Do we have enough to retire in 2023?

I’ll be turning 40 later this year. Since I am very much enjoying my full time job in high tech and finding it mentally challenging, I have no intention of quitting and “retiring” any time soon. However, the question of whether we have enough to retire when I’m 40 has popped up a few times in the last couple of years. 

As some readers may recall, my dad and my cousin both said sayonara to the corporate world when they were 42 and 43 respectively. The competitive side of me has always wanted to beat them by a few years. It is my hope that by retiring in my early 40s it would provide some inspiration for my own kids in the not-so-distant future. 

Can we “retire” in 2023 while I’m 40 years old? Let’s take a look at the numbers and find out.

Do we have enough to “retire” in 2023? 

Before I dive into the numbers,  I’m sure many of you have noticed the quotation around the word retire. Why am I doing that? 

Since starting our FIRE journey, I have always focused on financial independence. I don’t believe in early retirement. To me, retirement means sitting on the beach sipping pina colada all day. 

That may be fun for a week or so. But long term for someone that’s only in their 40s?

BORING!!!

That’s why I have stated that it’s time to retire FIRE. Becoming financially independent simply would allow someone to do things they enjoy, regardless of whether they got paid or not. The financial freedom behind financial independence is extremely powerful and empowering when you think about it.  

So when I talk about retiring in 2023, I mean quitting my full-time job to enjoy life. This could mean spending more time travelling around the world (when COVID restrictions are finally lifted), volunteering at local charities, spending more time reading, or challenging myself to run a marathon. It could also mean shooting more weddings and portraits with my photography business (I’ve not paid as much attention in the last 3 years or more) or increasing my blog publication frequency from once a week to twice a week as a way to help more people.

Some people may call working on my side businesses entrepreneurship because I’d be quitting my job to focus on self-employment. I don’t see it that way though. For me, it’s about working on things that I enjoy and not having to worry about how much money I make. I have found in the past when I have this mindset, money seems to come freely. 

Live off dividends only – what about taxes? 

One of our goals is to live off dividends when we are financially independent. Can we simply live off dividends without the need for additional supplementary income?

For 2022, our goal is to receive a total of $36,000 in dividend income. We have worked quite hard on increasing our dividend income by having a high savings rate and investing in stocks regularly.

Based on the latest dividend income projection, assuming no new contributions, no dividend cuts, and no dividend growth for the rest of the year, we should receive a little over $40,000 in dividends*. So I will use this number as the baseline dividend income if we were to retire in 2023. 

In case you’re curious, the dividend breakdown across the different accounts is as below:

Accounts	Dividend Amount
Mrs. T Taxable	$5,950.82
Tawcan Taxable	$10,473.20
Mrs. T TFSA	$5,153.92
Tawcan TFSA	$5,899.08
Mrs. T RRSP	$4,329.50
Tawcan RRSP	$8,208.91
Total	$40,015.43*

* The projected income is actually higher than this amount since we’ve purchased more dividend paying stocks and there has been organic dividend growth.

I’m very ecstatic with this dividend income projection. But since not everything is tax-free, what would be our net income after paying income taxes? 

For this calculation, I used Wealthsimple’s Tax Calculator for 2021. It’s simple and easy to use.  But it does not take common tax deductions like donations, spouse/common-law partner amount, and health expenses into consideration. For all intents and purposes, this calculator is sufficient for this exercise. 

For the living off dividends scenario, let’s assume that we will take out all the dividends from our RRSP and will pay withholding taxes as a result. Since I no longer have a full time job, let’s assume I have no other working income. We will also assume that we won’t make any RRSP contributions. 

Per my millennial’s ultimate RRSP guide, one must pay withholding tax for any RRSP withdrawals that are not part of the home buyer’s plan or life learning plan. The amount of withholding tax depends on how much money you take out. 

So if we take out $4,329.50 from Mrs. T’s RRSP and $8,208.91 from my RRSP, we’d have to pay $432.95 and $1,641.78 in RRSP withholding tax. The remainder, $3,896.55 and $6,567.13, respectively, would be counted as working income and be taxed at our marginal tax rate. 

Please note that we do receive US dividends in our RRSP accounts. To keep the math simple, I’m ignoring the currency exchange rates.

Dividends from our taxable accounts would be taxed as well. But since we only hold Canadian dividend stocks that pay eligible dividends in our taxable accounts and these eligible dividends are very tax efficient, we should be able to minimize the amount of taxes paid. 

Putting all the numbers into the Wealthsimple Tax Calculator we end up with these numbers: 

	Mrs. T	Tawcan
Employment Income	$4,329.50	$8,208.91
Self-employment income	$0	$0
Eligible dividends	$5,950.82	$10,473.20
Income Taxes Paid	$432.95	$1,641.78
Estimated refund/tax owed	($432.95)	($1,641.78)
Average tax rate	1.13%	2.13%
Marginal tax rate	20.06%	20.06%
After tax income	$10,280	$18,682
TFSA	$5,153.92	$5,899.08
Total Net Income	$40,015.43

Essentially if we rely on dividend income only and have no other income, we don’t have to pay any income tax. How nice is that?  

How much do we need?

But is $40,000 in dividend income enough money for us? 

Based on our spending history over the last 9 years, we have been spending under $40,000 in core spending with total annual spending between $45,000 to $60,000 (last year was higher than usual due to a few unexpected expenses). These numbers exclude any side business related expenses and contributions to TFSA, RRSP, and RESP. 

	Total core spending	Total Annual Spending
2012	$26,210.52	$44,603.76
2013	$26,343.00	$45,260.88
2014	$29,058.96	$47,391.96
2015	$31,256.88	$47,270.16
2016	$29,831.40	$47,566.96
2017	$33,887.68	$51,144.77
2018	$31,840.75	$57,231.99
2019	$33,199.98	$54,906.02
2020	$35,511.60	$48,908.74
2021	$38,950.66	$71,852.02

Core spending does not include expenses like travel, donations, gifts, eating out, summer camps, etc. So, to cover these non-core expenses, I believe we need a total $60,000 net income to sustain our current lifestyle while giving us some spending buffer.

When I’m “retired”, we don’t have plans to continue contributing to our RRSPs. We do plan to continue to contribute to our TFSA and RESP’s. To be as tax-efficient as possible, we probably will look into transferring shares from taxable accounts to our TFSAs rather than contributing new cash (we’d contribute if there is free cash available). We’d contribute $5,000 total in the RESP’s for both kids. This would result in a need for $65,00 in net income each year.

We usually incur around $5,000 in business expenses between Mrs. T and me. This would mean we need a total net income of $70,000. 

As mentioned, there are some buffers in this $70,000 per year income needed to give us some flexibility. Most likely, we can reduce this amount by slightly optimizing our annual expenses. 

In other words, while our $40,000 in dividend income can cover our core expenses, it doesn’t provide us with much buffer at all. We need to find additional income to supplement our dividend income. 

Self-employment income

Mrs. T enjoys her doula work and I enjoy shooting pictures and writing on this blog. What if we supplement our dividend income with self-employment income? Do we have enough for me to retire in 2023?

For this scenario, let’s assume that Mrs. T makes $10,000 in self-employment income and I make $25,000 in self-employment income. I’m using relatively small numbers so we aren’t forced to have to side hustle all the time and not enjoy life. 

The dividend income and business income add up to about $75,000 per year in this case. How much taxes do we need to pay?

	Mrs. T	Tawcan
Employment Income	$4,329.5	$8,208.91
Self-employment income	$10,000	$25,000
Eligible dividends	$5,950.82	$10,473.20
Income Taxes Paid	$432.95	$1,641.78
Estimated refund/tax owed	$823.05	$3,765.22
Average tax rate	6.19%	12.38%
Marginal tax rate	20.06%	22.70%
After tax income	$19,025	$38,275
TFSA	$5,153.92	$5,899.08
Total Net Income	$68,353

Between the two of us, we’d be paying a total of $6,663 in taxes which includes CPP/EI premiums, bringing out total net income to $68,353. This means we’re roughly short by about $2,000 to our target of $70,000 net income. 

The conservative or pessimistic side of me would conclude that’s not enough and I need to continue to work and build up our dividend income and side business income. 

The more optimistic side of me would conclude that these numbers are close enough and given that we already have built-in some buffers with the $70k target, it should be OK for me to give my 2-week notice and retire sometime in 2023! Woohoo!  

Wrapping it up – additional thoughts & analyses

Based on these rough calculations and analysis, if I really wanted to, I probably can retire in 2023 while I’m in my 40’s and have more free time. While relying on self-employment income isn’t the ideal situation, here are some additional thoughts and analyses.

• As mentioned, for our dividend income, I didn’t convert USD to CAD, so the actual dividend income will be higher than $40,000 (because of the conversion of American dividends at about 1.27). 
• For self-employment, since we can deduct business expenses and business home usage expenses, the actual net income most likely will be lower than $10k and $25k respectively. This should bring us much closer to the $70k target. Hypothetically, if we each have $2,500 in total business expenses, the numbers would look like below:

	Mrs. T	Tawcan
Employment Income	$4,329.50	$8,208.91
Self-employment income	$7,500	$22,500
Eligible dividends	$5,950.82	$10,473.20
Income Taxes Paid	$432.95	$1,641.78
Estimated refund/tax owed	$538.05	$3,1627.22
Average tax rate	5.46%	11.58%
Marginal tax rate	20.06%	22.70%
After tax income	$16,809	$36,413
Deducted business expenses income	$2,500	$2,500
TFSA income	$5,153.92	$5,899.08
Total Net Income	$69,275

This results in a net income of $69,275. Hey, that’s pretty darn close to our $70,000 target! Now I know you probably will say that business expenses shouldn’t be added back as income… I suppose you’re right.

• I have ignored the idea of selling some stocks to supplement our dividend income. Since stock profits are taxed at 50% of our marginal rate, selling stocks and using the money to supplement our dividend income may be more tax efficient than supplementing with self-employment income. Per the Cashflows and Portfolio retirement projections, the most optimized withdrawal order is taxable first, RRSP second, then finally TFSA. Therefore, I suspect further tax optimization can be had if we were to sell a small amount of stocks in our taxable accounts and not withdraw any money from our RRSPs. I would need to consult with a tax specialist to understand the details. 

While it is not possible for me to retire in 2023 and rely on dividend income alone, it is definitely possible if we were to supplement our dividend income with business income or sell a small portion of our dividend portfolio. It is comforting to know this possibility is available to us.

For now, I have no plan to hand in my 2-week notice. But it is comforting to know the option is there if we ever choose to. This awareness has also provided some self-empowerment for me when it comes to how I view my full-time work. 

We plan to continue our financial independence plan and re-evaluate our plans sometime in 2025. Since situations and plans can change, we also keep reminding ourselves to remain flexible and adaptable.  

Note: I’m not a tax expert so this is merely a fun analysis. There may or may not be some mistakes in my calculations.