Month: June 2021

There are no guarantees…

I want to talk about a 2-part interview with Reader B about how he and his wife earn $360,000 each year in dividends. If you’re interested in learning how Reader B accomplished this, please read both parts of his interview at over at the Tawcan website – part 1 is here and part 2 is here. If you’re seriously interested in dividend investing, spend some time on this website. It is one of the best places on the internet to learn about creating a cash flow stream from dividends.

Reader B doesn’t live off his dividends. He and his spouse retired in 2004, and they live off their pension income. They started investing 36 years ago, in 1985. As I understand the article, they eschewed RRSPs and invested solely in Canada. Their portfolio was worth just shy of $1,800,000 when they retired. And because they’ve allowed their dividends to compound since retirement in 2004, their portfolio is now worth over $9,500,000. (You’ll have to read through the interview and the comments on the second part to get the exact numbers.)

That’s pretty damn impressive… Between 2004 and 2021, this couple has increased the size of their portfolio by $8,000,000. Needless to say, this interview has given me some points to ponder. Namely, can I do the same thing?

I started my own dividend investment plan in 2011. Ten years later, I’m on the cusp of earning $30,000 per year in dividends. That’s a decent amount, but it’s not enough to afford me a very comfortable retirement. I’m not comparing myself to Reader B and his wife. Again, their portfolio has been around for 36 years – that’s 26 years longer than mine.

Like the Bs, I’m going to be living on a pension when I retire. That means that I have potential to leave my dividends alone to compound for another couple of decades. I too could see myself with a six-figure annual dividend payment if I don’t use any of my portfolio’s returns during the first chunk of my retirement.

Also like Reader B and Spouse, I don’t have any kids. There are no tuition bills, weddings (other than my own, which at this point is a statistical improbability), house down payments or significant graduation gifts to fund. My pension will be sufficient to keep me in the same lifestyle that I’m enjoying now. Spending the dividends each year will be an option, not a necessity.

The question I have to ask myself is…

… do I want to have a large annual dividend payment if I’m not going to spend it?

Don’t get me wrong! I am utterly fascinating by what the Bs have accomplished, and I will be re-reading their interview to learn more. My question for myself is what is the point of having that much money rolling in if it’s not to be spent at some point?

The 2-part interview was on the mechanics of this extremely successful dividend portfolio. There wasn’t a lot of philosophical discussion about the uses of money, or how the Bs intend to distribute their money once they’re gone. For my part, I think one of the best reasons to emulate the Bs’ strategy is to have funds on hand to pay for my nursing care if I live to be too old to care for myself. Even after inflation is factored in, I’m hoping that $360,000 per year is sufficient to hire a competent and kind nurse who’ll help me with the un-mentionable tasks that come with having an aged body.

Beyond my considerations of future nursing care, I’m at a bit of a loss to imagine how I would benefit from $360K each year if I wasn’t spending it. Again, the Reader B didn’t talk about his intentions for his money. He didn’t discuss how he and his wife feel about their passive income stream. For all I know, the Bs are planning to create a sustainable scholarship fund for their favorite post-secondary institution. Maybe their dividend portfolio will be left in a trust to fund animal sanctuaries. I really don’t know what their plans are, and it’s none of my business.

I’m just thinking about what I would do.

Like the title of this post say, there are no guarantees.

Some of you may remember that I’ve switched my investment plan. As of October 2020, all of my investing contributions have been going into VXC instead of into XDV and VDY. I’d been faithfully investing in my dividend ETFs since 2011. Again, that investment has resulted in a good-sized annual dividend payment. After the market rebounded in 2020 from the pandemic, I wanted to take advantage of the growth in equity. In hindsight, I made the right decision. My portfolio has more than recovered all that it had lost from February 2020 to March 2020.

Now that I’ve digested Reader B’s interview, I have to wonder if I made the right choice. According to his interview, the Bs never deviated from their dividend investing strategy. Did I make a mistake in October 2020? Should I have continued funnelling new money into my dividend ETFs? Should I go back to my former strategy? How will I know if I made the right choice?

There’s simply no way to know the answers to these questions in advance. I’m going to trust the choices I’ve made thus far and I’m going to stick to what’s been working for me. Fortunately, my decisions to date have not led me off course. Having confidence in my own choices doesn’t stop me from learning about the paths to financial success taken by others, assessing their methods, and considering whether to incorporate them into my own.

So I thank Reader B for sharing his story with the world. His decision to tell the world about his dividend investing strategy means that I have another example to ponder. And, even though there are no guarantees, there’s absolutely nothing wrong with considering different options!

Sequence of Return Risk

There’s a lot of jargon in the world of personal finance. The more terms you know, the more comfortable you’ll be when it comes to making decisions about your money. Today’s post is meant to be a short and sweet tutorial about the basics of Sequence of Return Risk.

A bear market is one where overall stock market returns are falling.

A bull market is one where overall stock market returns are rising.

This distinction is very important.

Retiring into a Bear Market

Let’s say you retire with $1,000,000. You plan to live on $40,000. So long as your portfolio is kicking off atleast 4%, then you’re golden for as long as you live. Hooray!

You retire. You smash your alarm clock. You wake up when you want with a smile on your face. The only fly in this ointment is that you’ve retired at the start of a bear market. The value of your portfolio drops 15%, which means your portfolio is now worth $850,000 (= $1,000,000 x [1-0.15]).

Your portfolio is still kicking off a return of 4%, but you’re not getting $40,000 per year anymore. With a portfolio of $850,000, you’re only getting $34,000 (=$850,000 x 4%). Where will the other $6,000 come from? Remember, you need $40,000 to fund each year of your retirement.

You’ll have to withdraw the extra $6K from your portfolio balance of $850,000, leaving you with $844,000 (= $850,000 – $6,000). That’s still a decent chunk of change, but eating into the principal had not been part of your retirement plan…

Year 2 of retirement isn’t exactly great either. The bear market is easing, but it’s still a factor. The value of your portfolio drops another 10%. (Yes, it’s possible for the stock market to drop two years in a row.) That $844,000 that you had is now down to $759,600 (= $844,00 x [1-0.10]). Yikes! That’s $240,400 less than what you started with when you first retired.

Yet you still need $40,000 per year to live on, and your portfolio is still kicking off 4%. Sadly, 4% of $759,600 is $30,384… which is $9,616 (= $40,000 – $30,384) short of your needed $40K. So where will that $9,616 come from? You’ll have to take it from your $759,600….dropping your portfolio balance back down to $749,984 (=$759,000 – $9,616). Not good!

Year 3 of retirement welcomes the return of a bull market, and the stock market goes up 7%. Hooray! Your $749,984 is now worth $802,483 (=$749,984 x 1.07). That’s still not enough to kick off $40,000. In fact, your portfolio will only earn you $32,099 (=$802,483 x 4%), which means taking a further $7,901 (= $40,000 – $32,099) from your portfolio.

Do you see the problem?

When you retire into a bear market, your retirement portfolio might not be sufficiently large to cover your anticipated expenses. You may be forced to withdraw money to cover your living expenses when the value of your portfolio has dropped!!! This is a very bad thing because it means that your money won’t be invested when the stock market invariably starts increasing again.

Retiring into a Bull Market

However, if you retire into a bull market, then things are considerably better. Starting with the same assumptions of a $1,000,000 portfolio, a 4% return, and annual expenses of $40K in retirement, check out what happens if the stock market goes up 7% in the first year.

Your portfolio is up to $1,070,000 (=$1,000,000 x 1.07). At 4%, that means your portfolio is kicking off $42,800 (=$1,070,000 x 4%). Yet, you don’t need more than $40,000, so you leave the $2800 invested. Now your porfolio is worth $1,072,800 (=$1,070,000 + $2,800).

In year 2, the market goes up another 15%. Your portfolio goes up to $1,233,720 (=$1,070,800 x 1.15). At 4% return, you’re receiving $49,349 (=$1,233,720 x 4%). Again, you take out the $40K that you need and you let the $9,349 continue to stay invested. Now, your portfolio is worth $1,243,069 (=$1,233,720 + $9,349).

Year 3 is another positive year, though not as positive as year 2. The stock market only produces an average return of 5%, generating $62,153 (= $1,243,069 x 1.05) for you. You don’t change your spending, $40K goes into your spending account and the remaining $22,153 stays invested. Now your portfolio is worth $1,265,222 (= $1,243,069 + $22,153).

See the difference? Retiring into a bull market means your portfolio will continue to grow, so long as you don’t spend every penny of your returns.

Protecting yourself from the sequence of return risk

Like I said at the start, this is just a short tutorial on the sequence of return risk. Other persons far wiser than I have spent way more time coming up with great strategies. One of the books that I would strongly suggest you read for a more in-depth analysis on this topic is Quit Like A Millionaire by Kristi Shen & Bryce Leung. Their book offers a brilliant strategy for avoiding the sequence of return risk – it’s called the Yield Shield and it’s awesome. Another great source of information about how to avoid sequence of return risk is this article from The Retirement Manifesto.

And if you really want to sink your teeth into this topic, check out Big Ern’s Safe Withdrawal Rate series at Early Retirement Now.

If you’re not able to avail yourself of the Yield Shield, then another way to make up for the shortfall between when you need and what your smaller portfolio can provide is to get a job. I’m not suggesting a return to full-time work, but maybe you’ll have to find a part-time job that generates $10,000 per year. A part-time income of $10,000 per year would definitely cover the shortfall in year 1, which means leaving your money invested so that it can grow when the stock market returns start becoming positive again.

And if you’re deadset against part-time work, then there’s always the option of cutting your expenses to live on whatever your portfolio generates. This isn’t the preferred option for a few reasons. First, it’s never fun to cut out the little extras that make life a bit more pleasant. Secondly, there’s only so much you can cut. Thirdly, there’s no room for surprise expenses like a new furnace in the dead of winter. While it’s not ideal, working a few hours a week might be a better financial alternative for you than cutting out expenses that make the non-working hours more comfortable.

So that’s my primer on the sequence of return risk. Retiring into a bear market is fraught with peril, but there are ways to minimize its negative impact on the sustainability your long-term retirement money. It’s best to retire into a bull market. Should you not be one of the people with an accurate crystal ball able to tell you what the future will bring, then I suggest that you read and learn more about how to ensure that your retirement portfolio lasts for as long as you do.

Super Powers

FU Money and being FI are super powers…

Dave from www.accidentalfire.com

I’ve written about FU Money before. It’s the money that you have set aside for those instances when you need to tell someone to “make love and go”. It’s not your emergency fund money. It’s not your retirement money. It’s not even your car replacement fund. Nope. Your FU Money consists of those funds set aside for giving you options when you don’t want to work anymore, when you just can’t handle another pointless meeting, nor one more inquiry from your micro-managing boss. It’s the money that will tide you over while you re-group and figure out the next step after you’ve left a situation that was driving you mad.

And long-time readers know that I encourage everyone to become FI, aka: financially independent. Being FI is great because it gives you even more options than FU money. Once your portfolio is kicking off enough capital gains & dividends to pay for your life as you’re currently living it, then you’re financially independent. And you want to know a secret? You don’t have to give up working just because you’re FI!

One of the options is to keep working, if you want to. You need not give up your employment just because your money is making more money for you. Once you’re FI, you no longer need to work but there’s also no need for you to quit your employment either. Again, for the cheap seats in the back, being financially independent gives you the option to work without needing the job. How cool is that?

I’d love to quit. As I’ve mentioned before, I have a great job. I work with very smart people on interesting problems that are mentally challenging. Before the pandemic, I travelled for work. My employer invests in training and I have opportunities to advance my career. I’m good at my job. There are many, many good things about my current position… Yet, it’s not what I want to do for the rest of my life. I want to quit.

So I’m working on developing my superpowers. Do I have enough FU money? Probably. Will I pull the trigger and use it? Probably not. Re-read my last paragraph. My position is pretty good so I don’t foresee a situation where I will be so incensed with my employer that I just walk out the door while giving someone the finger. Unless something changes drastically, I expect my departure to be mutual, respectful, and drama-free.

Still… I have my FU money in place, just in case I’m wrong.

I’ve spent the last 10 years working on developing the second super-power, i.e. becoming FI. It hasn’t always been easy and I’ve made my share of mistakes. However, I’ve learned from them and corrected them when needed. I’ve always believed that it’s okay to make a mistake. What’s not okay is making the same mistake more than once.

Do I still have learning to do? Of course I do! There’s this new thing called Bitcoin that everyone seems to be chattering about incessantly. I owe it to myself to figure out what that’s all about so that I can make an informed decision about whether to invest in it or not.

Despite my mistakes in investing over the years, I have to say that I’m far closer to being FI than I would have been had I not started. Investing money from every paycheque for the past 10 years has done wonders for getting me so much closer to my goal.

Maybe you wish you’d started 10 years ago too. It doesn’t matter. Start today. The time will pass anyway, so you might as well take the steps to build your own super powers. Don’t dwell on what you haven’t done yet. Make a plan to actively put a plan in motion to achieve your dreams. You get one life and you deserve to live the best life possible. If that means having a buffer between you and the Edge should you need to part company with your paycheque, then create that buffer. No one else is going to do it for you. And if you want to remove the golden handcuffs, then build a portfolio whose cash flow can replace your employment income. That way, if you decide to stay at your job, it’s because you want to be there. You won’t be shackled to the paycheque.

Super powers won’t solve all your problems. Life doesn’t work that way. What they will do is give you a financial cushion when you need one the most. They can alleviate the fear of not knowing how you’ll feed/shelter/clothe yourself without your employer’s money. The super powers will give you the confidence and comfort of knowing that you can survive even if you must part ways with your employer, for whatever reason.

Priorities Are Personal

Every day that you wake up offers you the chance to move closer to, or further from, your priorities. You can spend your life’s energy, time, and money in ways that are making your dreams come true. You can just as easily spend your resources making someone else’s dreams come true. One way or another, you will be spending our life doing something. It’s up to you to decide what that “something” is.

As the title of this post states, priorities are personal. There’s a very good chance that your priorities are not going to be the same as anyone else’s. Sure – there are general themes that apply to all of us. We all need food and shelter every day. Yet, some people will only eat organic while others will never learn to cook more than toast. Some people want a water view from their bedroom balcony, while others need easy access to the slopes and mountain trails in order to feel at peace.

The distinctions are in the details. And since this is a personal finance blog, I’m here to encourage you to spend your hard-earned dollars in ways that permit you to achieve your life’s priorities.

Most of the time, the things we want cost money. In the Before Times, I travelled every single year. In 2016, I had started travelling overseas. A big chunk of my annual spending was devoted to this priority – flights, hotels, food, souvenirs, excursions. It added up to $5,000 – $7,000 per year. Travel was one of my priorities so I was willing to give up other things. I ate breakfast at home instead of buying it at the coffee shop before work. I learned to cook more recipes in my own kitchen, instead of relying on the good folks of the restaurant industry. Spa treatments were curtailed. Concerts were foregone in favour of Spotify or CDs. Each of these littles choice allowed me to save between $100-$150 each week in order to fund my travel priority.

You can do the same thing.

List out everything that you want. Whether you cap the list at 10-20-30 things or experiences that you really want is entirely up to you. This is your list of priorities. Once you’ve completed the list, move to step two.

Put this list in order of importance. Is getting a pet more important to you than season’s tickets to a sporting event? Would you rather save for a down payment or go to a weekly happy hour? Does retirement matter more than upgrading your vehicle?

Once you have your priorities in order, you turn your attention to the money. How are you going to pay for all of your priorities?

Honestly? You can’t pay for everything at once. If you could, then there’d be no need to prioritize. You list is meant to help you choose where to allocate each dollar. As each priority is funded, the dollar can move to the next one.

For my part, my priorities are well-defined. Some of them will take a long time to pay for, but others can be funded in less than two years. Priority number one is paying for the annual expenses that will only stop when I do – property taxes and insurance premiums. I know in my heart of hearts that the day I don’t pay my insurance premiums is the day that my house burns down while my car is in the garage. I have an automatic savings plan in place so I can accumulate the money to pay these annual bills when they come due.

Retirement is priority number two. Sadly, I am not a member of the “I Love My Job” Club. My job is challenging, interesting, and well-compensated. I work with very smart people and am part of a well-functioning team. However, I’m not gleefully jumping out of bed every morning in order to do my job. I’m looking forward to retirement so I don’t have to do those parts of my job that I don’t enjoy.

As you may have surmised, travel is priority number three. In the Before Times, I’d be planning my next trip on the flight home. The world is a big place. I might not always have the physical ability to see it. Ideally, I will see as much of the world as I can while I still have the ability to walk, stand, sit, and maneuver without too much difficulty. However, we’re currently in pandemic times so travel is taking a back-burner.

Fixing up my house is priority number four. And by “fixing up”, I don’t mean replacing furnaces and water heaters. Those are things that fall under “maintenance/repair/replace”. No – I’m talking about landscaping projects. I’m taking about new carpet, new paint, new cabinetry. The stuff that has made HGTV so incredibly successful! There’s a good chance that I will be in my house for a very long time, so I want it to be comfortable and to my taste.

Priority number five…

Well, truth be told, there really isn’t one. Maybe replacing my SUV in the next 5 years? Whatever isn’t spent on priorities 1-4 sits in a slush fund, accumulating until such time as there’s something that I really and truly believe will make my happy.

It’s up to you to do the same with your money. From this day forward, think about your priorities before you spend your money. A simple way to do this is to set up automatic transfers to fund your priorities. Hive off part of your income into a savings account – for short term goals only – so that the money is there to pay for your priority. Long-term goals like retirement need to have their allocations invested in the stock market – RRSP and TFSA for registered monies and investment accounts for non-registered monies.