Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

Burning questions Retirees face

 

Retirees face a myriad of questions as they head into the next chapter of their lives. At the top of the list is whether they have enough resources to last a lifetime. A related question is how much they can reasonably spend throughout retirement.

But retirement is more than just having a large enough pile of money to live a comfortable lifestyle. Here are some of the biggest questions facing retirees today:

Should I pay off my mortgage?

The continuous climb up the property ladder means more Canadians are carrying mortgages well into retirement. What was once a cardinal sin of retirement is now becoming more common in today’s low interest rate environment.

It’s still a good practice to align your mortgage pay-off date with your retirement date (ideally a few years earlier so you can use the freed-up cash flow to give your retirement savings a final boost). But there’s nothing wrong with carrying a small mortgage into retirement provided you have enough savings, and perhaps some pension income, to meet your other spending needs.

Which accounts to tap first for retirement income?

Old school retirement planning assumed that we’d defer withdrawals from our RRSPs until age 71 or 72 while spending from non-registered funds and government benefits (CPP and OAS).

That strategy is becoming less popular thanks to the Tax Free Savings Account. TFSAs are an incredible tool for retirees that allow them to build a tax-free bucket of wealth that can be used for estate planning, large one-time purchases or gifts, or to supplement retirement income without impacting taxes or means-tested government benefits.

Now we’re seeing more retirement income plans that start spending first from non-registered funds and small RRSP withdrawals while deferring CPP to age 70. Depending on the income needs, the retiree could keep contributing to their TFSA or just leave it intact until OAS and CPP benefits kick-in.

This strategy spends down the RRSP earlier, which can potentially save taxes and minimize OAS clawbacks later in retirement, while also reducing the taxes on estate. It also locks-in an enhanced benefit from deferring CPP: benefits that are indexed to inflation and paid for life. Finally, it can potentially build up a significant TFSA balance to be spent in later years or left in the estate.

Should I switch to an income-oriented investment strategy?

The idea of living off the dividends or distributions from your investments has long been romanticized. The challenge is that most of us will need to dip into our principal to meet our ongoing spending needs.

Consider Vanguard’s Retirement Income ETF (VRIF). It targets a 4% annual distribution, paid monthly, and a 5% total return. That seems like a logical place to park your retirement savings so you never run out of money.

VRIF can be an excellent investment choice inside a non-registered (taxable) account when the retiree is spending the monthly distributions. But put VRIF inside an RRSP or RRIF and you’ll quickly see the dilemma.

RRIFs come with minimum mandatory withdrawal rates that increase over time. You’re withdrawing 5% of the balance at age 70, 5.28% at age 71, 5.40% at age 72, and so on.

That means a retiree will need to sell off some VRIF units to meet the minimum withdrawal requirements.

Replace VRIF with any income-oriented investment strategy in your RRSP/RRIF and you have the same problem. You’ll eventually need to sell shares.

This also doesn’t touch on the idea that a portfolio concentrated in dividend stocks is less diversified and less reliable than a broadly diversified (and risk appropriate) portfolio of passive investments.

By taking a total return approach with your investments you can simply sell off ETF units as needed to generate your desired retirement income.

When to take CPP and OAS?

I’ve written at length about the risks of taking CPP at 60 and the benefits of taking CPP at 70. But it doesn’t mean you’re a fool to take CPP early. CPP is just one piece of the retirement income puzzle. Continue Reading…

Book Shop Remix: Where would you shelve Retirement?

By Mark Venning, ChangeRangers.com

Special to the Financial Independence Hub

 

If you slid into your virtual bookshop to look for a book on the subject of Retirement, where would you begin? A keyword search would likely begin with the phrase “books on retirement” and …

Kaboom! An explosion of titles appear. Depending on your mindset, where your thinking was at a given moment, what triggering event gave rise to a conversation, you would gravitate to where? Titles such as The New RetirementalityRedefining Retirement: New Realities for Boomer WomenHow to Retire Happy, Wild, and FreePurposeful RetirementWhat Retirees Want. Only a slice of texts on an almost endless bookshelf, which began to expand after 2004.

In the year 2001, while working as a consultant at a career services firm, (aka Career Transition/Outplacement), a managing partner asked me to deliver a Retirement program. For the first time since the late 1980’s, a corporate client suddenly requested a set of workshops for their employees approaching what they prescribed as retirement age. When I looked through the thick Retirement binder with its referenced reading resources, I ached in the head after what I read.

Sparing the colourful expletives, my response to the managing partner the next day was that I needed to re-design the whole thing before I dared to set foot inside that corporate boardroom. We needed to not only be contemporary, but we also had to be futuristic, to constantly respond to changing attitudes on what I then described as later life journeys as opposed to Retirement. The trouble was it would all seem too cryptic, too ethereal in concept unless I spoke of Retirement.

In prep for the Retirement re-design, I scoured bookshelves to see what new thinking was prevailing at the time and, to my disappointment, there wasn’t much that ground breaking. Much of the material was from the mid to late 1990’s. When you walked into a bookshop, you would find these “Retirement” books in the Business section, likely under the sub shelf “Financial Planning.” The issue with many of these was that specific references became quickly time stamped “out of date.”

Scouting out the extravaganza of Retirement books

While still shelving Retirement books in the Business section, they are usually broken into two categories – Financial Planning and Lifestyle Planning, you may wander into the Careers section – Retire Retirement: Career Strategies for the Boomer Generation for example. With luck, visit Self Help (DIY retirement is a thing). One recommended book I found sits in the Christian Living section. Try fiction! Yes, there are those too; and no doubt, somewhere out there is a Boomer Retirement book club discussing the latest find.

Over my twenty years of scouting out the extravaganza of Retirement books there have been a few peaks in inspired writing and in some cases the writing, aimed at a corporate audience, advised on how organizations should be prepared to “survive the graying of the workforce” and be ready for the “looming wave of Boomer retirements.” Yet there is a trip wire here.

A funny thing happened on the road to Retirement. Where I live, in Ontario Canada, even with the provincial government prohibition of mandatory retirement (with the odd exception) in 2006 there continue to be sinister ways Retirement conversations with employees occur in the workplace. Continue Reading…

Investing in times of uncertainty

It’s easy to stick to your long-term investing plan when times are good. Indeed, if your investment portfolio had any U.S. market exposure at all over the past 12 years you’ve likely enjoyed nearly uninterrupted growth.

Of course, there are always bumps in the road. Stocks fell sharply in a short period between February and March 2020, the swiftest decline in history. The world was shutting down in response to the COVID-19 pandemic and investors panicked. But stocks came roaring back and the S&P 500 ended the year with a gain of 18.4%. Things were good again. Until they weren’t.

Investors have been worried about a prolonged stock market crash for years. Those fears are heightened each year that stocks continue to rise. Surely this can’t last forever. Meanwhile, as we come out of the pandemic, there’s anxiety over inflation and rising interest rates, which has put downward pressure on bond prices. Long-term government bonds are down 12% on the year. U.S. treasuries, the ultimate safe haven, are down 3.3%.

In uncertain times we look to economic forecasts and predictions of what’s to come. There’s no shortage of opinions, so it’s easy to find one that fits your narrative. It’s hard not to listen when legendary investors like Jeremy Grantham call this the greatest bubble since 1929.

So, what’s an investor to do when stocks are poised to crash, bonds are in a free-fall, and cash pays next to nothing? Even gold, often pegged as an inflation hedge and portfolio diversifier, is down nearly 10% year-to-date.

Are you properly diversified?

Is your portfolio as diversified as it should be? Does it have a mix of Canadian, U.S., International, and Emerging Market stocks? A mix of short-term and long-term corporate and government bonds?

Are you judging your portfolio as a whole or by its individual parts? It’s never easy to see a specific holding fall in value. It makes you wonder why you hold it at all. Bond holders must be feeling that way right now.

If you hold Vanguard’s Canadian Aggregate Bond Index (VAB), you’re likely not pleased to see this performance:

VAB YTD returns

When you add U.S. and Global bonds to the mix, the results are similar but slightly more favourable:

Vanguard US and Global Bonds YTD

Now let’s add Canadian, U.S., International, and Emerging Market stocks to the portfolio using Vanguard’s FTSE Canada All Cap Index (VCN), Vanguard’s U.S. Total Market Index (VUN), Vanguard’s FTSE Developed All Cap ex North America Index (VIU), and Vanguard’s FTSE Emerging Markets All Cap Index (VEE):

Vanguard Canadian, US, International ETFs

When you put all seven of these ETFs together you get Vanguard’s Balanced ETF portfolio (VBAL). Each part following its own unique path, but blended together using a rules-based approach that maintains the original target asset mix through regular rebalancing.

Here’s how that looks over a three year period (since VBAL’s inception):

VBAL since inception

This is what diversification looks like. While some individual parts lag behind, others lead the charge and drive the overall returns. Regular rebalancing helps ensure you always buy low and sell high while managing your risk and return. The result is a compound annual growth rate of 7.3% since 2018.

Perhaps the best way to visualize how diversification works is by looking at the periodic table of investment returns over the past 20 years (source: www.callan.com):

Periodic Table of investmeent returns

Last year’s winner is often next year’s loser. Every asset class has had its turn at or near the top, including large cap stocks, small cap stocks, emerging markets, real estate, bonds, and yes, even cash (once).

Do you think you can predict which assets will lead the way in 2021 and beyond? Unlikely. That’s why it’s best to diversify broadly so you can capture market returns without trying to guess where to park your money.

What about pulling out all of your investments and moving to cash? Well, cash was the worst performing asset class in eight of the 20 years. Even in 2008-09 bonds were the better bet.

Have you rebalanced?

I’ve written before about investors getting distracted by shiny objects like cryptocurrency, technology stocks, and high-flying fund managers. Even seasoned investors were moving more of their money into U.S. stocks, technology stocks, and Bitcoin to capitalize on rising markets.

Indeed, why hold bonds at all when every other asset class has been soaring?

The result is a portfolio and asset mix that is likely out of step with your original goals.

Rebalancing is counterintuitive because it forces you to sell what’s going up in value and buy more of what’s going down. It’s tough to wrap your head around selling U.S. stocks to buy more Canadian stocks. Or worse, to buy more bonds.

It’s even more difficult in uncertain times. It’s easy to look back at March 2020 or March 2009 as buying opportunities of a lifetime for stocks. But in the moment it probably felt terrifying to even be holding stocks at all.

Today, nervous investors are worried about holding bonds. What should be the stable portion of their portfolio is suddenly underwater and signs of future upside are nowhere to be found.

Damir Alnsour, a portfolio manager at Wealthsimple, has heard from many of these anxious investors in recent days. They’re asking questions like, will bonds keep going down?

“The answer is that no one really knows if it is likely to continue, but we always look at our portfolios with a long-term lens because we don’t allocate our investments based on short-term market performance. We expect that in the future there will be times where stocks are doing well, and bonds are underperforming but also the opposite. We can’t predict these times, and we don’t think anyone else can either,” said Alnsour.

He encourages his clients to take a 30,000-foot view and remember the reason their portfolio includes bonds. Bonds are a long term source of return that improve the stability of your portfolio because they often react to changes in the economic environment differently than stocks.

“During most of the major stock market downturns historically, bonds have increased in value and helped cushion losses,” said Alnsour.

Just like the three-year chart of VBAL’s returns, a well-balanced and diversified portfolio is expected to rise over time: after all, that’s why we invest in the first place. But it’s normal for the same portfolio to suffer minor short-term losses along the way that can sometimes take weeks or months to recover.

Back to Wealthsimple’s Alnsour:

“Also, keep in mind, we would rebalance the portfolio if bonds were to continue to sell-off. What this means is that should the bond allocation drop below our rebalancing threshold, we would sell some equities to add to bonds and therefore pick up more fixed income at a cheaper price and better yields (just as we would have sold bonds to add to your equity position in March of 2020!).”

Don’t Just Do Something, Stand There!

Your portfolio is like a bar of soap. The more you touch it, the smaller it gets. Yet in times of uncertainty we can’t help but feel like we need to do something to curb losses or increase gains.

The better choice, assuming you have a well-diversified and automatically rebalancing portfolio, is to log out of your investing platform, close your internet browser, and do nothing. Focus on your family, friends, hobbies: anything that will prevent you from logging back on and seeing your investments in the red.

As PWL Capital portfolio manager Benjamin Felix says, “your investment strategy shouldn’t change based on market conditions.”

That’s right. You identified your risk tolerance and time horizon, and chose your original asset mix for a reason. You understood that markets fluctuate, often negatively, for periods of time and that is out of your control. Yet when markets are going through their downswing, you feel compelled to change your approach.

Let’s go back to the term, “uncertainty.” Isn’t the future always uncertain? When are we investing in certain times?

Pundits and market forecasters often paint a bleak future, like Grantham’s 1929-style crash or Dr. Doom Nouriel Roubini calling for hyperinflation. The truth is nobody knows how this will play out.

What if you make a tactical shift to your investment strategy and you’re wrong? There are plenty of investors who moved to cash after the global financial crisis and never found their way back into the stock market. Once you convince yourself of a particular narrative it’s nearly impossible to admit that you were wrong and change course.

Final Thoughts

It’s reality check time for investors. We’ve been in a bull market for 12 years (minus a few blips). Almost everything has worked, which can lead to overconfidence in your investing skills. Meanwhile, many investors have strayed away from their original goals to chase even higher returns from U.S. stocks, technology stocks, and the like.

It’s time to check in on your portfolio and make sure it’s broadly diversified and risk appropriate for your age and stage of life. It’s time to rebalance, if you hold multiple funds, and get back to your original target asset mix. Finally, if you’re already invested in an appropriate asset allocation ETF or robo-advised portfolio, it’s time to do nothing. Don’t change your investing strategy based on market conditions.

Take a long-term view of your investments rather than looking at the daily changes (which can be maddening). That’s how to invest in uncertain times.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on March 5, 2021 and is republished here with his permission.

Was the F.I.R.E. movement doused by the pandemic?

Cutthecrapinvesting: Image by Mohamed Hassan via Pixabay

By Dale Roberts

Special to the Financial Independence Hub

Checking in on Vanguard’s VRIF

Cutthecrapinvesting: Image by Cris Ramos from Pixabay

By Dale Roberts

Special to the Financial Independence Hub

In September, Vanguard’s VRIF ETF was launched. The ETF is an all-in-one retirement funding solution. It is designed to pay out 4% of the portfolio value in 12 monthly distributions. That level of income is set at the end of each calendar year, based on the year end value. After the Santa Claus rally, it looks like VRIF holders will be getting a modest raise.

Here’s my original review of the Vanguard VRIF ETF. Simple and cost effective asset allocation portfolios can (historically) work very well to provide consistent and generous retirement income. The Vanguard VRIF option does it all for you, from portfolio management to paying out that income each month. Of course, you can also create your own ETF portfolio for retirement funding.

The key message is that simple works. And fees are important. I am a big fan of financial planning at the right cost, but keep in mind that investment fees and advisory fees will reduce the amount that your investments can deliver each year. You would subtract that percentage off the top. That’s why you might consider a fee-for-service advisor. In the end they might provide that retirement funding plan that would include an investment option such as VRIF.

The VRIF payout

The initial monthly distribution for VRIF was set at .083333 cents per unit.

As per the ETF mandate the distribution will stay the same throughout the year. The amount in your pocket includes fees and any withholding taxes within the ETF assets. It’s 4% in the clear. Of course, you would (most often but depending on your tax situation) create taxes payable from receiving the income in an RRSP, RRIF or taxable account. Within your TFSA the income would be tax free.

The performance of VRIF

In addition to paying out the monthly distributions, the ETF has also increased in price by 4.5% from inception. Continue Reading…