Can't wait for financial freedom at 65? How about freedom at 45? Or even 35?

Currently if you have no other source of income you can collect approximately $45,000 in dividend income before having to pay any income tax in Canada. Add to this the $52,000 TFSA deposit limit once the 2017 amount kicks in on January 1 and this provides a great opportunity to have a future source of income that is untouchable by the taxman. You can have a comfortable early retirement but the key here is to build up wealth while you are young. A 3-4% portfolio dividend yield is reasonable and most of these dividends grow over time. In Canada the TSX averaged 6% and in the US the S&P 500 averaged 10% annualized returns of over the past 30 years, so a nice round goal of a minimum of $1,000,000 would provide decent income of $60,000 Canadian or $100,000 US per year without having to draw down the original million. Of course everyone has different spending habits, some may need $2 million or more, others may be able to live off of $500,000. The one consistent factor though is everyone needs to be efficient with their money to reach their goal. Fixed income is much too low in today's environment to be useful for achieving our goals, so the stock market is the best alternative, but it is risky. How can we reach our goals without taking on too much risk or having our portfolios make us lose sleep during the tough times? There are many simple but effective ways to do this.

1) My advice is to first start with a core of solid, low beta, dividend growing companies that will provide stable income indefinitely. These may not result in significant capital appreciation but that is not their purpose since you are not intending to sell them, they are there to provide steady income through the good times and bad and into retirement.

2) For the middle tier growth companies that you are interested in use option strategies to hedge some of the risk, but not all of the upside. Covered calls can provide income of 3% monthly on many growth stocks, but of course these come with risks if the story fails, so do not make them the bulk of your portfolio. Make sure to keep some of the position unhedged though (I'm still kicking myself for letting my Netflix go on a $60 covered call as it now soars trading roughly twenty times that value after stock splits, so I will never make that mistake again).

3) Look for short-term opportunities or day trades to add capital to your portfolio and get you closer to you goal. Do this is tax sheltered accounts such as the TFSA, RSP or 401-k. Find an edge, a stock, a sector, something you do well that you can profit on consistently (for premium subscribers I share my ideas of what I do and some simple wealth builders). These are short-term positions, don't fall in love with any of these stocks. I like to day trade so I am out of the position and back in cash for the next day because you never know what can happen overnight and I don't like having large exposure when trading is closed. These don't have to be exotic strategies or high-risk, there can be a couple of times or trades a day where I see opportunities for 3-5% or more in a span of half an hour to an hour, and then I close the position with a little more capital in my account. As this capital builds I disperse it between my long-term income providers, my mid-tier growth trades and my day trades so that all of them are now producing more income than previously. All three sections grow and since money grows exponentially the 3% tomorrow is better than my 3% today, so I'm well on my way to my goals!

4) Finally, I suggest some diversification, not just in equity holdings, but in sources of income. Personally I try to maintain some assets in stocks in a couple other currencies as well as having some of net worth invested in retail assets which also produce steady flows of income. The more sources of income you have, the more resilient you are since your well-being is less dependent on any one source.

With passive income coming in some people may get to the point where they are comfortable exiting the traditional workforce by 35, others may still be uneasy at 65. Every individual and every situation is different but one thing is certain, proper planning and investing will get any individual in any situation closer to their financial goals.

Day Trade

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