Can Alan, 53, generate enough dividend income to retire comfortably in seven years?

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Alan is 53 years old and runs his own small business. He recently bought a stake in his ex-wife’s parents’ house to give his three children, all in their early 20s, “a place to live until they’re ready to go on their own,” he said in an email. writing.

Alan does not have a pension plan, but is heavily invested in dividend-paying North American stocks. He adds approximately $40,000 in retained earnings from the company annually to his portfolio. His small-town Ontario home is valued at $739,000 with a $288,000 mortgage. “As a stock company owner, I am able to write off most of my expenses and live very frugally,” writes Allan.

A short-term goal is to winter outside Canada for three months each year. In the long term, we would like to grow our investment portfolio to generate an annual dividend of $65,000. Thanks to the dividend tax credit, dividends are usually favored over salary and interest income.

“I would like to know if my idea of ​​accumulating high-dividend stocks until they replace pensions and never selling them is a good idea,” Alan writes. He hopes to achieve financial independence by the age of 60. He added that while he may choose to work less, he won’t fully retire “because I love what I do.”

“Cash stocks are a safety net for when you need more money,” he wrote. “I would like to know where the tipping point is where I can spend all my hard earned money without having to add new capital to my investment.”

Alan said he was happy to leave the money to his children. “But that’s not my goal. I raised them to look after themselves.”

When will his portfolio generate $65,000?

We asked Andrea Thompson, a certified financial planner and founder of Modern Scents, a Mississauga-based advice-only financial planning firm, about Alan’s situation.

what the experts say

Thompson said Alan lives frugally, with most of his personal expenses being paid for by his company. The company reimburses him about $3,500 a month for his home office, car, and other expenses. He also does small jobs as a side job from time to time.

Alan’s personal investment assets are distributed between registered and unregistered accounts. He is a do-it-yourself investor, buying and holding high-dividend stocks primarily in Canada and the United States. His portfolio gives him a dividend income of 5.98%. That generates about $55,000 a year, which he reinvests. Every year he transfers money from unregistered savings to a tax-exempt savings account to take advantage of his donation room.

Alan’s corporate investment portfolio is worth $157,000 and has a $40,000 loan from the Canadian Federal Emergency Business Account, which he plans to repay by the end of the year.

Allan’s portfolio lacks diversification, with 85% Canadian stocks, 14% U.S. stocks and just 1.4% ex-North American stocks, Thompson said. “He may want to consider diversifying his exposure to more global companies outside of Canada and doing so within the RRSP and/or locked-in retirement accounts.” [LIRA]says Thompson. “Having a Canadian dividend-paying company in his unregistered account will allow him to continue to take advantage of the Canadian dividend tax credit.”

She recommends keeping a year or two of your expenses in cash or cash equivalents to weather the stock market turmoil after you quit your job.

Alan does not receive a salary and therefore does not make payments to the Canada Pension Plan. He estimates he will be eligible to receive his CPP benefits of $620 a month when he turns 70. She also plans to defer receiving retirement benefits until she turns 70, which will increase her benefits by 36% to $935 a month.

“Based on Alan’s current dividends, savings, and dividend reinvestments, he should be able to hit his goal of generating $65,000 in passive income by age 60 without a problem,” Thompson says. His portfolio is estimated to have reached about $1.6 million by that point, of which about $540,000 will be deposited in his corporate account. This assumes a pre-retirement rate of return (dividends and capital gains) of his 6.27%, based on Financial Planning Standards Council guidelines. At that point, Alan can stop adding earnings from his company to his stock portfolio and start spending the money he earns instead.

He may want to keep TFSA balances as a medical emergency fund.

From a drawdown perspective, if Alan decides he no longer wants to work, the planner recommends withdrawing $49,000 in annual dividends from the corporate investment account, known as non-qualified dividends. Dividend amounts will decrease as other revenue streams become operational. (Usually small private companies pay out unqualified dividends to shareholders out of their after-tax profits, which means the company has already paid them.) Corporate tax with that income. Taxed at a different rate than qualified dividends to avoid double taxation. )

He plans to stop reinvesting dividends from his personal unregistered portfolios and start receiving them in cash instead. Dividends from this account will be approximately $21,700 annually. “His average tax rate for the year will be his 1%, so his income will be very tax-friendly,” Thompson says.

Allan, now 65, recommends planners convert their RRSP to a Registered Retirement Income Fund (RRIF) to take advantage of the $2,000 annual federal pension income tax credit. He may also initiate minimal RRIF withdrawals. If she withdraws her RRIF before age 72, Alan will be able to maintain a very low average tax rate after she retires, reducing the chances of her old age benefits returning when she turns 70. she says.

RRIF’s minimum mandated income will allow him to earn about $10,000 a year at age 65, allowing Allan to reduce his non-eligible income. He takes a dividend from the company, she says.

For example, 71-year-old Alan’s income includes approximately $31,350 in annual CPP and OAS benefits, $7,500 in corporate dividends (down from $49,000), $13,700 in RRIF withdrawals, and $28,000 in personal dividend income. resulting in total pre-tax income of approximately $80,000 per year. Year. Considering an estimated 2.1 percent inflation rate, his expenses would rise to $80,000 at that point, including debt servicing. His tax will still be insignificant.

Alan will also need to convert LIRA into a Lifetime Income Fund (LIF) and start making minimum withdrawals when he turns 72. This would increase his income by about $8,000 a year, at which point he would be able to further reduce the level of ineligibles. Planners say he receives a dividend from the company. Dividend payouts are flexible, so you don’t have to receive a fixed amount each year. He can continue to use this to his advantage after retirement, ensuring that his taxes are kept low and that he can take full advantage of the additional tax benefits available through the company.

A lot could happen in the 40-odd years of this projection, but if Alan can live on dividends alone and leave his principal untouched, he will have $6.8 million in the future at age 95, or 95 years old. will be able to leave a fortune of approximately $3 million at . Here’s the dollar today, says Thompson. This is net of future inheritance taxes and fees of approximately $575,000.

Client status

Man: Alan, 53, and his three children.

problem: Will he have enough dividend income to retire comfortably at 60?

plan: Continue to save and reinvest dividends until retirement. That way, you can receive the dividend in cash. In the unlikely event that dividend income does not grow as expected, you will still be able to leverage your capital.

In return: A good investment for a lifetime.

Monthly Net Income: Take as needed.

assets: Bank account $9,000. A locked-in retirement account of $51,765 from a previous employer. RRSP $118,345; TFSA $186,595. Unregistered Investment: $466,740. Corporate accounts are $157,940. Housing costs are $739,000. Total: $1.73 million.

Monthly spending: Mortgage $1,370. Property tax $335. Water, Sewer, Garbage $105; Property Insurance $135. $140 for electricity. $125 for heating. Maintenance, garden $605. Travel $1,160. $400 for groceries. $25 for clothes. Vacation, travel $415. Food, drinks and entertainment $305. sports, hobbies and subscriptions $20; health and dental insurance $150. Life insurance, disability insurance $140. Communication fee is $120. TFSA $500. Total: $6,050.

liabilities: Mortgage $288,000. The line of credit is $100,000. Total: $388,000.

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Some details may be changed to protect the privacy of the person mentioned in the profile.

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