Monday, January 5, 2015

Year End Review 2014 - After Second Full Year of Retirement

It's hard to believe that my husband and I are already half-way into our third year of retirement after leaving the workforce together at age 48 back in May 2012.  Now that we are both over 50, being retired feels less of an anomaly, but is just as much of a joy and blessing as when we first embarked on this adventure.  So far, each calendar year of our retirement has been marked by a major event that "defined" that year. The latter half of 2012 was spent researching, selecting, downsizing, packing and moving Rich's parents into a retirement home.  2013 was unfortunately marked by my illness when I was diagnosed and subsequently treated for breast cancer.  Luckily I fully recovered and in 2014, we finally took our dream vacation with a 7 week trip through France.  Now that 2014 is about to come to a close, I wonder what will be the highlight of 2015?  It is also time to take stock of this past year from a financial perspective and determine how we did when compared to our retirement plan.

We completed our first year-end review (found here) at the end of last year, using the various spreadsheet calculators and techniques that I describe in our book Retired At 48 - One Couple's Journey to a Pensionless Retirement.  This year, we will repeat those steps but now we have a baseline to compare against.

Retiring at such an early age without the safety net of a defined benefit pension is quite the daunting prospect, since we are almost solely reliant on our own personal savings to fund our retirement.  To reduce the chance of running out of money too soon, we created a very conservative retirement plan, selecting an extremely modest rate of return (4%) for our investment growth while using a higher than expected initial estimate for our expenses.  The thought was to allow any good stock market years to act as a buffer for the periods of poor performance that will likely occur periodically over the next 40+ years of our plan.

We start off by updating our retirement plan spreadsheet, entering the 2014 actual ending balance for our portfolio, comparing it against the estimate and then using the actual balance to recalculate the rest of the plan for the remaining years.  This recalculation gives us a more realistic estimate going forward.

For the second year in a row, our actual balance exceeded our estimates, with a net growth of 12% after withdrawing dividends for income, as opposed to the assumed 2%.  Several factors led this.  First, because of our conservative plan, we are still spending less than estimated although that gap narrowed a little in 2014 when compared to 2013.  In a later step, we will drill down and examine our expenses to explain this.  Also, the TSX had another relatively good year, with an overall upward trend for Canadian stocks in 2014 (despite several dips along the way).  As a result, many of our stocks grew in value. Finally, we benefited from the bonus of having 23 out of our 35 stocks raise their dividend payouts one or more times in 2014.  While we knew this was likely for some of our stock, we did not factor the dividend growth into our retirement plan, since we could not count on this happening.  In fact, the total amount of dividends generated by our non-registered account grew by 17% in 2014, after a 14% growth in 2013.

We then examine each of our RRIF accounts, calculating the new annual minimum RRIF withdrawal for 2015.  This amount, which grows each year, is determined by the formula (2014 closing balance * (1/90-age of younger spouse)).  We confirm that the annual dividends which we generate from the RRIF account are still sufficient to cover the minimum RRIF withdrawal.  We do have enough for 2014 and should continue to enough for multiple years still, especially if the dividend payouts continue to increase.  At some point, the minimum will become larger than we can cover with our dividends and at that point, we will need to either sell some stock or transfer out stock in-kind to make up the difference.

Next we review the performance of our individual stocks, paying closer attention to the stability and growth of their dividends than to the share price.  While many of our stocks increased their dividend, none of our stock decreased their payout, so we are in good shape. This year, we decided to add columns to our stock portfolio spreadsheet, to track the dividend history for each of our stock holdings.  We now have a better picture regarding which companies regularly increase their dividend payouts each year and which companies don't.  This helps us decide which stocks to buy more shares of, when we make our TFSA contribution each year, or when we select stock to register for the Dividend Reinvestment Program (DRIP).

We also take a look at our asset allocation and sector diversification, to ensure that we are not overloaded in any one sector.  We are most heavily invested in the Financial sector (banks and insurance companies), just like many ETFs or Mutual Funds, and the TSX in general.  But the value of those shares make up less than 33% of our portfolio, which is still within a reasonable range according to the experts. We examined our exposure in the Energy/Oil & Gas sector, in light of the recent free-fall of oil prices.  While we have heard horror stories such as AGF Management cutting their dividend by 70%, luckily none of the energy companies that we invested in have cut their dividends at this point.  Even if one or more companies do reduce their dividend payout in the future, it will not severely impact us since we have ensured that no individual dividend makes up a significant proportion of our total dividend income.

Finally, we run our Quicken report on annual expenses by categories, so that we can compare with previous years and look for trends.  At a high level, our overall spending for 2014 increased by 3.2% in comparison to 2013.  This is initially concerning since our projected average rate of inflation in our retirement plan was set at only 2%.  We did have some unexpected one-time expenses this year that will not reoccur in the future, so that might account for the deviation.  We will keep our eye on this and if the trend persists, we may need to recalculate the rest of our retirement plan using a higher inflation rate.

Drilling down by category, we notice some more patterns.  In 2014 our condo fees increased by over 7%, again higher than the anticipated 2% inflation rate.  Looking back at the previous years, the increase was 1.7% in 2012 and less than .05% in 2013, so maybe this was just a catchup year.  This is another area that we will need to keep an eye on.  In terms of auto related expenses, our fuel consumption and costs decreased significantly in 2013, due to no longer driving to and from work and this trend has continued in 2014.  Our auto maintenance costs are slowly creeping up as our car gets older.  Eventually we will be hit with a large expense when we need to replace our car.

In terms of money spent on vacation, we actually did not do so badly considering we were away for 7 weeks in France followed by 1 week in Calgary (for a family wedding).  Taking part in a home swap and not requiring to pay for accommodations for a large part of our France trip really helped to cut down the costs.  We also notice that we spent less on groceries and dining out than usual, so part of our vacation costs offset the usual eating expenses that would have been spent had we been home.

So the financial review after our second full year of retirement shows us in good shape.  Steady as she goes and onwards to 2015.

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