Tag Archives: retirement income

Living off the Dividends?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It is the most popular rallying cry for self-directed investors in Canada and the U.S. – I plan to “live off of the dividends.” Or in retirement – “I am living off of the dividends.” The notion leaves money on the table in the accumulation stage and living off of the dividends leaves a lot of money on the table in retirement. Don’t get me wrong, I love the big juicy (and growing) dividend as a part of our retirement plan. But as an exclusive strategy, the income approach simply comes up short.

It’s not a popular Tweet, but I have suggested that no investor with a viable and sensible financial plan would live off the dividends. Add this to the points made in the opening paragraph; it might not be tax-efficient. Also, the dividend would have no idea of what is a financial plan and what is the most optimal order of account type spending. Check in with the our friends at Cashflows&Portfolios and they can show you a very efficient order of asset harvesting.

On Seeking Alpha, I recently offered this post:

Living off dividends in retirement; don’t sell yourself short.

Thanks to Mark at My Own Advisor for including that post in the well-read Weekend Reads.

Financial Planner: It may be a bad idea

From financial planner Jason Heath, in the Financial Post.

Why living off your dividends in retirement may be a mistake.

Retirement planning is a personal decision, but you might be making a big mistake if you go out of your way to ensure you can live off your dividends, since you will be leaving a great deal of money when you die. In the process, you may have worked too hard at the expense of family time or spent too little at the expense of treating yourself.

In that Seeking Alpha post, I used BlackRock as the poster child for a lower-yielding dividend growth stock. The yield is lower but the dividend growth is impressive. That can often be a sign of underlying earnings growth and financial health.

2022 update: BlackRock is falling with the market (and then some); the yield is now above 3%.

Making homemade dividends

In that Seeking Alpha post, I demonstrated the benefit of selling a few shares to boost the total retirement take from BlackRock. The retiree gets an impressive income boost, and only had to sell 2.8% of the initial share count. The risk is managed.

Starting with a hypothetical $1 million portfolio, $50,000 in annual income represents an initial 5% spend rate. That is, we are spending 5% of the total portfolio value. Without share sales the retiree would have been spending at an initial 3.3%.

Share Sales (in the table) represents the income available thanks to the selling of shares: creating that homemade dividend.

The retiree who has the ability to press that sell button to create income enjoyed much higher income. In fact, the retiree would have been able to sell significantly more shares (compared to the example above) to create even more additional income.

Plus the dividend growth is so strong, it quickly eliminated the need to sell shares.

BlackRock Dividend Growth – Seeking Alpha

In fact, the BlackRock dividend quickly surpasses the income level of the Canadian bank index. It can be a win, win, win. Even for the dividend-loving Canadian accumulator, BlackRock is superior on the dividend flow.

But of course, the aware retiree will keep selling shares and making hay when the sun shines. They might cut back any share sales in a market correction: also known as a variable withdrawal strategy.

It’s a simple truth. Don’t let the income drive the bus. It doesn’t know where you need to go. This is not advice, but consider growth and total return and share harvesting.

Don’t sell yourself short.

In the Seeking Alpha post, I also offered:

The optimal mix of income and growth for retirement Continue Reading…

Moshe Milevsky and Guardian Capital unveil a Modern Tontine in new Retirement solution

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Moshe Milevsky

A revolutionary new approach to preserving portfolio longevity through a modern “Tontine” structure was unveiled Wednesday by Guardian Capital LP and famed author and finance professor Moshe Milevsky.

GuardPath™ Longevity Solutions, created in partnership between Guardian and Schulich School of Business finance professor Milevsky, is designed to address what Nobel Laureate Economist William Sharpe has described as the “nastiest, hardest problem in finance” 1

Announced in Toronto on September 7, a press release declares that the “ground-breaking step” aims to “solve the misalignment between human and portfolio longevity.” See also this story in Wednesday’s Globe & Mail.

Over the years, I have often interviewed Dr. Milevsky about Retirement, Longevity, Annuities and his unique take on how the ancient “Tontine” structure can help long-lived investors in their quest not to outlive their money. Milevsky has written 17 books, including his most recent one on this exact topic: How to Build a Modern Tontine. [See cover photo below.]

Back in 2015, I wrote two MoneySense Retired Money columns on tontines and Milevsky’s hopes that they would one day be incorporated by the financial industry. Part one is here and part two here. See also my 2021 column on another pioneering Canadian initiative in longevity insurance: Purpose Investment Inc.’s Longevity Pension Fund.

Addressing the biggest risks faced by Retirees

In the release, Milevsky describes the new offering as a “made-in-Canada” solution that addresses “the biggest risks facing retirees and are among the first of their kind globally. Based on hundreds of years of research and improvement and backed by Guardian Capital’s 60-year reputation for doing what’s right for Canadian investors, I am confident these solutions will revolutionize the retirement space.”

Milevsky’s latest book is on Modern Tontines

In an email to me Milevsky said: “You and I have talked (many times) about tontines as a possible solution for retirement income decumulation versus annuities. Until now it’s all been academic theory and published books, but I finally managed to convince a (Canadian) company to get behind the idea.”

In the news release, Guardian Capital Managing Director and Head of Canadian Retail Asset Management Barry Gordon said that “for too many years, Canadian retirees have feared outliving the nest egg they have worked so hard to create.” It has answered that concern by creating three solutions that aim to alleviate retirees’ greatest financial fears: The three solutions are described at the bottom of this blog.

With the number of persons aged 85 and older having doubled since 2001, and projections suggesting this number could triple by 2046,2 Guardian Capital says it “set out to create innovative solutions that this demographic could utilize when seeking a greater sense of financial security.”

Tontines leap from Pop Culture to 21st Century reality

Tontines were one of the most popular financial products for hundreds of years for individuals willing to trade off legacy for more income, Guardian says. Once in a  while the tontine shows up in popular culture, notably in the film The Wrong Box, where the plot revolves around a group of people hoping to be the last survivor in a tontine and therefore the recipient of a large payout.

“With our modern tontine, investors concerned about outliving their nest egg pool their assets and are entitled to their share of the pool as it winds up 20 years from now,” Gordon says, “Over that 20-year period, we seek to grow the invested capital as much as possible to maximize the longevity payout. Along the way, investors that redeem early or pass away leave a portion of their assets in the pool to the benefit of surviving unitholders, boosting the rate of return. All surviving unitholders in 20 years will participate in any growth in the tontine’s assets, generated from compound growth and the pooling of survivorship credits. This payout can be used to fund their later years of life as they see fit, and aims to ensure that investors don’t outlive their investment portfolio.” Continue Reading…

Retired Money: Rising rates make annuities more tempting for Retirees

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My latest MoneySense Retired Money column looks at whether the multiple interest rate hikes of 2022 means its time for retirees to start adding annuities to their retirement-income product mix. You can find the full column by clicking on the highlighted headline here: Rising rates are good news for near-retirees seeking longevity insurance.

The Bank of Canada has now hiked rates twice by 50 basis points, most recently on June 1, 2022.  That’s good for GIC investors, as we covered in our recent column on the alleged death of bonds, but it’s also  welcome news for retirees seeking longevity insurance.

As retired actuary Fred Vettese recently wrote, retirees may start to be tempted to implement his suggested guideline of converting about 30% of investment portfolios into annuities. As for the timing, Vettese said it is “certainly not now: but it could be sooner than you think.” He guesses the optimal time to commit to them is around May 2023, just under a year from now.

After the June rate hikes, I asked CANNEX Financial Exchanges Ltd. to generate life annuity quotes for 65- and 70-year old males and females on $100,000 and $250,000 capital. The article provides the option of registered annuities and prescribed annuities for taxable portfolios. It also passes along the opinion of annuity expert Rona Birenbaum that she greatly prefers prescribed annuities because of the superior after-tax income. Of course, many retirees may only have registered assets to draw on: in RRSP/RRIFss and/or TFSAs.

For a 65-year old male investing $100,000 early in June 2022, with a 10-year guarantee period in a prescribed (non-registered) Single Life annuity, monthly income ranged from a high of $548  at Desjardins Financial Security with a cluster at major bank and life insurance companies between $538 and $542. (figure rounded). Comparable payouts on $250,000 ranged from $1299 to $1,390. Because of their greater longevity, 65-year old females received slightly less: ranging from around $500/month to a high of $518, and for the $250,000 version from $1238 to $1319.

Here’s what Cannex provides for comparable registered annuities (held in RRSPs):

For a 65-year old male (born in 1957), $100,000 in a Single Life annuity nets you between $551 and $571 per month, depending on supplier; $250,000 generates between $1,399 and $1,461 a month. For 70-year old males (born 1952), comparables are $625 to $640/month and $1,578 to $1,634 a month. Continue Reading…

An income strategy for new retirees: HDIF

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By David Kitai,  Harvest ETFs

(Sponsor Content)

One third of recently retired Canadians surveyed by RBC insurance said they retired sooner than they planned because of the COVID-19 pandemic. That same survey found that retirees, especially new retirees, are increasingly concerned about affording their retirement.

More than 78% of survey respondents said they were concerned about the impact of inflation on their savings. 47% said they were concerned about a lack of guaranteed income and 48% said they worry about outliving their savings.

All three of these concerns come down to income. New Canadian retirees, many of whom retired early due to COVID, are worried that they don’t have a stable source of income that can overcome the rapidly rising cost of living and last for their whole lifespans.

One income asset class can help with those worries.

Inflation worries come after years of low-yielding bonds

The income concerns discovered by the survey should come as no surprise. For the better part of a decade income yields from fixed income investments have been at or near historic lows. Retirees used to live on the income these investments provided but yields at sub 2% levels have been unsustainable.

More recently, rates have begun to rise as central banks attempt to reign in inflation. However, with inflation in spring of 2022 hitting levels above 6%, those rising bond yields are still paying negative real income.

That trend is reflected in the fact that 78% of survey respondents said they were concerned about inflation. Many traditional income sources seem incapable of matching what inflation has done to ordinary retirees’ balance sheets.

Many income sources, but not all.

Equity Income ETFs for retirees

An equity income ETF takes a portfolio of equities — stocks — and uses a combination of dividends and a covered call strategy to generate consistent monthly cashflows for unitholders. This results in an ETF with a target annual yield that can be as high as 8.5%, paid in the form of a monthly cash distribution. These assets can still participate in market growth opportunity, like an ordinary equity ETF, albeit with some growth opportunities limited due to the covered call strategy. The end result is a product paying consistent income with exposure to market growth opportunities. Continue Reading…

JP Morgan, RBC on post-Covid Retirement trends

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A couple of recent surveys from J.P. Morgan Asset Management and RBC shed a fair bit of light into recent Retirement trends in North America in the wake of the ongoing Covid-19 pandemic. Summarized in the October 2021 issue of Gordon Wiebe’s The Capital Partner newsletter, here are the highlights:

First up was J.P. Morgan on August 19 in a study focused on de-risking for investors approaching retirement and about to draw down on Retirement accounts.

The study was quite comprehensive, drawing on a data base of 23 million 401(k) and IRA accounts and 31,000 Americans. 401(k)s and IRAs are similar to Canada’s RRSPs and RRIFs.

De-risking is quite common, with 75% of retirees reducing equity exposure after “rolling over” their assets from a 401(k) to an IRA. These retirees also relied in the mandatory minimum withdrawal amounts.

Of those studied, 30% received either pension or annuity income, and the median value of Retirement accounts was US$110,000. The median investable assets were roughly US$300,000 to US$350,000, with the difference coming from holdings in non-registered accounts.

Not surprisingly, the most common retirement age was between 65 and 70 and the most common age for commencing the receipt of Social Security benefits was 66. (Coincidentally, the same age Yours Truly started receiving CPP in Canada.)

The report warns that retirees who wait until the rollover date to “de-risk” or rebalance portfolios needlessly expose themselves to market volatility and potential losses: they should consider rebalancing well before the obligatory withdrawal at age 71.

The newsletter observes that 61-year-olds represent the peak year of baby boomers in Canada and cautions that if they all retire and de-risk en masse, “Canadian equity markets will likely undergo increased downward pressure and volatility. Retirees should consider re-balancing or ‘annualizing’ while markets are fully valued and prior to an increase in capital gains or interest rates.”

The report includes several interesting graphs, which you can find by clicking to the link above. The graph below is one example, which shows average spending (dotted pink line) versus average retirement income (solid green line.) RMD stands for Required Minimum Distributions for IRAs, which is the equivalent of Canada’s minimum annual RRIF withdrawals after age 71.

EXHIBIT 4: AVERAGE RETIREMENT INCOME AND SPENDING BY AGES Source: “In Data There Is Truth: Understanding How Households Actually Support Spending in Retirement,” Employee Benefit Research Institute & J.P. Morgan Asset Management.

RBC poll on pandemic impacts on Retirement and timing

Meanwhile in late August, RBC released a poll titled Retirement: Myths & Realities. The survey sampled Canadians 50 or over and found that the Covid-19 pandemic has caused some Canadians to “hit the pause button on their retirement date.” 18% say they expect to retire later than expected, especially Albertans, where 33% expect to delay it.

They are also more worried about outliving their money, with 21% of those with at least C$100,000 in investible assets expecting to outlive their savings by 10 years. That’s the most in a decade: the percentage was just 16% in 2010.

Sadly, 50% do not yet have a financial plan and only 20% have created a final plan with an advisor or financial planner.

Those near retirement are also resetting their retirement goals. Those with at least $100,000 in investable assets now estimate they will need to save $1 million on average, or $50,000 more than in 2019. 75% are falling short of their goal by almost $300,000 on average.

Those with less than $100,000 have lowered their retirement savings goal to $533,153 from $574,354 in 2019, and the savings gap is a hefty $472,994.

To bridge the shortfall, 37% of those with more than $100K plan stay in their current home and live more frugally, compared to 36% of those with under $100K. 31% and 36% respectively plan to return to paid work, 31% and 23% plan to downsize or move, and 3 and 5% respectively intend to ask a family member for financial assistance.