Wow 2020 you sure took us for one hell of a ride. If you were to ask me back in March 2020 if we’d be where we are today with record breaking stock market returns I’d tell you to shove it. I cannot believe how 2020 came to a close and the markets just continued to climb ever since its crazy drop-off in March. VTSAX, which tracks the overall US stock market and makes up the majority of our portfolio, was up 18.7% for the year. Are you kidding me? Are we reaching a bubble? Are the largest companies that make up a majority of the index (tech) over valued? Is it time for small value stocks to shine?
P/E ratios currently sit at 38.49 which is very high and unsettling. For those unfamiliar with P/E ratios and why I’m so weary of the markets, you can read more here. It’s not as scary as the 2008-2009 Great Recession but we are approaching the 2000 Dot Com Bubble territory.
Looking at Shiller PE ratios, which are cyclically adjusted price to earnings ratios, we are looking at scary indicators too. The Shiller P/E ratio is currently at 34.72 which is past the Black Tuesday (Great Depression) value of ~30. The only other point in which we’ve seen the Shiller P/E Ratio this high was during the Dot Com crash where it reached 44.19. Essentially this value is coming up with the price to earnings ratio that is based on average inflation-adjusted earnings from the previous 10 years. If this is gibberish, you can read more here.
The main reason why this is important is because of it’s correlation to determining safe withdrawal rates. When the Shiller CAPE is high, the lower your safe withdrawal rate and vice versa. Granted we are also in low interest rate territory which helps, but I still do not like these numbers at all.
Now, does this mean to sell everything and run for the woods? Sash your portfolio in cash, bonds, real estate, gold, or crypto instead? These aren’t bad ways to diversify, but no that’s not what I’m saying. Just something to be aware of.
Will we continue to see some market volatility in the near term? Likely. That’s inherently what the stock market is all about… volatility and risk! The point, as always, is to ignore the noise. Understand your risk tolerance and invest for the LONG TERM and do not obsess over the day to day blips.
Speaking of withdrawal rates, for those who haven’t seen it – Bill Bengen (the author of the report titled “Determining Withdrawal Rates Using Historical Data” which is what the Trinity Study was based off of and where the ‘4% Rule’ was coined) recently provided an updated report in Financial Advisor Magazine titled “Choosing The Highest Safe Withdrawal Rate At Retirement” with a more rosy outlook in withdrawal rates.
Based off this recent report, with the current market structure of being in a low inflation regime (where CPI is between 0-2.5%) and where the beginning Schiller CAPE range is 23 or >, then the report states a safe withdrawal of 5%.
Does this mean we are bumping up our withdrawal rate plans? Absolutely not. But a worthwhile read nonetheless.
Just like in our previous quarterly updates, we are going to break down exactly where our current investments live for our Q4 2020 update.
A Look Into Our Liquid Assets
As of December 30, 2020 here is a breakdown of our liquid assets (home and car not included as these are illiquid!):
Any Liabilities?
Back in October we paid off our mortgage on our townhouse, which we are currently renting out, but also purchased another home so our mortgage liability is currently $314,379 at a 2.04% fixed interest rate for these first 5 years. So here’s the total amount of our passive net worth:
We are focusing on the top green number (without the mortgage) as the plan is to sell the townhouse and pay off our mortgage with those proceeds prior to retiring early. Here’s a pie chart for my visual learners.
The Cash Bucket
We now have ~$85,000 sitting in cash – woohoo!? Of that, ~$35,000 will be going towards investments in Q1 2021 (TFSA, RRSP, RESP) leaving us with ~$50,000 in cash.
We will deplete about $30,000/year from our annual expenses while we have our mortgage in place. The majority of the mortgage at our new place will be covered by the rental but we will be left with about $2,000 per year to come up with the difference. Thank you house hacking for continuing to keep this expense low.
We will bring in about $47,000 after-tax income from my part time job (plus any sort of bonus which I do no include here). Our current thought/plan is to get our cash bucket to the ~$85,000-$100,000 range before pulling the plug on the job.
We were originally planning to have this figure in the $125,000-$150,000 range which would equate to $25,000-$30,000 withdrawals per year for 5 years. However, we will not need to be withdrawing this amount to start with thanks to Canada’s generous benefits that we will be receiving once I leave my employer. More to come on our reasoning here in a separate post dedicated to this topic.
Our overall cash/bonds/stocks breakdown is:
We went from 21.8% cash in Q2, to 10.7% cash for Q3, now to 8.8% in cash for Q4. It’s all relative really as we decided to put it into housing instead.
Remember, during our wealth building phase we were NOT this heavy in cash. We are not financial advisors in any sense, but we would not recommend holding this much cash during your wealth accumulation phase unless you have a large purchase coming up such as a down payment for a home.
Research shows that being 100% invested is better than hoarding cash. This Seeking Alpha article breaks down the numbers and shows how that works. Even though the math works (100% invested in the market), psychologically, I feel better having cash available and on hand.
It helps me sleep better at night since we are so close to our FIRE number and will help protect us against sequence of returns risk once we do FIRE (which I am very attuned to given the current Shiller P/E ratios above).
Morgan Housel wrote it quite perfectly in his new book The Psychology of Money:
“Say cash earns 1% and stocks earn 10% a year. That 9% gap will gnaw at you every day.”
“But if that cash prevents you from having to sell your stocks during a bear market, the actual return you earned on that cash is not 1% a year – it could be many multiples of that, because preventing one desperate, ill-timed stock sale can do more for your lifetime returns than picking dozens of big-time winners.”
This is probably the most eloquent articulation of why you need to have a sufficient cash balance on hand (especially when it comes time to withdrawing and not having any earned income anymore). It may feel like you are leaving money on the table, but the last thing you want is to be forced into a fire sale.
Our short term play is to be ~75% in stocks and our long term play is to be back at ~90% in stocks like we were for a majority of our wealth accumulation phase. The game plan is to transition via a glide path to a higher stock allocation over the next 5-10 years as we deplete our cash and bonds first during our withdrawal phase.
At the end of Q3 we were 68.3% in stocks and now we are at 76.3% due to our cash finding a new home (pun intended), shifting some bonds to stocks, and the stock market going on a tear this past quarter. As our cash bucket fills back up, this will likely shift the stock portion of the portfolio back down a bit but it could remain in this elevated state if stocks do well this next year again. We are OK if our stock allocation remains above 75% of the overall portfolio as the goal at this point is to build back up the cash reserve and pay off the new mortgage. I am totally fine if our stock allocation grows to become more than 75% of our portfolio by the time we retire. I just want to ensure we have enough cash on hand for the first 5 years to weather any early dips in the market.
What Is The Plan Between Now and FIREing?
I swear every update I say our goal is to retire in about a year from now! Clearly I’ve been pushing things off hah! One more year syndrome??
The original plan this time last year was to retire in March 2021 after receiving my annual bonus. While we could do that and it likely would all work more than fine, we’re in this really Zen spot where life is good so we might as well keep chugging along as is and keep adding buffer to the numbers. I feel like I’m retired with my current part-time shift-work setup yet we’re still able to save 50% of my salary.
All that to say, we are flexible with the timing of when I leave the office. If I get a new crazy aggressive boss, I’m out. If we shuffle shift partners and I’m now with someone too intense or lazy, I’m out. If work becomes too stressful, I’m out. If my part-time setup no longer works for the company, I’m out. If I need to start coming in for day shifts, I’m out. If my schedule changes to something not conducive to us, I’m out. You get the idea. We have more than enough F-U money that the job needs me more than we need the job.
As of now, we are thinking that I will take some time off in 2021 for baby 2’s hopeful arrival and then return to work until at least March 2022 so I can get two nice bonus checks (March 2021 and March 2022 granted the 2022 one would be significantly less if I’m gone for part of the year on parental leave). At that point, we can assess how the work-life balance is going as a hopeful family of 4.
We will be renting out our current townhouse where we will be netting ~$1,200/month after all expenses (thanks in part to not having a mortgage on it anymore) which covers 90% of our mortgage at our new place.
Whenever we do sell the townhouse, the proceeds will fund a large majority of the remaining mortgage balance for our new place (at least 95%, if not the whole thing depending on when the sale of the townhouse takes place and for what amount we net). So while that big red line item in the liabilities chart above may seem scary, we’re not too concerned about it at all. The goal has always been to be 100% debt free, including the mortgage, whenever we retire and that still remains the plan even in this low interest rate environment.
What Do We Invest In?
To dig even further, here is a breakdown of the different accounts we have our non-cash investments in:
- Vanguard US Total Stock Market Index Funds: 48.2%
- This is either in VTSAX in our US accounts or VUN.TO in my Canadian accounts. We are big fans of tracking the overall US stock market. Canadians can also perform Norbert’s Gambit to hold VTI in USD instead.
- Vanguard Target 2045 Index Fund: 28.2%
- VTIVX which is made up of the following: 54% Total US Stock Market, 35% Total International Stock Index, 7% Total Bond Index, 3% Total International Bond Index. We like target-date funds even though it has a slightly higher expense ratio (0.15% vs 0.04%) because it provides us with some international funds and this index rebalances itself over time.
- Vanguard US Total Bond Market Index Fund & Vanguard Canadian Aggregate Bond Index: 13.6%
- We hold VBTLX in our US accounts and a small amount of VAB in our Canadian accounts.
- Company Stock: 7.8%
- I only own one individual company stock and it’s for a renewable energy company I’ve worked at for years.
- International Funds: BlackRock iShares Core MSCI All Country World Ex Canada & Developed All Cap ex US Index: 2.2%
- REIT Index Fund: Less than 1%
That’s it! Some acute FImily followers may realize that we made some changes to our allocation over the last quarter. What did we do?
- We really only have 1 adjustment to report for this quarter. Back in late October we decided to shift ~$50,000 of our bonds over to stocks. The main reason being that I don’t see many positives in the short term for bonds these days. While I am weary of the stock markets, I also do not see bonds playing a huge role in this low interest rate environment. (As interest rates fall, bonds go up and vice versa. Seeing that we are at near 0 interest rate for the foreseeable near term future, this means there is likely little opportunity for bonds to go up.) I still think our bond portfolio is still too high (~$150,000) given where I think bonds are heading. I may shift another $50,000 of stocks over to bonds and then leave the bond portfolio alone.
- We also had to shift some cash around for the new home and we took out $9,500 from our TFSA to ensure we could cover all costs. So the plan is to dump this $9,500 right back into our TFSA on January 1 (as you have to wait until the following calendar year to recontribute any withdrawals).
- We had some cash sitting in our RRSPs and are working on shifting that over to VUN.
- Once I receive my bonus in March we will shift that cash into any remaining room in our TFSA & RRSP as well as into Finn’s RESP for 2021. Anything remaining will go into our high interest savings account to build up the cash buffer. We’re also planning to buy a hot tub this year!
Here’s a chart with the breakdown:
We are big fans of Vanguard, index funds, ETFs, and low fees. If you are interested in learning more about any of the funds we invest in, click on the links below:
- Funds within our US portfolio:
- Funds within our Canadian portfolio:
A large majority of our investments from stocks or bonds are in either US stock market index funds or US bond market index funds (a majority of the Vanguard Target 2045 fund is in US holdings). We made some adjustments this year to get ~10-20% of our portfolio in international funds. Last update we were at 10.2% international and now we are at 10.9% international so I’m pretty happy here.
It can be argued that many of the companies in the US stock index have a significant amount of business taking place abroad. Again, we are not here to argue or tell you what to do, we are simply showing you our story and methodology.
What About Currency?
For the sake of this exercise, we are keeping all currencies as is in their current currency denomination, but as we mentioned in a previous post outlining our FIRE number, we are using currency arbitrage to keep our safe withdrawal rate below 4%.
As of this writing, 75% of our accounts are in USD and 25% are in CAD. If we converted all USD to CAD based on today’s exchange rate of 1.28, we’d be looking at a total of $1,184,879 CAD in our investment accounts.
Assuming $35,000 CAD in annual expenses, this puts us at a 2.95% withdrawal rate. If we bumped up our expenses to $40,000 CAD it would be a 3.38% withdrawal rate.
We also have the Canadian Child Benefit (CCB) and some federal and provincial benefits working in our favor once we FIRE which brings our withdrawal rate down to 1.52% at $35,000 annual spend and 1.94% at $40,000 annual spend. This assumes the CCB supplements our child-related costs while we have kid(s) in the house and then both our income & expenses drop when the kid(s) are older/out of the house and the associated CCB is gone.
Where Do We Stand?
For those who have been following along, you know that our FIRE number is $875,000. (We will be doing an update to our projected FIRE number here shortly since it’s been awhile and we decided to be even MORE cautious/conservative.)
So let’s do some simple math:
$979,139 – $314,379 = $664,760
While this may not look rosy, we are past our FIRE number. Weehee! This short term “issue” of having a mortgage will be gone once we sell our townhouse and wipe out the mortgage of our new home with the proceeds. Thus, I am mostly focused on the first number of the equation above.
It will be interesting to see what 2021 has in store for us. I’m quite confident we will cross the $1,000,000 mark in investments this year. My true FatFIRE goal is to have over $1,000,000 in stocks and bonds PLUS 5 years of cash piled away (I view FatFIRE not on your spending level but on how low you can get your withdrawals and how much flexibility you add into your plans). We shall see if we can get to this point!
Our Net Worth:
As for our total net worth, we would then add in the value of our illiquid assets like our home and cars. Our townhouse is valued at roughly $300,000, our new home is valued at around $400,000, and our two cars are valued at around $11,000. Of course, we will not know the true value of these illiquid assets until we actually sell them down the road.
Adding these three figures into our net passive investments of $664,760 above gets us to a total net worth estimate of:
$1,375,760
That’s an overall increase in net worth of $56,828 from last quarter and I can tell you I make nothing close to that quarterly so compound interest and the market are definitely helping to bump up that figure from last quarter.
When looking at how we’ve done for the total year, our Q4 2019 report showed us with a total net worth of $1,210,455. That’s an improvement of over $165,000 for the year. Just wild considering what a shit storm 2020 has been! (And that our real estate market is stagnant in our neck of the woods.) (And that our income is quite low, so the large majority of the figure came from the markets.)
We have a few other items in our portfolio that we like to hide behind the scenes as our true emergency fund such as my Health Savings Account (HSA), my pension from my previous employer, Nic’s 401k, our child’s RESP, any CPP/SS/OAS/GIS potentially coming our way in the future, and our future car fund so for the sake of this exercise we are not including them.
Voila! Stay tuned to see how our net worth has changed in 3 months when we check back in on this. Hopefully we will do a little celebration when we see our liquid investments (cash, stocks, bonds) cross the $1,000,000 mark!
What is your asset allocation and where are you at on your journey (i.e. paying off debt, wealth accumulation, retired early, etc.)? Do you calculate your net worth? If so, how often do you check in on your accounts? Thanks for tuning in and comment below 
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Whoop whoop, keep up the great work Court and Nic. Love how you mentioned Morgan Housel’s idea of holding an ample amount of cash and how that can actually save you in dire situations (such a great book I tore through it in like 3 days.)
Also, really appreciate how transparent you are with numbers and figures. Might be the only blog out there that does this!
Looking forward to more content!
Thank you Jeff! I actually haven’t been able to get my hands on his book yet (!!! STILL waiting for it from the library, it’s quite popular around here hah) but I heard him mention that part of the book on a podcast and thought it was great. We try to show as much as we feel comfortable with to help others on their path – glad you find it helpful!
That’s a very sweet spot to be in, Court, when the job needs you more than you need it! Way to go! I’m curious to know, what are your thoughts about how you might want to identify yourself when people ask what you do for a living? Retired? Investor? Stay at home mom? And I wish you all the best with hopefully baby #2 :).
Hey Danielle, yes indeed, it is a very sweet spot! You know, I’ve never really thought about that but likely would say stay at home mom as that’s what Nic currently goes by. But really, the answer would depend on who the conversation is with – someone I’m comfortable with = retired (which hopefully leads to “what? how?” and I can explain and help them), someone I hardly know = investor or even more broadly “in finance” just to drop it and move on.
Sounds great, Court 😉
Thanks for this — as I’ve commented on other posts, we’re in a very similar situation. I do a formal total of our various accounts quarterly, and our Q4 total was a hair under $1.2 M (USD). Subtracting our mortgage would put it at 1.05 M (USD). In terms of AA, it’s similar – we’ve got more cash than usual (10%) from our house sale but we’re putting most of that back into the market ($10K a month). Outside of the cash, we’re 51.5% US Stock, 35% INT Stock, 3.5% REIT and 10% bond. I’m thinking about phasing out the REIT, though.
I’ve always said our FIRE number was $1.2 M (including a reasonable mortgage) but, like you, I feel like things are pretty overvalued right now. Plus, we moved from the US to Canada in July and I want to see what our real COL is up here. So far, though, it seems good. In a year or so we’ll revisit things, but we’re definitely reaching the “don’t really have to work” phase.
One thing we’ve been thinking about recently is diversifying outside of investments to other ways to reduce spending / meet needs. So, for example, putting solar on the roof, or building a greenhouse, etc. I’m particularly interested in gardening once I transition away from full-time work. Neither of those are particularly huge expenses, though. Until now, I’ve never invested in things like gold, crypto, etc. and I’m not super tempted. We’ll see.
So many similarities, I love it Dave! Good for you for being 35% intl – I want to put more into internationals but it’s hard seeing their lagging performance (even though this likely is a sign yelling TO invest in them!). Is there any reason behind keeping/selling the REIT?
Are there any items that have been way off in your estimates since you moved to Canada? Some things here seem to be more expensive compared to the States while some other items are more affordable.
Love the idea of the solar, greenhouse, and garden!! The house we moved to has 2 large raised garden beds so we are going to test things out this year too 🙂 Unfortunately, where we are solar doesn’t make much sense from a cost standpoint but we continue to monitor the market and hopefully someday we can be living on solar too (as that’s my background).
Congratulations on exceeding your FIRE number.
Maybe you have mentioned this in your previous posts but I am assuming you exclude RESP account(s) from your Net Worth calculation. If you don’t mind me asking, how do you invest in your RESP? I invest in VGRO for our seven-year-old daughter.
Also, are you able to still trade in US Taxable Accounts? When I moved to Canada, I had to liquidate taxable investments in Vanguard as I could not maintain an active account as a Canadian resident.
In terms of investment portfolio, we are currently at 85% stocks/15% bonds and this year will move towards our target of 70/30. I evaluate our expenses, investments and net worth on a quarterly basis. We have paid off debts and will probably reach FI (at say 3% SWR) in a couple of years. Things are good in terms of work, and will likely take more time off/sabbatical short term. No plans to RE, at least for now.
Thank you Shashi! We’re now being even more cautious and coming up with more things to anticipate in the future to build up for aka one more year syndrome lol but totally ok with it and acknowledge it as life is good.
Correct we have some money set aside for our little one both in an RESP and a taxable account (which we may move over to an informal trust) which are not included in these figures. Personally, we are 100% in VUN for our 2.5 year old and plan to be 100% equities for the majority, if not all, of the duration. Same may say that’s too extreme, but we will reassess at age 15 to see how the portfolio is doing. Many could argue that VUN is not diversified enough and to go with something like VEQT instead, which is more than fine – I personally think there’s too much of a tilt of VCN inside these all in one funds. We plan to add in VIU and VEE to diversify a bit over the years.
No, I cannot still trade within my taxable accounts in the US. They are still there and growing, but can’t contribute into them.
A 85/15 or 70/30 split sounds great. I think anywhere in that 75/25 camp +/- 15 basis points is a good spot to be in (which gives a lot of room I know ha). But really anything above 60/40 is good in my books.
Sounds like you’re designing that happy life too filled with fulfillment and balance 🙂 That’s what it’s all about!
Thanks for these financial update posts. It’s helping me make a decision I need to make. It’s nice to know there are others forging the FIRE path with similar numbers and circumstances. We are sitting at 1.2 million invested Canadian $, plus a paid off house – not including the RESP. 3 Teenagers at home.
I have recently acquired an “aggressive boss” as you mentioned and frankly, it sucks! So, I am thinking of pulling the plug. My wife works part-time in a job she loves, in an essential industry and makes about 30k a year, she has no desire to stop doing that anytime soon – so that will supplement.
The CCB will help as well, and will go up after year 2 of having lower income coming in.
Hey Scott! Sounds like we have similar set-ups, nice job! The aggressive bosses of the world suck!
It sounds like your wife’s part-time job + CCB will definitely bring in a nice chunk to supplement any withdrawals from the portfolio. The other thing to remember is that quitting doesn’t mean you will never ever bring in any sort of income. If you want to, after a year or two of pulling the plug (or maybe once the kiddos have moved out) you can choose to pick up a low stress gig that brings in say $20k/year for a few years and you’ll likely be more than set as your portfolio can continue to grow over those years too.
Or is it possible to talk to your aggressive boss and let them know how you’re feeling and demand a work set up that would be conducive to wanting to stay (perhaps working from home to avoid said boss, or reducing your hours, or focusing on projects that give you more independence away from aggressive boss?). Worst they do is fire you which is what you were thinking of doing anyway 😉 You have control at this point as the job needs you more than you need the job. The key is to remain flexible and know that likely everything will all work out! 🙂
Ok… so I hadn’t noticed until now.
Why so little in the TFSA, even if because of US vs CAN residency etc it appears at least one of you has the ability to have one, so why isn’t it maxed out? Why have that big taxable CAD when you have empty TFSA room sitting there?
Hey Chris – great job catching this. So Nic is the only one with a TFSA due to my dual citizenship status. And we moved here in 2015 so we don’t have the full contribution room compared many who were living here and able to start in 2009 (or at least able to catch up afterwards with all the built up contribution room). Instead of the $75,500 that most Canadians have (assuming 18+ residents since 2009), she has a total $44,500 of contribution room.
When we moved, we were traveling in 2015 not working so no income to add in then. In 2016, income started coming in but we were saving up for the downpayment on our townhouse that we purchased later that year as we still owned our FL townhouse too. And the biggest thing, is it took us awhile to get our bearings straight with our Canadian investments. No American is taught TFSAs and RRSPs and with a lot going on with the move to another country, it took us awhile to develop our investing strategy. We only started pouring money into Nic’s TFSA in 2018. Then in 2020 we pulled out $9,500 for the new house purchase. A week after this posting (which is based of our 12/30/20 figures) $15,500 was dumped into the TFSA in early 2021 for the $9,500 for the house (which we had to wait until the new year to recontribute) + 2021’s $6,000 limit. So as of today, it’s sitting closer to $54,000 (CAD).
As for my large taxable amount, this was part of that whoops in the learning curve. I started that one in 2017 – before the TFSA, DOH! The plan is to shuffle some of this around once I leave my job and drop to a lower tax bracket. During the first 5 years when we don’t need to withdraw anything since we will have our cash stash, I plan to withdraw up to the federal basic amount (assuming it will be ~$15k) from my taxable and put as much into the TFSA (based off annual limits at the time), Finn’s RESP, and the rest to Nic’s taxable as well (to even our accounts out as I didn’t know about filing taxes individually annually since you can file jointly in the States).
Hope this makes things a bit more clear. Alway trying to learn!
I was going to ask about the TFSA but looks like Chris beat me to it. Good friends of mine had to take out their TFSA when they moved down to the US a few years ago to avoid the tax complications.
You guys are on it! Hopefully the explanation above makes a bit of sense. Having to deal with a move with accounts in multiple countries is no fun!