# Is this a good way to reason about how much capital I need?



## james4beach (Nov 15, 2012)

I have about 30 years until retirement and although life can change a lot between now and then (including tax rates!) I'm wondering if the following is a reasonable way to estimate how much capital I need to accumulate to retire comfortably. What do you think of this approach?

Currently I'm single and live on 35k total expenses. Let's call it 40k/year.

To eventually live off, I'm assuming a Buffet's-wife-allocation of 90% XIC and 10% VSB. The tax characteristics have intrigued me.

Say you have 1.5m capital in 90% XIC and 10% VSB.
XIC spins off: $18,900 cap gains and $18,900 eligible dividends
VSB spins off: $3,750 fully taxable income
Total income distribution = $41,550 (gross), about 2.8%, seems about right for capital preservation

Here's the interesting part, according to the tax estimator, in most provinces I'd pay virtually no tax on this. *After tax income would be 40k per year.*

And of course all of this assumes I don't eat into the capital at all. I certainly can, in practice, so that's a big safety margin.

Does that mean that $1.5 million is about the right ballpark for how much capital I should accumulate?


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## james4beach (Nov 15, 2012)

And there's still a bit of pessimism in that tax analysis, because XIC and ZCN sometimes generate nearly FULLY eligible dividends


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## slacker (Mar 8, 2010)

If the purpose of your calculation is to get a ballpark on how much capital to accumulate, then you're on the ballpark.

But should consider inflation and volatility.

Can the cash distributions keep up with inflation over time?

What happens to the years, when the market return is -40% ? Would you reduce consumption? Or dip into capital?


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## OnlyMyOpinion (Sep 1, 2013)

As you note, XIC's payout can be a combination of eligible dividends, other income and return of capital. I'm not sure what average I'd use, see Distributions>Table>Calendar Year at: https://www.blackrock.com/ca/individual/en/products/239837/ishares-sptsx-capped-composite-index-etf
One future risk is changes to the dividend tax credit by a tax-hungry federal government (provinces too). People 'rich enough' to have dividend income are probably an acceptable target. Note for example that the DTC as a % of actual dividends dropped from 27.5% to 20.7% over the years 2009-2012 (See discussion: http://www.taxtips.ca/dtc/enhanceddtc.htm). 
So as always, you don't want all of your income eggs in one basket.


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## amitdi (May 31, 2012)

slacker said:


> If the purpose of your calculation is to get a ballpark on how much capital to accumulate, then you're on the ballpark.
> 
> But should consider inflation and volatility.
> 
> ...


Good questions, but consider that this is a theoretical model. The idea is to get a ball-park.

Inflation should be taken out of the equation by working with real returns. Reduce the expected return by inflation. So if you future CAGR is 7%, use 7-3=4% and ignore inflation (assuming 3% avg inflation). Real returns are easier to work with because you can assume constant income.

Regarding recession period, well yes one would dip into the capital. But then there are also periods where mkt would give $100K when one only needs $40K. On balance, everything should work out. theoretical model, remember.

Recently, even I did a similar analysis. I had 3 levels of income required. 1-barebones, 2-reasonable lifestyle, 3-reasonable+vacation every yr. and then i calculated how many years I need to work to reach each of these levels. there were lots of calculations and modeling in between, and factors. but i boiled everything to best case and worst case. reality would be somewhere in between, but i wanted to see what the range is.

Surprisingly, my beast case scenario to reach barebones came out to a surprisingly low number, just 4 more years. I am in early 30s. Realistically, I expect to reach level 3 in early to mid-40s.


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## My Own Advisor (Sep 24, 2012)

About $1.5 M in 30 years is likely very good but not enough.

This is because of inflation.

Since bond yields are pathetic I'm personally going with some sort of cash wedge for retirement:

http://www.myownadvisor.ca/cash-wedge-opening-investment-taps/

"After the one-year cash fund is tucked away I will create a 50/50 split of the remaining portfolio funds this way:
50% invested in dividend-paying stocks from Canada and the U.S. (about 30-40 stocks in total) and use the dividend income generated from these investments for living expenses, and
50% invested in a couple of low-cost, diversified, equity ETFs that invest in thousands of stocks from around the world. We will spend the distributions from these investments and keep the capital intact for long-term growth."

Your plan is good but I'm just saying for me I prefer more equities, that spin off more dividends and distributions; dividend increases that protect me against some inflation - and I will just keep a cash buffer instead of bonds. Using this model I will also pay virtually no tax if with no other income, most of the Canadian dividend stocks are kept in a taxable account.

I think anyone retiring today with about $1 M in the bank, and no debt, + government benefits is probably good to go for a comfortable middle-class retirement for another 20-30 years depending upon their spending needs of course.


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## CalgaryPotato (Mar 7, 2015)

Yeah, to add to what others have said, you are still pretty young (I think) and at the start of your career. Even maintaining that 35K a year lifestyle for the rest of your working life, isn't what happens with the typical person. For the rest of us, as we progress in our careers we begin to spend a little bit more here and there, and all of the sudden on top of inflation, our lifestyle matches our current salary level, not our previous one.

Also since you are young, single and without kids, I'd highly consider not even taking into consideration what you spend now. Because having a family changes your expenses enormously, and all of your planning. So unless you are truly planning for this to be your life for ever, I'd keep working hard at saving, but not start worrying about actual numbers until your life is a little further along.


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## My Own Advisor (Sep 24, 2012)

Further to CalgaryPotato's comment, the fact that you save (so you understand how to save), how to invest, how to forecast investments - and visit a money forum - tells me you're 95% ahead of the game. Maybe more


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## Pluto (Sep 12, 2013)

Yes, you are in the ballpark. If you invested 1.5 mil in stocks today you should get around 60,000+ in dividend income right now with no worries. To do that, look at xiu holdings and eliminate the dogs, and buy conservative to very conservative dividend payers.


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## canew90 (Jul 13, 2016)

I've never been of the mindset as to The Size of the Pile, IMO better to invest with the objective of How Much Income will my investments generate. As the income grows so will the capital, but income is real, especially during the accumulation phase. Capital will be up & down, and hopefully over the long term up, but no one knows when those ups & downs will occur. Income generation can be controlled better and will generally continue to grow over time. If you've got 25, 30 or more years, wouldn't it be nice to see the annual income grow from $1,000, $5,000, $10,000, $25,000, etc, so when you are getting close to retirement you'll know exactly how much income you can expect and that it will keep on growing, regardless if the pile is up or down.


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## steve41 (Apr 18, 2009)

Sigh. OK, the rules of compound interest and inflation are a given, ditto income tax rules (progressive, indexed brackets, surtaxes, clawbacks) the RRIF minimum and LIF maximum withdrawal factors, CPP and OAS as well. Everyone of you have a computer with more horsepower than it took NASA to put a man on the moon..... why not calculate it? That is if you aren't too busy playing Pokemon that is.


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## ValMiks10 (Aug 25, 2016)

That’s seriously far dear, I wouldn’t be so concerned about retirement just yet, I mean 30 years! It’s better we let our self free and enjoy life into of worrying about retirement so much when it’s so far. As per investment, I think bonds look best bet.


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## amitdi (May 31, 2012)

ValMiks10 said:


> That’s seriously far dear, I wouldn’t be so concerned about retirement just yet, I mean 30 years!


WHAT ???!!???? 

this is CMF, toddlers here start retirement planning as soon as they start to walk..........


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