By Dale Roberts, cutthecrapinvesting
Special to the Financial Independence Hub
It is a common question from readers. How do I create reliable retirement income with ETFs? It is a simple answer if we consider the last 40 years. A simple mix of Canadian, U.S. and International stocks has provided the necessary growth component. Core bond funds have offered the required risk management. Stocks for offense. Bonds for defense. A typical balanced or balanced growth couch potato portfolio did the trick. Today, we’ll look at the 2021 returns for retirement ETF portfolios.
In early 2019 I posted the simple 7-ETF portfolio for retirees. Please have a read of that post for background on the ETFs, risk, and the retirement scenario.
Seek retirement and investment advice
You can self-direct your investments if you have the knowledge and you understand your risk tolerance level. But I’d suggest that you contact an experienced fee-for-service financial planner who has expertise in the retirement arena. With a fee-for-service advisor you will pay as you go. You can pay by the hour, or perhaps pay a flat fee for the evaluation and plan. You might then set off on your own to build the portfolio with all the right pieces in the right place.
I’d also suggest that you read my review of Retirement Income For Life: Spending More Without Saving More. That’s a wonderful staple read for retirees and retirement planners. The author, Frederick Vettese, was the chief actuary at Morneau Shepell.
Your retirement ETF will be one piece of the retirement funding plan. The following represents a model for consideration and evaluation.
The 7-ETF Portfolio for Canadian retirees
You may choose to go more aggressive or more conservative in your approach. And keep in mind the above is not advice, but ideas for consideration. That said, I do see it as a sensible conservative mix. You may decide to add more inflation protection by way of energy stocks or commodities.
And let’s cut to the retirement funding chase. Here’s the returns for the 7-ETF portfolio for retirees for 2021. Charts and tables are courtesy of portfoliovisualizer.com
Yup, that simple mix delivered a return of 13.8% in 2021. That is a very good return for a conservative mix that has a 45% bond allocation.
For risk and return benchmarks have a look at …
The ultimate asset allocation ETFs page.
Here’s the returns of the individual assets for 2021.
With inflation fears dominating the back half of 2021 the inflation-sensitive assets of the Canadian High Dividend VDY and REITs performed very well. Keep in mind that two of the assets are in U.S. Dollars. You can substitute and use Canadian Dollar holdings. See the original 7-ETF post.
At Questrade you will hold dual currency (U.S. and Canadian dollar) accounts. You can buy ETFs for free.
Vanguard VRIF ETF for retirement
Recently I also looked at Vanguard’s VRIF Retirement ETF. That retirement funding ETF delivered a very nice income increase for 2022.
Here’s the VRIF distribution scorecard
Distributions per share.
- 2020 0.83
- 2021 0.87 (4.5% increase)
- 2022 0.94 (7.6% increase)
The portfolio income
Portfolio visualizer offers that the starting yield (2021) in the 7-ETF portfolio would be in the area of 2.8%. You will sell assets to create additional income.
Creating that retirement income
You may choose to ‘fund as you go’. While you will have portfolio income (from bonds and dividends) that is accumulating, you will likely have to sell assets to create the desired portfolio income. The basic idea of asset harvesting would be to keep the portfolio close to the original asset weighting. You do not have to be exact in this regard.
You may choose to sell assets monthly, quarterly, or you may even move the assets to a cash (ETF) at the beginning of the year to ensure that you have your retirement income for the year safely stored in cash. Of course, consider fees and taxes.
Retirement spend rate
Here’s an example of a 4.8% spend rate. That is to say, each year you would spend 4.8% of the initial total portfolio value. Each $100,000 would create $4,800 of income, before taxes, each year. A $1,000,000 portfolio would deliver $48,000 of annual income, before taxes.
The chart runs from January of 2015 to end of 2021. This is for demonstration purposes. I have not adjusted for inflation.
So the good news for this simple mix of ETFs is that you would have enjoyed a decent spend rate and the portfolio value would have increased by 17.4%. Of course it is favorable to have a buffer to weather the storms such as the great financial crisis that began in 2008, or the dot-com crash of the early 2000’s. An increasing portfolio value will offer that much-welcomed cushion.
The bonds and cash help in that regard as well – to protect against severe market corrections.
Sequence of returns risk
We need to manage the sequence of returns risk in retirement.
And keep in mind that we enter the retirement risk zone about 10 years previous to our retirement start date. We need to de-risk and prepare the portfolio well in advance.
And here is an interesting approach. You can remove sequence of returns risk (entirely) by going very conservative as you begin retirement. You would then increase your stock allocation (and growth potential) in retirement. That is called a retirement equity glidepath.
A portfolio spend rate example
Here’s an example with the 4.8% spend rate from the year 2000. That is a very unfortunate start date as 2000 is the first year of the dot-com crash. U.S. markets were down three years in a row. Canadian markets suffered as well.
We see that the Balanced Portfolio is still chugging along in 2021, while the all-equity global portfolio went to zero in 2017. We have to protect against an unfortunate start date.
Keep in mind that there are many periods when the most optimal option is an all-equity or equity-heavy portfolio that would provide greater retirement income. But with an aggressive portfolio you run the risk of retiring and running head first into a severe market correction. You don’t want to gamble and hope that you get lucky. Most retirement specialists would recommend a Balanced or Balanced Growth model.
Recessions and deflationary periods might also ‘kill’ the aggressive portfolio.
Variable withdrawal method
You might consider a variable percentage withdrawal (VPW) approach.
With a VPW you would adjust your withdrawal percentage based on market returns. Think of it as guardrails so that your retirement funding does not go off the rails. In periods of market declines you would spend less from your portfolio. When the markets are roaring, spend more. Think of it as a ‘take what the stock market gives you’ approach.
Of course if you had de-risked enough, you would likely not have to worry about poor stock market returns. You would likely continue to with your initial spending targets that were set pre-retirement.
I will be back soon with a post on this VPW retirement strategy.
Pensionize more of your income
Portfolio risk can be minimized by way of pensions and other income. Of course you can pensionize more of your retirement income by way of annuities. You might consider the Purpose Pension Longevity Pension Fund.
Annuities and the Purpose fund can work in concert with your portfolio, pensions and other income.
Use some income boosters
You may decide to shade in greater income by way of individual stocks, or you might bump up that Vanguard VDY and BMO Income ETF weighting. Retirees can certainly take comfort in seeing greater income enter the portfolio, and by having more of their spending needs covered by portfolio income.
Also, we may need to compensate for the lower bond yields available in 2022. We can use these conservative high dividend stocks and ETFs as ‘bond substitutes’.
Keep in mind, this approach is not necessary, you might continue on with a sensible ETF retirement portfolio.
That said, we should not forget the importance of total returns. Growth is good in any stage, especially in retirement. But there is nothing wrong with slanting the portfolio to some greater income. You may even consider some of the specialty income ETFs on the BMO site.
It may still be prudent to hold some bonds that will cushion the blow in stock market declines. IMHO, they will still do their thing. They will go up when stock markets get hit hard.
I am also working on a post that covers this income-based strategy that includes using generous dividend paying stocks as bond substitutes.
Get a retirement funding plan
Once again, retirement funding is more than tricky business, and the risks are incredible. You should strongly consider connecting with an advice-only planner. You’ll receive a plan that should provide the optimal order of retirement income harvesting (RRIF vs TFSA vs Taxable vs pensions vs other income). The plan will also create tax efficiency. There are many other financial planning considerations.
The self-directed investor might also consider the service provided by Mark Seed from My Own Advisor. He runs Cashflows & Portfolios where they will provide options for that optimal retirement funding strategy. That service is provided for a very reasonable fee.
If you do head to Cashflow & Portfolios, be sure to tell them Cut The Crap Investing sent ya. :-)
Thanks for reading. Please leave a comment with your ideas, concerns or questions. Or feel free to send me a note by way of that contact form.
Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dale’s site on Jan. 22, 2022 and is republished on the Hub with his permission.