Life is uncertain. We are living our day-to-day lives with a certain level of uncertainty, but that’s part of the fun. Some people don’t like having too many uncertainties, so they take actions and precautions to reduce uncertainty.
The same thing can be said for early retirement and living off one’s investment portfolio. There are many steps you can take to increase the margin of safety of your investment portfolio to ensure it can sustain your lifestyle and you don’t run out of money.
As we draw closer to achieving financial independence through dividend income, also known as living off dividends, we are spending more time on the steps needed to prepare ourselves for this significant financial and life milestone.
I thought it would be interesting to explore the steps we are taking in 2026 when it comes to our early retirement planning.
Building up our cash reserve
Along our financial independence journey, we have been extremely focused on building up our dividend portfolio. As a result, we have been working hard to grow our savings gap and invest the saved up money to buy dividend stocks and index ETFs.
For the most part, we don’t keep a lot of cash in our chequing and savings accounts, because we see too much cash sitting around as opportunity cost.
But as we get closer to financial independence, it is important to start building up our cash reserve. Cash reserve is important because it provides flexibility and prevents us from having to sell off our investments during a sudden market crash because of some unexpected need. .
Last year, we managed to save enough money so that we had over $25,000 in our Long Term Savings for Spending account. Unfortunately, at the time of writing, we are below that number because of the yearly RESP contributions and having to buy a new fridge. Since one of our financial goals is have more than $35,000 in our cash reserve, this means we need to save up more to first bring the amount in our LTSS account to above $25,000 first, then try to save more to hit the $35,000 market.
But building up our cash reserve is more than just having cash sitting around in our bank account. It’s also about having cash available in our investment accounts, too, as I’ll explain in the next section.
Turning off DRIPs
We are currently investing 100% of our dividend income. We enroll in dividend reinvestment plans (DRIPs), so dividends are automatically used to get additional shares. Years ago, when fractional DRIPs weren’t available, we could only drip full shares (i.e. dividends received were more than the share price). We’d let the remaining dividends accumulate in our accounts until we had over $1,000 before we bought more dividend stocks or index ETFs (we did this so the trading commission was less than 1% of the overall transaction).
Nowadays, with the existence of fractional DRIPs from brokers like WealthSimple and TD, most of our dividends are reinvested right away. Before fractional DRIPs were enabled with TD, and because TD charges $9.99 per trade, we would move the remaining dividends collected in our taxable account with TD to WealthSimple to take advantage of the no-commission trading. We no longer have to do this..
Questrade still doesn’t support fractional DRIPs (and only fractional share purchase on certain securities), so we can only drip full shares and the remaining dividends get deposited in our accounts. Since Questrade no longer charges trading commissions, we don’t need to wait for dividends to accumulate to over $1,000 before reinvesting the money. Lately, we would use dividends to buy more stocks & ETFs when there’s a red day in the markets.
As we get closer to financial independence, we plan to change the way we utilize DRIP. We want to drip selectively. We plan to turn off drip in our taxable accounts and RRSPs by the middle of this year (or by Q3). We will keep DRIP on in our TFSAs to allow investments/dividends to compound.
That’s step one in building up a cash wedge in our taxable accounts and RRSPs for the eventual withdrawals when we do live off dividends. But we certainly don’t want money sitting in cash and not doing anything for us.
So what’s our plan with the dividends received in taxable accounts and RRSPs?
This is where investing in safe cash alternatives comes in.
Investing in safe cash alternatives
For dividends received in taxable accounts and RRSPs, we want to put them to work. But we don’t want to reinvest them into dividend-paying stocks, then have to sell stocks when we start withdrawing. Nor do we want to be waiting for dividends to accumulate before withdrawing.
Turning off DRIPs will allow us to start accumulating cash. Ideally, we want to accumulate enough money to cover 100% of our expenses for the next year, so we don’t need to sell any stocks. This is one way to increase our margin of safety in early retirement. Another benefit to having sufficient cash for next year’s expenses is that it is easier to budget, since we would know how much money we would have at the beginning of the year.
With the money accumulating in our taxable account, RRSPs, and savings account, we need to look at alternative ways to grow the money so we are not losing purchasing power due to inflation.
The current plan is to invest dividends collected in high-yield high-interest savings account (HISA) ETFs like CASH and HSAV because these HISA ETFs have high liquidity.
Since distributions from these high-yield HISA ETFs are taxed as 100% interest income, they are not overly tax-efficient. Therefore, it makes sense to invest in these HISA ETFs inside of our RRSPs.
Note: I know that withdrawals from RRSPs are taxed as working income as well so there may not be too much of a difference, but income inside RRSPs is tax-deferred so we can let the interest grow until withdrawals. This is a lot better than taking the tax hit in the same year as when you receive the interest.
For dividends sitting in our taxable accounts, if we invest in “safer” investments like GICs, HISAs, HISAs ETFs, bond ETFs, or even money market, all the interest earned would be taxed as 100% interest income, and not very tax efficient. Unfortunately, there’s no other way around it. If we really want, I suppose we can invest the money in dividend-paying Canadian stocks, but that’d go against the idea of building up a cash reserve in our taxable accounts.
Therefore, it probably makes the most sense for us to just take the tax hit and invest dividends in our taxable accounts in one of the HISA ETFs or move the money and start building a GIC ladder if the rates are attractive. (Knowing the low interest rates environment we’re in, probably hard to find attractive rates for short term GICs).
What would we do with the cash sitting in our LTSS? Well, we may consider parking some of it in cash inside a flexible high-interest savings account for planned expenses. To make sure money is working hard for us, it probably makes sense to invest the money in a high-yield HISA ETF.
Our plans with money in taxable accounts and LTSS aren’t 100% decided. More tax calculation and planning is needed, considering I will be working full-time and earning income in 2026 and Mrs. T is generating income via her side hustles.
If any readers have other suggestions or recommendations on what to do with cash in our LTSS and taxable accounts, I would love to hear them.
Alternatively, we can consider turning DRIP off first in our RRSP and invest the money in one of the HISA ETFs. Then, in the latter half of 2026, turn off DRIP in our taxable accounts to minimize tax consequences. This approach, however, means we won’t have as big a cash reserve.
It’s complicated to plan everything and that’s part of the fun of planning for early retirement!
Planning extended healthcare coverage
We currently have extended healthcare benefits through my employer. The extended healthcare benefits allow us to get coverage on prescription drugs, out-of-country trip medical coverage, paramedical services like massage, acupuncture, counselling, physiotherapy visits, vision care, and dental care.
Since I pay for part of the extended healthcare benefits, we try to take full advantage of our paramedical, vision, and dental benefits every year.
In early retirement, we would need to cover extended healthcare coverage ourselves.
In the Early Retirement Healthcare in Canada – What are our options post, I mentioned that we have two options:
- Self-funding extended healthcare
- Government and private coverages
The private coverages will need more planning and research. However, based on my initial research, it looks like we can continue private health insurance via the existing employer plan.
According to SunLife website, our current extended health benefit provider, when I leave an employer group plan, I can convert to an individual plan within 60-90 days without medical underwriting or testing. Doing so should allow us to continue paying the same amount for extended health benefits rather than a very high premium.
I plan to do more research on extended health benefits. As well, I will need to check with the company HR team to find out more information without raising too many red flags. I also plan to contact SunLife and find out more information.
If any readers have done similar conversions in the past, I would love to hear your experience.
Consider the psychological transition
Early retirement isn’t just financial, it’s a transition psychologically, too.
Early retirement means I no longer have to work during the week so I need to find purpose and structure in my life. What I plan to do in early retirement is something Mrs. T wanted me to spend more time planning. I simply can’t sit on my butt all day; I need to find things to keep me busy.
Since most of my friends and people I know will be working during the week, I need to find ways to interact with other people. I can certainly go to the gym more regularly and join more curling teams to keep myself occupied. But I think it’s more than just that. Most likely I will involve myself in meaningful volunteering work during the day to ensure some level of social interaction with other people. I also plan to get back to photography and maybe learn new hobbies.
My plan throughout this year is to talk to more early retirees and find out what they did in the first couple of years of their early retirement.
Summary – Early retirement planning, steps we’re taking in 2026
These are some of the things we plan to do as part of our early retirement planning. As you can see, not everything is set in stone. We plan to keep things somewhat fluid so we can adjust our plans as needed.
One thing I realized is that I need to seek out early retirees and learn more from their experience, especially when it comes to ensuring money in the cash reserve is working hard and the most cost-effective extended health coverage.
If you have any suggestions, recommendations, or experiences, please leave a comment or email me privately.
Congatulations on being close to early retirement.
Like most newly-retired people I talked with, the days go by very quickly.
I think the reason is that you choose to do the things you WANT to do and when you’re doing something you want to do, time flies.
Thank you Trevor.
I loved this article. I need to work on that idea myself, but it’s mostly for my wife.
My side hustles, house stuff, kids, etc. keep me more than busy. I literally go to bed and think that I didn’t get to 20% of what I wanted to do done. It’s hard to find an hour a week to stream a show. I see that you are able to read books and think, “Wow it must be amazing to do that.”
That said, I can get on tangents not keep track of time. For example, read a couple of blog posts and move on, and here I’m writing this comment – LOL.
ROFL…. yea I guess I’ve been able to keep myself focused on getting things done and be efficient with my time every day. Having said that, sometimes I do end up just scrolling mindlessly on my phone. Need to stop doing that ha.
Hi! Perhaps another cash alternative option is short term t-bills. Global X offers both the CAD CBIL and US UBIL.U versions. Cheers and thanks for your post, our family loves reading them every Mondays 🙂
Thanks Lawrence, I have also been looking at CBIL.
1. Build your cash bucket and spend from it in early retirement, using dividends to replenish the cash bucket
I transfer non-reg dividends to my cash bucket at Wealthsimple earning 2.25% interest. I spend from the cash bucket. I reinvest all dividends in my TFSA and RRSP (minus an annual $5K dividend withdrawal) to partially fund my TFSA each year.
This way, at least psychologically, my cash bucket is always at or around the same amount. It goes up and down but hovers around the same amount.
I know others have spent from their cash bucket down to zero and then had to rely on dividends exclusively. That stresses me out.
I saved up a sufficient cash bucket up before early retirement (for me that’s between $50-$75K personally) and then I spend from it for all my day-to-day needs and replenish it with non-reg account dividends.
2. Consider taking out a HELOC while you’re still employed
You don’t have to use it but it’s easier to get it while employed. It’s there in case you ever need access to a large amount of cash in a hurry.
3. Don’t over stress about hyper optimizing everything
Could I earn more than 2.25% interest for my cash bucket with Wealthsimple? Yes. But I don’t think it’s worth the hassle. Under the Wealthsimple umbrella, I can manage my continued stock/fund purchases via dividends in my TFSA and RRSP (and occasional non-reg stock/fund purchase) while sending my non-reg dividends to my cash bucket all within the wealthsimple platform. Easy breezy.
4. Find early retired (new) friends (or just retired (new) friends)
I am doing the Camino hike this summer with an early retired friend I met on my trans-Asia cruise this past year. She is close to my age.
I met up with retired friends @FIREWeGo in Bangkok and Kuala Lumpur this past year while traveling in Asia.
At my vacation home, I have dozens of retired friends who are mostly 60+ in age but still lots of fun.
I play pickleball back home with retired friends who are in their 50s and 60s.
You could throw it in EQ 30 day Notice account and get 2.75% You just have to know 30 days in advance when you need money. I just move X amount out every month for spending. But that adds one more minor hassle and now you have things under an additional roof.
Thanks for the long feedback Dividend Daddy and love how much thoughts you put into this comment.
It’s interesting to see that you’re still reinvesting dividends in RRSP and TFSA. I like the idea of building up cash bucket so you don’t have to rely on dividend income right away. That’s something we’re striving for us well.
Good point on HELOC, need to look into that.
I think in the FIRE community there’s a mindset of optimizing everything. That gets very tiring once we’re on the journey for a while. So yes, I totally agree that over optimizing can be detrimental to you mentally and emotionally. There will be some level of inefficiency in life and you need to be OK with it.
Good call on find early retired (new) friends or just retired new friends!
I’m US based so this may not work for you. For my “safe” cash like investments, I use SGOV but considered BOXX ETF (does box spreads on SPX) and yields slightly more than SGOV. If you hold BOXX for a year plus, it’s treated as long term capital gains, so it’s an extra after tax boost. I also have ICSH and am looking at JAAA which have very modest volatility/risk but better yields. Lots of options as you move up/down the risk/return curve. I have around 10 years worth of essential spend in these “safe” instruments as my cash reserve which I’ll admit is overkill. I’m fine that my kid will inherit less because of this 🙂
I’ve been retired for about a year. I guess I’m still in the honeymoon phase as I don’t miss work and still enjoy reading, working out, traveling, watching trash action movies, napping, goofing around, learning different random stuff, etc. But I’m an introvert who doesn’t need very many social activities and don’t have this need for “purpose” beyond taking care of family (including kids, parents, in-laws). IMO, I don’t think you will get bored in retirement as you seem to have curiosity and willingness to try new things. From everything I read (I read a number of forums and blogs on FIRE), if you’re the type of person who planned well financially and are willing to get out there and try enough new/different stuff, you’ll eventually find a new rhythm and tell yourself you should have retired earlier.
Thanks for the feedback, Phillip. SGOV/BOXX seems to be similar to CBIL here in Canada. Congrats on around 10 years of essential spend, that’s really amazing!
Glad to hear that you’re enjoying retirement. It’s all about finding a new rhythm in your retirement life that allows you to be happy with your life.
Sunlife offered a retirement plan for $85/month without dental coverage, and a lifetime cap of $200K… so if you have 200k worth of stock set aside for medical coverage, you can do your own health plan. Recall the advice to avoid any pressure tactics to buy now before this offer expires upon retirement !
Thanks for the info, will have to take a closer look.
Hi Bill, I am not sure if I understood correctly. Can you please explain this or point me to the link where I can read about it.
Thanks
“For dividends sitting in our taxable accounts, if we invest in “safer” investments like GICs, HISAs, HISAs ETFs, bond ETFs, or even money market, all the interest earned would be taxed as 100% interest income, and not very tax efficient. Unfortunately, there’s no other way around it.”
There is a way around it, you can buy a HISA proxy like HSAV which reinvests the dividend within the fund. The value of the shares is increased with the effective interest rate. It’s up 2.77% in the last year. When you sell it’s capital gains, which is far better than interest income.
Will take a look, wasn’t aware of HSAV until readers pointed it out. If HSAV keeps going up similar to interest rate and when you sell it’s only capital gain, that’s certainly more tax efficient than earning interests.
I looked at HSAV but decided against it because there’s no guarantee the price will be higher when you want to sell. Looking at a 1 year chart, the worst-case happened if you bought 19 Aug 2025. The price dropped right after that and you didn’t break even until 16 Dec 2025.
We currently use CSAV. It has a slightly higher dividend than CASH but a lower volume traded.
The TSX website has a good ETF comparion tool at https://money.tmx.com/en/etf-comparison
Thanks for pointing out CSAV, will take a look.
Thanks as always. And excellent point re planning to find purpose and structure during retirement. The friends I have who have not transitioned successfully ( regardless of wealth level ) didn’t spend enough time on this aspect. You can only travel, eat out, sit on the beach etc. so much. Having a real passion to replace your work hours seems critical to success.
Thank you, Mrs. T has been bugging me a lot about figuring how what I plan to do in retirement.
Good article Bob. I see you are doing extensive planning on your forthcoming retirement!
Two thoughts on HISAs: 1. Make sure where ever you park your money the full amount is insured by the CDIC, 2. Do not exceed the $100,000 limit per issuer, and per class of deposit (RRSP, non-registered, etc.), and 3. Consider cashable GICs which can be cashed out after 30 days with no penalty, and pay a higher rate of interest than a straight savings account.
With respect to extended health after you retire: based on my experience, the premium will increase dramatically with much less coverage, and much lower caps than your extended health insurance at your work. After 3 years I did not see any benefit in continuing it. Your situation could easily be different (coverage for 4 people, no senior drug coverage. I am guessing you are several years from being a senior!)
Good luck with your planning!
Thanks Daniel. Yes CDIC will be important for sure. I’ll have to call SunLife one of these days to find out more what the premium will look like, I suspect even if I “keep” my work’s extended health the premium will be higher.
Hi Bob,
When I retired ~15 y ago I opted to continue my medical coverage with the company, SunLife, that ran the workplace plan. Given later circumstances this was a wise, more like happenstance on my part, decision. In 2022, I contracted C19 in Norway which may or may not have been the cause of a tear in my lung which quickly followed. The subsequent hospital stay and a 14 d no-fly window was costly. My foreign travel coverage with Sunlife, administered by Allianz in Europe, covered all of the medical expenses as well as some of the incidentals like hotel costs during the no-fly window. The process wasn’t all smooth as there was back-and-forth with Allianz over a 7 month period. But, in the end, they came through. This one incident exceeded the cumulative payments i had made during retirement. I think it has been valuable to continue or replace the coverage you have had, especially since you and your family travel extensively.
Glad to hear that you opted to continue your medical coverage with SunLife and got them to cover your medical expenses while travelling. Sorry to hear about the experiences though, not fun to have to go to the hospital while traveling.
HSAV pays no monthly taxable distributions. When you sell you get a cap gain assuming you sell at a higher price. HSAV is notorious for trading at a NAV premium however.
Also remember a famous saying…. “Don’t let the tax tail wag the investment dog”.
Interesting, will take a look at HSAV. Thanks for mentioning.