Posted by In my line of work, a common saying is “hope is not a strategy”. Hoping something will turn out alright without setting a plan is a sure fire way to fail.
“A goal without a plan is just a wish.”
Antoine de Saint-Exupéry
Similarly, hoping everything will work out for retirement without proper planning is insanity. It would be like going on a roadtrip with a destination in mind but no planned route to get there. Here’s where a financial plan comes in.
A financial plan is simply a plan with milestones that will get you to your financial goals. It’s no different than plotting a route on a map to get to a travel destination.
Studies show that you are up to 40% more likely to achieve your goals if you write them down. Since I want to gain every advantage in achieving our financial independence goals, it’s best to write out our financial plan!
1. Our financial goals
We are on a path to financial independence so we can spend our time as we wish. With this in mind, our financial goals can be split into 2 phases.
a) By 45: Grow investment accounts to $1.5M
With $1.5M, we could stop contributing to our retirement accounts by 45 and just let it grow to hit our retirement goals. Without the need to contribute to retirement savings, this gives us the flexibility to downshift our careers if we want to. We could search for less stressful jobs or work more aligned with our values at a lower salary.
By eliminating the need for more contributions, we only need to find a job that can pay for our living expenses. It frees up cash flow for us to take on meaningful opportunities that may not have meaningful paycheques.
We neither love nor hate our current careers. Our compensation is reasonable given the level of stress and effort for the work. Given that, we don’t see a need to seek a less stressful job or the “job of our dreams” immediately.
b) By 55: Grow investment accounts to $2.3M, pay off mortgage, and retire
With $1.5M in investable assets at 45 and ~4% returns, it would grow to $2.3M by a target retirement age 55. At $2.3M, this yields approximately $70K in annual withdrawals at a very conservative 3% rate ($70K / 3%).
Since we want to retire, we also don’t want to have the financial obligation (or mental stress) of a mortgage on our principal residence.
Our current family home is likely too large and requires too much upkeep during our retirement, so it is possible for us to release capital by downsizing our property. It also adds some cushion to our $2.3M investment accounts.
It would be our retirement dream to have access to a lakefront cottage property (whether owned or rented). We don’t have any current plans to buy one, so we will reassess whether we have the financial ability to do so closer to retirement.
2. Saving Money
Contrary to popular personal finance advice, we do not have a monthly budget where we track all of our expenses across the major spending categories. We find it takes too much time and effort to categorize our expenses, with little benefit.
At the end of the day, “how much money are we saving” is the most important fact to know. As long as our savings is on target with our financial goals, that’s all that matters. Whether we spend $50 on a restaurant meal or 10-20% on discretionary expenses doesn’t matter to us.
Save 30% of after-tax income
With that in mind, we currently save 30% of our after-tax income, which will get us to our financial goals mentioned above. The remaining 70% is our day-to-day expenses, including any mandatory & accelerated mortgage payments.
We aim to save any incremental income (e.g., salary increases above inflation/cost-of-living-adjustments, bonuses, etc.) we receive. This ensures we keep our lifestyle inflation in check and adds a bit of acceleration to our financial goals.
3. Only carrying low-interest “good debt”
We see “good debt” as low-interest loans used on assets that generate income or assets where value likely increases over time.
Good debt includes: mortgage debt, business & investment loans, student loans with a clear path to increase income, rental property debt
Bad debt includes: car loans, credit card debt, student loans for degrees with limited income potential
There are some exceptions, but the general principal of “good debt” holds:
- Good debt: a car loan if you need the vehicle to work
- Bad debt: investment loan to buy penny stocks
4. Our Emergency Funds in a HISA
We aim to have ~6 months of expenses in our emergency fund. It’s definitely on the higher end than conventional wisdom of 3-6 months.
However, both Mr. LJ and I work in positions where there’s some employment risk in an economic downturn. We also carry a substantial mortgage as we are early in our mortgage term.
We have access to an undrawn HELOC with a 6-figure credit limit. But banks have the ability to pull HELOCs, although it’s unlikely to happen, so we don’t want to rely on the HELOC.
There are a number of articles that suggest a low emergency fund balance or even none is sensible. As we grow our taxable investment accounts and have more of our mortgage repaid, we will mostly shift to a lower balance. In a few years, we will revisit the right amount of emergency funds to maintain.
5. Our Asset Allocation: Stocks & Bonds, Canada vs. US vs. International
With about 20 years until we need to withdraw money for our retirement, our stock vs. bond split is very aggressive:
| Stock | 100% |
| Bond | 0% |
| Cash | 0% |
When we are (hopefully) achieving our first financial goal at age 45, we will re-evaluate and adjust to a more conservative portfolio.
We split our 100% equity allocation across global equities, and will rebalance if we are +/- 2.5% of the targets:
| Our Portfolio | VEQT | XEQT | |
| US equities | 42% | 44% | 45% |
| Canadian equities | 26% | 30% | 25% |
| International equities | 24% | 19% | 25% |
| Emerging equities | 8% | 7% | 5% |
Our current targets are somewhere between the two popular all-equity asset allocation ETFs of VEQT and XEQT. These targets are a tricky one, as I find myself wanting to continuously tweak it. At a later date, I will write a more detailed post on our thinking behind these targets.
6. Our Asset Location: RRSP, TFSA, Taxable, Other
Our asset locations are prioritized by accounts with (1) employer-matching benefits, such as pension plans and employer stock purchase programs, (2) RRSPs to defer taxes, and then (3) TFSAs. At a later date, I will write a more detailed post on our asset location strategy.
Once those accounts are maxed out, we will start contributing to taxable accounts.
7. Our Asset Selection: Individual Stocks vs. ETFs
Numerous research pieces (here, here and here) have shown that active managed funds underperform passive funds in a majority of circumstances. There’s also Warren Buffett’s famous bet that hedge funds would underperform the S&P index and the Oracle of Omaha was right.
We don’t want to invest the time to identify under-valued stocks to purchase. I highly doubt we will outperform active managers.
Given that, we are 95% invested in diversified ETFs with the remainder in individual stocks. As more contributions roll in over time, I expect our proportion to grow in diversified ETFs. All of the individual stocks are blue chip dividend payers or large diversified conglomerates. I don’t expect we will add to those positions, but rather hold them over the long term.
8. Our Insurance Policies
While there are many life insurance products available, we only put in place a term life insurance policy. A term life policy made sense due to (1) matching our coverage to our liability risk, and (2) lower premiums versus other life insurance products.
Since we are just a two-person household without children, our only liability is our mortgage. Both Mr. LJ and myself are working in decently paying jobs, such that one spouse would make enough to meet daily expenses (excluding the mortgage payments) on their own.
Given that, we each purchased a 30-year term life insurance to offset the outstanding mortgage amount over the span of the mortgage term.
Personally, I do not believe in whole or universal life insurance, which offer savings/investment value on top of the death benefit. In discussing whole and universal policies with my insurance broker, she could not explain to me how the savings/investment values are calculated because they are variable. To me, that makes no sense and I am better off investing the excess premiums (above term life insurance) on my own.
We also looked into insurance to cover non-death situations, such as critical illness and disability.
With the level of coverage of critical illness, I believe I am better off self-insuring as I am assuming any critical illness will be short term in nature. Either I’ll be dead quickly or I won’t be around long enough to be a financial burden on the family.
With disability insurance, I would have preferred the coverage because any disability would likely be a long term financial burden. Unfortunately, the premiums were so outrageously high that it didn’t make financial self to seek third party insurance. I’m just going to take on the personal risk that a disability won’t occur in the near term. Over the long term, we would have stronger financials to self-insure this risk too.
9. Our Estate & Wills
Shortly after Baby LJ was born, we got our wills and power of attorneys (for health and finances) done immediately.
Although, I have started an “Important Financial Information” document. I manage most of the finances in the household. If something were to happen to me, Mr. LJ likely won’t know where our financial accounts are at and how to access them. I’ve created a shared Google Document so he would have access to in emergency.
10. Reassess & Rebalance Annually
Every year, it’s important to assess whether the above financial plan is still applicable in light of personal circumstances (e.g., current age, family size, savings/spending changes, life perspective, etc.)
However, the annual reassessment shouldn’t cause a significant change in the financial plan. It’d be more tweaks around the edges, until we shift into more wealth-preservation age ahead of retirement.
During our income earning years, asset allocations will be rebalanced using new contributions aligned with our paycheques.
Execution is everything
Writing out a financial plan is only a basic step. Executing the plan is the most important.
We’ve had this financial plan in place for roughly a year. So far, we are on track and are executing to plan. Every year, I’ll check-in and readjust as needed.