Reader Mail: I Have $600k, Can I Retire?

We’re going to do something a little different this week.

Bev writes in:

I’m 51 and my husband (David) is 53. We’ve accumulated a (liquid) net worth of about $600,000 that is mostly invested in dividend ETFs, boring stuff like SCHD and VDY on the TSX. We also have some individual stocks, as covered by the Canadian Dividend Investing premium service. My husband makes about $100,000 per year and I make about $45,000. We spend about $75,000 per year. Our house will be paid off in about a year, and when that happens our spending will fall to about $60,000 per year.

He’s tired of work and wants to retire. He realizes we don’t have nearly the dividend income needed to replace our salaries, but rather than work a decade longer he wants to sell everything and put the portfolio into high-yield stuff like HDIV and YMAX. He figures he can get a 10% yield, which, combined with my salary, will give us plenty of income, plus extra money to reinvest each year.

I’m worried about these investments, and especially worry that these dividends aren’t sustainable. What do you think?

Thanks to Bev for writing in, and I’m happy to help. First, let me congratulate both of you for accumulating a pretty impressive net worth at a relatively young age. If you include the paid-off house and some of their other assets, they’ve squeaked into the millionaires club. And they did it just after the age of 50. Not bad!

That’s a pretty good result, but is it enough to be able to retire early? Let’s take a closer look.

The dangers of a high-yield portfolio

On the surface, David’s plan to convert their portfolio of boring dividend payers to one that pays a much higher yield is a good one. As it stands, their portfolio generates about $25,000 per year in income, while a 10% yield from a high-yield portfolio would immediately increase income substantially. 10% of $600,000 is $60,000, which is about what they project to spend once the mortgage is paid off.

In fact, I’d argue that David is actually being a little conservative on some of his income expectations. For instance, HDIV currently offers an 11.84% yield, and some of those Yieldmax funds in the U.S. yield even more.

(David plans to use the U.S.-listed Yieldmax funds to both increase the couple’s passive income and so he doesn’t have to convert their USD accounts back to Canuck Bucks)

However, before he does that, he should be aware of two problems that arise from these types of portfolios. They include:

1. Risk of distribution cuts

2. Taxes

We’ll start with the distribution cut risk. As the old saying goes, there’s no free lunch in finance. A high yield has to have some sort of tradeoff, or it simply wouldn’t exist. The price would be bid up and everyone would collect their risk free dividends.

In addition, a high yield fund tends to do well enough during a bull market that it can accumulate a years-long record of paying consistent — or even increasing — dividends. Everything can look hunky dory until one day it all goes to hell.

It’s a little bit like this chart, actually.

As I went over when I wrote about HDIV a few months ago, there are two risks in these income funds. The first is the leverage, which magnifies underlying price movements. If an ETF has a very reasonable 25% leverage ratio, suddenly your garden variety 10% decrease becomes 12.5%. Your ETF in a 20% bear market is suddenly 25% lower. And a once in a generation 40% decline is a 50% fall at 1.25x leverage.

The leverage cuts both ways. It makes the upside sweeter, but it also makes the downside more painful. And in a retirement, we want to avoid sharp downturns as much as possible. That’s why I have such a boring approach.

HDIV proved this a few weeks ago. Shares plunged amid the market’s tariff tantrum, falling from $17.50 to just over $15 in a matter of days. That’s a 14.3% decline, while the TSX 60 only fell by about 10%.

The other problem is taxation. Bev and David’s portfolio is approximately 80% Canadian dividend payers and 20% U.S. dividend payers. Because of the dividend tax credit in Canada, their dividends are quite attractively taxed. They also use RRSPs and TFSAs to keep their tax bills down. If they convert their holdings to some of these income funds, they run the risk of increasing their tax bills significantly.

In 2024, HDIV paid investors a distribution of $1.976 per unit. Out of that:

• $0.30577 came from eligible dividends

• $0.80748 came from capital gains

• $0.08378 came from “other income”

• $0.77897 came from return of capital

The tax treatment wasn’t that bad, but let’s compare that to 2023, when HDIV paid a $1.651 per unit distribution.

• $0.15862 came from eligible dividends

• $0.30294 came from “other income”

• $0.21463 came from foreign income

• $0.97481 came from return of capital

Nearly a third of the fund’s income in 2023 would be fully taxable. Now, this isn’t a huge deal if David has no other income, but the fact remains that this fund simply won’t be be taxed as attractively as a dividend fund.

As for the taxation of the Yieldmax funds, those would undoubtedly be much worse than HDIV. They would add to the couple’s tax bill.

My plan for Bev and David

The good news for Bev and David is they can pretty much afford to retire today, and without needing to make wholesale changes to the portfolio, either.

Remember, their spending is about to fall to $60,000 per year after they pay off the mortgage. If we combine Bev’s salary ($45,000) and the couple’s combined dividend income (currently $25,000), we get a combined income of $70,000.

That’s easily enough to cover their $60,000 annual spending, plus I predict that their spending will go down slightly because David no longer has to go to work. I asked them, and they estimate David spends $5,000 per year on commuting costs, work clothes, lunches with collogues, and little gifts (out of his own pocket) for his team. That brings spending down to $55,000 per year, and David thinks a fun retirement project would be to try and get their costs down further.

If they earn $70,000 from Bev’s salary and their dividends and only spend $55,000, that frees up $15,000 per year to put back to work into stocks. That’ll help increase their nest egg, further buoy their dividend income, and ultimately bulletproof their retirement.

Here’s what it might look like in spreadsheet form:

Basically, if Bev keeps working until 65 and they reinvest a portion of their dividends, they easily make it age 65, when Bev intends to retire. CPP and OAS will kick in for them (conservatively estimated at $7,500 per year each) at that point. Once Bev retires and her salary goes away, then she and David will have to dip into their investment principal.

David retiring early also gives him plenty of opportunities to liquidate his RRSP at attractive tax rates. I encouraged him to play around with a tax calculator to see how he can get the best bang for his buck, but generally he’ll benefit from pulling out his RRSP money during years where his income is quite low.

We’ll note that I assumed that their spending will increase by 3% per year, while Bev’s salary will only increase by 1% per year. I did that simply to bulletproof the plan, to create to make sure it can survive higher than expected inflation. Like David, Bev would expect her spending to decrease in retirement.

So, Bev and David, good news. I believe that you can afford to retire on your current dividend income. As long as Bev works until she’s 65 and they reinvest some of their unspent dividend each year, I believe the plan is solid. There’s still some risk in there, but I believe it’s a pretty good plan with multiple safeguards in place. I give it a high chance of succeeding.

How Bev and David can bulletproof David’s early retirement

Even though I’d give this retirement plan a high chance of succeeding, Bev and David might still be worried about the future.

Which is why I’m adding this little section at the end, letting them know a couple of simple ways to really bulletproof their retirement.

The first is selling off the family home. Bev and David have a son who is in his mid-20s. He’s well-established in his career and has built a life for himself in a nearby city. He no longer needs financial support, but both Bev and David want to have enough to give him a healthy inheritance.

The family home is worth about $450,000. Bev and David can downsize to a condo and put about $200,000 in their pocket, and on a tax-free basis, too. If that $200,000 is invested, it’ll generate an additional $8,000 per year in passive income. They’ll also save money on utility and maintenance costs by living in a condo. That’ll further bulletproof the retirement. Besides, they’ve been thinking of downsizing for a few years now.

The second way to add a layer of safety to this exercise is for David to work part-time between now and age 65. David is a manager that regularly gets called during evenings and weekends to help fix production problems. He also works about 50 hours a week besides that. But before he was a manager, he was a contractor, and he has spoken with other contractors he knows about part-time work. Most have confirmed they’d be thrilled to have a knowledgeable guy they can call to fill in for a few days on big jobs.

I encouraged David to at least consider that route. It would get him away from the job he hates, and he would enjoy the work. Adding just $20,000 per year in active income would turn a nice retirement plan into one with a 100% success rate. It would also increase the potential inheritance down the line or, better yet, allow them to give to their son while he’s still young.

The bottom line

I’ve got good news for David and Bev (or David, anyway). They can afford it if David decides to retire.

As long as they keep their spending under control, keep Bev working, and reinvest a portion of their dividends, they should be in good shape.

To really bulletproof this plan, I suggest they either sell the family home and move into a condo, or have David work part-time. But I don’t believe they need to do that for the plan to work.

For the first time in years, I’m going to open the comment section to y’all. Have thoughts on Bev and David’s retirement? Click through and let us all know!

One more thing

Bev and David are Canadian Dividend Investing premium subscribers, and they credit the service for helping them find Canadian stocks that both offer generous dividends, but that also come with attractive dividend growth.

In fact, they just bought shares of one company we just profiled, one that offers a 5%+ payout plus what should be 3-5% dividend growth over time. That’s a nice combination.

For dividend stock ideas — and much, much more — straight to your inbox, every week, upgrade your subscription today. Get Canada’s top dividend stock analyst in your corner for just $0.55 per day!