The financial independence retire early movement is getting a lot of attention lately. While it’s nice to see the movement gaining traction, I feel most of the major media coverage has been very early retirement focus. I think this is paints a very bad picture of what financial independence retire early (FIRE) is about. Furthermore, most of these FIRE stories are US related. As a Canadian, I want to hear more Canadian financial independence retire early stories. Therefore, I started an interview series with a focus on financial independence retire early in Canada.
If you are reading this and are Canadian, financially independent, retired early, or getting close to these major financial milestones, I would love to hear from you.
Today I am fortunate to be able to interview J who is financially independent and his spouse is already retired a few years ago. J reached out wanting to share his story and how he can retire in another year or so.
Q1. That is amazing you reached financial independence in 2014 and your wife has since retired from work. Who discovered the idea of financial independence retire early (FIRE)?
When we started this journey over 20 years ago there was no serious FIRE movement, except for the Freedom 55 ads that most people were aware of on TV and radio which we sort of laughed at because it was considered unattainable by most. It wasn’t until many years after that, in the course of diligently saving and investing that I realized that early retirement was possible. Three years ago, my wife’s company downsized and she was given a package and forced to retire. It was scary at the time, but we were in such good shape financially that it basically had very little effect on us. Now, with the stresses of work, I feel I’m ready to do the same, with my mindset now aligned with the concept of FIRE.
Q2. Like me, you are an immigrant. You moved to Canada in the early 70’s with your parents and brother with little to no money. Your parents work hard to put food on the table and never made a lot of money. Has this uprising influenced how you view money and how you spend money?
Yes, for sure it did. After moving here, my parents could only afford a mice-infested rental in a basement of a house near downtown Toronto. They worked hard to feed us and they saved. They saved to buy a house and to put us through school. As I kid, I never really wanted them to buy me anything and I never really asked for anything, because I knew the hardships we went through. We did grow up comfortably, in a nice area of Toronto, in a house that was our own. But I believe our early experience with money (or the lack of it) carried over into my adult life: buy a house, pay it off fast and then save money wisely.
Q3. You and your wife have two kids in their late teens. What approaches did you use to make sure they are financially responsible? Did you give them any allowance? Was the allowance tied to household chores? Do you have any advice to me and my wife and how we should teach our 6 year and 4 year old kids about money?
We set up our kids with saving accounts when they were very young. We didn’t give them allowances but expected them to help out with the occasional chores. They received a lot of money as Christmas and birthday gifts from relatives. At the time, we taught them to keep most of this money as savings but encouraged them to enjoy some of it too.
At a very young age, they were enrolled in a lot of sports, including swimming and skating classes. Eventually, some of these skills became useful when they worked as swimming and skating instructors. This provided them with both leadership and money earning opportunities. The importance of saving and investing what they earned has helped them become financially responsible – but they are also proud to have some spending money to have fun when out with friends.
As they got older we taught them the concept of compounding interest, simple budgeting and the importance and satisfaction of earning their own money. I believe the worst thing someone can do is to spoil their children with unlimited money. They will lose a lot of their motivation to study, to work hard and to earn themselves a good living through their own resources.
Q4. You mentioned that one of the main things that contributed to your financial success is tracking all spending, earnings, investing transactions, dividend, etc. Why do you think it’s so important to track all these transactions?
Right after we bought our house back in the mid 90’s the experience of being on our own financially was new and scary to us. We both had jobs that paid OK, nothing great, so with a new house and mortgage we decided to track our spending using financial software. At first we used Kiplinger’s Simply Money and then moved to Quicken. I believe there is a lot of capable software out there now but back then not too many – the internet itself was just getting started.
We knew it was important to to live within our means and to pay ourselves first. After basic living expenses and mortgage payments, priority was the RRSP, after that whatever we had left over, including our RRSP refunds went straight to mortgage pre-payments. Tracking earnings, mortgage payments / prepayments and RRSP contributions allowed us to see where our money was going. By tracking our mortgage payments we saw how each payment was itemized, between interest and principal and the effect that pre-payments had in reducing our mortgage expenses which ultimately increased our net worth faster.
After paying off the house, we shifted our focus on investing. The financial tool allowed us to track each investment transaction, including buy/sells, dividend income, interest income, etc. The ability to provide data on investment performance with customized reporting for date ranges, accounts, individual securities, and asset classes became very important. I link this information back to financial decisions that were made. I have over 20 years of financial / investment information and it tells me where my returns are coming from. Seeing my dividend income increase year over year provides additional motivation. I firmly believe that a lot of my success was built on having the inclination and diligence to complete these tasks through software on a regular basis.
Q5. What is your investment strategy? Do you invest in mutual funds, index ETFs, dividend growth stocks, individual stocks, or rental properties? How are you diversifying your investments?
My current asset allocation is 50% Canadian stock, primarily invested in large cap dividend paying companies, 30% in Canadian fixed income (equally split between individual preferred shares and bond index funds), 17% in US Equity (primarily US large cap stocks with a small portion in US index/ETFs) and 3% in Global equity (index funds).
My personal data tells me my best returns have been the result of investing in individual Canadian dividend paying stocks and preferred shares. This is where I’ve focused my investment strategy, mainly through my Canadian non-registered account. I buy these stocks when they “go on sale”, taking into consideration high historical dividend yields to maximize the effect of compound growth. I reinvest all dividends. Some of my best returns are in the following asset classes: Canadian pipelines, REITs, banks, utility and preferred stocks. On the other side, I have generally not done well with US or Canadian small caps, and my foray into upstream assets and resource stocks has been mostly money losing efforts. Therefore, my focus are on the ones that I have done well in. That said, the returns on my Canadian non-registered account are 13.8% annual IRR (10yr) / 15.8 %(5yr), 17.3% (3yr), and 32.3% (1yr).
Tawcan: Wow those are great returns! We are averaging 40.88% from 2012 to 2019.
I have not done nearly as well on my US dividend holdings, where there is more market success with growth stocks such as Google or any of the FANG stocks. I do not hold any of these as I don’t have confidence investing in non-dividend paying securities. No regrets however, as I’ve done fine using other strategies.
I do not own property for the purpose of investment or income. My Canadian REIT portfolio has earned me an annual IRR of 12.5% over many years, which I am satisfied with and I don’t have to bother with getting calls to fix leaky toilets etc. LOL.
Q6. You previously invested in mutual funds and index funds. Why did you decide to move all your investment into dividend paying stocks?
I should clarify that by saying that I moved most of my investments to Canadian and US dividend paying stocks, but left some in US and International index funds. The mutual funds performed poorly and index funds were mostly swapped to dividend stocks as my financial tracking was telling me I was doing very well with the total returns realized through investing in such and reinvesting the dividends. I’m very process-oriented and it became an iterative exercise in buying stocks, verifying performance and repeating success knowing the conditions and criteria of specific transactions. It has allowed me to tune out market noise by relying on personal information and research rather than headline stories . For example, I’ve held pipeline stocks for well over a decade and made a lot of money from it. However, you would think with all of the negative news out there about pipelines, one would think that these are poor investment choices. My personal data and research tell me otherwise, reflected in excellent returns from the likes of Enbridge, Pembina, Veresen, and Keyera.
Tawcan: Cool list. Here are the best Canadian dividend stocks that we regularly add more shares to.
Q7. Your dividend income exceeded your annual expenses in 2014 and in 2018 has exceeded your annual income. Are you living off your dividend income now? Or are you fully investing dividends still because you are still working?
I am still working and continue to reinvest the dividends. I expect to retire soon and when I do, all DRIPs will stop. Dividends will then fund my retirement.
Q8. Tell me some of your financial mistakes. What have you learned from these mistakes?
Many years ago, I started investing in mutual funds on my own. These did poorly so I decided to seek the advice and assistance of a financial “advisor” from a bank. The advisor put my money into back-end loaded, high MER 3rd party mutual funds, e.g. AIC, CI, Fidelity, Trimark and the like. These had MERs in the 3-4% range and worst of all were back-end loaded so I had to pay a penalty to get out. It was a painful lesson.
About four years ago, my investing expanded into resource / upstream dividend stocks, both Canadian and US listed. Virtually every one of these cut or completely eliminated their dividend. I’ve sold all of them at a loss with an understanding now that not all dividend paying stocks are profitable. I’ve promised myself to stay away since I don’t have the expertise to invest wisely in this sector.
Q9. Do you take advantage of TFSA and RRSP? Do you plan to withdraw early from RRSP before age 71? If so, what are you early withdrawal strategies to minimize RRSP tax penalties?
I have always maximized our TFSA and RRSP contributions. Both of these have done well with the RRSPs growing to the extent that I need to consider early withdrawal when retirement begins to minimize the effect of taxation in later years. I anticipate income from non-registered accounts will continue to grow into retirement so it make sense to withdrawal RRSP funds early as I will likely get hit with a bigger tax bill later on. This is something that I need to look further into as I will need to develop a good strategy going forward. I’ve been so focused on accumulation that I’ve not put the time into thinking about this.
Q10. What is your withdrawing strategy once you are living off your investment? Do you plan to tab into your principal in the first five years? Or do you plan to utilize distributions/dividends?
Based on my financial data, expenses should be fully covered from non-registered dividends alone. I can further supplement that from RRSP dividends and perhaps early drawdown. I don’t anticipate the need to touch any of my non-registered principal. Overall, I should be well below a 4% annual withdrawal rate.
Q11. What do you see yourself in 5 years and 10 years from now? What are the top three things you are looking forward to?
I’m sure that I will be retired within 5 years. I would love to spend more time with family. I travelled a lot for work and reached a point where I was sick of airports and hotels. I know it’s different travelling for personal vacations or leisure and I will probably learn to disassociate travel with work.
That said, three things that I would like to do:
- Spend more time with my wife, family and parents. Get into a good exercise routine and have them participate with me to maintain our health.
- Spend as much time in the summer at a recreational property that I purchased not long ago – in my attempt to diversify some assets away from the financial markets.
- Perhaps learn to enjoy traveling again and spend winters down south or anywhere warmer!
Tawcan: I’ve been travelling a lot for work lately, I hope I don’t become like you and get stick of airports and hotels.
Q12. How are you planning to fund your kids’ post-secondary education? Are you planning to pay for their educations fully? Or the kids need to cover a portion on their own?
Our kids were set up RESPs right after their birth. The first was set up using a basket of index / e-funds and remained in such until withdrawal of funds for University. The other started the same but based on what I learned from my time investing, I swapped over to dividend stocks a few years back. Both portfolios did well. That said, the cost of a good University education is enormous and may not be fully covered by RESPs alone. I will let them look after the difference so to take on some responsibility of funding their education.
I haven’t told anyone but on occasion I will chime in on financial or market related topics with acquaintances or friends and they will ask how and why I have such insight. I just tell them it’s a hobby of mine and leave it at that. We live fairly simple: no extravagant vacations or cars so people don’t really know about our situation. Like it or not we live in a very competitive society, where one is judged by their careers, the car one drives, what school the kids attend, sports they are involved with etc. It can get awkward when the topic of money is added on top of these things and I’d rather not subject myself or my family to it.
Q14. What would you tell someone like me who is trying to achieve financial independence? Do you have any advice for financial independence retire early?
Bob, I would say understand the power of compound returns and start early. I say that in a general sense and not you specifically because I believe you are on the right track. I see a lot of similarities in our approach to dividend-based investing. Looking at your November 2019 Dividend Income and Financial Independence Journey Update, you are where I was 10 years ago. It was around then, things started going parabolic – where the magic of compounding took over and milestones were hit very quickly after taking decades to reach that first one.
Looking back in this journey it started with a commitment to being financially responsible and to take advantage compounding returns over time, knowing how powerful this was but not knowing exactly how to execute it. However, I understood the importance of 1) earning power at work, 2) controlling expenses and 3) investing money. Well, I never climbed the corporate ladder to earn a very high income but I was good at controlling my expenses and over time, through trial and error, learned to be a successful investor. After reaching FI, the effect of work became decreasingly important to my overall net worth. It’s both exciting and scary for me because I know that I have the resources to retire but still find it difficult to let go of an ingrained routine that I’ve settled on after so many years.
Regardless, I should reinforce the fact that diligently tracking my earnings, expenses and investments played a big role in my ability to reach a state of FIRE.
Thank you J for your excellent insight on the financial independence retire early movement in Canada. You’re so correct that we live in a very competitive society. It is best not to waste your time, energy, and money trying to be better than someone else. You’ll feel better off and do better financially too!
Dear readers, are you enjoying the Canadian Financial Independence Interview Series? Are you a Canadian that is financially independent or retired early from your career? Or close to reaching this key financial milestone? If so, I would love to have a chat with you. Give me a shout!
And in case you want to read the other interview series.FIRE Canada Interview #1 – Vancouver reader J