternatives to make up for the missing income to cover their expenses. We could call them semi-retired.
  • Patient people will wait to reach their magical number to ensure that all their expenses are covered. They will no longer have to think about working for money, ever again.
  • Anxious people, on the other hand, will be more afraid to quit. What if it doesn’t work? What if they run out of money? What if a disaster strikes? Perhaps it’d be better to work for one more year, if necessary?

Do you recognize yourself in one of these?

Whichever you relate to, don’t lose sight of all the freedom that your wealth will bring you.

Hope for the Best, Prepare for the Worst

I am convinced that if you have the resourcefulness, discipline and the will to achieve FI, you will be able to handle the hazards of a young retiree’s life. However, for the anxious people, it’s important to put certain systems in place to ensure that the plan works smoothly.

No one wants a stock market drop right after resigning. Unfortunately, it can happen. If your portfolio drops by 30%, you will temporarily no longer have 25 times your annual expenses. Your money may run out faster than planned.

Therefore, it’s necessary to plan everything before pulling the plug and know how to manage a crisis.

Solutions

So for the anxious ones out there, here are some strategies to consider:

How to Prepare for the Crisis
  • Choose a “safer” withdrawal rate than 4%;
  • Review your portfolio Asset Allocation (stock/bond ratio);
  • Build an emergency fund;
  • Build a Yield Shield, which involves pivoting some of your assets to earn more dividends during the first few years of retirement. That way, dividends will cover a greater portion of your annual expenses and you’ll avoid selling low during a stock market drop.
How to Manage the Crisis
  • Lower expenses to the bare minimum (as close as possible to 4% of your portfolio’s new value);
  • Work temporarily;
  • Weather the storm in a country where the cost of living is lower (or as the Millennial-Revolution authors put it: “If shit hits the fan, we’re going to Thailand”);
  • Avoid selling your stocks while it’s low by selling bonds instead and using dividends to cover expenses.

 

Of course, it’s not all black and white. There are different opinions on the subject. Notably, financial planner and tax accountant Ed Rempel challenges all these conventional retirement strategies in this article and offers alternative ones. 🙂

If the idea of quitting and living off your investments makes you anxious, even if the calculations work, it’s up to you to think of strategies that’ll give you peace of mind, so you can go for it!

And when in doubt, read these wise words:

There is a way out of every box, a solution to every puzzle; it’s just a matter of finding it.

– Captain Jean-Luc Picard

Gifts From the Government

You now have a foolproof plan. Your investments will generate enough income to cover your expenses forever. On top of that, there are some things that should not be overlooked.

Regardless of your age once you reach FI, you will have access to certain refundable tax credits, provided you have a low enough taxable income.

In 2020, the maximum you can get for the Federal GST/HST Credit is $443.00. The maximum amount for the Quebec Provincial Solidarity Tax Credit is $1,015.00. We are talking about $1,458 per year combined! To generate this amount of passive income by yourself, you would need $36,450 ($1,458 x 25) in investments. It doesn’t mean you can rely on it to fund your retirement, but it can be seen as a significant bonus, as long as those credits are available.

I’m not gonna lie. Our governments are very generous. But they are particularly generous with families.

As a single woman with no children, I am not the best person to explain the advantage a low taxable income can have on the various government family allowances and child benefits. However, this article from Financial Independence Hub might give you some pointers.

Public Pension Plans

Now, you cannot overlook the different sources of income available when reaching the traditional retirement age. I am, of course, talking about Québec Pension Plan (QPP) or Canada Pension Plan (CPP) for the rest of Canada, and Old Age Security (OAS).

It is difficult to estimate what these amounts will look like in several years or even decades. However, the QPP gives access to your own Statement of Participation on their website. Under section 3, you’ll find the current monthly pension amount. That amount is an estimate of the pension you will receive at the specified age, if there are no other incomes added until then.

The SimulR tool is also very interesting since it allows you to see what the QPP and OAS amounts might look like at different retirement ages (60, 65 or 70 years).

In 2020 dollars, the maximum monthly amount of OAS is $614.14, or $7,369.68 per year. In addition, the Guaranteed Income Supplement (GIS) can be added on top of OAS. For example, single persons with less than $18,624 in taxable annual income can get up to $917.29 more per month, or $11,007.48 per year.

So, yes, your investments must fund your retirement for the rest of your life, but from the age 60 (for QPP) or 65 (for OAS), you will have the opportunity to have other sources of income. At that point, you could reduce withdrawals from your investments, as your expenses will now be partially covered by these incomes.

If you need to withdraw 4% of your investments for only half of your retirement, it increases the chances that your money will survive your early retirement and outlast you. 🙂

Unless you simply choose to spend more. 😉

More Tax Optimization

It’s the previously mentioned taxable incomes that make tax optimization so relevant right from the start.

The withdrawal part is a very complex subject, which requires a lot of planning and doesn’t have a one size fits all plan. Considering that I have not yet reached FI myself, I am not in the best position to tell you what to do. However, I want to bring to your attention some of the key tax notions.

In my previous article, I mentioned that it is strategic to choose which registered accounts to maximize first. It will be equally strategic to choose which account to withdraw from first, for the same reasons.

Tap Into Your RRSP Immediately

One might be tempted to dip into that pretty large TFSA from the get-go to get tax-free income. However, that would be a mistake.

If you don’t want to end up with a huge tax bill later in life, you’ll have to start withdrawing from your RRSP (and/or LIRA) right away. Keep in mind that QPP/CPP and OAS will be taxable. If you use your TFSA from the start, you keep the taxable accounts (RRSP, LIRA, non-registered accounts) for later.

Also, the RRSP must be transferred to a Registered Retirement Income Fund (RRIF) at age 71 at the latest and a minimum annual withdrawal is based on age. For example, the minimum withdrawal rate at age 71 is 5.28% in 2020. That is well above the 4% rule. The same principle applies to the LIRA, which must be transferred to a Life Income Fund (LIF). If you’ve never withdrawn from these accounts before then, you will now have significant taxable income, in addition to QPP and OAS income. As a result, all those incomes will be taxable at the same time. This will bring you to a higher marginal tax rate. The tax bill will be brutal!

Pierre-Yves McSween’s book Liberté 45 also addresses the subject in chapter 17. He calls it the amortization strategy or the art of spreading your RRSP withdrawals to reduce your tax. Here is my rough translation:

Most people start withdrawing from their RRSP in retirement, usually around age 65.

However, at age 65, you can have other sources of income: Old Age Security, Quebec Pension Plan (QPP, which can also be delayed until age 70 to increase the monthly pension), a portion of the pension accumulated with an employer, etc. Therefore, the more you withdraw from your RRSP per year, the more likely you are to raise your marginal tax rate and lose net income.

Pay Little to No Tax

For example, by spreading your RRSP withdrawal, you can pay almost $0 in taxes. Indeed, our generous governments provide basic personal tax-exempt amounts. In 2020, the amounts are set as follows:

  • Federal: $13,229.00
  • Provincial (QC): $15,532.00

Of course, these amounts will increase over the years. As a matter of fact, future federal amounts are already known:

  • 2021: $13,808
  • 2022: $14,398
  • 2023: $15,000

If you manage to keep your taxable income below the basic personal amount threshold, you pay $0 in tax. Additionally, refundable credits and family allowances will be maximized and you’ll be eligible for GIS later! Only good things, right?

Of course, if you plan to have higher annual expenses than the basic personal amounts, you will have to pay some taxes. You can do calculations with this simulator and get an idea of your marginal tax rate accordingly. You could also withdraw the balance from your TFSA and then pay no tax.

In addition, while drawing down from your RRSP and LIRA, your TFSA continues to grow. Later, it will become the main source of passive income. This income will therefore be nontaxable, forever. Very convenient when comes the time to receive QPP/CPP and OAS.

Long story short? Neglecting tax optimization is leaving money on the table. You remember what I think of leaving money on the table, right?

My Plan

First, you’re probably wondering what my “number” is. It’s still a work in progress, since I still have to track my expenses over several months (even years), to have a complete picture.

However, I estimate that I would be able to cover my essential retirement expenses with about $10,000 in today’s dollars. In addition, there would be trips and activities of all kinds. I still want to live once I’m retired. 😉 Thus, I aim for $15,000 in annual expenses. With the 4% rule, I get $375,000 ($15,000 * $25) as a magic number.

However, I have to consider inflation (average of 2%) in my projections. Since I aim for FI at 35, at the latest, I have to plan until 2026.

  • 2021: $15,300 * 25 = $382,500
  • 2022: $15,606 * 25 = $390,150
  • 2023: $15,918 * 25 = $397,950
  • 2024: $16,236 * 25 = $405,900
  • 2025: $16,561 * 25 = $414,025
  • 2026: $16,892 * 25 = $422,300

    • So by 2026 at the latest, I would need $422,300 in investments to cover $16,892 in annual expenses. This number includes my DBPP commuted value that I will take once I resign. I estimate that value will be around $100,000.

    That’s when I’ll have to start withdrawing from my investments. After years of piling up money, that’ll feel weird!

    At that time, I am considering applying certain strategies to optimize withdrawals. Here they are, in no particular order:

    There you go. It’s still a very rough draft. I will surely make a whole post on the subject, because some points are already more elaborate than others in my plan. I’m also currently looking into Ed Rempel’s alternative strategies. However, nothing is set in stone. I still have six years to prepare for that moment, and build a foolproof plan.

    Let the Chips Fall Where They May

    Finally, remember that a worker’s life is not without its pitfalls. If there is one lesson to be learned from 2020, it’s that no one is safe from layoffs, bankruptcies or illnesses. Some people are currently experiencing significant financial difficulties and must deal with those situations and find solutions.

    The early retiree’s life will also have its share of obstacles. If tightening your belt, going to Thailand or work temporarily are the worst-case scenarios, no one is going to cry for you. It’s all a matter of perspective.

    The best way to ensure a comfortable financial future over several decades is to have a solid plan and review it on a regular basis.

    Our species can only survive if we have obstacles to overcome.

    – Captain James T. Kirk

    This puts and end to my Steps to FI series. I hope you enjoyed it and you’ve learned something! The idea is to give you as much information as possible to help you take action. 🙂

    I already have a ton of ideas for my next articles, so stay tuned!

    Invest Your Savings

    November 9, 2020 / / 4 Comments

    Ah, investing. That big, scary monster. The cause of countless cases of analysis paralysis.

    There is so much information available about investing, you would assume it’s now easier than ever to get started. In fact, it’s quite the opposite. There is so much information out there, it’s overwhelming.  Since some of the information can be so contradictory, many will simply give up before they even started.

    Does that sound familiar? I’ve been there. 

    So exactly where do we start?

    This article will be littered with links and references. There is a lot of information to consider on the subject and I don’t want to bore you (or scare you). Rather than rehash information, I’d rather send you to excellent sources. 🙂

    Disclaimer

    First, let’s get some things straight. I’m not a financial advisor. I am not licensed to make financial recommendations. This article will not provide financial advice, but will rather provide my personal opinions. I will only try, to the best of my knowledge, to explain how important investing your savings as early as possible is. I prefer to simply refer you to some of the best resources. The goal is to help you avoid analysis paralysis and take action.

    Compound Interest, the Eighth Wonder

    In my last post, I postponed the importance of return until later. When starting to save, you have to focus on maximizing the savings rate first. This is what really makes the difference when starting to accumulate wealth.

    Eventually, return will become your best friend.

    One of the best metaphors I’ve read so far to illustrate the power of compound interest is from Robert R. Brown’s excellent book Wealthing Like Rabbits. I can’t recommend this personal finance book enough. It is loaded with pop culture references (including Star Trek!), and manages to make personal finance really accessible to millennials.

    In the book, you may have guessed by its title, compound interest is compared to rabbits doing, well, what they do best:

    Imagine you’re on a great big island. […] Now imagine that some farmer decides it would be fun to go hunting rabbits on his farm on the great big island. So, he obtains twenty-four rabbits from a distant and foreign land and releases them onto his farm on the great big island. The rabbits then proceed to do what rabbits do best every chance they get.

    Here’s my question:

    Approximately how many rabbits do you think would be on the great big island after about sixty years?

    […]

    Would you believe about ten billion? Yes, you read that right. Ten billion rabbits. Amazing, isn’t it?

    Well, compound interest is like that. The money you invest will make money, which will also make more money, and so on and so forth, exponentially. The most important factor in favour of compound interest is time. The more time you have to invest, the longer compound interest will work its magic. Hence the importance of starting as soon as possible.

    To learn more about compound interest, in addition to reading Wealthing Like Rabbits, check out these articles:

    These articles provide concrete examples with numbers to illustrate the power of compound interest. Enough to make you want to invest right away, right? 😉

    Risk and Return

    Of course, to get return worthy of rabbits doing it like, well, rabbits, you have to be prepared to live with the ups and downs of the stock market.

    As the 62nd Rule of Acquisition states: The riskier the road, the greater the profit.

    If you turn your back on risk, you turn your back on a decent return.

    To learn more about the link between risk and return, I invite you to look at these L’indice McSween segments (French only):

    It all comes back to the riskier the road, the greater the profit. The more risk you are willing to take, the more compound interest will operate.

    Another nice rule to remember to help you visualize the power of return (and why you should take more risk), is the Rule of 72. Dividing 72 by the expected return equals the number of years needed to double the value of an investment. For example:

    • A 10% return will take 7.2 years to double your initial investment.
    • On the other hand, if you settle for a 1% Guaranteed Investment Certificate (GIC), let’s say, your initial investment will take 72 years to double.

    That GIC is suddenly much less attractive, isn’t it? 

    Wealthsimple made it the subject of an entire article, if you want to learn more about it.

    In short, because risk and return are so closely linked, you need to have an idea of your risk tolerance. That will tell you what kind of return you can expect. Fortunately, several online questionnaires are available to help you figure it out. Among others, the Autorité des marchés financiers (AMF) offers a tool to help determine your investor profile.

    Asset Allocation

    Once our risk tolerance is figures out, we can look at our future portfolio’s asset allocation.

    There are two main classes of assets to consider for your portfolio:

    • Stocks are volatile, somewhat risky (depending on diversification, of course), but there is long-term high return.
    • Bonds, on the other hand, provide stability at the expense of return.

    Thus, we can modulate our desired return and risk by adjusting the stocks to bonds ratio.

    A fairly common rule of thumb is to use your age as your percentage of bonds, and invest the difference in stocks. So a 20 year-old would have 20% bonds and 80% stocks. A young investor can afford more volatility, since they have a longer investment horizon than, let’s say, someone in their 50s. A 50-year-old should aim for a 50/50 ratio.

    Another more aggressive rule of thumb is to subtract your age from 120 to get your percentage of stocks. Accordingly, the same 20-year-old would have 100% stocks, while the 50-year-old would have 70%.

    Of course, these are simple rules of thumb. Your asset allocation always comes down to your risk tolerance. An aggressive 70-year-old investor might opt for a 100% stocks, while a (overly) cautious 20-year-old might choose to put his savings into a GIC (remember what I said earlier about GICs?) To each their own tolerance.

    However, I am 100 % sure that risk aversion can be cured with a great deal of financial education. 😉

    RRSP or TFSA?

    This is the kind of question that comes up very often. Anyone thinking about retirement investing will consider the RRSP. However, most people do not even know that it is possible to invest in a TFSA. With a name like the Tax-Free Savings Account, people seem to assume that’s just that: a boring savings account offering 0.10% interest. The government is in no hurry to correct those assumptions, since the TFSA is, in Pierre-Yves McSween’s words, a weapon of mass tax destruction. 

    Any income from a TFSA is tax-free. If part of your portfolio’s passive income is non-taxable, that means less money to the taxman and more money for you. For more details on this real tax gift, I invite you to take a look at this very comprehensive article from Tawcan.com.

    So, knowing this, RRSP or TFSA?

    You may find me predictable, but…

    Both.

    No matter how much you need to cover your retirement expenses according to the 4% Rule (25 times your expenses), I suspect it is at least a few hundred thousand dollars.

    To reach such an amount, you’ll need to save a lot. And while RRSPs and TFSAs are nice tax gifts, all good things come to an end. There is, of course, a maximum of contributions established for each account. You can find your personal contribution limits in your CRA Account.

    Knowing this, your savings will inevitably reach the contribution limits for these two registered accounts. Once both accounts are maxed out, you’ll move on to non-registered accounts.

    However, maxing out these accounts is better done in that order:

    • It is preferable to invest in a TFSA when earning a smaller income in a lower tax bracket. The rule of thumb here would be to invest in a TFSA, and once it’s maxed out, switch to the RRSP.
    • Conversely, it is preferable to invest in a RRSP when already earning a higher income in a higher tax bracket. This helps reduce the tax bill. Once the RRSP is maxed out, switch to the TFSA. 

    But remember that to achieve FI, both accounts will inevitably be maxed out. No need to overthink which one is best.

    Beating the Market Is a Myth

    You may be thinking that since you don’t know what to invest in, it’d be better to let a portfolio manager take care of it. Plus, since they’re professionals, they’ll beat the market, right?

    Do you know how many portfolio managers outperform the market?

    11%.

    You understand, as I do, that the remaining 89% fails. And they’re professionals! How are we supposed to do any better?

    When you think about it, is it really talent, or just sheer luck that makes anyone beat the market? To add insult to injury, these so-called professionals will charge you outrageous fees for their disappointing results! Even if their return is already negative! Thieves! 

    So why not settle for market returns, instead of trying to beat it?

    Take a look at the S&P 500 index (based on the 500 largest U.S. companies). Or at the S&P/TSX index (based on the 60 largest companies listed on the Toronto Stock Exchange).

    Not bad at all, is it? It’s pretty obvious that there is an upward trend in the long-term return. Good thing our investment horizon is long-term too!

    Knowing this, isn’t it great to learn that there are index funds (which hold the same assets as an index), which aim to replicate those returns. And since it’s a boring passive investment method, the fees are lower than actively managed funds. Fantastic, isn’t it?

    Long story short, trying to beat the market is futile and expensive (isn’t it ironic?). Instead, own the market. Choose low-cost index funds.

    You’re wondering which index funds to choose? There are models out there for you! Notably, you can take a look at those index fund portfolio models presented by the excellent website Canadian Couch Potato.

    My First Investments

    My first investments date back to 2014. My then employer encouraged us to contribute to FTQ and Fondaction RRSPs, in addition to one of their own mutual funds. I knew next to nothing about investing at the time, but the meagre pay deduction required to generate a juicy tax refund was enough to convince me.

    After that, I started looking into personal finance and reading (obsessively) on the subject in early 2017. Everywhere I looked, the importance of investing as early as possible kept coming up. I understood that I had to take advantage of compound interests over the next few decades, but I wasn’t too sure how to proceed. I read all about stocks, bonds, ETFs, mutual funds, but I could not make heads or tails of it.

    After reading Andrew Hallam’s Millionaire Teacher, I was finally able to take action. He managed to make investing accessible to me. While he mostly emphasized on buying index ETFs through online brokers (for lower fees), he also recognized that Tangerine offered affordable and accessible investment funds. As most of my banking was already done with Tangerine, it did not fall on deaf ears. 

    Shortly after, I opened my first individual RRSP and I started investing with regular automated deposits in their most aggressive fund (100% stocks). Considering my age (26) and my Defined Benefit Pension Plan (DBPP), I could handle the most aggressive portfolio possible.

    After that, I continued learning on investing and gained confidence. Just a few weeks later, I decided to invest in a Wealthsimple RRSP, out of curiosity. Their fees were lower than Tangerine’s (0.50% vs. 1.07%). However, they didn’t have a 100% stock portfolio. At the time, from memory, the most aggressive they offered was 80/20. 

    It was about a year later that I decided to open an account with Questrade. I was then able to start investing in index ETFs, here and there, with a few thousand dollars. I was learning as I went along.

    It was in November 2018 that I had to take the DIY investing more seriously. A few months earlier, I started a new job for another company. I decided to take my old job’s DBPP commuted value over to Questrade. A portion (approximately $29K) had to go into a Locked-In Retirement Account (LIRA) and the surplus (approximately $13K) would go into my RRSP. 

    I suddenly felt like I had a fortune to invest, all by own self. I learned everything I possibly could and proceeded to invest my money.

    Since then, I have transferred all other RRSPs to Questrade, except for my worker’s funds. These are not reputed to be easy to transfer or withdraw, let me tell you that. I also started investing in a TFSA, once my RRSP was maxed out (thanks to the DBPP commuted value surplus). Once I max out my TFSA, I’ll have to open a non-registered account, also offered by Questrade. I still have $49,000 in contributions to make up for, so that’s definitely not a problem for today. 😉

    My Current Portfolio

    I’ve had different strategies during my few years as an investor, but I’ve switched things around last July. Currently, my portfolio is made up of 94% stocks (XEQT) and 6% bonds (ZAG). It’s a pretty simple, borderline boring, portfolio, but it’s all I really need. On top of that, the fees are about 0.19%. That’s a long way from actively managed mutual funds. 🙂

    Why a 94/6 ratio? Because it was actually 90/10, but during the stock markets little hiccups in September and October, I sold some bonds to buy stocks at a discount. 🙂

    Ultimately, I plan to sell all bonds to have a portfolio consisting solely of stocks. I want to maximize my return during the accumulation phase. I’m playing with the idea for now. The next stock market dip might convince me to make a move, who knows!

    Which Platform to Use

    As you noticed, I now do all my investing through Questrade. If you are interested in opening an account, please use my QPass Key 665709686438830 and we will both get $25.

    However, there are multiple other options available to you. If you prefer to work with an advisor, go right ahead! However, make sure that the professional in question is there to advise you, not to sell you investments that will benefit him more than to you.

    And as there is a ton of platforms, Hardbacon offers excellent comparators, both for Robo-Advisors and for Online Brokers, which could possibly help you make a pick.

    Keep in mind that it is always best to go for the lowest possible fees. One percent fees can make a huge difference on your return. This Get Smarter About Money calculator shows the impact fees can have on your investments. Don’t let the bank take away your return.

    Another interesting alternative for people who want to start investing, without too much thought: Tangerine’s investment funds. Management fees are a bit high (1.07%) compared to online brokers or robo-advisors, but reasonable compared to big banks’ mutual funds (usually more than 2%).

    Personally, I think it’s a great way to start investing without having to think too hard about it. Tangerine keeps it rather simple with only 5 different index funds, modelled according to the client’s risk tolerance (which is assessed by answering a questionnaire). Automate your savings and don’t think about it again!

    If you don’t already have an account with Tangerine and you’re interested in opening one, feel free to use my Orange Key 45955399S1 and we’ll both get $50.

    That’s how I started investing, and I’m really grateful to have had this easy option when everything else seemed impossibly complex. It gave me the opportunity to put my small savings to work, while I didn’t feel confident yet for more complex alternatives.

    Now Will Never Come Again

    Remember that the best time to start investing was yesterday, the second-best time is today, and the worst time is to wait until tomorrow. Whichever path you choose, start investing now.

    Live now; make now always the most precious time. Now will never come again.

    – Captain Jean-Luc Picard

    The worst thing that can happen to you is analysis paralysis, and end up doing nothing. It’s terrifying to make decisions on a subject you barely know. I’m very aware of that. I can only tell you that the important thing is to start. Take the easiest option to begin with, then learn more on the subject as needed, and then make adjustments. Or keep it simple forever. It can’t be worse than sticking your money under the mattress. 🙂

    Thank you for reading my article, which turned out quite lengthy despite all my best efforts. What can I say, I really like investing! 😉

    Don’t hesitate to comment. I look forward to reading and answering, especially if you feel lost and would like to brainstorm. If you prefer a little more discretion to talk about investing, you can write to me directly on my Contact page or with Messenger through my Facebook page.

    See you next week!