Early Retirement Planning – Q&A with Reader P

As you can imagine, a lot of planning is required to reach early retirement. Despite all the planning, projections, and running different scenarios, there will always be some level of uncertainty when it comes to early retirement. However, because the financial independence retire early (FIRE) community is a very supportive and tight-knit one, it is not difficult to find help and support.

A few months ago, I wrote about some of the steps we are taking and plan to take in our early retirement planning. After the post was published, a long time reader called Reader P reached out and shared his and his wife’s early retirement plans and some of their thoughts. After some back and forth, I thought it would be interesting to share their story and their early retirement plans in the form of a Q&A. 

Q1. Welcome to this blog, Reader P. We have exchanged emails over the years (8 or more years, I think). Very happy to hear that you have enjoyed reading this blog. Can you tell us a little bit about yourself and your wife? 

A1. First of all, thank you, Bob for giving me this opportunity! Your blog is one of the very few blogs I frequent and I admire what you have accomplished. Moreover, you are an inspiration to anyone who wants to achieve Financial Independence.

As for us, we are in our mid-40s with 3 kids aged 14, 11, and 9. I am a Professional Engineer earning $130K (before any bonuses) and my wife is a Registered Nurse who now works 0.6 FTE (full time equivalent, starting 2022) and picks up additional shifts; her total salary hovers around $80K. She was full-time before but with our current situation, it is time we lead a little more balanced life. 

We try to live off of her income and my income is used for investing, mortgage pre-payments, and for anything that is “fun” which includes travel, kids recreational activities, and cars.

We didn’t start saving/investing until we turned 30, and in our 20s, a lot of $ was spent on things that ultimately added no value to us.

Q2. That’s interesting you try to live off Mrs. P’s income and use your salary for mortgage payments and investing purposes. What was the reason for such an arrangement?

A2. Because my job isn’t always secure, it made sense for us to live off of her income, as she is a nurse and her job is quite secure. 

Thankfully, I was only laid off once early in my career and found another job within a month. However, being laid off early in your career can significantly alter your perspective on the world.

Q3. Are both you and your wife maxing out TFSAs and RRSPs every year? Why do you think that so many Canadians don’t max out their TFSAs and RRSPs? 

A3. Yes, we max out both TFSAs and RRSPs each and every year, after we turned 30. TFSAs were introduced when we were in our late 20s so it was rather easy to use up the contribution room once we got serious about investments. 

As a nurse, Mrs. P’s actual RRSP contribution room is reduced because she has a defined benefit pension plan. So it is “easier” to max out her RRSP room as it’s under $4K per year. Mine is a little more, but we are still able to save each month, which we then put towards a non-registered account(s).

Most folks don’t put in as much in their registered accounts, probably because of a lack of knowledge, information, and understanding. Compounding works amazingly, and its full power can only be felt if you start early. That is what I’m teaching my eldest.

Q4. Do you have pensions through work? Has having pensions through work made your early retirement planning a little bit easier? If not, please explain. 

A4. Yes, I do have a pension through work via SunLife. Unfortunately, I don’t have much say except that I have selected or opted for index-based mutual funds. I only contribute enough to get the match from the employer, which is 5% (so I contribute 5% and the employer matches that). The rest of the RRSP contribution room is done by me directly, by investing in low-cost index funds.

I think having a defined benefit pension plan is like gold; they are hard to come by, but once you have it, you should never let it go (within reason). But having a pension through work that is mostly mutual funds with high fees isn’t that great. I sometimes wish my employer would just give me the 5% directly, and I would invest it myself. I have kept track of my performance for RRSP from work and RRSP that I self-manage, and as you expect it, my self-managed RRSP is easily outperforming the Sunlife options because of the fee difference.

As for early retirement planning, I would say that for most, having pensions through work is very beneficial, given the match from the employer. And having a defined benefit pension plan is like hitting a jackpot. 

Q5. You shared a similar investing path as us – started out with mutual funds then went into DIY investing. Why did you make this switch?

A5. So we started investing in 2010 when we were expecting our child. In the 2000s, we didn’t invest anything other than a matching work pension. At that time, I had no idea how to invest, and everything felt so new. But with a kid on the way, it prompted me to do more work. 

I started with reading several books (Millionaire Next Door, Stocks for the Long Run, etc.), and I found the Canadian Couch Potato blog and realized that investing is quite simple: just buy a low-cost index fund and stay the course. We were with TD bank, so buying TD e-series mutual funds, which were index-based funds with the lowest MER was the way to go. So we started DIY investing. We went with what was called an aggressive portfolio: 25% each of CAD, US, Int’l and Bonds (TD900, TD902, TD911, and TD909). I’d buy once a month each so that is 48 total transactions, and the best part about TD e-series mutual funds is that they are commission-free. So we were saving $480 per year in transaction fees. Another benefit of TD e-series mutual funds is that there is no bid-ask spread, so that is some savings there as well. Plus, your dividends are automatically reinvested which means that there is no drag of uninvested cash. TD e-series mutual funds were our go-to from 2010 until 2022.

Side note: I eventually got rid of my entire bonds position in 2022 because I realized that I don’t need bonds to help me stay the course. Volatility didn’t bother me one bit and I already had a mortgage so logically speaking, having bonds made no real sense. With that said, I would still consider buying bonds again about 5 years before full retirement.

Tawcan: Agree with you, the TD e-series mutual funds are pretty great, 

Q6. When you went away from mutual funds, you went with index ETF investing, then switched to dividend growth investing, and recently moved back to index ETF investing. Can you explain the reasons behind these moves? 

A6. The more I read, the more Dividend-Growth-Investing spoke to me. I loved the idea of having free income coming in, and having lost a job in 2012, I really was intrigued by the idea of living off of dividends, so we started buying dividend-paying Canadian individual stocks. We did that from 2015 to the summer of 2022.

In the spring of 2022, my eldest, who was 11 at the time, was displaying some negative behavioural symptoms. We initially thought that she was just going through puberty, but it turned out to be far, far worse. 

Because of school shutdowns and a lack of social interactions due to COVID, many, many kids got the short end of the stick. My girl was one of them. She also faced cyberbullying, and we had to take major interventions to ensure that she went back on track (and thankfully, she is now). Basically, a smart, hard-working girl who gets good grades started getting below-average grades, got bullied, started having suicidal thoughts, etc., really puts another perspective on what is important in life.

Tawcan: Sorry to hear that you went through that. That must have been rough for the family. 

A bit more background. In spring 2020, when markets crashed, both Mrs. P and I agreed that this is a once a once-in-a-generation buying opportunity. In fact, many stocks in 2020 were as cheap as they were when we first started buying them in 2015! 

As such, Mrs. P. picked up as many nursing shifts as she could. Because of shift-differentials (you get paid more if you work evenings, weekends, and a lot more if you work STAT or Overtime), Mrs. P worked extra long and we banked a lot of cash. In 2020 alone, we saved and invested six figures in non-reg accounts. We did that again in 2021, and we did around $40K in 2022. Then we had this behavioural problem that came upon us, and it dawned on us that money isn’t everything. 

So we changed our strategy: she went to work part-time and we started paying a lot more attention to all three kids to ensure that they are on the right track. What good is having a 7-figure portfolio if your kids are on drugs and are under a bad influence? 

At the same time, I had been reading Humble Dollar blog and came to the conclusion that volatility doesn’t bother me at all. So I sold all the TD e-series mutual funds and converted them into XEQT in both our TFSAs and RRSPs.

We also stopped adding to our non-registered accounts but we still max out TFSA and RRSPs. 

The main reason we stopped buying individual stocks is that there is a tremendous amount of empirical evidence that suggests that buying individual stocks is a loser’s game. 

So I honestly asked myself why I even started buying dividend-paying stocks? I came up with 4 reasons:

1. I like dividends!
2. Dividends are generally more tax-efficient if coming from Canadian companies
3. I wanted to beat the market
4. A hybrid strategy means I’m hedging my bets and if I’m wrong with one strategy, I have the other to fall back on.

To answer the first question, it’s simple: who does not like dividends? But having dividends when you are also working isn’t the best tax strategy, is it? Plus, all ETFs provide some level of dividends so the first point isn’t very strong.

Second point is true: dividends are indeed more tax efficient but I’m trying to maximize my wealth, and letting tax dictate my investing strategy isn’t smart.

The third point is where I made the mistake when I started buying DGI stocks: countless studies show that buying/selling individual stocks isn’t the best way to beat the market. Sure, my stock-picking strategy ultimately ended up beating the S&P 500 but that was because of timing and luck, and there is no way I could repeat the same performance.

Fourth doesn’t make logical sense if you look at hard evidence. Evidence suggests that buying a low-cost diversified index fund is the way to go.

The final nail in the head was when I ultimately realized that these companies, whose stock I own can and do go bankrupt or get merged. In fact, the S&P 500 has a turnover ratio that says that most companies get rotated within 35 years. This means that if I held on to my current non-reg stock portfolio, within a generation, most stocks would have been liquidated. Now tell me, how is that a smart strategy? 

If all of the above doesn’t convince you to stop buying individual stocks, consider this: I may feel that I have the mental wherewithal to undertake these buying/selling decisions. But if I am old, do you think I would still have the same amount of energy, zeal, and “smarts”? I don’t think I would, so going down to a simple (but very effective) strategy of a one do-it-all fund makes the most sense for me.

I’m not going to argue with passionate DGI investors as their minds are made up. But having done all the strategies, I am convinced that the simplest strategy that you can implement and carry on, despite what the market does is the best one. Plus, I no longer have to worry about these individual stocks and figure out when to buy, etc. That is a huge mental load off my head, and I can now focus on other important things like being there for my kids.

Tawan: You bring up some key valid points on DGI vs index for sure. But I suppose how one invests is a very personal decision based on various factors. 

Q7. You haven’t switched from dividend stocks to XEQT in non-registered accounts yet. Can you explain the reason for that?

A7. I still have those 24 dividend-paying stocks. Many are up big time, but 3 or 4 are down: BCE, AQN, T, etc. I could sell some of these and trim the position but for some reason, I can’t seem to hit the “sell” button. 

As of right now, the 12-month trailing dividend that we receive is $3,082 per month from this non-reg portfolio, and the dividends continue to increase at the rate of 3% to 4% per year. I kind of just want to ride it and see what happens for another decade before deciding on what to do. The smart thing would be to sell them all and convert to XEQT (or XAW), but I don’t quite want to do that just yet. Maybe in 10 years, we shall see.

Q8. Why did you pick XEQT instead of the other all-in-one ETFs? 

A8. This one is simple: if I were to start investing now, which ETF would I go with? I’d want something that has the lowest MER, with the broadest diversification. So XEQT fits that bill. I would also teach the same to my kids: which is the best ETF based on current information? 

XAW might be better because I already have so much exposure to Canadian stocks, but I plan on selling these stocks one day, so I want to be as diverse as possible. XEQT also has a lower MER, and because it has more Canadian exposure, it has a higher dividend payout, which always appeals to people like me (and you) who want and like dividends.

Q9. When is your current early retirement plan? What steps have you taken to get ready for early retirement?

A9. Our problem is that despite starting late in terms of saving, we still ended up with having saved way too much, and didn’t really think about early retirement in detail as we were saving. I haven’t really thought about a retirement plan. All I know is that in 20 years, when we are 65, we will have way more discretionary income than we do today, so our goals are to help each kid with enough down payment so that they can buy/afford a home. 

In fact, even if we stopped contributing today and the markets yielded the same 8% to 10% average annual return, we would have a portfolio in the 8-figure range.

Q10. Tell me a bit more about your portfolio withdrawal strategy in early retirement. Do you have a set plan?

A10. Right now, the plan is to live off of dividends, which are set to be $7K+ per month, plus my wife’s pension, which is expected to be $4K+ per month. Then we have our RRSPs, which we would need to liquidate. 

As it stands, we plan on gifting TFSAs to our kids so that they can use it for down payments on their homes. It appears that the withdrawal strategy is way harder than the investing strategy.

Q11. You are concerned about having your wife manage the non-registered accounts due to all the potential complications with Adjusted Cost Basis (ACB) on the various securities. Why is that?

A11. Correct. My wife has already had to deal with many issues and she isn’t particularly interested in learning the ins and outs of investing. Maybe when all the kids are 25+, then she can breathe a little easier and better. 

But my biggest fear is what if I were to pass away earlier than expected? What happens then? I wouldn’t want the portfolio to be liquidated and the Estate to be hit with a massive tax bill, as we have quite a bit of unrealized capital gains in our non-registered account.

So this is yet another reason for me to switch out the non-reg, pay the tax bill, and convert it to XEQT. Then it i just one fund to worry about.

Q12. For early retirement planning, why is some level of estate planning so important?

A12. Simple answer: to minimize the tax burden. There are several strategies you can employ but they are far beyond my knowledge. For that, I’d hire an expert tax accountant. Do you know of one good one?

Q13. You are currently heavily invested in equities. Do you plan to shift more investments into bonds as you get older? Or are you planning to simply hold more cash in early retirement? What’s your plan in terms of protecting yourself from an extended bear market and emergencies? 

A13. Because Mrs. P already has a defined benefit work pension plan, I consider that as a bond: it will always be there. But if she didn’t have that, I’d consider switching to some bonds 5 years prior to retirement. I’d have at least 5 years of my annual expenses in bonds or GIC and use a ladder approach. Either way, I think most folks reading this would be just fine and I bet that many folks would hit the mythical 8-figure net worth milestone if they give it a long enough time frame.

Q14. Looking back on your financial independence journey, are there certain things you would have done differently or changed if you were to start the journey today? 

A14. Yes, I think I would have started saving a little earlier. Saving/Investing is so much easier now than it was before: you can buy commission-free and transaction-free stocks via WealthSimple. Try not to compare yourself with others as your life journey is your own.

I also wouldn’t have switched strategies 3 times: I would stick to buying a passively-managed index fund with the lowest MER, and contribute to it as often and as much as I can.

Q15. Do you have any advice for other readers of this blog? 

A15. Three pieces of advice:

1. Who you marry is the most important decision of your life. Don’t settle. Try to find a partner who shares your outlook on life. Grow with that person. No one is perfect, so don’t expect your partner to be perfect, but definitely find a good person who has a clean heart and who cares about the things you also care about.

2. A few decisions that you make in your life account for 80% of the variability in your life outcomes. So be very thoughtful about those decisions. One of them is a home purchase. Be intentional about it. Rent if you need to, before you figure it out. Nothing wrong with renting. We rented a duplex until just before our second kid was born, while we figured out where to buy. Buy a home near your work, and where your kids will go to school. Travel time sucks and time is very important. Another decision is cars: don’t overpay for a depreciating asset. While I would love to own a BMW M3, I’d rather have more free time to enjoy life.

3. Don’t miss out on small things; many great things in life are free. Like going to park with your kids. Or having a pizza and movie night at home with your children. Etc. Figure out what is important to you and what makes you happy, then go do those things!

Thank you, Reader P. You certainly brought up some very interesting points on DGI vs. index. I appreciate that I can have educated discussions with readers on different investing strategies. Ultimately, you need to deploy a key investing strategy that works for you and your family in the long term!

I also appreciated that you pointed out that it’s important to analyze key decisions in life and always remember to enjoy the small things in life! 

Readers, I hope you enjoyed this early retirement planning Q&A.