How to estimate whether you’ve saved enough for an early retirement



Q. I need some help figuring out what to do with my nest egg. I have always done my own investing and returns have been pretty good. However, this year at age 49, I am unexpectedly retired and would like to stay that way. I had liquidated most of my assets to start fresh with a “cash-flow” income-generating, retirement-type portfolio but I am kind of stuck on how to go about it building one.
I own my own home, which is valued at about $340,000. I have about $200,000 in equity in it, but I still have a $140,000 mortgage at 2.64%. Both my RRSP* and TSFA* accounts have always been fully topped up as I have no employer pension plan. I have about $75,000 in TFSAs, $235,000 in an RRSP, and about $300,000 in non-registered savings and investments. I own my car and, apart from my mortgage, have no debts. I hope to generate a higher income from my investments for the next 20 years, transitioning to an income of 20% less after age 70.
How can I set up my portfolio and my finances to create some type of cash flow on a monthly basis, and what kind of returns can I expect?–Simon
A. Simon, when you say you want a “cash flow portfolio,” what do you mean? Generally, it means a portfolio made up of dividend-paying stocks for these two reasons:
To provide a steady income while preserving your capital; and
Tax efficiency.
I’m suggesting you consider sticking with the investment approach you’ve been using successfully, and create an income stream by regularly selling a portion of your investments.
I know what you’re thinking—that if you sell when markets are down, you’ll create a loss, reducing your capital, from which you may never recover.
Let’s make sure we’re both on the same page when it comes to dividends. In simple terms, when a dividend is paid, the share price drops by the amount of the dividend paid. For example, if a company’s share is valued at $100 and a $5 dividend is paid then you should expect the stock price to decline by the amount of the dividend, or in this case by $5.
Now let’s get back to the concern about selling an investment to create an income stream when markets are down.
What is the difference between selling $1,000 from your portfolio versus a company paying you a $1,000 dividend, keeping in mind the reduction in stock price? In theory, there should be no economic difference; however, in the real world there may be some differences:
1. Potentially lower taxes with your own income stream on non-registered accounts.
Selling to create your own income stream will provide you with a mix of return of capital (ROC), which is not taxable; and capital gains, which are tax-preferred. This combination is more tax-efficient than dividend income.
In addition, unlike with a dividend income stream, you have control over the timing and amount of cash-flow deposits, giving you greater tax-planning opportunities.
I should acknowledge that if your only income is eligible dividends (dividends from large companies) from a non-registered account, you can earn up to a certain amount tax-free (in Ontario, that’s about $51,800).
2. Creating your own income stream may lead to higher costs.
Simon, if your current portfolio is made up of stocks or ETFs, you’ll have trading fees to pay every time you sell a portion of your portfolio. Is your investment approach successful enough to overcome the trading fees?
There is no fee to pay if you receive dividends, and there is generally no fee if you sell portions of a mutual fund portfolio.
I’ll leave it to you to consider those points while deciding your investment approach.
You’ve also asked what rate of return you can expect. Below, I’ve highlighted the historical returns for the U.S. and Canadian markets. This data comes from the Dimensional Fund’s Matrix Book, 2018.  The inflation-adjusted returns are simply the historical rate of return minus the historical inflation rate.
Notice the long-term, after-inflation returns in the bottom two rows. If you add the current inflation rate of about 2%, then a 6% return on equities today, before costs, is probably not bad.
 

1 year
2018
5 years
2014 – 2018
10 years
2009 – 2018
15 years
2004 – 2018
20 years
1999 – 2018
50 years
1969 – 2018
S&P 500 Index (in USD)
-4.4
8.5
13.1
7.8
5.6
9.8
S&P/TSX Index (in Cdn.)
-8.9
4.1
7.9
6.6
6.6
8.6
S&P 500 Index (in Cdn.) (inflation adjusted
2.2
12.2
12.4
6.3
3.0

S&P/TSX Index (in Cdn.) (Inflation adjusted)
-10.7
2.3
6.2
4.8
4.6
4.5
The FP Canada Standards Council annually publishes investment return assumptions, and financial planners are recommended to use them in their financial plan preparations. Below are the suggested return assumptions, before fees. Looking at the table, a Canadian equity fund with fees of 2.4% would have an assumed return of 6.1% – 2.4% = 3.7%.
INVESTMENT RETURN ASSUMPTIONS

Inflation
2.1%
Short-term
3.0%
Fixed income
3.9%
Canadian Equities
6.1%
Foreign Developed Market Equities
6.4%
Emerging Market Equities
7.2%
For planning purposes, I’d recommend you use those return assumptions. If you have a 70/30 portfolio of equities and bonds, the assumed return is 4.34% after product and advisor costs (5.7% – 0.36% – 1%, for example).
Using those return assumptions, I ran a few different scenarios to see what your retirement income might look like if you retire now, at age 49.
If you follow a traditional plan of drawing on non-registered money first, and from the RRSP/RRIF you draw down $23,000 indexed to age 90, you maintain your mortgage payments, and you never have to sell your home or rely on its equity, then that’s probably still not enough to retire on now, even with your OAS and CPP payments coming later in retirement.
I also modelled you paying off your mortgage now with your non-registered money, borrowing the money back and investing it so the interest is tax-deductible. This increased your annual income to $24,250, which is still not likely enough.
It may be possible to provide you with enough retirement income if you want to use the equity in your home, but without more information, I can’t make that recommendation.
Simon, at age 49, you still have a lot of life to live. If you’re able, I’d encourage you to find a new job or career. Even if you work to age 55 and don’t save any additional money, you would be able to draw an indexed income of $40,000 in today’s dollars to age 90.
I know you have a lot of money saved, but to stretch it over another 41 years is going to be tough. There are a lot of unknowns, including new cars to buy, trips to take and things to enjoy that will require more money. Waiting a few more years before stepping away from the workforce entirely will provide you with a safety net that will give you the financial peace of mind a comfortable retirement requires.
Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at [email protected]
Allan Norman is licensed for the sale of insurance products and provides financial planning services through Atlantis Financial Inc. Additionally, he is an IIROC registered investment advisor with Aligned Capital Partners Inc. (ACPI), and as such, if you contact Allan you may be dealing with more than one entity depending on the products or services discussed. Any reference to specific mutual fund companies should not be regarded as an endorsement, offer or solicitation to buy or sell any investment fund or service. Mutual funds are provided by Aligned Capital Partners Inc. (“ACPI”).
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