Wednesday, January 15, 2014

Surprise Year-End Bonus

Since we are trying to fund much of our retirement income from our dividend-bearing stocks, I often use the analogy that the stocks we own are like our employers and the dividends they pay represent our salary.  When a stock increases its dividend, it is equivalent to receiving a pay raise.

This year, one of our "employers" gave us an unexpected year-end bonus.  Canada Bread Company (CBY-T) currently offers an annual dividend of $2.00 per share, paid quarterly at the beginning of January, April, July, and October at $0.50/share.  Then came the amazing surprise–In mid December, Canada Bread Company announced a special dividend of $8/share to distribute extra revenue that they generated in 2013!  This one-time payout was 4x more than the sum of all the dividends that we received throughout the entire year.  We had missed this announcement when it was made and therefore were not expecting this additional allocation.  Imagine our surprise when this money showed up in our account at the beginning of 2014.  It was Christmas all over again.

Based on the current price, which is hovering around the $70 mark, the yield for CBY is around 2.9%, which is below our target dividend yield when picking stocks.  However we bought this stock at the beginning of the year when it was selling just under $50, providing an actual yield for us of around 4%.  So even before this special dividend, we were quite happy with this stock.  It not only provides a decent yield but has given us some value growth as well.  The bonus has just been the icing on the cake.  What real "employer" gives such generous bonuses these days?  Thank you, Canada Bread Company!

Tuesday, January 14, 2014

After First Full Year of Retirement - Year End Review 2013

2013 marked our first full calendar year of retirement, which meant living entirely off our retirement savings.  While it was our first year of receiving no salary income, we were each able to make one final (abet relatively smaller) RRSP contribution for the months from January through May that we worked in 2012.

Before we retired, we created an in-depth projection in our retirement spreadsheet calculator that would estimate and track the amount that our investments would grow by versus the amount of money we would spend, year to year.  At this milestone of our first full retirement year, it is time to take stock of our actuals compared to our estimates and re-adjust our future projections as required.  This is an exercise that we will continue to execute at the end of each year, to ensure that we stay on track and will not deplete our retirement nest egg prematurely.

First we look at the big picture at a high level.  In our retirement plan, we had logged the actual amount of our investment portfolio at the beginning of 2013 (A), and used our parameters (B-G) for growth versus spending to calculate our estimated balance at the end of the year (H).  Scotia iTrade, our discount brokerage, provides an easy way to determine the actual balance of our portfolio, either by account (RRSP, TFSA, non-registered) or as a grand total. 

At the end of the year, we log the actual ending balance (I) in our spreadsheet.  This is used as the starting balance for the next year, causing the entire plan to automatically recalculate (L).  It also calculates our actual growth (K) and therefore the rate of return of our investments.  Using the tool Quicken throughout the year, we have tracked how much money we spent, what we spent it on, and how much money we withdrew from our portfolio to pay for our expenditures.  We update our spreadsheet with our actual spending (M) and then compare all our actual data against our estimates.

We would like to be spending an amount equal to or less than our estimated rate.  If we find out that we have overspent in the previous year, then we will reduce our discretionary spending (dining, entertainment, vacations) the up-coming year to get back on track.  We were very pleased to find that we came in just under our estimates and are on good footing in our plan going forward.

Next we drill down deeper to get a year by year estimate of how each of our accounts will draw down.  This will help ensure that we are receiving the expected cash flow from each of our accounts.

In our book Retired at 48, we describe how we proved that in the long term, our total portfolio would last longer and we would pay less income tax over our lifetimes if we collapsed all of our RRSPs immediately and sourced our expenses by taking some money from each of our accounts, rather than spending all the money in the non-registered account first.  Each year, we will take out the minimum allowable amount from our RRSPs and the rest from our non-registered.  Part of our year-end review involves calculating how much the minimum withdrawal from our RRSPs will be for the next year, and ensuring that we have the cash flow to support these withdrawals at the times that they are made.  In a previous article, I discuss what could happen if this cash flow is not available.

Throughout the year, we diligently categorized our spending in Quicken so that we could get totals on our major categories such as entertainment, dining, vacations, condo fees, property tax, etc.   Now that the year is done, we can run our various Quicken reports to review our actual spending patterns compared to our budgeted estimates.  We also compare our spending for the past year with the trends from previous years to see if there are any significant changes.  Based on these reviews, we create new estimates for our mandatory spending items, adjusted for inflation, to determine how much discretionary spending we can afford for the next year.

Finally, we perform a review of our portfolio, which is mostly made up of dividend-bearing stock, to see if any reallocation needs to occur.  We calculate the sector distributions of the value of our stock to ensure that the relative percentage of our holdings have not skewed too high in any given sector.  We look at the financial results for each stock and read the updated analysis to ensure that no stock has taken a turn for the worse.  We also confirm that the dividend payout for the stock is still holding firm, since we are trying to fund our retirement from our stock dividends.  Actually these last two steps are on-going activities that we execute regularly throughout the year, since we cannot wait an entire year to find out that a stock has cut its dividend.   Throughout this past year, only one of our stocks cut its dividend by a small amount, while many of our stocks have raised their dividends.

At the end of our year-end review, we are happy with where we have ended up over all, and look forward to the next year.