My Own Advisor: Coles Notes version of our retirement plan

My Own Advisor: Coles Notes version of our retirement plan

Coles Notes version of our retirement plan

Coles Notes: Student guides to literature, published in Canada. The Coles bookstore first published Coles Notes in 1948. The first title published was on the French novella Colomba by Prosper Mérimée.

I’ve written a little bit about my investment strategies in the past and for many months now, I’ve kept two main ones posted on my site. These strategies, dividend investing and indexing, keep me focused however our retirement is more than a two-pronged approach. It seeks to strike a balance amongst four key components you'll read about below.

Just like reading the nuts and bolts about Hamlet in Coles Notes, this post is an overview of our retirement plan.

Part A – RRSPs

Ever since I read David Chilton’s “The Wealthy Barber” coupled with my Dad’s voice saying “pay yourself first son”, I have. Over my entire professional career, I’ve always contributed to RRSPs. Some years were much leaner than others but I always did it. So has my wife. 2011 will be no exception. We feel RRSPs will be a major piece in our retirement puzzle. While we have never had the kind of income to maximize our RRSPs, we do try and optimize them - contribute enough each year to our plans to avoid paying any additional income tax. (We already pay enough tax). To ensure we don’t lag market performance, we’re invested in the market with ETFs:

o Our iShares S&P/TSX 60 Index Fund (XIU) provides us with the relative performance of the S&P/TSX 60 Index, comprised of the 60 largest (by market capitalization) Canadian stocks listed on the TSX.
o Our iShares Dow Jones Canada Select Dividend Index Fund (XDV) provides us with the relative performance of the Dow Jones Canada Select Dividend Index; 30 of the highest yielding, dividend-paying companies in Canada using dividend growth, yield and average payout ratio as criteria.
o Our iShares DEX Universe Bond Index Fund (XBB) provides us with the relative performance of the DEX Universe Bond Index; a broadly diversified set of investment-grade Government of Canada, provincial, corporate and municipal bonds issued domestically – it’s basically our one-stop shop for the bond market.

In my RRSP, I've also got a few U.S. dividend-paying stocks for some international exposure but the majority of our savings are in ETFs.

Many fellow bloggers, such as Canadian Couch Potato, Canadian Capitalist,Michael James on Money, Andrew Hallam and DIY Investor, to name a few are strong advocates of index investing and if you’ve read any of their blogs for any period of time, you’ll understand why. Index investing just makes sense. Our goal over the next 15 years is to steadily increase our ETF units to provide us with a moderate nest egg to compliment the rest of our retirement plan below.

Part B - Dividend Income

Investing in stocks that continually pay dividends or better still, consistently pay and increase their dividends year after year can have a dramatic effect over time – not only does this provide investors with a steady passive income stream but also an increasing passive income stream. Simply put, under this strategy, our money is always working for us so we won’t have to. With every passing month, we’re moving another step closer to our 15-year dividend income goal of $30,000 per year. Aggressive? Yes, very. Unrealistic? I don’t think so. Watch for my next few dividend income updates to find out why I think we're on pace, slowly but surely :)

Part C – Defined Pensions

When I started my job at my current employer, I was offered a choice for my pension plan – defined contribution (DC) or defined benefit (DB). I chose DB since under this structure my pension would resemble a percentage (up to 60% if I wanted to work another 25 years) to the amount I’m earning now. When my wife started her job she was offered the same choice and chose instead the DC plan (based on advice from her Investors Group Financial Advisor). Note: never take advice from Investors Group...just my opinion...

Anyhow, with my defined benefit approach, I know in advance how much pension I will have when I retire. My wife’s pension on the other hand is a little less of a benefit since she is forced to invest in mutual funds our company has chosen and is fully dependent upon the performance of those products. Luckily, we have some indexed products to choose from. While the benefits of a DB plan outweigh those of a DC plan, a DC plan by no means is the end of the world. Overall, we're fortunate to have pension plans. Knowing this, we're going to work these accounts to our utmost advantage. Employer willing, our plan is to continue contributing to each both plans to have about 25 years each of vested retirement benefits when we call it a career.

Part D – TFSAs

Investing in stocks or ETFs that continually pay dividends is one thing, having those securities sheltered from tax forever is something spectacular. At least we can all credit our federal government by doing one thing right over the last few years - establishing Tax Free Savings Accounts! While there remains some fine print to be aware of, TFSAs have many upsides:

o You can open a discount brokerage TFSA to hold stocks or ETFs.
o The funds in the TFSA can be grown and withdrawn tax-free.
o You can contribute to a spousal TFSA and they can withdraw from it tax-free (for income splitting purposes).

Before the government decides to take these accounts away or change them significantly, our goal over the next 15 years is to continue using TFSAs to build tax-free income, using ETFs and REITs for now, but probably Canadian dividend-paying stocks down the line. I'll let you know what and why I buy, when I buy it.

So, there you have it, four parts that when combined will form our retirement plan. I’ve left out income from government benefits such as Old Age Security (OAS), Canada Pension Plan (CPP) and Guaranteed Income Supply (GIS) since while I believe OAS will always exist, CCP might not and I don’t think my wife and I will qualify for GIS. The latter is a good thing since that means everything has gone according to plan.

As the saying goes, I guess time will tell, won't it? :)

What do you think about our retirement plan?
Got some feedback or comments to share?

I hope so, I welcome it.
Cheers!