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Early Retirement: The CASH FLOW Model

I did a retirement scenario after reading “Why Swim with the Sharks“, now after reading “Stop Working: Here’s how you can!“, I’m going to do another analysis based on the CASH FLOW model like Derek Foster has implemented at the young age of 32.

Based on my Retiring Early article – The Expenses, I determined that my wife and I would need around $45,000(after taxes) in todays dollars to cover our expenses and discretionary spending during retirement.

The calculations are pretty simple for this one, but it also depends on what kind of assumptions that you make. In this case, I can assume that if I invest in Canadian based strong dividend companies, I can average around a 3%-4% / year in dividend income. The great thing about these companies have historically increased their dividend on a yearly basis at a greater pace than the rate of inflation.

If we were to retire early, and depend solely on our dividend income (3% dividends / year), then we would require a $1,500,000 portfolio ($45,000/0.03). If you wait for stocks to go on sale, and the yield averages out to be 3.5%, you would need a $1,285,714 portfolio ($45,000/0.035).

But wait, my calculations are before taxes, and I need $45,000 in after tax income. If I account for the dividend tax credit, and assuming that dividends are my only source of income, we would need dividend income of $23,500/spouse after taxes!

Yes, that’s right, $23,500 x 2 = $47,000, which means only $2,000 annual income tax. How? If you make purely dividend income (no other income), you get super tax breaks. In fact, if you are in any other province besides Newfoundland, you’ll end up paying even LESS tax ($600 in ON and $0 in BC)! You can try your own scenarios based on your province by using the tax calculators on Taxtips.ca.

Back to the task at hand, so if my wife and I needed a $23,500 income / investment account, assuming an dividend average yield of 3.5% we would need each non-registered investment account to be approximately $671,428 for a total of $1,342,857.

When we reach the age of 60 and 65 and CPP and OAS starting rolling in, the extra income will be considered gravy.

What are the risks involved with this strategy? I would say the main one would be inflation risk. If inflation ever gets out of control like it did in the 80’s, then inflation would eat up your dividend payments. But then again, if inflation were to go up, people would probably start selling their dividend paying stocks thus increasing the yield. Another risk is if the company decides to stop paying their dividend. This is not likely for a strong dividend company like RBC who has been paying their dividend since the 1800’s, but it is possible.

The solution to these risks? Consider having multiple sources of cash flow in addition to the dividend paying stocks for diversification (real estate etc).

In Summary:

  • To determine your required dividend portfolio size for retirement use this formula: (Required Expenses/dividend yield) (see above for examples).
  • Canadian Dividends are given favorable tax treatment, dividend income alone will be taxed very little if anything at all (varies by province and portfolio size).
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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 20 comments… add one }
  • Mike March 14, 2007, 7:48 am

    As nice as it sounds to have a portfolio you can live off forever, I think it’s more realistic to have a smaller portfolio that you deplete. If you retire at 34 then you can’t start selling any of the shares because the portfolio may not last the 50+ years of your retirement. If you retire at 55+ then depletion shouldn’t be a problem. You can still have most of your income from divs (in the early years).

  • David March 14, 2007, 10:10 am

    Why do you discount the OAS / CPP, since it is about a 15% addition to your income — that’s a LOT of financial gravy.

    I’m also curoius about your expenses. My accounts indicate the two of us spend about $15,000 PA on necessities, not including mortgage or car payment. We also are mostly beyond the stage of buying large items for the house. So, while I agree that my utilities are lower than you pay in Newfoundland, and you may want to travel more than we currently do (work gets in the way of pleasure) I’m not sure that you’d need three times the income I calculate to be comfortable in retirement. Did you derive the numbers in your earlier post based on actual expenditures, or is it simply an estimate?

    Please be aware, I have not included any allowance for expenses like the hot water tank, furnace, or roof replacement in my base costs, and need do that, but each should properly be amortized in a sinking fund prior to their replacement.

    Finally, I agree with Mike, you should also expect to deplete your portfolio, unless you plan on leaving your retirement income to your kids or the SPCA.


  • FrugalTrader March 14, 2007, 10:18 am

    Hey guys, thanks for the comments.

    I did this analysis just for analysis sake. I do plan on depleting my portfolio during retirement as stated in my retiring early series.

    David: I discounted OAS/CPP in this analysis b/c I assumed that we would retire early. If we were to retire early, all of our expenses would have to be covered by our dividends without depleting the capital. Even when OAS and CPP kick in, they will be in addition to the dividend income already being received to cover our expenses. Also, our expenditures account for travel and a fudge factor. Please see my “retiring early” series on the right side bar under “Popular Articles”.

  • Canadian Capitalist March 14, 2007, 10:27 am

    The biggest risk in retiring early and living entirely off dividend income is the scenario in which dividend increases are not keeping pace with inflation. This has happened in the past and could happen again in the future. Don’t forget that the recent past was unusually good for dividend-payers.

  • FrugalTrader March 14, 2007, 11:28 am

    CC: Good point, duly noted.

  • Common Sense March 14, 2007, 3:26 pm

    There are more ways than dividends to get cash flow even when you are not working. You get appreciation from your stocks as well as dividends. You can collect rent. You can collect money from your blog. I think you can make at least 10% return on your investment. You just have to find an investments that give you higher returns than 3.5%. If you have $550k, and it returns 10%, that’s 55k per year. Pay 10k in taxes, and you will still have 45k money to live off of. The trick is finding the 10% returns. That’s the hard part.

    Here, start a few laundromats:
    10% return on investment

  • David March 14, 2007, 8:19 pm

    Common Sense said: Here, start a few laundromats: Beach Solar Laundromat

    In a province where if it’s not raining, there’s drizzle or fog? THAT shows Common Sense!


  • David March 14, 2007, 9:23 pm

    I did read your Retiring Early series, that’s why I aked the question about your calculations. I’m not sure when exactly I would plan to retire, but I know to the day the last possible date I’ll be working for my current employer!

    One of the discussion points that often seems missing from many financial blogs that discuss retirement is the idea of working at a job you love, possibly far beyond normal retirement age. My father, a well-known St. John’s businessman, just celebrated his 50th business anniversary. He’s there, not because he needs the income — he’s there because he truly enjoys what he’s doing. Admittedly, he is not as involved as he once was — my sister manages the daily grind. He and Mom travel as they wish; visit their granddaughter in BC multiple times per year, and wander around the island on a regular basis. I hope that more of us can find that joy in the vocations we have chosen, and be able to continue doing the things we love as long as we possibly can. I truly hope that Dad never “retires.”


  • Blain Reinkensmeyer March 15, 2007, 12:02 am

    I like this post as it really just gets the mind thinking about different ways to generate passive income (atleast that is what happened to me, haha). Dividends, real estate, high yield funds, the list goes on and on!

  • Q Cash March 15, 2007, 3:52 am


    The dividend tax credit is probably the best thing I learned from reading Derek Foster’s book. Up until then, I hadn’t realized what a huge difference it could make to your tax scenario.

    I have a monthly income fund (from BMO) in my portfolio which also offers a nice return (6.2% currently) but also includes a ROC component that I am not taxed on (it reduces my cost base, but if I am not planning on selling anytime soon, who cares). There are a few other income funds like that out there, so you might not need as much as you think you do.

    And don’t forget about all the reduced expenses that “retirement” brings.


    PS for DAVID – I think most of us define “retirement” as not having to work. I think I have been busier since I started my early retirement, than I ever was working. But it is doing things I WANT to do and things I enjoy a lot better than my job. If you have a job you love, then all the power to you. But there is an inherent freedom and reduction in stress working when you know you can leave any time. :-)

  • Q Cash March 15, 2007, 3:58 am


    You asked way back in a previous post what sort of expenses I have reduced in the 2 1/2 months since my early retirement. Here is a quick list:

    Gas – $25-35 per week (down from $100) I expect this will drop further once the nice weather is here and I can use my bike more often

    Dry Cleaning – $0 per week (down from avg $25/week)

    Lunch – $0 per week (down from avg $15-20/week) granted this is now in our grocery bill, but I am not eating out like I did previously. I always kept trying to take lunch to work, but never quite pulled it off.

    Coffee – $10 per week (down from avg $25/week – I still enjoy my Tim’s, but instead of needing two or three a day, I have one on my way back from the gym – the $10 is based on me actually getting to the gym everyday :-)

    These are just the ones of the top of my head. I still need to get into my “routine” but there are certainly some intangibles that I haven’t factored in yet.


  • FrugalTrader March 15, 2007, 6:02 am

    David: Yes, in part 1 of the retire early series, they are based on current expenses + expected expenses during retirement + fudge factor. Your father is very fortunate to be working in a career that he loves, something I hope to find.

    QCash: Thanks for posting your expenses! How is retirement going? Have you invested your portfolio in mostly dividend paying stocks?

  • Oleg March 16, 2007, 2:19 am

    Do you know how big the inflation is right now?
    I’m pretty sure it’s not under 2%. Because(according to my university materials) a “healthy inflation” that is good for the economy is 2-3%.
    And I’m pretty sure that in USA there(I live in Estonia, here btw too) is a much bigger inflation.
    And according to some materials considering stock… the average income of stocks is 12%. Which means that you’re just being ripped of and are losing money.
    3%-3%=0% Why losing? Because money that isn’t earning money is lazy money.

  • Raag Vamdatt January 15, 2008, 1:22 pm

    “But then again, if inflation were to go up, people would probably start selling their dividend paying stocks thus increasing the yield.”

    If investors sell stocks, the “current” yield of the stocks would go up – that is, the yield calculated based on the current stock price would go up.

    But you would have invested at an earlier price – so, your yield, based on the price at which you bought the stock, would remian the same irrespective of price movements of the stock.

    Yield for you would change only when the dividend amount per share changes, or in case of corporate actions like stpck splits or bonuses.

  • Dividendgrowth February 5, 2008, 4:14 pm

    I wouldn’t be concerned about inflation if you were holding stocks. Stocks are one of the best hedge against inflation in my opinion because they represent ownership of a business, which most people forget when discussing shares. If prices start increasing at a rapid rate, the companies in which you hold stocks would be able to increase their prices at a faster rate than the rate at which their costs would increase. Therefore you wouldn’t be in too much of a trouble. I do agree though that you might want to have a diversified stream of income, so instead of just holding Canadian dividend stocks, you might also want to own some sort of a world index portfolio. I understand that dividends could be cut. But if you own a basket of at least 30 stocks, you should be able to withstand these times. I am a big oponent of putting amounts over 10% of your portfolio in bonds/short-term instruments like CD’s. I think that you are leaving a very small margin of error with fixed income instruments.

  • Sampson February 9, 2009, 9:15 pm

    I’ve always viewed stock returns as relatively inflation resistant, that’s what we always read anyway.

    But… I wonder if there are particular industries/companies that are at less risk of having inflation eat away profits. Presumably the ‘safety’ stocks including infrastructure, utilities, and some consumer goods companies can increase prices at the rate of inflation. – Again, this is what we always read, but has anyone done some sort of meta-analysis looking at these types of companies and their earnings and found any trends/relationships with inflationary rate?

  • Jack Foley June 6, 2011, 7:02 am

    I think the secret is to diversify your dividend income over different asset classes. If you had your income from dividends from bank stocks, you would have been wiped out recently..

  • cannon_fodder June 6, 2011, 12:47 pm

    Jack Foley,

    I actually set up a Smith Manoeuvre account in late 2009. My bank dividends were fine… but some of the other companies (Manulife, Teck Resources) saw them slashed or suspended.

    So you are right to caution people to diversify.

  • Jack Foley June 6, 2011, 12:56 pm

    Yea over here in Europe for example, people got wiped out with their shares and dividends from financial institutions.

    In one way its ignorance as over here in europe, people dont know how to invest in the stock market so they do what their friends do..

  • PANNA KAPADIA January 6, 2012, 12:45 pm

    Have you consider effect of Inflation on your reserve money.

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