Saturday, January 5, 2019

Year End Review 2018: After Six Full Years of Retirement

It has been 6.5 years since my husband Rich and I retired together at age 48 and the time seems to have gone by in a flash.  Reflecting on this past year, 2018 certainly was a wild and turbulent time for the stock market. The S&P/TSX Composite Index went through a roller coaster ride, starting off at a 10-year high with a value of just under 16413.  After such a long bull run and with all the economic and social-political turmoil happening around the world, it is not surprising that the markets were due for a fall.  By the second week of February, the index fell 8% to 15034 but surprisingly by mid July, it had rallied to be even slightly higher than its year-beginning value.  Unfortunately it was pretty much downhill from there, as the index went on a downward spiral, falling to its lowest point on Christmas Eve with an index of 13780.  The index was16% below its starting value before rallying slightly and closing the year with a final value of almost 14323, down 12.7%.  It is too bad there is not a way to predict the timing of the rise and fall of the stock market, in order to take advantage of the adage to buy low and sell high.  In early February, as part of an effort to re-balance our portfolio, I decided to sell some of the shares of Premium Brand (PBH) in my LIRA for $106/share.  This would reduce the total value of that holding and lock in some of the profits made.  The shares had risen rapidly in price since I first bought them in October 2016 for $60/share.  I regretted the sale when the stock price continued to rise to over $120 through April, but then unexpectedly, the price started to plummet.  By the end of 2018, PBH was going for around $75/share and my earlier transaction seemed prescient, when it was actually just dumb luck.
Our portfolio followed a similar trend to the TSX and ended the year down 10% from our opening balance.  But because of our strategy to hold Canadian eligible dividend paying stocks long-term while living off our dividends, we were not really affected by the volatility. While the value of our portfolio took a dive along with the rest of the market, the total dividends generated by our stocks increased by 5%, with the majority of the companies that we hold raising their payout at least once in the year.  Since we first started living off our dividends when we retired in 2012, our total payout has increased over 45% despite a few duds decreasing or eliminating their dividends.  When the market eventually recovers, I will look at the feasibility of selling the few stocks that we own which have not raised their dividends for multiple years.  This is assuming that I can find replacements that have a better history of raising dividends, but which will still maintain our diversification and dividend yield requirements.  We actually see the downturn in the markets as an advantage since it allows us to use the Dividend Reinvestment Plan (DRIP) to purchase more shares at a lower price.  We apply the DRIP to companies that we would like to grow, in accounts where we are not using the dividends paid as immediate income.

As part of our annual year-end review, I took a look at the distribution of our various stock holdings and the dividends that they generate in terms of market capitalization and market sectors.  We want to ensure that our holdings are skewed more towards the stability of large and mid cap stocks as opposed to small cap, and that we are well diversified across multiple sectors.  This year, our small cap percentage increased, not so much because we bought more stock from smaller companies, but because some of our mid cap stocks lost so much in value that they became small cap.

Despite our goal to buy and hold most of our stock, 2018 marked an unusually active trading year where we lost our holdings in some companies through forced buy-backs, mergers and acquisitions. In some cases, it was a welcome and beneficial change while in others, it was not what we would have preferred to have happened since it led to a loss of a steady dividend income stream that we would now need to find a replacement for. The CEO of HNZ Group bought back all of the shares of his company at a price of $18.70/share, which left us with a capital loss of around $7K but gave us a much higher share price than the market price.  Enbridge (ENB) merged with its subsidiary Enbridge Income Fund (ENF), providing Enbridge shares to replace the ENF shares.  Royal Bank (RY) called back its preferred shares RY.PR.D and paid out its value in cash.  This was actually a blessing for us since we regretted buying the preferred shares but there was not much of a market to sell them.  The preferred shares gave us a good yield of 4.5% at the time of purchase and promised a more stable share price. But the dividend was fixed while Royal Bank raised its yield twice annually over the same period.  We would have been better off to just buy and hold more Royal Bank.  In each case where we received cash for the buybacks, we purchased more dividend paying stock.  I chose Emera (EMA) and Bank of Montreal (BMO), both with long-standing histories of raising dividends.

An interesting situation arose when it was announced that Brookfield Infrastructure (BIP.UN) would purchase Enercare Inc. (ECI) in a friendly takeover.  We own both of these stocks, holding Enercare in both a registered and a non-registered account  and Brookfield only in a registered account.  Our first decision was whether to accept cash or Brookfield shares for the transaction.  While I would want more BIP.UN in my registered account, I do not want it in our non-registered account because it is a limited partnership that pays return of capital instead of dividends, which leads to accounting and tax complications if not sheltered in a registered account.  By the time I made my decision to take shares in the registered account, it was too late to make the request, so I ended up with cash in both cases.

The next issue to deal with was the $18,000 capital gain that would be triggered in our non-registered account from this forced "sale" of our ECI stock.  We already had a $7K loss from the HNZ transaction to partially offset the gain, but still needed a further loss of $11K to offset the whole amount.  At the beginning of the year, we assessed the major "paper loss" that we held in our Corus (CJR.B) stock when its price plummeted to less than 20% of our purchase price.  We decided that since we would lose so much of our initial investment, it was not worth selling even though they planned to cut their dividend later in the year.  We would not recover enough money to buy much of anything else so our best bet was to hold, gather the measly remaining dividends and hope for an eventual rebound or a buyout like HNZ which might artificially inflate the sale price.  But now that I needed a loss to cover the ECI gain, it seemed the perfect time to dump some of my Corus stock, which I did.

Like Corus, I had a similar decision to make with my Cominar REIT (CUF.UN) stock, which I held in my RRIF account.  After years of paying out a fairly decent dividend, Cominar cut their dividend slightly in 2017 and then more significantly in 2018.  I should have cut and run last year but inertia and the hope of recovery prevailed.  Now belatedly, it was time to take action and unlike Corus, I would still recover over 67% of my initial investment which was enough to buy a replacement stock.  With the cash generated from the sale, I purchased Manulife Financial (MFC) which yields a healthy 5% and has raised its dividend annually for at least the past 5 years.

In last year's blog, I wrote about changing our RRIF withdrawal strategy from taking a monthly cash payout to making a stock withdrawal "in-kind" at the beginning of the year.  The goal is to gradually move dividend income from being taxed at 100% in the RRIF to generating Canadian eligible dividend income in our non-registered account which is taxed at a much more lenient rate.  We would also be reducing the values of our RRIFs at a faster rate since we are removing both the capital and the income it generated.  Finally by taking our RRIF payments as stock in kind, it reduced the amount of cash that we needed to save up in those accounts, and therefore allowed us to DRIP some of our stocks.

My second goal was to smooth out the monthly dividend income being generated from our non-registered account so that each month would pay enough to cover regular expenses.  Abnormal or unexpected expenses would require dipping into the cash reserves that we held in our short and long-term "kitties".  Since the dividends paid out in the second month of each quarter were relatively meager, I deliberately withdrew stock from our RRIF accounts that paid out in that month.  While I made good inroads last year, I am happy to report that at the end of 2018, this second goal has been fully accomplished.  For 2019, I no longer need to worry about this requirement when selecting which stocks we withdraw for our annual RRIF payments.
In late 2018, I turned 55 which is a milestone year in terms of our retirement, expense and investing strategies. I now qualify for a few early seniors discounts including 20% off on Tuesdays at Rexall Pharmacy and 10% off at Best Western.  While the medical emergency travel insurance that I usually purchase from Manulife costs a few dollars more after turning 55, at least I still don't need to fill out a medical questionnaire to qualify.  This is not required until age 60. I also confirmed that I still qualify for the 15 day travel insurance that comes with our Visa infinite Dividend credit card.  This ends at age 65.

Most significantly, turning 55 meant I could finally start collecting income from my locked-in defined contribution work pension plan, which I moved into a self-directed locked-in retirement account (LIRA) at the time of my retirement at age 48.  While we were able to convert our RRSPs into RRIFs immediately after retiring and have been receiving annual income from these accounts ever since, our LIRAs were not available for conversion into Life Income Funds (LIFs) until age 55.  In addition to the age requirement, the LIF is much more restrictive than a RRIF in that you are required to withdraw an annual amount that falls between both a minimum and a maximum.  The limit on how much you can withdraw each year is designed so that the income in the LIF lasts until age 90.  These paternalistic controls on my hard-earned employment retirement savings felt galling to me, so I was happy to learn about a relatively obscure rule that allows me to request that 50% of my LIF be freed either as cash or as a one time tax-free deposit into my RRIF account.  The catch is that you must submit the form within 60 days of the LIF account becoming active, or else you lose this right forever after!!  Information about this rule can be found on the Financial Services Commission of Ontario website and the request form can be found at

On the day of my birthday, I called the sales department of my discount broker Scotia iTrade in order to open a locked-in Life Income Fund (LIF).  They were able to fill in most of the form for me over the phone and then emailed it to me to print and sign.  I dropped off the signed form at my local Scotiabank branch and within a few days, my LIF account was open.  I then proceeded to wait and wait for the money to be transferred from my LIRA to my LIF.  What I was not informed until I enquired a week later was that I had to send them a written "letter of instruction" before this would happen.  It was not automatic as I initially assumed and this delay almost derailed my timing for processing the form to free 50% of my LIF.

In the meantime, I scheduled an in-person meeting with a representative at the Scotia iTrade sales office in order to execute the directive to free the 50% of the LIF.  I chose to move the money into my RRIF as opposed to taking a lump sum cash amount, in order to prevent a major tax hit on my 2018 taxable income.  This way, I will be taxed on the LIF withdrawal but will be assigned a deduction for the same amount, resulting in no tax being paid on the transfer.  I printed off the form and filled out most of the fields prior to the meeting.  Part III and Part IV of the form required signatures in front of an impartial witness, which the iTrade sales rep was able to act as.  I found out from a friend who had a federally regulated pension plan that he required a Public Notary or Commissioner to be the witness. Luckily this was not the case for my provincially regulated LIF.  Noting that Part IV required signed approval from my spouse, I brought my husband with me to the meeting so that he could sign in front of the witness.

I requested to transfer 50% of the value of my LIF into my RRIF as stock in kind.  Prior to the meeting, I spent some time analyzing the stock in my LIF to see which companies and how many shares I could move in order to come close to 50% of the value of the LIF.  Because I could not predict the stock prices on the day of the transfer, I requested a bit less than the 50% value and made sure that I had accumulated enough cash to make up the difference.  I instructed the rep to use the lowest stock price of the day, so that I could free up more shares.  As of this year (2019), I  will need to start my annual withdrawal from my LIF and will again request to withdraw stock in-kind.  At age 55, my minimum withdrawal is 2.86% and the maximum is 6.5%.  Unlike the RRIF, I cannot use my spouse's age to set the withdrawal percentages.  Now that I have gone the entire process of converting my LIRA to a LIF and freeing 50%, my husband will be ready to do the same when he turns 55 later this year.  Since his work pension amount is less, after the 50% withdrawal he may soon qualify to unlock the entire remaining value of the LIF under the "Small Amount" rule.  See Question 9 of the LIF FAQs.

Several years after RBC and TD Banks first introduced them, my discount broker Scotia iTrade has finally followed suit and now offers U.S. registered accounts for RRSPs, RRIFs, LIRAs, LIFs and TFSAs.  Within these accounts, you can hold American stocks or Canadian stocks such as Algonquin Power (AQN.T) and Brookfield (e.g. BIP.UN, BEP.UN) that pay dividends in U.S. Dollars and keep the U.S. cash rather than having the dividends converted to Canadian and incurring currency exchange and extra fees charged by the brokerage.  It has been estimated that the savings on these fees could amount to as much as 1.5% of the value of the dividends for each payout.  I have now moved the applicable stocks in our portfolio to the US side in both our registered and non-registered accounts.  For our non-registered account, I have been transferring any US cash dividends to my US bank account, thus generating a source of US funds to spend on our trips to the United States without having to pay currency conversion rates.  I am not sure yet whether I can withdraw US cash from the US side of my TFSA account directly to the US side of my non-registered account without the money being converted to/from Canadian.  If this is possible, then I assume that I can then re-contribute the Canadian value of that withdrawal amount the next calendar year?  I will try this with a small amount later on in the year.  Similarly I have not tried to withdraw US stocks in kind as part of my annual RRIF withdrawal.  This might be an experiment for a future year.

In 2018, we made some major changes to our utility expenses.  Finally deciding to get with the times, we purchased a second cell phone so that we each had one and cancelled our  phone land line.  In addition to the cost savings of the phone line, we had the extra intangible advantage of getting rid of the telemarketers and donation seekers who were basically the only ones calling our land line.  We now obsessively protect our cell phone numbers and only provide them to companies or institutions that we actually want or need to call us.  We were lucky enough to be able to take advantage of the brief price war that the major Tel-coms waged this year and snagged the deal of 10GB of data for $60/month from Bell Canada.  In fact, my husband signed up for the cell service deal before we even bought the second phone.  We renegotiated a cheaper price with Rogers for our internet and cable bill after our previous discounted deal expired but it was only for one year so I think we will need to try and do so again this year.

For the first time since 2014, we were not able to secure a home swap for our vacation.  We still had a lovely 3 week "Off The Beaten Path" trip to London, England in May, but it was quite the sticker-shock when we had to pay for our own accommodations for the first time in years. We also took an overnight cycling vacation to Meaford, Ontario (near Collingwood) in July and an impromptu, last-minute 2 night/3 days stay in Manhattan in November which I am busy trying to blog about.  Unfortunately once again, I have not been able to finish writing about our vacations within the year that we took them.  We continue to enjoy tennis, cycling, walking, theatre, art galleries and taking interest courses.  I have been trying to complete a free online course on Greek Mythology for over half a year now, but keep getting distracted by other activities and social events.  Our early retirement continues to be wonderful, active, fulfilling, stress-free and was worth all the saving and planning over the years that made it possible.

2017 Year End Review
2016 Year End Review
2015 Year End Review
2014 Year End Review
2013 Year End Review
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