Category: Withdrawal

How I Plan My Withdrawal Strategy

February 22, 2021 / Fire Trekker / 8 Comments

Hello!

In the last months, many of you have requested an article about my future withdrawal strategy.

Actually, I had already broached the subject in my article called Living Off Passive Income. However, there are so few resources on withdrawal strategies for (very) early retirement that I thought it would be useful to elaborate a bit more on the subject. In addition, our friend FIRE Habits recently wrote about his own withdrawal strategy (French). I thought it would be interesting to elaborate on my own strategy. This way, you’ll have access to two different strategies for two completely different situations.

As he puts it so well in his article (free translation), “There are as many withdrawal strategies as there are tax specialists.”

Of course, this following strategy may very well change along the way. You never know what life will bring, after all. Based on my projections as of today, I will outline my strategy as a single woman without children.

Disclaimer

I am not a financial advisor, tax specialist or retirement planning specialist. Nor am I accredited by law to make financial recommendations. This article will not provide any financial advice. I will only attempt to explain how I plan to live off passive income, to the best of my knowledge. The goal is to provide an example of a strategy and perhaps get some of you to think about building your own.

The Different Sources of Income

First of all, the most confusing part of living off our passive income is the many possible sources of income upon retirement. These different sources of income vary as much from a tax point of view as from a temporal point of view.

Here are the sources of income I’ll have access to, as well as their important aspects to consider.

RRSP

Withdrawals from an RRSP will be taxed at the same rate as income. It offers flexibility by having no maximum withdrawal limit. However, once a withdrawal is made from an RRSP, the contribution space is not recoverable. It disappears forever.

In addition, regardless of the amount withdrawn, your financial institution must withhold income tax at source. If you ended up paying too much, the amount will be returned to you the following year after doing your tax return. We certainly don’t like to make a 0% interest loan to the government, but that’s the way our wonderful tax system works.

An RRSP can also be transferred to a Registered Retirement Income Fund (RRIF).

RRIF

At the latest, an RRSP must be transferred to a RIFF at age 71 and a minimum annual withdrawal is then established based on age. For example, the minimum withdrawal rate at age 71 is 5.28% and increases as you get older. This rate is therefore higher than the 4% rule. Compared to an RRSP, you cannot add funds to a RRIF.

My research did not identify any advantage to transferring an RRSP to a RRIF in the context of early retirement. Do not hesitate to correct me if I’m wrong on this one!

LIRA

Those who have been reading this blog for some time already know that I currently contribute to a defined benefit pension plan (DBPP) through my employer. Once I resign, I plan to take the commuted value. Part of that amount will go to a Locked-In Retirement Account (LIRA). I have already been down that road in the past. Therefore, I’ll have a considerable amount of money in my LIRA.

What are the specifications of this account? It’s actually quite similar to an RRSP. The LIRA contains money that has never been taxed. This means it will be taxable as income at the time of withdrawal.

However, the only way to withdraw income from it is to transfer the money first into a Life Income Fund (LIF).

LIF

In Quebec, we are quite lucky. In fact, there is no minimum age required to transfer one’s LIRA into a LIF. However, I understand that it is not as simple for other provinces or for LIRAs under federal jurisdiction. Thus, my strategy only applies to Quebec laws. It may not apply to your specific situation.

Once the LIF is set up, you can withdraw one of two types of income from it.

Life Income

The main thing to remember about Life Income is that there is a maximum to how much can be withdrawn each year. The maximum is calculated based on age, the LIF balance, and the reference rate set each year for LIFs (6% in 2021). The idea behind this is that it must last for the rest of your life.

Thus, this type of income has many more limitations than RRSPs.

Temporary Income

Temporary income, on the other hand, offers more flexibility. In fact, it allows withdrawals of up to 40% of the value of the MPE, or $24,640 in 2021. A specific request must be made each year to your financial institution to benefit from it.

To qualify, Retraite Québec specifies that the following two conditions must be met:

You must have only one LIF;
The gross amount of other income for the 12 months following the application for temporary income must not exceed 40% of the MPE for the year of the application.

Also, like an RRSP, the LIRA must be transferred into a LIF no later than age 71 and is subject to a minimum annual withdrawal based on age.

For my specific situation, I should be eligible for Temporary Income as my total gross income should not exceed 40% of the MPE. I will therefore have more flexibility than if I only had access to the Life Income.

Retraite Québec also offers a calculator to help you get an idea of how much and what kind of income you can get from your LIF.

TFSA

What else can we say about the TFSA other than it is a gift from heaven?

After contributing amounts that have already been taxed, withdrawals and investment income are not subject to taxation.

That means there’s no downside to letting your TFSA grow as long as possible. The TFSA will provide non-taxable income. Let me rephrase that:

The longer you let the TFSA grow, the more non-taxable income you’ll have.

In addition, unlike an RRSP, any withdrawal from the TFSA will free up contribution room for the following year. In other words, if you withdraw $10,000 from your TFSA one year, you can put that $10,000 back the following year.

In addition, there is also the new annual limit. In 2021, that was $6,000 in additional TFSA contributions. Of course, this may change in the future, if the government finally realizes how much tof a weapon of mass tax destruction the TFSA is. 😉

Non-Registered (or Taxable) Account

Non-registered accounts have no minimum or maximum withdrawal amount. They allow you to receive different investment income, which is subject to different tax rules. As a matter of fact, our friend Felipe described them perfectly in a recent video. Basically, here’s what you need to keep in mind.

Dividends

Dividends have preferential tax treatment thanks to tax credits. Dividends from Canadian shares are taxed even less. The tax credits are in fact so generous that, in the absence of other income, a single person can receive up to almost $50,000 in dividends without paying a single dollar of tax. It’s also important to remember that dividends are subject to tax from the moment they are deposited, even if you plan to reinvest them.

Some ETFs are designed to pay no dividends. These types of ETFs simplify this tax aspect.

Capital Gains

The capital gain, or profit realized on the sale of an asset, is taxed more favourably. In fact, the income inclusion rate is only 50%. At least for now.

For example, a stock bought at $100 and then sold at $120 represents a realized capital gain of $20. However, only 50% of this gain, or $10, will be subject to taxation.

The major advantage of this type of income is that it has to be declared only when the gain is realized, i.e., when the asset has been sold. That means you can defer a capital gain for as long as needed.

Interests

Interest income is the least tax-efficient type of investment income. This is because interest income is taxed at the same rate as regular income.

Keep in mind that bonds generate interest income. Because this type of income is taxed much less favourably, it is best to keep your bonds in a registered account, unless you hold a bond ETF that does not pay out any distributions.

Public Pension Plans

Now, the different sources of income to which I’l be entitled at the traditional retirement age should not be overlooked either. Of course, I’m referring to public pension plans such as Quebec Pension Plan (QPP), or CPP for the rest of Canada, and Old Age Security (OAS).

QPP

The QPP pension is based on the income on which one has contributed. Thus, it is difficult to estimate one’s pension will look like in several years or even decades. Fortunately, QPP gives access to an individual’s participation statement on its website. In section 3, there’s the current monthly amount. This amount represents a retirement pension estimate, if no other income is added to those already registered until then.

The most important thing to remember is that QPP is taxable and can be received as early as age 60. From ages 60 to 70, the pension varies greatly. Exactly the same applies to CPP.

OAS and GIS

Unlike QPP, OAS is based on the number of years someone lived in Canada after the age of 18.

In 2021 dollars, the maximum monthly OAS pension is $615.37 taxable (or $7,384.44 per year). It can be received as early as age 65, but it can be deferred until age 70. The longer it is deferred, the higher the pension will be each month.

If someone’s net income exceeds $79,845 (including OAS benefits), a portion of the OAS must be repaid. No pension is paid when the net income exceeds $129,075. Fortunately, this should not apply to me. 🙂

On top of this, there is the Guaranteed Income Supplement (GIS). Unlike OAS, GIS is non-taxable. In 2021 dollars, any single person with less than $18,648 in taxable annual income (including OAS) can receive up to $919.12 more per month (or $11,029.44 per year) as GIS.

CRA states that there is no benefit to defer the pension when eligible to GIS.

Asset Allocation and Asset Location

You might remember I previously discussed this in my article about how to invest your savings. However the subject is still as relevant, if not more so, when it comes time to make a withdraw from your nest egg.

In addition to choosing a stock/bond ratio we’re comfortable with, it is important to put the right things in the right places. There are two simple and good reasons: return and tax optimization.

So, let’s take a look at the relevant aspects of stocks and bonds.

Stocks

Of course, stocks are relevant everywhere. Stocks will get us good long-term return and will ensure the sustainability of our portfolio. Regardless of the stock/bond ratio chosen, there is a high probability of having some stocks in every account. However, in my opinion, the TFSA remains the account to be prioritized. It’s where you want maximum returns.

Historically, there is a difference in returns between global and Canadian stocks. Therefore, it would be appropriate to concentrate the better-performing portion (global stocks) in the TFSA and the less performing portion in the RRSP/LIRA (canadian stocks).

Bonds

Remember that bonds offer more short-term stability, but they necessarily slow down return. On top of that, they produce interest income that is heavily taxed. Considering this, the logical choice is to keep bonds in a RRSP/LIRA. Unless you hold a swap-based bond ETF, there is no benefit to having bonds in a non-registered account.

The last place to hold bonds is a TFSA. The last thing we want is to slow down its return and amputate our future tax-free income.

My Future Portfolio

Considering all of the above, here’s what my portfolio could look like when time comes to withdraw. As I explained in a previous article, I will have kept enough RRSP room to absorb my DB pension commuted value excess. So, once the commuted value is factored in, my portfolio should look like this :

Account	Amount	Proportion	ETF	Taxation
RRSP/LIRA	$260,000	61%	XEQT and ZAG	Taxable
TFSA	$125,000	30%	ZGQ	Non-taxable
Non-registered	$40,000	9%	HGRO	50% on capital gains
Total	$425,000

While still in the accumulation phase, I currently hold 100% stocks ETFs (ZGQ and XEQT). However, once I get closer to having to live off my nest egg, I plan to make the transition to something around 90% in stocks and 10% in bonds. Yes, I have a very high-risk tolerance. 🙂

Since RRSPs and LIRAs act in a fairly similar fashion, that means about 61% of my portfolio is subject to being taxed just like income. I intend to hold my 10% in bonds (ZAG) there, given the less than advantageous tax treatment of interest income. Also, since bonds will slow down my return, I prefer holding it in my RRSP/LIRA. I’ll also focus my home country bias there (XEQT).

About 30% of my portfolio will be concentrated in my TFSA, and will provide non-taxable income. In it, I will hold 100% global stocks (ZGQ) to allow it to grow as much as possible. Remember that there is no disadvantage to having a very large TFSA. 🙂

As for the non-registered account, it will be a meager 9% of my portfolio. By holding only a 100% stocks ETF with no taxable distribution (HGRO), only capital gain will be taxable. The tax treatment will therefore be much more advantageous than my RRSP/LIRA.

My Withdrawal Strategy

Keep in mind that the Canadian tax system is a progressive system, which means that low income is taxed at a lower rate than a high income. The more taxable income you earn, the more tax you pay.

Knowing this, we need to be careful not to receive too much taxable income all at the same time. Keep in mind that QPP and OAS will be taxable at a later date. At the same time, let’s not forget that the RRSP/LIRA will have to be mandatorily transferred to a RRIF/LIF at age 71 and will be subject to a predetermined minimum withdrawal (certainly higher than 4%).

Thus, I see my withdrawal strategy in two stages.

Before Age 65

Remember that the RRSP/LIRA is taxed more heavily, the non-registered account is taxed more advantageously and the TFSA is not taxed at all.

Considering this, I will prioritize making withdrawal from my two most heavily taxed accounts, i.e., my RRSP and my LIRA. Since I am aiming for a frugal retirement, my withdrawals should be close to the basic personal amount. Anything above could come from the non-registered. Thus, I would pay very little tax, even when making withdrawals from my most heavily taxed account.

I could also slowly transfer money from my non-registered account to my TFSA. That is, if we keep having new contribution room each year. I somehow doubt that, but let’s keep on dreaming.

That way, I’ll delay withdrawing from my TFSA as long as possible. In the meantime, it will continue to grow. When the time comes to withdraw from it, i.e., once the RRSP/LIRA and non-reg are fully depleted, my TFSA will provide 100% tax-free income. This will come at a good time, since taxable income from QPP and OSA will inevitably come into play.

After Age 65

It is quite difficult to estimate my future QPP pension, as I intend to stop contributing to it, or at least contribute very little, long before I am entitled to it. As for what age I’ll start receiving QPP and OAS, I am far from having made up my mind. Regardless of the age and amount, we need to remember it’ll still be taxable income.

So, if I’ve already completely depleted my RRSP/LIRA and my non-registered account, I’ll only have one other source of income left at that time. That is, of course, my TFSA, and the income will be entirely non-taxable.

Thus, in the absence of other taxable income, QPP and OAS pension will be taxed much more favourably (if at all). In addition, I will most likely have access to the GIS. Those public pension plans additional income should then allow me to slightly reduce my TFSA withdrawals to less than 4% per year. This should further ensure the sustainability of my portfolio.

The Opposite Strategy

For many, withdrawing from an RRSP at age 35 is sacrilege. Yet, it’s really the most optimal way to withdraw from your portfolio, now that the TFSA is part of the game.

Imagine the opposite strategy.

I’d start withdrawing from my TFSA from the get-go. I’d enjoy a tax-free retirement income for maybe 10-15 years and then it’d completely depleted.

Once that’s done, all I’d have left would be taxable income. While I was depleting my TFSA, my RRSP/LIRA and my non-registered account would have grown. I’d probably start withdrawing from those at around age 45-50.

At 60-65 years of age, QPP and OAS would kick in. At age 71, my RRSP/LIRA would need to be transferred to a RRIF/LIF and would be subject to a minimum withdrawal of 5.28% and more per year. If all those different sources of income put together end up being too high, I would not be eligible for the GIS and I would be taxed at a higher tax bracket.

Isn’t it better to spread taxable income over the entire retirement period?

Withdrawing During an Apocalypse

Of course, there are also some strategies in case of a disaster. Whether it’s problems in your personal life or a stock market crash, you need to know how to adapt your withdrawal strategy.

Personally, I don’t believe in keeping the equivalent of several years’ worth of cash on hand. Currently, in my accumulation phase, I don’t even have an emergency fund. In this respect, this article is very relevant to me. Once I retire, I will possibly keep 3-6 months of cash expenses, at most, but certainly not the equivalent of several years. This small emergency fund could be useful in the event of a correction to avoid selling at a loss.

In the event of a bear market while I need to withdraw, I’d choose to sell bonds rather than stocks at a loss. Considering that I should have 10% of my portfolio in bonds, this represents about 2 and a half years of annual expenses.

I also don’t rule out the possibility of further reducing my expenses, or simply working, albeit temporarily. There is no shame in that.

Dividends could also be used as income instead of being reinvested. It would not require to sell anything at a loss, since that money would already be sitting in cash.

So, that was a brief overview, which I’ve even touched on before, but which may require an article of its own at some point in the future. 🙂

Conclusion

So that was my strategy with the data I have as of today. I am very well aware that 1,001 things can change until then. However, to achieve a goal in life, you have to plan ahead. A goal without a plan is a dream. You plan with what you know, and adjust as you go along.

If you fail to plan, you are planning to fail.

– Benjamin Franklin

I am not a professional and there are certainly things I forgot or neglected to take into account. Feel free to let me know what I might have forgotten. However, I believe that considering the lack of resources on the subject, it is relevant to start the conversation and exchange on the subject.

Have you thought about your own withdrawal strategy? 🙂

Live Off Passive Income

November 16, 2020 / Fire Trekker / 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.

How my number will increase with inflation

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:

Maximize my long-term return with a high proportion of stocks;
Use Millennial-Revolution’s Bucket Strategy for the first few years;
Withdraw from my RRSP and LIRA right away and up to the basic personal amount;
Optimize housing expenses with Geographic Arbitrage;
Optimize travel expenses with Travel Hacking.

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!