Tuesday, January 9, 2018

Year End Review 2017 : After Five Full Years of Retirement

It has been 5.5 years since my husband Rich and I retired at age 48.  With 2017 coming to a close, it is time once again to analyze how we did on the year.  Where the TSX lost 11% in 2015, then soared 22% in 2016, 2017 ended in between with modest gains of 6%.  It was not as clear cut in determining how our portfolio performed in 2017, due to an unexpected influx of funds arising from the receipt of a modest inheritance.  We used part of these funds to add more dividend-paying stock to our portfolio in order to increase our dividend payments that we use as our source of retirement income (more on this later).  In order to have an "apples to apples" comparison to the previous year, I worked out our performance excluding the new investment funds.  Based on this calculation, we had a 14.9% increase in value over 2016 when including the dividends that we withdrew as income, and a 10.2% increase excluding them.  While it is nice to see the value of our portfolio grow in excess of the TSX, what we really care about is the amount of dividends that we generate.  Back in 2013/14, dividends were growing in double digits, but the growth has progressively slowed down since then.  In 2015/2016, our dividends grew between 6-8% but in 2017, they only grew by 4% (again, excluding our new investments).  I use the term "only" since this seems low relative to previous years.  But compared to the salary increases (or lack thereof) that I used to get while working, having an annual 4% raise is still pretty good.

I checked on the mix of our portfolio in terms of market capitalization and sector to ensure that we were still sufficiently diversified.  Since our strategy is to buy and hold for the dividends as opposed to buy and sell for value gains, we more or less held the same stock between 2016 and 2017 with a few minor additions and subtractions.  Therefore it is not surprising that the numbers are quite similar year to year.  Our relative percentage in large cap stock has grown a bit, mostly because some of the mid cap stocks that we owned in 2016 have grown in size and now are classified as large cap.  We are happy to see that our dividends continue to come from a variety of sectors and that we are limiting our exposure to riskier small companies.

When you come into unexpected funds that fall outside of your annual budgeted income, the tendency is to indulge a bit on discretionary extravagances that you would normally not consider.  We definitely did this, each selecting a few items that we have always wanted, but could not normally justify.  Before doing this, we made sure to first allocate money to rebuild our short and long term emergency funds, which had been decimated the previous year by major unexpected home repair expenses.  One of the extravagances that I wanted in particular was a TIFF Patron's Circle Gold membership, that would allow us to attend press and industry screenings of movies during the annual Toronto International Film Festival.  While our other purchases were one-time expenses covered by the one-time influx of extra funds, the membership would be a new major expense that would need to be added to our annual budget.  We continue to live by the adage that "if we can't afford it, we can't have it", so in order to support this ongoing expense, we needed to add enough new stock to pay out dividends to cover the amount each year.  This was all taken into consideration before determining how much we had left to spend on fun purchases.

I had an extra goal that I wanted to achieve when deciding which stocks to purchase in order to add dividends to our non-registered account.  As previously mentioned, we withdraw some or all of the dividends that we receive each month to use as income to pay our monthly bills.  Up until 2017, the dividends that we were paid in the first and third months of each quarter (e.g. January/March) far exceeded the ones we received in the second month (e.g. February).  While we made more than enough dividends in the first and third months to cover our average monthly expenses, the second month always fell short, thus requiring some planning to save up extra money for those months.  In 2017, we finally had additional funds to invest and so I was able to tackle this issue.  While making the payout of the three months equal is not reasonably achievable, I wanted to get to the point where the second month could at least cover a normal month's expenses.  I therefore focused on purchasing stock that I was interested in anyways, but which happened to pay in the second month, or at least monthly.

It has been our strategy since we retired to try to slowly reduce the value of our RRSPs so that we would not be hit with a huge tax bill when we turn 71.  In that pursuit, we converted our RRSPs into RRIFs right after retirement in 2012 and started withdrawing the legal minimum in cash each year.  As it turned out, the annual dividends generated from our RRIFs exceeded the minimums.  So despite these withdrawals and because of long term upward trend of stock prices, the value of our RRIFs continued to rise since we never reduced the capital.  Going forward from the 2018 RRIF withdrawal, we have implemented a new strategy.  Instead of saving up our dividends and withdrawing cash, we will move dividend stock "in-kind" from our RRIFs to our non-registered account at the beginning of each year.  This strategy achieved multiple purposes.  It effectively reduces the value of our RRIFs by reducing the amount of stock held there, and eliminates the dividends paid out by those shares.   In addition, by again selecting stock from our RRIFs that paid in the second month, I furthered my goal of smoothing out our monthly income flow.  Finally I no longer have to worry about maintaining enough cash flow to support the entire annual RRIF withdrawal.  I only need enough cash to cover any excess amount triggered if my stock transfer exceeded the minimum withdrawal amount, since we would be charged a withholding tax on that amount.  If we continue this strategy for multiple years, we should eventually generate a noticeable reduction in the value of our RRIFs and successfully move more of our income from being taxed at 100% (from the RRIF withdrawals) to the much more tax efficient dividend payouts from a non-registered account.

I had several reasons for choosing to move stock in-kind as opposed to selling in the RRIF, making a cash withdrawal and re-purchasing the same stock in the non-registered account.  I saved the two $9.99 transaction fees for the sale and purchase, but that was inconsequential.  More importantly, it was an easy process, taking a simple phone call to my discount broker Scotia iTrade to make the in-kind transfer happen.  If I had sold stock and then purchased, I would have to wait 5 days for each of the transactions for the trades to settle and could have missed out on a dividend payout in the interim.  And there was always the chance that after selling a stock, the price might soar and I would lose money trying to buy it back.  With the in-kind transfer, I controlled the price that was used for the transfer, being able to pick between the low and the high price that the stock reached that day, up to the point that I requested the transfer.  I chose the low price, so that I could transfer out more stock while still maintaining close to the minimum RRIF withdrawal.  The only thing I would do differently next year is to wait until later in the day to make the transfer, since it would give me  a longer period of time from which to choose a price.  I also found out that I could transfer more than one stock as part of my RRIF withdrawal, but the stocks had to be Canadian.  I could not transfer a US stock from my RRIF into my US non-registered account.

We had one more unplanned investment opportunity in our non-registered account which arose towards the end of 2017.  In 2016, HNZ Group (HNZ.A) cut their dividend payout and as a result, the value of our stock plummeted and we lost the income generated by those dividends.  We thought about selling the stock, but since we had lost over 50% the value of this holding, we were not going to be able to buy much with the proceeds anyways.  So rather than lock down the loss, we decided to hold onto the stock for a while to see if it rebounded.   Towards the end of 2017, we were notified that the president of HNZ Group was offering to buy up all of his company's stock at a much higher price than had reached for over a year.  Because of this forced sale, we recouped about 85% of our original value.  Now we had a new chunk of money to invest in dividend paying stocks, as well as a small loss that we could carry forward to a future tax year to offset a future capital gain.  With the inheritance investment, the RRIF transfers and the investment from the HNZ sale, I am happy to report that our second month dividend payout now is large enough to sustain itself for a normal expense month, without the need to borrow funds from a previous month.  Mission accomplished.

All in all, we continue to be in good position and ahead in terms of our retirement plan.  In 2018, I will turn 55 and will be eligible to collapse my Locked in Retirement Account (LIRA) and turn it into a Locked-in Income Fund (LIF).  Given that my birthday is at the end of the year, I will probably wait until the beginning of 2019 to do so, rather than add a new income stream so late in the year.  This will probably become a topic of discussion for next year's Year In Review blog.

From a social aspect, we are still busy as ever, with no plans to slow down.  We still have not had the time to tackle many of the hobbies and activities on the original to-do list that we made when we first retired.  In 2017, we continued to be lucky in securing another home swap that allowed us to vacation abroad economically, this time spending 3 weeks in the spring in Belgium, including a 9 day home swap in Antwerp.  We did so much on this trip that it took me the rest of the year to blog about it.  We also took some shorter trips to New York City, Ottawa, Stratford and Cleveland that I have not written about yet, but pledge to complete before starting our 2018 vacations.  In addition to the interest courses that we take at Innis College as part of the Later Life Learning group, we have also discovered some excellent courses at Hot Docs including ones on Film Noir, Art Deco and the History of Design Styles.  Rich has picked up a few new hobbies including meeting with a group who share his interest in vintage watches.  In order to keep our minds sharp, we have taken to completing one or more crossword puzzles each day, taken from the free Metro paper, the Globe and Mail or the New York Times newspapers.  We look forward to continue pursuing our many interests through 2018, and maybe we can even check off a few more new items from our original list.

2016 Year End Review
2015 Year End Review
2014 Year End Review
2013 Year End Review
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  1. Hello. I am so impressed by your accomplishments. In fact, you inspired my wife and I to retire at 51. Your review commented about a holding that cut its dividend and how that meant a loss of income and dramatic decline in share value. Is there any reason you would not hold a significant proportion of preferred shares? The tax treatment is favourable and I can't recall when a BBB or higher rated company actually defaulted on a preferred dividend payment.

    1. We do own one preferred shares (from Royal Bank) and while it is true that it provides stability in terms of both share price and dividend payout, it also does not raise its dividend. So a dividend yield that was quite healthy when we bought it in 2011 now lags behind our many other stocks that regularly raise their dividends. We rely on our dividend increases to keep up (and so far exceed) inflation. We temper the risk of dividend cuts by diversifying and ensuring that no one stock makes up such a large portion of our income that it would seriously affect us if they decrease or cut it. The other thing about preferred shares is that they are less liquid and less traded than stocks so it would be more difficult for me to sell my preferred shares if I choose to. While it is more risky to play in stocks than to go with the safety of preferred shares, so far the benefits have more than outweighed the drawbacks for us, especially since we deal mostly in blue chip stocks that regularly raise their dividend.

  2. Thank you for the response. Would you ever share the names of some of the holdings you think are the best for expecting continued dividend growth? I would love to add these names to my portfolio as well. Cheers! Please keep up the blogging!!!

    1. Email me at retiredat48book@gmail.com and we can communicate there. Note that I can only share with you our own experiences since we are not experts by any means, nor do we have a crystal ball into the future :)