Hey hey hey! It’s Friday, so it’s time for a reader’s case!
I’ve been studying FIRE seriously since 2014, and I was hoping to pull the plug next year, or at least seriously decrease my day job, so I can work on my side hustle and enjoy time with our kids. Most people our age are in the accumulation stage and think I’m nuts. My husband is willing to work for another year or so, but is increasingly interested in FIRE also.
My gross income $182,995.66 + side hustle (haven’t calculated this past year, but usually <$10K)
Annual family spending $60,000. Does not include spending for my job & side hustle, which is about $78K (a good chunk of the latter is taxes, but also accountant, professional dues, etc.).
No debt. House & 2 cars paid in full, although house will need repairs.
I’m trying to move us to a 60/40 stock/bond split in anticipation of FIRE. Right now, we’re at about 67/33. I’m happy to send you the whole spreadsheet through Sync, should you be comfortable with that. This includes $160k for our kids’ education.
Husband has a defined contribution pension, I think it’s called, for which he’s not eligible until age 55. If he cashed it out instead, it’s worth another $155K. I have no pension.
We are Canadian, so I’m not too worried about health care. We have room to reduce expenses, although we anticipate that any graduate school for our kids would make that difficult.
I’m trying to do Justin Bender’s suggestion of splitting between GIC’s and bond funds: https://www.pwlcapital.com/en/Advisor/Toronto/Toronto-Team/Blog/Justin-Bender/December-2017/The-Most-Boring-Battle-Ever-Bond-ETFs-or-GICs
1. Does this split look reasonable? I know we’re overweighted in the U.S., but I love the returns compared to Canadian and even international.
2. Simplifying our accounts. We have a ton of accounts. I’d like to move from MD Management to Questrade, but Questrade won’t cover more than one account per household, and I saw one MDM fee schedule that was $315 per account, and we have at least 9 MDM accounts. Questrade said the best it could do was offer us some free trades per account. I know you two are the optimizers, so please help!
3. Worried about actual retirement. According to you and FIREcalc, we’re good to retire. But Moneygeek, for example, has a retirement calculator for members only (https://www.moneygeek.ca/members/retirement-planner/#) that suggests I need to work through 2019 to get over a 95% success rate.
And the questions you might not be able to answer…
4. Bond options for corporate/US accounts?
But I hate how all my bond funds are in the red, and GIC’s will only keep up with inflation if I lock them up for 4-5 years.
I’m struggling to find decent GIC’s either in USD or for a corporate account.
I did buy some preferred shares and already have REIT’s.
5. Some people max out their RESP and forgo the Canadian grant. Others say you can invest outside the RESP and transfer it in and still get the grant. We’ve been doing the latter. Not sure which is best.
So, to be honest, when I initially read this email I was like “I’m not doing this one! They’re too far ahead! My analysis will just be: You’re Done. Go away.”
But then I took a look at their rather detailed portfolio and I thought, hey this could be interesting to dissect. So here we go.
First of all, You’re Done. You can retire tomorrow if you want. With a 2M portfolio and $60k spending, you’re sitting on a 3% Withdrawal rate which has a 100% success rate. So pack up your things and ride off into the sunset.
But AboutToFIRE has graciously provided us with her investment allocation, so let’s take a look at that and see what we can see here? After that, we’ll answer her questions.
Now before we start, let me again emphasize that anything I say is NOT investment advice. I am not a certified financial advisor, and anything I say should be vetted with a fee-only financial advisor before implementation.
OK so let’s take a look at this allocation. Looks like AboutToFIRE has been 67%/33% while working, and now wants to move back to 60%/40%. Smart. That’s the allocation we used when we retired, and as we’ve been been writing about the past few weeks, it creates a nice Yield Shield that you can use to power your early retirement.
So before we begin, let’s bring that table back again, shall we?
OK so what do we notice here?
Cash Should Not Be Part Of Your Asset Allocation
I don’t know why people do this. Not the part about keeping some money in cash, that’s fine. But nailing it to a percentage of your portfolio.
Cash should have one job and one job only: To finance your short-term day-to-day expenses like food and booze. Cash should not be a line item in your investment portfolio, because cash dose nothing but sit there.
Keep a cash cushion, as I’ve written about here, separate from your investments. And keep enough of it to finance 3-5 years of living expenses (after accounting for income from the Yield Shield). After that, your target allocation for cash in your investment portfolio should be 0%. Cash isn’t an investment.
You’re More American Than You Think
You’re surprisingly pro-American for a Canadian, and I get it. The S&P 500 romped ahead 21% in 2017! Personally, I’ve maintained a neutral weighting on (20% Canadian, 20% American, 20% International), but if you want to tilt towards the US a bit more, fine. Your target of 32% isn’t too nutso.
However, your International allocation is using a Global Ex-Canada fund. Remember, a Global Ex-Canada fund actually includes the US as part of it. I looked up a typical global Ex-Canada fund like VXC, and 54% of its holdings are American! So while you think you’re 32% allocated to the US, you’re actually closer to 32% + (54% x 10%) = 37.4%.
I don’t think that was intentional. You may want to consider consolidating that holding into an EAFE fund like XEF.
Good job! No seriously, you’ve done a great job creating a balanced, diversified portfolio that has gotten you and your family onto the cusp of early retirement. You’ve obviously done a ton of research, are familiar with the FIRE blogs, and need very little help other than a thumbs up for someone who’s done it before.
So officially: Thumbs Up!
Now Onto The Questions!
OK then, AboutToFIRE had a few other questions for us, so here are our answers:
Q1: Does This Split Look Reasonable?
After a few minor tweaks, yes.
Q2: Should We Simplify Our Accounts?
I don’t know. I don’t know what MDM charges to manage your accounts, but here’s what you do to decide. Figure out how much you save per year with a low-cost brokerage like Questrade vs. MDM. If that’s more than the transfer fee, just pay the transfer fee and move it on over. If not, stay put. Easy peasy.
Q3: Worried About Actual Retirement
Let me put it this way: Our retirement numbers aren’t as good as yours. If we could switch places with you, we would.
You’re good to go. FIRE away.
Q4: Bonds vs GICs
To our American readers, GICs are like CDs. In that they both suck.
Don’t buy GICs. I’ve been interested in money stuff since I graduated in 2006, and at no point in time have GICs ever made sense. Lock my money up for 5 years for 2%? I can make more in an online savings account!
GICs can go F#%@ themselves.
“Some people max out their RESP and forgo the Canadian grant.” These people are what we call “Idiots.”
For our American readers, RESPs are tax-free savings accounts we use to save for kids’ education. Kinda like your 527’s. Only, you know, better.
RESPs take in after-tax money and shelter any gains from further tax. Only for every dollar contributed, the government will match 20% of it, up to a maximum of $500 a year. So you can contribute $2500 a year, and have the government give you a guaranteed 20% return on your investment.
You also have a lifetime limit of $50,000 that you can put into an RESP account. So if you dump a full $50k into the RESP in one year, you only get government matching of $500, then you can’t contribute anymore, meaning you will have permanently lost out on free money you could have gotten.
So absolutely do not listen to that idiot friend of yours who just want to dump money into the RESPs. Invest outside, and gradually transfer $2,500 into the account each year.
Over To You
And now, over to you. What do you think? What should AboutToFIRE do with her portfolio? Let’s hear it in the comments!
For the new readers joining us, this post is part of a re-occurring series called “Friday Reader Cases” where, every other Friday, we analyze the financial situations of readers who write-in and encourage feedback from the Millennial Revolution community in the comments . You can read the rest of the series here.
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