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Freedom 65: Goals And Strategy

It has been less than two years since I purchased my first shares in Ford Motor (NYSE:F) and nearly a year since I have been learning here at Seeking Alpha. I began this journey in investing when an advisor left us with less than 10% of our 22 years of retirement savings. With no company pension waiting in the wings, I was attempting to salvage the shattered dreams of the comfortable, but modest, retirement we had always been told we could easily afford. There was no possibility for a comfortable retirement anymore, but I could at least try my best to manage well what we could squirrel away, and began to voraciously read and learn.

The feeling of never being able to afford to retire lasted as we watched the portfolio go down another 10% while the market went down 12%, in 2011. To clarify, the portfolio value doubled, as we added funds, but the ROI was negative. But my husband encouraged me to keep learning and trying for "just one more year". A higher-paying job, and the lower expenses of an empty-nest helped us to add funds faster. But the biggest factors, the articles here on SA and the time to process it all has resulted in a total turnaround.

At first I was swing-trading, with only moderate success, but soon after being introduced to Seeking Alpha, I discovered dividend growth investing and everything has changed. When I first read about living off dividends in retirement, I harrumphed and thought that could never be possible for us. But I kept reading and learning. It took quite a while to believe we could afford to retire at all without taking high levels of risk, and that the steady, practically boring, DGI names could really take us where we wanted to go. The SWAN (sleep well at night) element of this approach kept attracting me and I experienced success with a few commonly recommended DGI names. The stress gradually subsided and I kept reading.

Freedom 65? Is it really possible? Even for us? Could we really retire at a typical age, even if we had to start basically all over again at age 42? It is only in recent months that I have truly believed we could possibly have enough to retire on. I finally proved it to myself, by taking the amount we currently have now, adding in the contributions we plan to make each year, plus a 4% dividend amount, plus 6% share price growth rates. The spreadsheet compounds it quarterly over the next 21 years (when we reach 65). The numbers say it's possible, but it has taken longer for me to truly believe this can actually apply to us as well. We will really be able to retire and live off the dividends, if we consistently add the planned amount of contributions, earn 4% in dividends, and have annual share price growth of at least 6%. If we mess up and don't add the planned contributions, or share price does not grow, or dividends are not earned, we will face difficulties. But I'm beginning to believe that these are attainable goals, without requiring a significant risk profile.

Replace employment income in retirement passively via dividend income, enough to survive, maintaining our modest lifestyle, so that we do not need to spend the principle of our investments, so that we don't run out of funds and are able to pass on our tidy little nest egg to our children to do the same with.

Portfolio Strategy
1. Keep Saving
Articles here wisely discuss living within your means and savings as a fundamental hurdle to being able to invest. The funds we are and plan to contribute to our retirement nest egg are significant and face some substantial headwinds. i.e.. last year's trip to visit our daughter who lived in Europe, and a trip to visit my aging grandmother who has since passed away. Some things really are worth it, but it is easily possible we will be unable to meet our retirement goals, if we don't remain diligent to save.

2. Create a Windfall
Since we have had a substantial detrimental cash drain to our retirement fund with disastrous consequences, substantial cash bonuses to our retirement fund in the future could have equally, but beneficial, consequences! The problem, of course, is how to create a windfall! We are actively implementing two plans.
Since a home is often the largest portion of a family's assets at retirement, and ours will be owned outright by then, we thought having another paid for by someone else might be a good idea, so we bought a rental property and are planning for at least one more. We're expecting that in 10-15 years this will create a nice injection of cash when it is sold, which will be used to purchase dividend growth stocks. We don't plan on necessarily keeping the rental property until retirement for income in retirement but, like a stock, plan on selling if there's a 'run-up' in price. As the property is currently self-sufficient, and rented reliably by one of our children, the risks are minimized.

Another way we are creating a windfall is to move funds, at the end of the year, from the TFSA (Roth IRA) accounts into RSP accounts (401K's) which includes being able to move stock without selling/buying via direct transfer. This will create a substantial tax refund which can then be dropped into the TFSA's to purchase more stock which can grow tax free until the end of the year when we can do the same again (and again and again), doubling the amount of those contributions each year. In a way, it is like borrowing our own tax money from the government to invest. I transferred from the TFSA during the last week of the year, so that the full TFSA contribution room becomes available again immediately in the new year.

This will create a tax bill in retirement, so beware of implementing this strategy excessively, but I will be careful not to move us beyond the lowest tax bracket in retirement, which shouldn't be too difficult! Without company pensions, it is easy to estimate our future tax situation, which will be primarily based on the portfolio I am building.

3. Manage Taxes
Another significant hurdle is taxes. Now that we have become empty nesters, and at the same time had an increase in income, many of our previous tax benefits have vanished. Taxes erode earnings and can make the job of saving much more difficult. Taxes are our family's single largest annual expense (followed by mortgage and insurance). Reducing that is of primary importance. Last fall, I invested time, energy and a few hundred dollars in an extensive tax preparation course which has been very enlightening. Properly sheltering investments in non-taxable accounts. using the above strategy with TFSA/RSP (Roth IRA/401k) contributions, charitable donations of winning stocks from taxable accounts instead of cash, tax loss selling, learning to maximize dividend tax credits, and claiming all benefits one qualifies for, as well as not paying someone to prepare our family's complicated taxes has this course saving multiple times its cost each and every year. Remarkably, the course itself provides enough education credits to pay for two-thirds of itself immediately. It's been one of my best investments this year, and we will reap the benefits year after year. As an added bonus, I have yet another part-time job for the tax season. It's been win-win-win all around! I wish someone had recommended it to me several years ago.

4. Grow Dividends
I have learned there is a big difference between dividend stocks and dividend growth stocks. The dividend growth stocks will have you far ahead, especially when the finish line is 21 years away. It does not take many years of a dividend not growing to make a smaller dividend percentage that grows reliably a much more valuable investment. I now keep my eye on the YOY dividend growth percentage when picking stocks. Also, stocks without dividends are far less attractive than they used to be.

5. Grow Total Portfolio Value
I know the pure DGI people are going to jump all over including growing "Total Portfolio Value", but just hear me out first. We cannot currently live for a month on the current annual dividends I earn and stocks yielding 90% are pretty hard to come by! In order to exclusively live off our dividends, I must grow the portfolio's total value (by over 20 times in 21 years. Thank goodness for the amazing properties of compounding!) by several means before we reach retirement. Obviously, as previously demonstrated, there must be continued contributions, a few windfalls, tax sheltering, reinvested and growing dividends which all lead to total portfolio growth and therefore dividend growth. Dividend growth IS is the whole point, but our goal cannot happen without concurrent total portfolio growth. Total portfolio growth will matter less as less as we approach living off of the dividends and it will not matter whatsoever once we are living exclusively on the dividends. But at this point, it's an critical factor. If, as my spreadsheet demonstrated to me, my average portfolio growth is less than 6%, we will not be able to retire at age 65 or not be able to live off the dividends alone. The more growth my portfolio shows, the more comfortable and generous our retirement will be. I fully acknowledge that a pure DGI portfolio also naturally includes portfolio growth, and probably more than enough to provide the minimums required.

6. Diversification
Diversification is another factor I need to address. I need to continue to further invest in a wider variety of DGI stocks and make sure those dividends continue to grow. At this point, I simply own too few to be safe, but I have doubled the number in the last six months up to a dozen, with a goal of twenty-five by the end of this year. Should diversification include stocks beyond dividend growth stocks? I foresee that this is something that will change as we move closer towards retirement age. For now, though, if I run into some compelling growth or value plays which I firmly believe will be beneficial, my personal portfolio theory allows this. But as we grow closer to retirement, these will be far less compelling, in favor of preserving capital and growing dividends and a reliable income stream, over total portfolio growth.
As my spreadsheet shows, I now have target amounts of dividends expected each quarter, as well as target amounts of growth expected each year. Having had no experience in dealing with any of these targets yet, I only have others' guidance to go on and a small amount of backtesting. If the 6% growth target is more than met by the much larger DGI majority of my portfolio (which also provides the 4% dividends) on a regular basis, why would I take unnecessary risk to grow total portfolio growth? However, if it is not met, why would I not participate in a carefully chosen growth or value play in order to shore up total value?

7. Hands on Management
Another way to add to total portfolio value is to employ more hands-on management approaches to the dividend portfolio. I could sell overvalued names and wait for pullbacks to repurchase the same equity, (keeping in mind the ex-dividend date), which increases the numbers of shares, thus increasing dividends (and therefore total portfolio value). I have employed this strategy effectively with Keyera (TSE:KEY) this year, gaining an enviable yield-on-cost for the future. Selling parts of overweight positions to diversify into other stocks with a higher yield, or higher percentage annual dividend growth, or the same yield with a likely higher share price growth, within the dividend growth circle, will also grow my portfolio. I reluctantly sold half of an extremely overweight position in Enbridge (NYSE:ENB) recently to purchase other DGI names. This still leaves me with a substantially overweight position, but one I'm more comfortable with, at least for the time being.

My portfolio strategy this year: careful saving, creating windfalls, managing taxes, growing dividends and total portfolio growth, diversification, and continuing to actively manage.

I just want to say one more thank-you to the contributors here at Seeking Alpha. Without your assistance and encouragement, I would not still be doing this. Our goal, which still feels a bit like a dream, would never be realized. I have been able to dramatically increase our total portfolio value for each of the last 2 years using the above strategies. The biggest gift has been the security of knowing that there is the possibility of a retirement future for us again.

The numbers don't lie. Freedom 65 is truly a possible reality for us. Maybe it can be for you, too.

Disclosure: I am long F, ENB, OTC:KEYUF.