Earlier this year, I wrote about stepping away from full-time work at the end of 2026 or early 2027. The idea is to either retire early and focus on my hobbies and passions, or transition from full-time to part-time. What this looks like exactly, I am not 100% sure yet. What I know is that we have some plans in mind and having plans is better than having no plans at all. Those plans are a bit like a road map. They provide a guide but can always be adjusted as circumstances dictate.
I don’t want to get into the details and whether we have enough dividend income to sustain our current lifestyle. The reality is, early retirement is a scary topic for most people. There’s always a level of uncertainty involved. Early retirement is even scarier for planners like me who like to model, plan, and look ahead via spreadsheets and projections. What makes things especially scary for planners like me is that we are constantly thinking about how to minimize risks and how to optimize finances.
I’ll be honest here, sometimes I start thinking about these things and that gets me all wound up.
What if our portfolio doesn’t generate enough money?
What if there’s a recession and our portfolio value and dividend income diminish significantly?
What if our expenses exceed what we planned?
And the questions go on and on…
However, we are not the only household that’s working toward financial independence and early retirement. Many people have done it and lived off their portfolios for decades – my dad, my cousin, and many other FIRE bloggers and non-bloggers. It’s comforting to know for the most part things have worked out for these early retirees. It’s also comforting to know that there’s no one definite way to approach early retirement.
Today, I would like to take a closer look at the steps we are taking and planning to take as we get closer to early retirement. How can we minimize our risks and increase our margin of safety?
Turning off DRIP
Currently, we are enrolled in DRIP with TD, Questrade, and Wealthsimple.
With TD and Questrade, we enroll in synthetic DRIP and drip one or more full shares at each dividend payout. The leftover cash is deposited in our accounts. When the cash amount is large enough, we then use it to purchase other dividend stocks. With Wealthsimple, we are enrolled with fractional drip, so all dividends are reinvested.
At some point, we plan to turn off DRIP, probably in the middle of next year or so. The idea is to build up a cash reserve so we can start withdrawing money from the different accounts once a year or biannually to avoid paying any withdrawal fees. Since we plan to withdraw from RRSP and non-registered accounts first, and try to leave TFSA untouched for as long as we can (so it can continue to compound), we may leave DRIP intact for TFSA.
Build up a cash reserve
The best way to increase our margin of safety in early retirement, especially in the first few years of early retirement, is to have a large cash reserve.
How much cash reserve do we need?
Probably a year’s worth of spending in a high savings account is optimal. If we want an even higher margin of safety, possibly 1.5 years’ worth. If we look at our total expenses over the last five years, the total amount has fluctuated quite a bit due to various large expenses. If we look at our core expenses (i.e. Necessities), we have been averaging around $41,000 annually. So having about $50,000 to $70,000 in cash reserve should be sufficient.
Having said that, we may consider having between $70,000 to $90,000 if we want to have enough to have a year’s worth of total spending. This amount may be reduced slightly if both Mrs. T and I were to work part-time and generate a small amount of income. We also want to watch out for not having too much cash sitting on the side, since that creates opportunity cost.
As you may recall, one of this year’s goals is to save $25k in our LTSS/cash reserve. We had the exact same goal back in 2023 but didn’t accomplish it due to the various large expenses we had throughout 2023.
If there’s one thing that’s bugging me in the back of my mind lately, it would be the slow progress of building our cash reserve. Over the last few years, we have had some large expenses – fixing the house gutter, painting the house, replacing the roof, trips to Denmark and Taiwan, etc. Some of these expenses, like trips to Denmark and Taiwan and painting the house exterior, were planned, but some of these, like gutter and roof expenses, weren’t. With the fence needing to be fixed and a few international trips in the works, it may be a challenge to hit the $25k goal this year, not to mention the eventual goal of $50k to $70k.
As you can see, this is definitely a work in progress.
Having a cash reserve will provide peace of mind and give us more flexibility; both are extremely important in early retirement.
Portfolio Tweaks
At the time of writing, we own 39 individual stocks and 2 index ETFs in our dividend portfolio. As we get closer to early retirement and living off our portfolio, there are a few minor portfolio tweaks we can do.
- Reduce the number of individual stocks – ideally, we’d like to trim down to about 35 or even 30 individual stocks. This would mean not having to track as many individual stocks and potentially reducing overall risk by not owning higher volatility stocks. To do so, the first thing to consider would be closing out the smaller positions. Depending on whether BCE turns its books around or not, it may be worthwhile to close BCE too. The next option would be to consider owning one stock in a particular sector or field. For example, we currently own both Enbridge or TC Energy Corp. Perhaps it’s worthwhile to focus on only one of them rather than holding both. (Note, not 100% convinced only owning Enbridge or TC Energy Corp is a good idea but it’s worth exploring that idea).
- Increase higher growth stocks – increasing our exposure to higher growth and lower dividend yield stocks would also be a good idea. Higher growth stocks typically would result in higher share price appreciation. These stocks also typically have a lower initial dividend yield but offer higher dividend growth. The higher share price appreciation would give us the option to tap into our portfolio (i.e. selling shares) if necessary. The higher dividend growth investments would also allow us to keep up with inflation and grow dividend income organically. Some of the stocks that are considered as higher growth, low yield high but dividend growth are stocks like Waste Connections, Brookfield Corporation, Costco, Apple, BlackRock, and Visa.
- Increase index ETFs – As we aim to reduce the number of individual stocks we own, increasing our exposure to index ETFs would allow us to continue to be well diversified. XAW offers geographical and asset diversification; QQQM tracks the NASDAQ 100 and would allow for diversification in the technology sector.
- Increase non-registered accounts – we have been very fortunate to be able to max out our TFSAs and RRSPs every single year since we started our financial independence journey in 2011. Once we max out our tax-advantaged accounts, we then invest money in our non-registered accounts. As we prepare for early retirement, we plan to increase contributions to our non-registered accounts. This is especially important when we plan to delay TFSA withdrawals for as long as we can. There are benefits to fund our expenses using non-registered accounts. First, eligible dividend income is very tax-efficient when we are making less than $57,375 a year. Second, if we need to tap into our portfolio by selling shares, capital gains are also quite tax efficient as well (50% of the marginal tax rate). Although we can rely on RRSP withdrawals, the amount withdrawn is fully taxed at our marginal tax rate. Therefore, the trick is to minimize the yearly RRSP withdrawal amount..
Create a dividend buffer
One thing we can further increase our margin of safety in early retirement is to create a dividend buffer.
What did I mean by that?
If our annual spending is $60,000, it is excellent if our dividend portfolio produces exactly $60,000. Obviously, that doesn’t provide any buffer if we end up exceeding the annual spending estimate, so it’s always good to have a little bit of a buffer. If we estimate a 15% buffer, that means we need $69,000 in dividend income.
Now, imagine we build in a 25% buffer, or $75,000 dividend income a year. If we continue to only need $60,000 a year, the extra amount can be reinvested for dividend income growth. In the years we need the extra money, our dividend income can sustain the need, and we don’t need to tap into our cash reserve.
The danger here is building too much of a buffer and falling into the one more syndrome trap – keep working to build up our dividend portfolio and dividend income forever. We need to find a balance between having enough buffer and being able to step back from full-time work.
Summary – early retirement planning
With all the planning, early retirement can be a scary topic. But life is full of uncertainties and we certainly can’t plan for everything. If we can, life may get quite boring, actually.
There are things that we can’t control, like inflation, interest rates, and market performance. But we can certainly control things like our savings rate, cash reserves, asset allocation, and diversification to help improve the margin of safety in early retirement.
And most people that I know who have retired early don’t actually stop working anyway – they tend to generate money via part-time work or passion projects. If all else fails, there’s absolutely no shame in returning to the workforce for a few extra years.
Financial independence and early retirement is all about creating strategies, having plans, and creating options in life so you are not tied to your full-time job. It’s nice to know there are options if you were all of a sudden on the chopping block.
What do you think about the steps we are doing and planning to do as we prepare for early retirement?
We’re on track to retire no later than June 2027. My wife will hit here unreduced pension by December 2026, so possibly we will move the date up. She’s a teacher and feels inclined to finish the school year.
I lost my salaried job in November 2024. We turned off the DRIP in our non-registered accounts in July of this year. Between that and some contract work that I’ve been getting we have been able to meet our needs and have savings that will last until at least February (this doesn’t count dividends that we will receive between now and February). I’m expecting more contract work shortly.
Our biggest goal right now is to try and eliminate our five figure mortgage by retirement. We could live with a year or two of payments, if necessary, but I would love to pay it off sooner than later.
I call myself “reluctantly semi-retired”. I really enjoyed spending the summer with my wife, but now that she’s back to work I’m a little restless, and feeling a little guilty. I’m hopeful the contract work will continue until she is ready to call it quits.
~James
That’s amazing James!!! Doing contract works seem like a good idea to continue with getting employment income. Getting rid of the mortgage by retirement is definitely a good idea, one less thing to worry about.
Great article!! I look forward to many more as you move into your early retirement. There aren’t enough shares of life after FIRE. Great job!
I resonate with many of your thoughts although we are a baby step ahead of you, the same worries ring true. Even as I seek examples of people who are doing fine. (My latest discovery was Marla Taner’s journey.)
Things we implement to decrease our risk include a 2 year expenses cash stash, we shifted our focus to include a large amount of dividend income, we have no debt, forecast to age 95, have an empty HELOC and we also use the CPP and OAS as “gravy” in our calculations. We also are taking the bigger ticket bucket list travel destinations sooner than later.
Some of our wildcards are the most important people to us; our children. One is in university and the other still in high school. Their prospects, though I’m hopeful, doesn’t look as easy as ours when we graduated post secondary in the early 2000’s.
Neither of us truly work anymore. My sweetheart’s fun job brings in $4K a year. And we live in YYC. And we have no “old money.”
Our withdrawal idea is once we turn 51 to withdraw our RRSP and melt it down by the time we are 70. We are deferring OAS and CPP. The amount we withdraw will hopefully keep us in a tax advantaged bracket . Although I just discovered a huge error in my plan. The other part of the income we need was to be derived from the dividend income from our non registered. Whoops it’s the grossed up amount that is reported as income. Dang it!
We plan to leave our TFSA for last but might have to utilize it along with our RRSPs maybe. It’s just not as successful as our non reg.
Looking forward to hearing more .
Thank you Sheryl! That’s the plan, to write more and more about our thoughts on FI and the plan post FIRE. A 2 year expenses cash stash sounds like a really smart idea, that’s exactly what we’re planning as well. Not counting CPP and OAS in the retirement calculation is exactly what we’re doing too. It’s better to be slightly conservative IMO.
Yes, post secondary education cost is hard to project/predict, but kids can work part time and hopefully get some scholarship. If that’s the case, that would help with the education cost.
Hey Bob – this is a great article and look for more on this topic – I am 59 and only really starting to think about retiring, by 65 and planning on how to handle my RRSP, TFSA and non-registered accounts for maximum tax efficiency and at the same time – piece of mind, and not being caught in a high tax bracket when starting to deplete my RRSP etc…
This is a big topic for many I’m sure – looking forward to more on your strategy/strategies..
John
Hi John,
Thank you. That’s the plan – write more articles on this similar topics.
Thank you for sharing your dividend plan. I apologize in advance if my question is too intrusive, but do or Mrs. Tawcan expect to receive pension income in your later years? Will you be in the position of having your dividend income bolstered by pension income beyond the CPP and OAS?
No worries. Neither Mrs. T nor I have work pensions. We are eligible for CPP and OAS but we aren’t including these in our calculations. We see them as “extra” gravy. Hope this helps.
Great post! Our timing is a bit further out than yours but still very relevant for us.
A few additional questions for you:
1) Would you consider money in a short-term bond ETF (such as XSB) as a ‘cash reserve’?
2) What are your thoughts on early retirement with very little in non-registered assets? We’ve maxed both TFSAs and RRSPs but have very little saved in non-registered. Will this mean we’ll be stuck with a higher tax bill come retirement or less tax optimization options?
Hi Marilyne,
For the most part we aren’t investing in bond. With the current low interest rate, it seems to make very little sense to invest in bonds for me. For cash reserve, we might break the amount and invest in high savings account and high interest savings ETFs. Not 100% sure about bonds yet, maybe a little bit?
If you have very little in non-registered you need to make sure you strategically pull out money from RRSP to minimize your tax consequences, since withdrawals from RRSP (and also RRIF) count as “working” income. If you can, it’d be beneficial to build up your non-registered accounts so you can defer TFSA for as long as possible.
I really liked this article. I’m probably going steal…, errr, borrow it for an article in the next few weeks. I think my wife’s retirement timing aligns with yours. I don’t know if I’ll retire from my gig work, but I can certainly take time off as needed.
The strange thing is that even though I’ve been going through these steps, it hadn’t occurred to me to write about it. And that’s exactly what my blog is about!
Haha, stealing/borrowing idea is totally OK. 🙂
It’s always nice to bounce ideas off bloggers.
As always thanks for being forthcoming with your thoughts, plans and intentions. I’m 53 and starting to think seriously about reducing to part time in the next few years. One thing I haven’t seen many people talk about is what people plan to do with healthcare. I know when I retire that will be one item that I will lose from my employer. Have you given any thoughts on any extra healthcare above and beyond the provincial coverages?
Lucky for us Canadians we do have universal healthcare. The tricky part is the extended health care coverage. That’s something I need to do more research on. I did some quick research and looks like Manulife offers extended health care options that you can purchase but they look somewhat expensive. More research is needed.
When I retired in May I was a little surprised how much private health care costs. We went with Manulife and purchased healthcare and travel (no dental as we will soon qualify for provincial coverage in Manitoba) and it costs about $230/month.
Wow that’s quite a bit! What kind of coverage do you have if you don’t mind me asking?
I retired at age 52 due to health reasons. I postponed starting my defined benefit pension (no indexing) until age 58. Dividend income covered a large portion of our core needs and I set up laddered GIC’s to cover the gap. this got us through the gap until I started my pension. Once I started our pension, we enjoyed a surplus income and reduced spending our dividends by half and our portfolio began to grow faster.
In the past 21 years, our dividend income went from about 80% of the pension amount to over 200% of my pension.
Congrats on the early retirement at 52 (hope your health has been better since). Pretty amazing your dividend income went from about 80% of the pension amount to over 200%. There are many different variables and it’s simply too difficult to project/simulate everything.
Can’t have enough money so keep working if you love the work. Teenagers and University are getting more expensive so the RESP will barely cover a few years post high school. Budget for that.
This year we had unexpected expenses: all the 10 year old appliances gave out, unbelievable. Needed new fridge, dishwasher, hot water heater for the radiant floors and garage door needed new light sensors. Waiting for the microwave next.
It’s always hard to predict for these unexpected expenses. 🙂
Super timely post. We are also thinking about an early retirement (both 42) and what this looks like to us. My only question is how are you getting TD to drip automatically back into your account? Keep up the great posts!
Wow that’s amazing, congrats on your early retirement coming up.
You need to call TD to set up DRIP.
Everyone needs to figure out their own comfort zone. Mine is overkill so our kids will likely inherit quite a bit but I’d rather have this than stress over not having enough. It’s the elimination of stress that drove my very conservative calculations (targeting 3% asset withdrawal rate but in reality it is closer to 2% given current spending … but who know what our late-life expenses will be. I’m a US resident so healthcare and assisted living can be quite expensive in late life. Your plan is too aggressive for me. I retired in April (with wife going to work 1 day a week starting next year) and I wasn’t ready to pull the trigger without 5 years of essential spending in cash like assets (mostly SGOV). And kids are expensive being most expensive their teenage years so we made sure our kid’s expenses were covered through college.
If you hate your job, I can understanding wanting to FIRE quickly. But from my read, it sounds like you still seem to enjoy your job. I was in a similar position to yours (product manager in tech) and decided to stick around working a bit longer until the kids were of college age.
You do you. Just sharing what was comfortable for me.
Hi Phillip,
Appreciate you sharing your story. Congrats on retiring in April! Being more conversative doesn’t hurt and passing down money is a good thing IMO. Yea US healthcare would make things a bit more complicated to plan. Working a few additional years if you enjoy your job makes a lot of sense, or negotiate something with your employer. It will be interesting to see how the future holds for us.
Fantastic info as always. I’m a planner and uncertainty is my enemy. your posts are very helpful. Very best of luck on the journey.
Thank you.