Hello from Newb

[eric]

Hey guys/gals,

Recently discovered this forum - been lurking and getting some good info.* As it seems to be the norm, and I'd like some feedback my plan, I'll lay out my situation.* We live in Canada, btw.

I am currently 32 years old and am planning to retire within the next 3 years.* I am married to a teacher, 34, and we have no kids by choice (although we do have 4 dogs).* We are basically debt free, with the exception of our mortgage.* The only other debt is our personal car, which is leased.

My work situation is that I am the president of a small engineering firm with a few employees.* We've been in business for 5 years.* The money is good but the hours suck.* I sit at a computer all day running CAD and booking vacation time is next to impossible.* I even got high-speed internet installed at my cottage so I can go there and still meet the needs of my clients.

I average about $160,000 year in the company of late, although times have not always been so good.* We barely survived the bubble implosion, and the company operated at a loss for a few years.* My salary out of the company is approximately $75,000, but and is set so that I can maximize my RRSP while keeping my personal taxes as low as possible.

The company is legally incorporated and gives me several advantages, such as controlling my personal income, income spitting with my wife, writing off a company car, writing off a home office, etc.* *Oh her side, my wife is a teacher and makes approximately $60,000/year from her job.

In terms of real-estate, we own a house and a cottage.* Our mortgage for both is approximately $215,000.* The house was recently assessed at $311,000, and the cottage I figure is worth about $75,000.

With regards to savings, my wife and I have both been maxing out our RRSPs for the last 8 years or so.* Between the two of us, we have about $165,000 in investments in RRSPs, and are adding to it at a rate of approximately $20,000/year.* So far, we are seeing close to 9% ROI.

Not sure how familiar you guys are with RRSPs, I gather they are similar to 401k's.* Basically, the gov't allows you to stash 18% of your gross salary, or $15,000, which ever is less, into your RRSP.* Money put into your RRSP is deducted from your taxable income, and grows tax free within, but money taken out is considered income and taxed as such.

I have only recently started investing through the company, and have about $50,000 invested so far.* I'm averaging (so far) about $10,000 a month in investments via the company.

I've been scratching my head on how to retire for the last few years, but couldn't figure out how to get $30,000 - $40,000/year, indexed to inflation, in income for the next 40 years.* I toyed with the idea of buying rental property, but it would take 5 or 6 years for me just to make my downpayment back, and I would need 3 or 4 properties to generate sufficient income.

Then I came across this book called "Stop Working", by some guy who makes the somewhat dubious claim to be Canada's youngest retiree at age 34.* The premise of the book is to identify stable companies that have been paying a yearly dividend for 10 or more years and have been increasing their dividends on a regular basis.* *You try to snap them up when the stock price goes down, and then you simply hold on.* Your income comes not from slowly chipping away at your nest egg, but from receiving divident payments.

To boot, dividends are taxed very favorably in Canada.* You can make about $30,000 year in dividend payments and pay next to no income tax.* Anyhow,* through the company, I have been purchasing shares of dividend paying companies and income trusts.* I am trying to diversify as much as possible, but my company portfolio is basically energy (oil, natural gas, electricity), commercial real-estate, and financials (banks).* So far, I am getting about a 8.5% dividend yield.* Personally, we're are invested only into mutual funds.

So, the plan is this.* Over the next 2 to 3 years, slowly convert my personal holdings from mutual funds to dividend paying companies and grow that portfolio to about $200,000.* In the company, continue investing as I have been doing and grow that portfolio to $250,000 - $300,000.* Aim in both portfolios to achieve a dividend yield of 8%, which would generate a total of $40,000/year in dividend payments.

By doing more than half of the investments through the company, I can continue to control our salaries and ensure that we both get the same amount so as to minimize out taxes. Plus, my personal* marginal rate is already 50% so for me take that amout of money out would be extremely painful.* Meanwhile, being a small business, the company enjoy a rate of only 22% on profit.

Once the income is established, we sell the house.* While the value has gone up by $100,000 in the last 4 years, I am going to assume that its going to stay flat and that we'll sell it for $311, 000.* Pay off the mortgage (which covers both the house and the cottage), and move to the cottage.* This will leave us with just under $100,000 in cash, plus we are now living mortgage free.

We'll either take the $100,000 and further invest into dividend-yielding shares, or put it into some safe yielding 5%.* After 3 or 4 years, or whenever we get tired of living at the cottage, sell it.* We should then have approximately $200,000 in cash, and go buy our final retirement home, somewhere deep in the woods with no neighbours.

Emotionally, we both can't wait.* I've been lucky to make my money early in life, and I've had a taste of the supposed "good life".* I got the sports car, the home theatre room, the big screen tv, the granite counters, the marble floors, the gadgets and toys.* I'm thankful that I've had that, because now I know that its not what makes me happy.* I've been able to cross that off the list, rather than always wondering "if I'd only bought the bigger house, then I would of been really happy".

We've also had a taste of the "simple life" with the cottage, making firewood, collecting maple sap and making maple syrup, fishing for your dinner.* And I've tasted enough of that to know this is where I am truly happy.* Yes, we'll still have some of the modern trappings of life - internet, satellite TV, but my time will be my own and will no longer be for sale.

[maddythebeagle]

Welcome.


I think you are thinking of Derek Foster, who retired early on dividends.

http://forums.moneysense.ca/thread.j...=1547&tstart=0

I also think that he doesnt have any debt (mortgage paid off), which helps a lot with cash flows and dont need as much money. Also, helps that Canada has socialized medicine vs. us. I havent read all of his book, but am somewhat doubtful on if this can be done for a lot of people that age. I think that the average age of folks on this board for FIRE is 45-50 based a recent poll.

I too am interested in replacing some of my income at retirement with dividends. Are you looking to use dividend reinvestment plans. The one thing that I have found about Canadian plans offer more energy and banks and hard to diversify so I know several Canadians that are looking to more u.s. companies. Also, in your taxable accounts, if you have low-cost mutual funds (index funds) that also can throw off dividends so something to consider.

Also, there are still big advantages for 401k (tax deferred accounts) type accounts and everyone should use in my opinion.

If you are interested in dividend reinvestment plans (several Canadian investors): http://www.dripinvesting.org/Boards/Boards.asp

I personally am targeting 1/3 401k type account, 1/3 in dividend paying stocks, and 1/3 from a pension and having house paid off.

[bosco]

Welcome Eric (although I am a relative newcomer also)

As for Maddy T B's comment, the thing about RRSPs that may not be evident is that unlimited diversification is not possible since there are rules about what percentage may or may not be invested in non-Canadian securities. I know that there has been talk about liberalization, but don't know if it ever actually happened. On the other hand, I would caution anyway against investing too heavily in US securities, since the Canadian dollar is on the rise versus US, and the trend can kill you (it's been hurting me lately since a lot of my money is in US denominated securities). Europe and Japan don't look too bad.

I think you are on the right track as far as using capital gains and dividends to control your tax liability. RRSPs are not as attractive as traditional IRAs (the closest counterpart) due to the higher marginal tax rates in Canada.

It looks like you expect to have, at retirement

RRSPs $200,000
company investments $300,000
net from house sale $100,000

income from company (not clear to me)

so you will have around $600,000 in investments, from what I can gather from your post.

I'm not sure you should plan on a continue 9% ROR going forward. Canadian equities have done well lately relative to US, but that is partly a result of "sector rotation" as they are heavily energy and natural resource-based. I'm also not sure, at your age, if you should plan on a 4% withdrawal rate. Something less than that might be more cautious.

Also, at your age, CPP and OAP are clearly not in the picture for a while.

So the question, as I see it, really comes down to....How much will you continue to get from your company in income, and what do you think your expense level will be? I don't know if you can realistically expect to get 8% dividend returns over the long haul. If you can, your plan might be feasible, but sounds optimistic. If you can't...might have to try to work part-time a bit, while you let your nest egg compound.

Just a few random thoughts. I wish you well, and hope that this works out for you. Sounds like you are well on your way.





Where is your cottage, and where is your house? I am retiring in Canada also, in approximately 20 months (yes the countdown is on). I live next to the BC/Alberta border. Sales taxe

[eric]

Thanks for the comments guys.* I appreciate the feedback.

As for as RRSPs go, they recently eliminated the foreign content rule.* Unfortunately, buying US dividend paying shares is not as attractive as I have to withhold a certain amount.* I also see some pretty major issues with the US economy that frighten me.

My company basically doesn't function without me, which is part of the problem, so I am shutting down the engineering side of it when I retire.* Therefore, going forth, the only income will be dividend income that the company receives.

In terms of withdrawing, by which I assume you mean selling off a small portion of my investments each year, I do not plan to do - at least not anytime soon.* My investments are there purely to generate dividend income.* As I get into my 50's - 60's, I might start to consider selling off and get some extra cash, although by then what's left of CPP will start to kick in, so I might not need it at all.

The real question, as you put it, is how much can I realistically get in terms of dividend yield?* I am currently doing better about 10%, but alot of that is driven by my oil investments.* At the low end, I am getting just under 4% dividend yield from my bank stocks.* These are extremely safe (CIBC has been paying dividends since 1862), but the yield is fairly low.* However, they do raise their dividends by anywhere from 3% to 13% every year, so the effective dividend yield goes up quite fast.

My mid-range stocks (electricity, natural gas and commercial real-estate), are yielding between 6% and 9%.* These are more volatile, but again they tend to go up by 7% to 8% a year.

My high-end stock, an oil trust, is currently yielding 15% dividend yield.* This is quite volatile, and is more or less related to the price of oil.* However, unless I am missing something, I don't see oil going down any time soon.

In terms of expenses, my wife and I ran through some numbers and we'd be more than comfortable living on $35,000 to $40,000/year net.*

Our fixed expenses (food, dog food, property tax, electricity, insurance, gas, phone, TV) would run about $1500/month.* So $35,000 - $40,000 would leave us with approximately $1500/month in "disposable" income.* This should be enough to save money on the side to get a "new" used car every 5 years or so, and have money for a rainy day fund.*

I currently live and work in Ottawa, Ontario, and my cottage is in Quebec, about halfway between Ottawa and Montreal.* The US is great to make your money, but Canada is great for retiring.

[Calgary_Girl]

Hi Eric.

It sounds like you're doing great!

I've also read Derek Foster's book and DH and I have gotten into investing in income trusts paying anywhere from 7.5% up to 14%.

I would agree with you that retiring in Canada is easier. It's kind of funny how everyone has this misperception that we pay so much in taxes up here (I live in Calgary). I lived in the States for a couple of years and my paycheques (after-tax) were comparable to what they are now. At the end of the year, we were probably out of pocket MORE in the States due to higher medical co-pays, higher drug costs and higher property taxes.

[maddythebeagle]

Quote:

The real question, as you put it, is how much can I realistically get in terms of dividend yield? I am currently doing better about 10%, but alot of that is driven by my oil investments. At the low end, I am getting just under 4% dividend yield from my bank stocks. These are extremely safe (CIBC has been paying dividends since 1862), but the yield is fairly low. However, they do raise their dividends by anywhere from 3% to 13% every year, so the effective dividend yield goes up quite fast.

I think this is a good question. I invest in several dividend growers and I am more interested in dividend growth. I am not sure how to model this. I expect that a conservative 5% growth rate in dividends would be something although many are growing faster. The other school of thought is buy higher yielders as you get closer or in retirement. Some of those might not increase as much though. I do agree with Foster on not selling and continuing to take the dividends. It is simple and tax efficient. I cant figure some of these folks that buy and sell so much. Watch how Buffet works. I would only sell if I needed a little extra capital gains (plan not to) or simply because the business is no longer applicable (cant see banks and energy going that way anytime soon).

[nfs]

Quote:

dividends are taxed very favorably in Canada. You can make about $30,000 year in dividend payments and pay next to no income tax. Anyhow, through the company, I have been purchasing shares of dividend paying companies and income trusts. I am trying to diversify as much as possible, but my company portfolio is basically energy (oil, natural gas, electricity), commercial real-estate, and financials (banks). So far, I am getting about a 8.5% dividend yield.

Most of what throws off your "dividends" isn't eligible for favourable tax treatment under Canadian law. You are also very undiversified.

Quote:

Then I came across this book called "Stop Working", by some guy who makes the somewhat dubious claim to be Canada's youngest retiree at age 34. The premise of the book is to identify stable companies that have been paying a yearly dividend for 10 or more years and have been increasing their dividends on a regular basis. You try to snap them up when the stock price goes down, and then you simply hold on. Your income comes not from slowly chipping away at your nest egg, but from receiving divident payments.

Derek Foster works very hard not to draw your attention to the two principal reasons he was able to retire at 34. The first is that he hit it lucky on a few stock picks. The second is that he is sucking on the public teat.

On the thread that maddy linked from the other forum, he was asked specifically what percentage of his pre-tax income was derived from two federal government payments (the Canada Child Tax Benefit and the GST credit), both of which are tax-free and payable only to those with low incomes. His answer was about 15%. He also discloses that he pays 5-10% of his income in income taxes. He waved his hands a little about the property and sales and gas taxes he pays, while ignoring the education his children get, the medical coverage his family gets, the fire department, the roads he can drive on for free, etc.

To retire at 34 on your own hook is great. To retire at 34 and stick someone else with a bunch of your living expenses ...

Quote:

The real question, as you put it, is how much can I realistically get in terms of dividend yield? I am currently doing better about 10%, but alot of that is driven by my oil investments. At the low end, I am getting just under 4% dividend yield from my bank stocks. These are extremely safe (CIBC has been paying dividends since 1862), but the yield is fairly low. However, they do raise their dividends by anywhere from 3% to 13% every year, so the effective dividend yield goes up quite fast. My mid-range stocks (electricity, natural gas and commercial real-estate), are yielding between 6% and 9%. These are more volatile, but again they tend to go up by 7% to 8% a year. My high-end stock, an oil trust, is currently yielding 15% dividend yield. This is quite volatile, and is more or less related to the price of oil. However, unless I am missing something, I don't see oil going down any time soon.

IMO you could use some good investment and tax advice. Come on over to a Canadian forum and let us work you over.

Calgary_Girl:

Quote:

I would agree with you that retiring in Canada is easier. It's kind of funny how everyone has this misperception that we pay so much in taxes up here.

It is funny. But don't tell anybody else. It can be our little secret. My favourite story is this: With careful planning in Alberta, BC, and Ontario, a married couple can collect up to about $160k a year and pay no more than 10% of it in income tax. (No disguised welfare either a la Foster.) The US can't beat that.

[eric]

Thanks NSF. I took what Derek put in the book with a grain of salt, but it at least showed an other option other than "you need 5 million to retire". For example, in the book, he talks about Corby Distilleries and this amazing special dividend of $16.50 a share that they pay out supposedly every 5 years. Upon further review, however, Corby has only payed this special dividend once and their regular dividend has not budged in the last 5 or 6 years. Not a good investment.

Can you explain what you meant by not being eligible for the favorable tax status of dividends? I won't argue with you that I am not diversified, and this is something I am striving for. Keep in mind that this is only my corporate investments. My personal investments are still into mutual funds.

On the tax side, one could get into all sorts of philosophical discussions regarding this. As someone who falls squarely into the top 10% of Canadian earners that account for 53% of the personal income tax paid in this country, I've often feel frustrated by what I see as carrot-n-stick approach of our dear government.

Personally, once I retire I won't be applying for EI or any other gov't subsidies, but when I get my GST credit in the mail I certainly won't be throwing it in the garbage. I guess I figure I paid more than enough taxes already.

[nfs]

Quote:

Originally Posted by eric Can you explain what you meant by not being eligible for the favorable tax status of dividends?

The oil and gas trusts that you own (the REITs too) don't pay dividends. They have distributions that are a combo of business income, capital gains, and (usually) return of capital. The income and capital gains are taxable in your corporation, the ROC reduces your ACB and thus increases your future capital gains liability. It's also all passive income so not eligible for the small business rate inside the corporation. In Ontario, the corporate rate on investment income is close to 50%, not 22%.

Worse, if you let the money pile up inside the corporation, you run the risk of putting the active business offside the rules re assets, income, or both, and exposing any retained income to normal corporate rates, which are considerably higher than the small business rate it enjoys now. You need competent tax advice about this. Find a good accountant.

[eric]

Thanks, I wasn't aware that I wasn't eligible for the small business rate with investment income. To clarify, however, this still only applies to profit, correct?

If my corp makes $25,000/year in dividends/distributions/capital gains, but then turns around and pays my wife and I $25,000 in salary, it sees no profit, and therefore pays no (or little tax). Or is it more complicated then that?

I will take your advice about finding a good accountant specializing in taxes.

[nfs]

Quote:

Originally Posted by eric If my corp makes $25,000/year in dividends/distributions/capital gains, but then turns around and pays my wife and I $25,000 in salary, it sees no profit, and therefore pays no (or little tax). Or is it more complicated then that?

It's more complicated than that.

[nfs]

Quote:

Originally Posted by nfs Calgary_Girl: It is funny. But don't tell anybody else. It can be our little secret. My favourite story is this: With careful planning in Alberta, BC, and Ontario, a married couple can collect up to about $160k a year and pay no more than 10% of it in income tax. (No disguised welfare either a la Foster.) The US can't beat that.

An update: It's Thanksgiving Day in Canada too.

The Canadian federal government is going to fall next Monday on a motion of non-confidence. The governing party is accordingly handing out candy by the truckload.

Investors got their lolly late yesterday. Those with incomes entirely from Canadian dividends will be able to collect $48k a year tax free, $96k for a couple, starting next year*. AMT means that the 10% tax line is still around $160k, but conservative investors will make out like bandits.

But y'all keep believing we live in some high tax jurisdiction.
----------------------------------------------------------------

* Presuming any new government follows through, which is likely in any case.

[AltaRed]

Come on nfs... Canadians do live in higher tax environment. The marginal tax rates kick in at much lower thresholds than in the USA for the average income earner and substantially higher overall VAT rates.

[nfs]

Quote:

Originally Posted by AltaRed Come on nfs... Canadians do live in higher tax environment. The marginal tax rates kick in at much lower thresholds than in the USA for the average income earner

Hey, I thought this was an early retirement site. What's with all this concern about income earners?

Quote:

and substantially higher overall VAT rates.

Overall, sure. Mind you, you probably shouldn't compare the sales tax rate where you are right now with the sales tax rate where you used to live in Canada, should you?

The truth is that there isn't a lot of difference in overall tax levels between the two countries, once you throw things like property taxes and social security taxes into the mix as well. Some end up better off on one side of the border, some on the other. Typical working folk usually keep more dollars in the US but investors have tremendous flexibility with respect to types and timing of income received and can easily end up better off in the great white north.

Texas now and Alberta a year from now can be the best of both worlds, as you well know. Illinois to BC in 2000 worked wonders for me.

My parents spent half a year in Florida, when it came to taxes, they felt the situation was identical except that US Citizens have control of their money and can decide whether to spend it or not.

Canadians pay for Health Care through higher taxes, Americans can choose whether they wish to buy it or not.

Property taxes tend to be higher in the US, University is definitly much costlier, income taxes vary from state to state, we have the GST , Americans can look foreward to some kind of consumption tax(it is coming, a Politicians dream)

Liquor is definitly much cheaper in the US, old joke about getting my Vodka in Buffalo, my Liver in Toronto.

The original question about Retiring young, do not do it, find something you love to do and get some one to pay you for it.

Endless Saturday's can get tiresome.

One thought, work a little longer, buy some income properties, make that your full time job?

[REWahoo]

Quote:

Originally Posted by Howard The original question about Retiring young, do not do it, find something you love to do and get some one to pay you for it. Endless Saturday's can get tiresome.

eric, if you have spent much time reading this board you will know that Howard's quote above is probably not the majority opinion here. As Nords is fond of saying, "It's your own fault if you can't be responsible for your own entertainment."

My personal, albeit limited, experience is that "endless Saturdays" are pretty damn good.

[MRGALT2U]

Quote:

Originally Posted by REWahoo! My personal, albeit limited, experience is that "endless Saturdays" are pretty damn good.

Ditto!

JG

I agree with you REWahoo, most people would like to retire early, but at 30, that means another 50 to 60 years to entertain yourself?

My Buddy insists he is retired, he bought a Farm, he works 7 days a week and absolutly loves it, I say he is working but as far as he is concerned, he is Retired.

Another buddy also insists he is retired, he works as a Course Marshall at very exclusive Golf Clubs, makes less money than working at Walmart but he gets Free Golf at Clubs he cannot afford to join, something he does after he finishes working, daily.

I guess Retirement has differant definitions??

[Nords]

Quote:

Originally Posted by Howard The original question about Retiring young, do not do it, find something you love to do and get some one to pay you for it. Endless Saturday's can get tiresome. One thought, work a little longer, buy some income properties, make that your full time job?

Hey, Howard, c'mon, this is an ER board. *That "keep working" attitude on this board is about as welcome as an annuity salesman on the Vanguard Diehards board.

Here's a few things to consider: *
If we have enough money to live the life we want to live, then why would anyone go looking for someone to pay us? *Good for you if you find your avocation, but mine doesn't depend on finding someone else to validate it.

I've been doing endless Saturdays for over three years. That IS my avocation. *It's not tiresome and my "Things to do before I die" list is longer than when I was working for a living. *Apparently all that contemplation time is helping me find new things to explore.

The original poster sounds like he's found the solution to his problems, and it seems to be working for him. *IMO it's far better to ER as soon as feasible and live life outside the cubicle... after all, you can always go back to work.

[Ed_The_Gypsy]

Whoa, Nords, some of us ain't there yet. Right now, 'ER' to me means 'before I die'. :P

This thread interests me.

Y'all know that I am still in harness. We are actively considering several alternatives, but this is my current situation: I am a contract engineer, working steady in Alberta in the oil sands, but I am a Yankee Dog with a home and family just over the border on the Left Coast. The personal taxes in Alberta seem to be less than many places in the US and Alberta appears to be a lot more small-business-friendly than most of the US. The Albertan economy is also booming, especially in my field. There is opportunity up here. I think I can work here for many years in something that doesn't suck if I close one eye. (I learned the art of the metaphor in the Army. )

In the case that I might be here a while, I have been considering incorporating a business here and/or becoming a landed immigrant. Taxes are a puzzle, though. My assets consist of a small house in the US with a modest chunk of equity but most of my net worth is in IRAs. The house can be managed, but the IRAs are a puzzle. I pay income taxes like an Albertan but must file in the US with credit given for taxes paid in CA. If I moved up here, it is not clear if earnings inside my IRAs would be tax-protected in CA. Setting up an Albertan company is easy, but I am not at all clear how it would affect my US taxes. I have yet to find a cross-border accountant I have confidence in.

Retiring in Canada snowbird-style is an interesting possibility. I like it up here. No commitment yet, but I am taking notes.

Cheers,

Ed,
Taking a job away from a Canadian since 2003.