Retired At 34… 10 Years Later!!!

During the summer of 2004, I waved goodbye to the rat race for good and left the work world behind. I was 34 at that time. So this year, as I come up to my 10-year anniversary of retirement, I thought it might be interesting to take a look back and see if everything has gone according expectations…

What’s Retiring At Such A Young Age Like?

I will get to the financial factors in a moment, but first of all I want to offer a quick snapshot of how this has all played out in my personal life. For starters, my wife and I had two children when I left the work force, but with both of us not working and with some time on our hands, we now find ourselves with six kids! We have had the time to spend with them and have travelled to Florida a few times and also spent a whole year travelling around North America last year. Since my wife is Korean, we have also been to Korea with the kids. Finally, when we were travelling around North America for the year, we decided to homeschool our kids, but now we have continued with the homeschooling since we’ve returned to Canada, and so far so good.

I’ve also noticed that as you move from your 30s to your 40s, you have to work a bit harder to stay in shape.  When I was younger I could eat anything, do very little, and never gain weight, but it’s become harder now—I have to work at it. Every day I am thankful that I have the time to work out and keep somewhat fit…something that would be much more challenging if I had a fulltime job to attend to. I can now understand why some people put on weight in middle age, especially if they have kids and both parents work; there are simply too many demands and not enough time—and exercise moves down the priority list. Also, with the kids at home with us, we have time to swim and skate together as a family.

But now let’s move on to finances, starting with stock market volatility.

What About The Stock Market Crash Of 2008/09?

What about finances? This is an area that I always had confidence in, but looking back, I now realize that I probably had overconfidence…the stock market has a way of humbling every investor! When I first retired, I was thrilled that we had just experienced a huge stock market crash in 2001-2002 (led by the dot-com crash), so I did not expect the carnage that was to come in 2008-2009.  To say I was surprised by it would be an understatement!  

This carnage, combined with the fact that the income trust rules were changed in 2006, provided some challenges.  My portfolio was beaten up quite a bit during this time but overall dividends held up pretty well. My strategy of focusing on dividends was solid, but my overconfidence led me to make a few dumb moves.

Overall, though, stock market crashes are the friend of the long-term investor and this crash was no exception as it created a HUGE opportunity to buy some quality stocks at rock-bottom prices. This is one area where I’ve found many investors have a one-dimensional view of the world. Many investors insist that March 6, 2009 was the absolute BEST time to buy stocks, but this is only partly true. For Canadian investors, a year or so later was actually a better time to buy many US multinational stocks because the Loonie fell to below 80 cents during the crash but recovered to parity by 2010 while US stocks did not recover quite so strongly in some cases. I look back at this time period as a generational opportunity to load up on great, multinational stocks and I highlighted all my picks in my online video series (you can see the free sample clips at http://stopworking.ca/about-the-video-series/) and overall this portfolio has done incredibly well!

In a nutshell, retiring on dividend income has worked out very well. The funny thing is that I STILL get emails or comments telling me that retiring on dividend income is not really possible–even though that is what I have done–and it’s been 10 years now!

Let’s look at the main doubts some people have expressed…

Relying On Stocks For Your Retirement Is Risky

Many people view this approach as risky, but it really isn’t. Think it through …most people rely on working for a single paycheque and are dependent on only one source of income: their employer. The reality is that employers lay off workers at times so this is a risky income stream.  Contrast that with earning income from 20-25 different companies that have each been in business for decades and have increased their dividends regularly. If you stick to the “Idiot-proof ” type of stocks I highlighted in my fifth book, The Idiot Millionaire, it’s not risky at all. The key, of course, is to find recession-proof companies that keep earning money in good times and bad–you are NOT investing in volatile high-tech companies or gold miners.  Simple, boring companies that keep paying out dividends can create a wonderful pension income.

Things Can Change And Derail Your Plans

This comment I somewhat agree with: the only certainty in life is change (along with death and taxes, I suppose).  My portfolio was originally heavily tilted towards high-yielding income trusts which were dirt-cheap during the dot-com boom in the late 1990s, but a one-two punch of the tax rule changes and the fact that interest rates have plummeted and other investors have stampeded into the remaining high-yielding corporations has made them not even close to being as lucrative as they were when I first left the work world. But just as when you see a red light up ahead you take your foot off the gas and press the brakes to avoid smashing into the cars ahead of you, I too adapted my portfolio.  I now have a lot of quality stocks which offer lower dividend yields than income trusts offered, but they also have MUCH higher dividend growth rates. These multinational companies, like Colgate, Coca-Cola, etc. have increased their dividends for decades and they keep earning money in good times and bad. Last year every single one of these dividend-paying stocks in my portfolio increased their dividends with the exception of one, which held its dividend steady. My “pension income” just keeps rising–at triple or more the rate of inflation, so purchasing power keeps going up!

But With Investing Income, Won’t You Run Out Of Money?

This is where my dividend-income approach differs from the one promoted by many in the financial community.  In some cases, people calculate the “safe withdrawal rate” of their portfolio and they try not to be too aggressive to make sure they won’t run out of money. I don’t do that. I spend dividends. This approach creates the mirror opposite of running out of money…you sort of get to have your cake and eat it too!

Stop Working, Stop Saving, And STILL Keep Getting Richer!

The final beauty of having retired with dividends is that over time you keep getting a higher income AND you keep getting wealthier. Think about it…

My approach is to invest in “idiot-proof ”, blue-chip stocks that offer simple things that don’t change and that people buy regularly. Basically I’m looking for things you use every day, like coffee or toothpaste. The beauty of these stocks is that the businesses tend to be very low risk and these companies have consistently raised their dividends for decades–which ensures your income keeps growing…BUT it gets better than that!

Here’s why… when mature companies earn income, a good portion of it is not needed for reinvestment, so dividends are paid. But there are still some reinvestment opportunities whether this involves new factories in developing markets like India or China or add-on acquisitions (like when Pepsico bought Quaker Oats a decade or so ago and took control of the Gatorade brand). In addition, many companies are constantly buying back their own shares–reducing the share count, which has the habit of driving up the earnings per share (and also the dividends).

So if these companies are paying out 50% of their earnings in dividends, it means the other 50% is being reinvested on your behalf, which grows the intrinsic value of your stocks over time and keeps making you richer! The added beauty is that this is all tax-free wealth accumulation!

Here’s why… when you are slowly saving and investing to create wealth, you have to first earn the money and then pay taxes on those earnings–which means you only have the after-tax amount to pay living expenses and then invest whatever is left over after expenses to grow your wealth. BUT once you reach the point where you are living on dividend income, you can spend every last cent that you earn in dividends (and these earnings are often tax-advantaged, but it’s beyond the scope of this article to get into all the reasons). The money that is retained by the companies is used to expand their earnings per share, which also grows YOUR wealth over time–only you don’t have to pay ANY tax on this growth until you (eventually) sell your shares! This is a reason that buy and hold–and collect and spend—dividends works so well.

So ten years on in retirement, the dividends keep rolling in and the portfolio keeps on growing…

One final question I get from those who have seen the video series is why I own some very low-yielding stocks–why not stick to higher dividend-payers only?  VISA is an example of this. When I bought it a few years ago, it was yielding less than 1%. Weren’t there better dividends out there?

The first factor is that with the low dividend, VISA had a payout ratio of close to 10%--in other words 90% of the earnings were being reinvested! This has been reflected in the stock price which is trading at 300% of what I bought it at only a few years ago. In addition, the dividend has more than tripled! Within a few years, the dividend is going to look quite generous based on my purchase price. Any investor who bought VISA shares around the same time I did has got to be VERY happy with their results.

These types of stocks have helped bring my average portfolio payout to around 35-40%, which means that 60-65% of the earnings my stocks are generating is being reinvested to grow wealth over time—totally tax-free!  When I finally do sell, I will only face capital gains taxes which are half the regular tax rates at the various tax brackets. Finally, if there is another economic downturn, there is a huge cushion between earnings and dividends, which reduces the chance of dividend cuts. So my question is, “How is this strategy risky?”

In a nutshell, this is why the rich get richer….without lifting a finger!

Derek Foster (The Idiot Millionaire) – Six-Time National Bestselling Author www.stopworking.ca, stopworking34@yahoo.ca