My Long Term Goals: Echo’s Retirement Plan

I’ve written a little bit about my investment strategy and my goals to replace employment income with dividends over time.  I wanted to further elaborate my retirement plan and explain how I hope to retire early and live comfortably.

When I retire, I will have 3 main sources of income.  A defined benefit plan, RRSP and TFSA.  Let’s take a look at each of these income streams:

  1. Defined Benefit Pension – When I started my current job, I began contributing to a defined benefit pension plan.  My contributions are set at 11.5% of my salary, and my employer matches the contributions.  This will obviously be our main source of retirement income, however if I retire early I will miss out on the full value of this pension
  2. RRSP – Before I started my new job, I didn’t have the luxury of a defined benefit pension so I contributed to my RRSP.  While I don’t plan on contributing much more to my RRSP in the future, I have already built up about $40,000 worth of dividend growth stocks, REIT’s, and Income Trusts.  Since I contributed to this account early in my 20’s, the portfolio value should continue to grow over time.
  3. TFSA – I also have dividend paying equities in my TFSA.  I plan on maxing out my contributions annually, and re-investing the dividends whenever appropriate (I don’t use a DRIP).

So here’s the plan, assuming I retire early at age 55:

  • RRSP portfolio is worth $365,000 and paying $23,000 in dividends annually (assuming 5% dividend growth annually and re-invested when cash equals $3,000)
  • TFSA portfolio is worth $540,000 and paying $31,000 in dividends annually (assuming 5% dividend growth annually and re-invested when cash equals $3,000)
  • Defined Benefit Pension would pay me a bridge benefit of $13,440 ($1120/month) from age 55-64, and then the full pension would kick in at age 65.  Based on 25 years of service, my annual pension would be $62,400 ($5200/month).

We couldn’t survive on $1120/month, so we would meltdown the RRSP over the next 10 years.  I’ve estimated our withdrawals at $44,000 per year.  With the RRSP income and the bridge benefit, would be living on about $40,000 per year after taxes.

While that doesn’t sound like a lot, we wouldn’t have a mortgage or any other debts, and the kids would have moved out by then.  Besides, we haven’t even talked about using our Tax Free Savings Account in retirement yet.  This should add another income stream and safety net.

At the standard retirement age of 65, we begin to collect the full pension at $5200/month.  At this time, our TFSA has grown to over $1.2M and is producing $90,000 in dividends annually.  Sounds comfortable to me…

Now I’m making a lot of assumptions here, but who isn’t when they’re talking about 25 years down the road?  Whether I retire at 45, 55 or 65, I still like to have a plan for the future and know that we are on the right track towards our financial freedom.

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  1. Dr Dale Rathgeber on September 27, 2010 at 11:01 am

    You have ambitiuous goals. Please don’t forget to factor in the coming baby-boom retirement phenomenon which may well result in higher taxes for health care, and lower market returns as the boomers withdraw thier savings from the markets

  2. Echo on September 27, 2010 at 11:20 am

    Hi Dale, thanks for your comments. I don’t completely buy into the theory that the retiring baby boomers will drastically affect the markets. There is a whole new generation waiting to enter the market.

    However by investing in dividend paying stocks rather than growth stocks, I will be protecting my portfolio in the case that market returns are not very strong. I expect dividend payers to continue to increase their dividends over time.

  3. Dr Dale Rathgeber on September 27, 2010 at 11:48 am

    My crystal ball is as hazy as everyone else’s; however, the Canadian stock buying generational cohort is just not as large as the boomers. Sadly I also predict that they will be poorer due to higher taxation down the road. We need to hope for the Chinese and Indians new wealth classes to buy our stocks to keep up the demand. This is an oversimplification, obviously, and I hope that I am wrong about all of it.

  4. Financial Cents on September 27, 2010 at 4:10 pm

    Whatta great plan Echo!
    Can you imagine, $90 K/year in dividends. That would be amazing.

    I am surprised (only a bit) that you don’t have any passive income listed from any unregistered accounts…do you hold all your dividend payers in registered accounts?

    I look forward to sharing stories about our journeys!

    • Echo on September 30, 2010 at 9:14 am

      @Financial Cents
      When I first started investing in mutual funds, it was within my RRSP in order to obtain the employer matching contributions. When that amount reached a certain size (and I left that job), I transfered that amount to a discount brokerage and started purchasing stocks. Around the same time, the gov’t introduced the TFSA, so I used a similar approach with that account.

      I don’t have a non-registered portfolio, and I realize that I will be missing out on the dividend tax credit…however by holding these dividend payers in my TFSA, I will pay zero tax on my withdrawals, which is pretty good too 🙂

  5. Susan on March 28, 2012 at 5:58 pm

    tell me tell me how does $40k in rrsp’s turn into 365k in 20 yrs and explain the divi growth return so high…& TFSA that you can contribute 5K per year for another 35 yrs (175k) turn into 1.2 mil with 90 k/yr divi’s???show me the money!…i am so on your page with your defined retirement benefit and congrats! me very jealous not many hv this luxury! but the reality of rrsp/tfsa turning into these mega AMOUNTS…pls adv how…I have 60k in rrsp’s last 7 yrs NO GROWTH…i am happy to see my book value has come back…very interested to know!

    • Echo on March 28, 2012 at 7:53 pm

      Hi Susan, there’s a lot of guess work when looking 20+ years down the road. $40k can turn into $365k in 20 years at growth of 8% per year, with new contributions of $2k per year. Obviously there is no guarantee.

      The TFSA projection includes my wife’s contribution room, so $10k per year.

      What are your RRSP’s invested in (mutual funds, ETF’s, stocks)? Many people who are invested in actively managed mutual funds have been disappointed with their returns. The high cost of mutual funds in Canada (2-3%) can take a big bite out of your portfolio.

  6. Susan on March 29, 2012 at 4:37 pm

    Hi Echo, mutual funds Primerica MER about 2.32 (60K) BNS 15k mutual not sure mer 27k resp primerica 15K resp BNS new contributions to cash within the registered accts with BNS. I am gobbling up all your dailies and am forwarding them to my sons and BF to gain some understanding of money AND growth…i jump to all your links and would really like to know where to start to make my money make money…i do not have a pension plan at work neither direct or contribution… I am only able to invest $25/wk to my rrsp/$125 bi-weekly to resp and $360.00 monthly to savings acct. I am paying mortgage bi-weekly with 12yrs remaining with approx 500k equity. 1 son at college 3yr prog HVAC paid for and 1 son university 2013. my husband has no pension at work either and HAS about 52k (rrsp) mutual fund Primerica and approx 7k with BNS Mer’s and all that…no growth …Any ADVICE GREATLY APPRECIATED!!! Susan

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