Retirement planning: Money for something

Announcing a REAL target for your retirement savings goals.

For a couple of issues of this newsletter advisory, I have been (more than) hinting at how the retirement/planning complex has been pushing ordinary Canadians to commit to ridiculous retirement savings targets that, in my opinion, run 180 degrees to normal human behavior.

Now is the time for me to stop complaining about the retirement/planning complex, and provide my alternative. To put up or shut up, as it were.

There isn’t enough space on this page to fully define my own proprietary method of coming up with a savings target, but I can make a start here and finish the job in future issues.

Essentially, my plan involves putting yourself in a position where you can live ‘rent free.’ By rent free, I mean dedicating an appropriate amount of your portfolio to each of your expenses, such that the dividends (or interest or distributions) are sufficient to cover that expense.

A simple example should help here. The year 2013 has just completed. From my 12 monthly bank account statements, I know I paid Bank of Nova Scotia (TSX:BNS) $30 in 2013 for bank fees, etc.

Now the solution to living ‘rent free’ as far as my bank charges go: How much Scotiabank stock do I need to own, such that the dividends on the stock amount to $30 per year?

BNS pays an annual dividend of $2.48. Some simple arithmetic tells me that if I own 11 shares of BNS at a total cost of (11 x $63.32 per share) = $696.52 this little dedicated piece of my portfolio will generate $31.24 in annual income, enough to cover my bank charges for a year. I therefore simply need to have (11 x $63.32) = $696.52 of retirement savings to cover my bank charges every year.

Another example: I have a Telus cell phone that costs me $960 per year. Telus pays a dividend of $1.44 per share, so I need to own 668 shares of Telus, and my dividends will cover my cell phone charges. For a total cost of $42,297.76, I can live ‘rent free’ as far as my cell phone is concerned.

These are the broad strokes of my plan. You can finesse it by adjusting for things like the dividend tax credit, etc. if you like, but the concept is sound. Simply figure out what each of your expenses is – rent, gas for the car, cable TV, etc. – and buy a REIT, Imperial Oil, BCE Inc. – whatever is appropriate – to cover off each expense.

The real beauty of this plan is that, as your expenses go up every year, your dividends should too, such that you’re inflation hedged for life. More to come.


The merits of my plan

There is, of course, more to the plan as I have begun to lay it out in the main article on this page, and we will get to that ‘more’ in future issues. For now, let’s look at some of its merits.

First and foremost, my plan is consistent with human behavior. I don’t believe that ordinary Canadians first envision a retirement of white sand beaches and gleaming sailboats, and then set about putting a savings plan together to reach that illusory target. I believe that ordinary Canadians save what they can along the way, and then adopt whatever lifestyle those savings will afford them when the time comes. In short, retirement lifestyle is the product of what you can afford, not the product of what you’d like to afford.

Second, when you have all of your expenses covered by a dedicated piece of your portfolio, you’ll know you can stop saving. At that point you can elect to continue saving to provide an extra cushion, or not. But knowing you can now live ‘rent free,’ is way different from saving, say, $1 million and still not knowing if you have enough. I suspect that the total amount you will need will be much less than what you think you’ll need.

Third, dividend increases should inflation-index increased expenses to a large extent, if not totally.



Money Reporter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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