Tuesday, January 19, 2016

Go for Income

If you are thinking of retiring on dividend income or another stream of income, you perhaps should concentrate on what income you need rather than the amount of money in your portfolio. When I stopped working to live off my dividend income there was a big difference in gross income before and after this move. However, there was no difference in my net income. And it is net income that matters. Here I am talking about income after taxes.

I talked about taxes on Dividends in one of my blogs of last year. Bottom line you have to earn more than $49,000 in dividends for federal taxes to kick in. In Ontario, where I live you cannot avoid the Ontario Health Premium. In Ontario all you pay prior to $49,000 of dividend income is the Ontario Health Premium.

Another consideration is that if you are building a portfolio of dividend stocks like I did, my dividend income was always increasing. I had no year when my dividends did not increase. They also increased more than the rate of inflation. However, the increases did vary from year to year ranging between 5% and 23%.

Even in the most recent bear markets of 2000 and 2008, my overall dividend income went up. Yes, I had stocks that cut their dividends and stocks that kept their dividends flat. Example of flat dividends was the banks. However, other stocks increased their dividends. Over all my dividend income went up. For example in 2009 my dividends increased by 14.9% and in 2010 my dividends increased by 5.3% and in 2011 my dividends increased by 9.2%.

The value of my portfolio was a different matter and was quite volatile. My portfolio value over the long term has gone up, but it was going up then down then up constantly. The swing in value was small at times but very large at other times. In a blog entry in 2014 I talked about losing 30% of the value of my portfolio in 2000 and 2008 problems, but I did recover well. See my entry on 2000, 2008 and Recovery.

So I concentrated on getting the income I needed, not on the value of my portfolio. I have always had a budget so I knew what income I would need. If you have RRSP or RRIF accounts taxes are more complicated than just dividends. Basically you pay tax on RRPS and RRIF withdrawal amount like they were salary. They are fully taxable.

When I stopped working I had half my money in a trading account and half in RRSPs. My taxes were less because after quitting work I still had dividend income, but took for my RRPS half of what I was getting in a salary when I worked. I do wish they had TFSA when I was saving for retirement. I am paying tax at a higher rate taking money from my RRSP than when I was funding my RRSP.

However, as time goes on the amount you have to take from RRIF accounts increases as do the taxes you pay. I think that if you are not paying tax at the top rate, the TFSA is better than RRSP account.

In another post I talked about starting off using the 4%, 8% rule, then changed my mind about this because of the 2000 and 2008 recessions. See the blog entry Retiring using 8%, 4% Rule. I also wrote about this subject again, Retiring using 4% Rule.

On my other blog I wrote yesterday about Toronto Dominion Bank (TSX-TD, NYSE-TD)...learn more. Tomorrow, I will write about Bank of Nova Scotia (TSX-BNS, NYSE-BNS)... learn more.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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