Tag Archives: retirement income

Q&A on VRIF: Vanguard’s new Retirement Income ETF Portfolio

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Vanguard Canada

Special to the Financial Independence Hub

Republished with permission of Vanguard Canada

Late last year we launched a new all-in-one ETF solution, VRIF, to complement our existing line up of popular asset allocation ETFs.

VRIF, or the Vanguard Retirement Income ETF Portfolio, provides steady and predictable income to help investors meet their monthly expenses. It is made up of eight underlying Canadian Vanguard ETFs and will make an annual payout (currently 4% of the portfolio) split across equal payments each month.

The product has generated interest from investors and advisors along with several industry observers helping it become one of our top selling ETFs over the past few months and generating $150 million in assets (as of February 8, 2021).

It has also led to some questions on how it works and what it hopes to achieve. I wanted to collect some of those common questions and provide a few answers about VRIF.

1) What makes VRIF different from other similar monthly income funds and ETFs?

VRIF is unique in a few different ways. It incorporates a total return approach, meaning the portfolio is constructed to ensure it can help meet the daily living expenses of investors. There is an annual payout (currently 4% of the portfolio) split across equal payments each month. This is appropriate for investors and retirees looking for regular income as well as helping RRIF account withdrawals. For example, if you hold $30,000 in VRIF at the start of the year, that equates to $100 a month, for $1,200 over the year.

You also get a fully diversified portfolio with a mix of stocks and bonds, global diversification and a low-cost management fee of 0.29%*, which is currently about one-third of other similar retirement income products across the industry.

Another advantage to VRIF is that investors can rely on Vanguard’s global investment experts to monitor and assess the portfolio to meet the return target, along with providing regular rebalancing to help simplify the monthly income component. It really is a single ticket solution for investors to access monthly income.

* The management fee is equal to the fee paid by the ETF to Vanguard Investments Canada Inc. and does not include applicable taxes or other fees and expenses of the ETF.

2) How can VRIF help retirees and investors looking for income?

Managing income in retirement is not an easy task. There are a lot of ETFs and mutual funds for building up your retirement savings but not many for people who are looking to use those savings for their retirement spending.

With 30% of Canada’s population being 55 or older, the need for income has never been greater among investors. VRIF gives you a regular consistent payout each month (currently 4% of the total portfolio) and readjusts it once per year. Each year we set a dollar amount and it’s the same for every month in that year. The outcome is a simple and low-cost investment option that can help people enjoy their retirement.

3) How does VRIF expect to achieve the annual payout for investors given the current low-yield environment and where does that payout come from?

Within VRIF, we use a well-diversified total return approach to achieve a tax-friendly annual payout, (currently 4% of the portfolio) split across equal payments each month, that includes income from the portfolio and capital appreciation. Continue Reading…

Retired Money: Has Purpose uncorked the next Retirement income game changer?

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Purpose Investments: www.retirewithlongevity.com/

My latest MoneySense Retired Money column has just been published: you can find the full version by clicking on this highlighted text: Is the Longevity Pension Fund a cure for Retirement Income Worries? 

The topic is last Tuesday’s announcement by Purpose Investments of its new Longevity Pension Fund (LPF). In the column retired actuary Malcolm Hamilton describes LPF as “partly variable annuity, part tontine and part Mutual Fund.”

We described tontines in this MoneySense piece three years ago. Milevsky wasn’t available for comment but his colleague Alexandra Macqueen does offer her insights in the column.

The initial publicity splash as far as I know came early last week with this column from the Globe & Mail’s Rob Carrick, and fellow MoneySense columnist Dale Roberts in his Cutthecrapinvesting blog: Canadian retirees get a massive raise thanks to the Purpose Longevity Fund. Dale kindly granted permission for that to be republished soon after on the Hub. There Roberts described the LPF as a game changer, a moniker the Canadian personal finance blogger community last used to describe Vanguard’s Asset Allocation ETFs. Also at the G&M, Ian McGugan filed Money for life: The pros and cons of the Purpose Longevity Pension Fund, which may be restricted to Globe subscribers.

A mix of variable annuity, tontine, mutual fund and ETFs

So what exactly is this mysterious vehicle? While technically a mutual fund, the underlying investments are in a mix of Purpose ETFs, and the overall mix is not unlike some of the more aggressive Asset Allocation ETFs or indeed Vanguard’s subsequent VRIF: Vanguard Retirement Income Portfolio. The latter “targets” (but like Purpose, does not guarantee) a 4% annual return.

The asset mix is a fairly aggressive 47% stocks, 38% fixed income and 15% alternative investments that include gold and a real assets fund, according to the Purpose brochure. The geographic mix is 25% Canada, 60% United States, 9% international and 6% Emerging Markets.

There are two main classes of fund: an Accumulation Class for those under 65 who are  still saving for retirement; and a Decumulation class for those 65 and older. There is a tax-free rollover from Accumulation to Decumulation class.

There are four Decumulation cohorts in three-year spans for those born 1945 to 1947, 1948 to 1950, 1951 to 1953 and 1954 to 1956. Depending on the class of fund (A or F),  management fees are either 1.1% or 0.6%. [Advisors may receive trailer commissions.] There will also be a D series for self-directed investors.

Initial distribution rates for purchases made in 2021 range from 5.65% to 6.15% for the youngest cohort, rising to 6.4 to 6.5% for the second youngest, 6.4% to 6.9% for the second oldest, and 6.9% to 7.4% for the oldest cohort.

Note that in the MoneySense column, Malcolm Hamilton provides the following caution about how to interpret those seemingly tantalizing 6% (or so) returns: “The 6.15% target distribution should not be confused with a 6.15% rate of return … The targeted return is approximately 3.5% net of fees. Consequently approximately 50% of the distribution is expected to be return of capital. People should not imagine that they are earning 6.15%; a 3.5% net return is quite attractive in this environment. Of course, there is no guarantee that you will earn the 3.5%.”

Full details of the LPF can be found in the MoneySense column and at the Purpose website.

How to generate retirement income

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By Mark Seed, My Own Advisor

Special to the Financial independence Hub

You could argue beyond the how much do I need to retire question, this need comes up next: how to generate retirement income.

Rightly so.

I mean, we all want to know how best to use our retirement incomes sources wisely. Those retirement incomes sources are necessary to help fulfill income needs, while being tax efficient; income to provide some luxuries now and them, or to potentially deliver generational wealth should that be your goal.

My retirement income plan and options

I’ve been thinking about my income plan, or at least my semi-retirement income plan, for some time now.

I captured a list of overlooked retirement income planning considerations here.

Yet I can appreciate not everyone writes about nor thinks about this stuff.

There are obvious ways to generate retirement income but I suspect some might not appeal to you for a few reasons!

Option #1 – Save more

I doubt most people will like this option but it’s probably necessary for many Canadians: you’re going to need to save more than you think to fund your retirement. This is especially true if you have no workplace pension of any kind to rely on and/or you haven’t assessed your spending needs. More money saved will help combat inflationary pressure, rising healthcare costs and longevity risk.  Which brings me to option #2.

Option #2 – Work longer

If you didn’t like option #1, you might not like this one! Working longer into your 60s or potentially to your 70s might be the reality for a good percentage of Gen X and Y.  Part of the reasons these cohorts will need to work longer is because many Boomers remain in the workforce so they can fund their retirement. Some Boomers are continuing to work because they enjoy it. Some are continuing to work because they absolutely have to.

Option #3 – Spend less

The 4% rule remains a decent rule of thumb – it tells us we should be “safe” to withdraw approximately 4% of our portfolio with a minimal chance of running out of money.

Using 4%, a retiree would need $1-million invested to produce a steady income of $40,000 a year. Spending less, will absolutely help portfolio longevity and give stocks in your portfolio a longer time frame to run.

Our initial retirement income plan has us leveraging a mix of income streams in semi-retirement:

  1. Part-time work – to remain mentally engaged – in our 50s.
  2. Taxable but tax-efficient dividend income.
  3. Strategic RRSP withdrawals.

I’m not quite “there” yet in terms of other incomes streams, including TFSA withdrawals and exactly when to take those, but I’m working through that.

Generating retirement income

When it comes to you, options abound. You might have similar income streams or other ideas altogether. Remember, personal finance is personal.

I’ve had the pleasure of working with a few advice-only planners on this site and I’m happy to bring back Steve Bridge, a CFP from Vancouver for his detailed thoughts on this subject. Steve works as an advice-only financial planner with Money Coaches Canada (no affiliation with My Own Advisor). You can find him on that site for his services and you can follow him often on Twitter like I do at @SteveMoneyCoach.

Steve, welcome back to chat about this important subject!

Always a pleasure Mark. I love what you do here and I follow your journey. Continue Reading…

Checking in on Vanguard’s VRIF

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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…

Variable Percentage Withdrawal: Garbage In, Garbage Out

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By Michael J. Wiener
Special to the Financial Independence Hub

 

The concept of Variable Percentage Withdrawal (VPW) for retirement spending is simple enough: you look up your age in a table that shows what percentage of your portfolio you can spend during the year.

The tricky part is calculating the percentages in the table.  Fortunately, a group of Bogleheads did the work for us.  Unfortunately, the assumptions built into their calculations make little sense.

If we knew our future portfolio returns and knew how long we’ll live, then calculating portfolio withdrawals would be as simple as calculating mortgage payments.  For example, if your returns will beat inflation by exactly 3% each year, and your $500,000 portfolio has to last 40 more years, the PMT function in a spreadsheet tells us that you can spend $21,000 per year (rising with inflation).

Instead of expressing the withdrawals in dollars, we could say to withdraw 4.2% of the portfolio in the first year.  If the remaining $479,000 in your portfolio really does earn 3% above inflation in the first year, then the next year’s inflation-adjusted $21,000 withdrawal would be 4.26% of your portfolio.  Working this way, we can build a table of withdrawal percentages each year.

Of course, market returns aren’t predictable.  Inevitably, your return will be something other than 3% above inflation.  You’ll have to decide whether to stick to the inflation-adjusted $21,000 or use the withdrawal percentages.  If you choose the percentages, then you have to be prepared for the possibility of having to cut spending.  If markets crash during your first year of retirement, and your portfolio drops 25%, your second year of spending will be only $15,300 (plus inflation), a painful cut.

A big advantage of using the percentages is that you can’t fully deplete your portfolio early.  If instead you just blindly spend $21,000 rising with inflation each year, disappointing market returns could cause you to run out of money early.

Choosing Withdrawal Percentages

One candidate for a set of retirement withdrawal percentages is the RRIF mandatory withdrawals.  These RRIF withdrawal percentages were designed to give payments that rise with inflation as long as your portfolio returns are 3% over inflation.

Unfortunately, the RRIF percentages would have a 65-year old spending only $20,000 out of a $500,000 portfolio.  Some retirees chafe at being forced to make RRIF withdrawals, but when it comes to the most we can safely spend in a year, most retirees want higher percentages.

A group of Bogleheads calculated portfolio withdrawal percentages for portfolios with different mixes of stocks and bonds.  Most people will just use the percentages they calculated, but they do provide a spreadsheet (with 16 tabs!) that shows how they came up with the percentages.

It turns out that they just assume a particular portfolio return and choose percentages that give annual retirement spending that rises exactly with inflation.  You may wonder why this takes such a large spreadsheet.  Most of the spreadsheet is for simulating their retirement plan using historical market returns.

The main assumptions behind the VPW tables are that you’ll live to 100, stocks will beat inflation by 5%, and bonds will beat inflation by 1.9%.  These figures are average global returns from 1900 to 2018 taken from the 2019 Credit Suisse Global Investment Returns Yearbook.

So, as long as future stock and bond returns match historical averages, you’d be fine following the VPW percentages.  Of course, about half the time, returns were below these averages.  So, if you could jump randomly into the past to start your retirement, the odds that you’d face spending cuts over time is high.

For anyone with the misfortune to jump back to 1966, portfolio spending would have dropped by half over the first 14 years of retirement.  More likely, this retiree wouldn’t have cut spending this much and would have seriously depleted the portfolio while markets were down.

The VPW percentages have no safety margin except for your presumed ability to spend far less if it becomes necessary.

Looking to the Future

But we don’t get to leap into the past to start our retirements.  We have to plan based on unknown future market returns.  How likely are returns in the next few decades to look like the average returns from the past? Continue Reading…