My Investment Plan

by Mike Holman

Welcome to Money Smarts! If you're new here, please read the "About" page to find out more about this site. If you would like to receive updates by email then sign up here or you can subscribe to the RSS feed. Thanks for visiting!

I was asked recently by the Money Gardener about what my overall investment plan was. This was a good question because although I have talked about my various investments and ideas in a number of posts I never did a good summary of what I’m trying accomplish.

Basically my goal is to retire at age 55 or thereabouts (I’m 39 now). According to my estimates and calculations, we can retire on an income of $46,000 in 2007 dollars which will give us about $40,000 net after taxes. With this income we can live the same sort of life we live now using about $30k/year and the remaining $10k will go for vacations, spending, unexpected costs etc.

To achieve this, we are working on several fronts.

  1. Pay off the mortgage. Currently at $181k and dropping. This has to be zero before retirement.
  2. Use up all my rrsp room. Currently I contribute about 75% of my available annual rrsp room. Once the mortgage gets a bit lower then this figure will go up. I have about $40k of unused room so that will get used up as well. I’m a huge fan of rrsps and I think if you are in a higher tax bracket then they represent free money. Current rrsp value is about $230k.
  3. Leveraged investing. We have a modest leveraged investing plan which involves dividend stocks. I don’t expect this to be instrumental in our retirement planning but we’ll see how it goes. Current value of leveraged stocks is approx. $20k.
  4. Planning and monitoring. I’ve done a few basic spreadsheets (and posts) about simple retirement planning. I will continue with this series to get to more realistic scenarios. Obviously I will be doing these exercises using our data and that should tell us when we can retire.
  5. Education. I will continue to read books, blogs, and any other sources that offer information about retirement related financial activities such as investing, retirement taxes etc.

Investing Style:

I generally favour a low-cost passive investing style. Currently our money is mostly in ETFs, low-cost mutual funds, some GICs, and we own a few stocks directly in the leveraged account. I don’t believe that I can pick stocks that will do better than a passive index however for the leveraged plan, buying individual stocks works out better because we need a minimum dividend in order to help pay the interest costs.

Be Sociable, Share!

Want to learn more about RESPs? Buy The Book:

Resp-Book

The RESP Book: The Simple Guide to Registered Education Savings Plans

Everything you need to know about RESPs.

See it on Amazon now

Welcome to Money Smarts! If you're new here, please read the "About" page to find out more about this site. If you would like to receive updates by email then sign up here or you can subscribe to the RSS feed. Thanks for visiting!

{ 16 comments… read them below or add one }

1 Wooly Woman

Hey thanks for posting your investment plan! I like the idea of having the extra 10k a year for vacations extra, next time I do a plan I am going to consider this.

2 FourPillars

Thanks WW!

It’s kind of a general sort of plan – too many unknowns in the future.

But it’s better to have a general plan than no plan…

Mike

3 telly

Your plan soucnds well thought out and reasonable. One question I have is, why have you decided to invest in a non-registered account instead of applying those funds to either mortgage pre-payments or making up the $40k in your RRSPs?

I’ve considered doing the same but have not come up with a sound reason so mortgage pre-payments and RRSP catch up it is! I’d love to hear your take and reasoning.

4 moneygardener

Have you worked the numbers on the Smith Man.?

I’d be curious to know which ETF’s you hold in your RRSP.

5 FourPillars

Telly – the non-reg account is strictly for leveraged investing because that’s the only way to get the tax deduction on the interest.

Otherwise, I would agree with you – fill up all the rrsp first before investing outside the rrsp – and putting money into the mortgage isn’t a bad idea either.

Mike

6 FourPillars

Mr. C – I haven’t thought that far ahead.

MG – I just finished moving my rrsp to ETFs today. I’ll do some posts on it since I want to keep a record of lessons learned from trading.
The ETFs I own are:
XRB (real return bonds)
XSB (short term bonds)
VTI (USA all company index)
VEA (Europe & Asia)

I’ll do a proper asset allocation summary once I get everything finished. We have several accounts so I have to add them all together.

Mike

7 FourPillars

MG – I’m not a fan of the SM because I think it’s a marketing package designed for financial advisors. SM is just a form of leveraged investing with no reasonable limits as to how much you borrow.

In my case if I could borrow up to 80% of house value (not sure if the bank would even go for it), I’d be looking at a leverage of about $270k which is ridiculous.

Mike

8 telly

Mike,
Have you run some numbers that show you’re better off leveraging in the non-reg account (for the tax deductible interest) than by further contributing to the RRSP? I guess I’m still not sure why you chose non-reg (even with tax deductible leveraging) over RRSPs.

9 FourPillars

Telly – actually no I haven’t – good question!

I’ll assume you read my posts on my leveraged plan but basically I wanted to do a plan that wouldn’t cost me any cash flow. The only way I could do that was to do a leverage outside the rrsp (this reduces the effective interest costs) and I can use the dividends to help pay the interest.

A stock like BMO pays enough dividend to cover the remaining portion of the interest after the tax rebate – this is including the tax payable on the dividend. In a rrsp I wouldn’t be able to get the dividends out to help pay the interest.

If the plan is successfull then there should be a small profit from the annual cash flows (assuming the dividend goes up) and some capital gain profit as well. Since I didn’t use any of my own money, this will be straight profit.

I already contribute as much as I can to the mortgage & rrsp and by doing the leverage plan as well it means adding some risk and hopefully some reward as well.

Does that make sense?

Mike

10 moneygardener

Mike – Tranfer the whole kit and kabootle into Walgreens shares! :)

11 telly

I see what you mean. I kind of ignored the fact that you never actually added any of your own money into the mix so the non-registered money is NOT money that could have been ear marked for something else as it’s technically not your money.

Do you leverage with a HELOC? Did you incur a scost to set this up? I did read your leverage plan post – I guess I should go back to it. :)

You mention that you expect a cash flow from dividends as they are increased but what happens if interest rates climb as well? Do you have a break-even point? Again, I should really go back to your post.

We’ve been debating about non-registered investments ourselves. I guess I’m still trying to figure out if it’s right for us.

12 FourPillars

MG – consider it done!

Telly – that’s exactly it.

I have a HELOC – I didn’t incur any costs – when I switched over from my former mortgage lender the mortgage broker paid the fees to end the HELOC at the old place and the new mortgage had a $500 cash back to pay the lawyer (which u need).
If you want to set up a secured LOC then you should talk to your bank. Obviously you don’t want to break your current mortgage because of the fees.

Interest rates and break even point: I attached a spreadsheet to one of the leveraged posts – by changing the interest rate or dividend growth rates you can see the effect on the success of the plan. It’s really a combination of interest rates staying reasonably low and dividend growth rates that will determine how it works out in the long run.

One risk of the interest rates of course is that the cash flow of the plan can go quite negative if the rates jump up a lot.

13 telly

Yes, I remember that spreadsheet.

Another question, is the interest on the loan deducted from your gross income (pre-RRSP contribution)? I guess I should know this but I’m not entirely sure as I’ve never actually deducted investment interest. This might be a substantial difference if yoour RRSP contributions bring you down 2-3 tax brackets for example (such as for me).

14 FourPillars

Yes, it is.

You’re right – deducting interest will bring down your marginal tax rate the same way rrsp contributions do so that’s something to watch for.

Mike

15 Lewis Empire

I was just running some calculations and I just wanted to ask a few questions:
If you’ve currently got $250K in investments, then at 8% average return from today (39 yrs) to 2023 (55 yrs) you should have approximately $870,000 without adding another dime to your account? On $870K (at 8%) you would be creating a return of $68,500 per year.

Even if you assume that your expenses will increase by 3% inflation per year, you should still be able to withdraw a starting value of $56K (allowing for $20K in travel!) for at least 30 years.

Since you’re probably still investing monthly, your account should be significantly higher in 2023. Why limit yourself to $46,000 per year?

That being said, having $250K invested plus your home equity puts you WELL ahead of the average Joe with $20K in credit card debt and a nice TV. Thanks for giving me something to think about tonight!

16 FourPillars

Lewis, I haven’t done the post yet where I have all my exact calculations but basically I assume 4% real return on my investments, approx $15k per year contributions and about a 5% withdrawal (first year) from the rrsp upon retirement which hopefully will work out to about $46k.

Mike

Leave a Comment

Current day month ye@r *

Previous post:

Next post: