Asset Allocation during retirement?

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crimsondr
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Asset Allocation during retirement?

Post by crimsondr »

Hi all,

I invest in index ETFs with allocations similar to the Canadian Couch Potato model portfolios. My question is when you're ready for retirement, does your portfolio change and I don't mean just from aggressive to conservative allocations as described by CCP.

Do you switch to an income generating portfolio of assets? The yields from the CCP model portfolios aren't the greatest and so I am looking a higher yield equivalent of a CCP model for income instead of accumulation.

Thanks.
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Re: Asset Allocation during retirement?

Post by Spudd »

I retired about 2 years ago and I didn't change my allocation. I just sell off shares when needed.
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Re: Asset Allocation during retirement?

Post by crimsondr »

Spudd wrote:I retired about 2 years ago and I didn't change my allocation. I just sell off shares when needed.
So you are drawing down your portfolio. Somehow I just assumed I would switch to some kind of dividend/income allocation and live off the proceeds instead of selling assets.
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Re: Asset Allocation during retirement?

Post by AltaRed »

crimsondr wrote:So you are drawing down your portfolio. Somehow I just assumed I would switch to some kind of dividend/income allocation and live off the proceeds instead of selling assets.
That is an option to increase the cash flow component during withdrawal but most retirees cannot live off only the cash flow from their investments. They have to tap into capital. What is important is what the Total Return of your portrfolio is (capital appreciation plus cash flow from interest/dividends) each year and to sell some capital along the way to supplement cash flow. That is the concept of SWR, e.g. 3-4% of your portfolio value each year. You take what you can from the income stream and take the rest from capital sales. There is lots written on this subject, including material in our own finiki.
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Re: Asset Allocation during retirement?

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If one's portfolio is large enough that 4% is sufficient income for one's needs, then an income-oriented portfolio is viable.
Not a recommendation, but at the simplest level, BCE, the banks, and a couple of pipelines would meet those objectives ...

IMO, this is where a "keep it simple" approach is valuable. It's definitely easier to withdraw dividend income than it is to be regularly selling stocks. Not just easier from a no-transaction perspective, but also because it eliminates the need to decide, on an ongoing basis, what to sell. And the additional worry of "should I sell?" when the market is down.

If the efficient market theory tells us that total return should be the same whether a portfolio is CG-oriented, or income-oriented, or a mixture - then why not select the type of portfolio that is easiest to manage?
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Re: Asset Allocation during retirement?

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pmj wrote:If one's portfolio is large enough that 4% is sufficient income for one's needs, then an income-oriented portfolio is viable.
Not a recommendation, but at the simplest level, BCE, the banks, and a couple of pipelines would meet those objectives ...

IMO, this is where a "keep it simple" approach is valuable. It's definitely easier to withdraw dividend income than it is to be regularly selling stocks. Not just easier from a no-transaction perspective, but also because it eliminates the need to decide, on an ongoing basis, what to sell. And the additional worry of "should I sell?" when the market is down.

If the efficient market theory tells us that total return should be the same whether a portfolio is CG-oriented, or income-oriented, or a mixture - then why not select the type of portfolio that is easiest to manage?
My main problem would be converting an existing CG-oriented portfolio to an income-oriented one. The conversion would result in realizing capital gains and paying taxes. So drawing down to supplement cash flow from distributions would probably be most practical.
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Re: Asset Allocation during retirement?

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crimsondr wrote:My main problem would be converting an existing CG-oriented portfolio to an income-oriented one. The conversion would result in realizing capital gains and paying taxes. So drawing down to supplement cash flow from distributions would probably be most practical.
As it would be for those with taxable account portfolios. I sell shares when I need too...to supplement my annual cash flow needs.
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Re: Asset Allocation during retirement?

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AltaRed wrote:
crimsondr wrote:My main problem would be converting an existing CG-oriented portfolio to an income-oriented one. The conversion would result in realizing capital gains and paying taxes. So drawing down to supplement cash flow from distributions would probably be most practical.
As it would be for those with taxable account portfolios. I sell shares when I need too...to supplement my annual cash flow needs.
My RRSP holds primarily VTI with everything else in my non-registered account. So what was sold would depend on what would minimize the taxes at the time.
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Re: Asset Allocation during retirement?

Post by AltaRed »

It would obviously be whatever is in your taxable account because anything in your RRSP that is sold and withdrawn is taxed fully as Other Income.
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Re: Asset Allocation during retirement?

Post by pmj »

As an aside to the original Q, I think it's a fair comment on the investment industry that there is nowhere near enough info on the different process of divestment during retirement.

I hadn't given this too much thought until a friend asked "so what happens when I retire?"
I have been building an income portfolio for many years, reinvesting dividends, etc, so I "know" that "all" I have to do is to stop investing the dividends. I don't use ETFs (much), and that was my first suggestion - but not many of them provide dividends as high as (selected) stocks. MFs are worse.

The different focus of divestment is a significant contrast to the savings phase ... it's a learning process.
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Re: Asset Allocation during retirement?

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pmj wrote:As an aside to the original Q, I think it's a fair comment on the investment industry that there is nowhere near enough info on the different process of divestment during retirement.

I hadn't given this too much thought until a friend asked "so what happens when I retire?"
I have been building an income portfolio for many years, reinvesting dividends, etc, so I "know" that "all" I have to do is to stop investing the dividends. I don't use ETFs (much), and that was my first suggestion - but not many of them provide dividends as high as (selected) stocks. MFs are worse.

The different focus of divestment is a significant contrast to the savings phase ... it's a learning process.
This has been my approach as well. Been retired 10 years and so far have generally just spent divs (and pension). Portfolio is 100% equities as my pension would notionally represent about a 40% AA. Current yield about 3.5%. Have decided to start systematic liquidations of maybe .5-1% per year depending on the markets.

But my entire portfolio is taxable and this raises tax problems. Dividends are currently taxed at max marg rates of between about 32-40% depending on province of residence. Cap gains are currently taxed at between 24 and 26% but the cash flows from security sales will not usually be all cap gains, so liquidating securities will usually be quite a bit more tax efficient. These rates could well change as young Trudeau is looking for more tax revenues and seems to think investors are "rich" and should pay more. As mentioned it can be difficult to change strategy in a taxable account due to imbedded gains.
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Re: Asset Allocation during retirement?

Post by OhGreatGuru »

crimsondr wrote:Hi all,

...My question is when you're ready for retirement, does your portfolio change and I don't mean just from aggressive to conservative allocations as described by CCP. ...
Like a lot of things in life, the answer is "It depends".

What other income do you have? Do you have sufficient other income or savings to tolerate fluctuations in return on your investments? What are your income needs? Has your investment horizon changes? etc.
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Re: Asset Allocation during retirement?

Post by BRIAN5000 »

As mentioned it can be difficult to change strategy in a taxable account due to imbedded gains.
On the next 50% correction could be a good time, more tax effective. :cry:
Have decided to start systematic liquidations of maybe .5-1% per year depending on the markets.
So you're going to give cash now or later, easy, instead of gifting portfolio. I'm thinking daughter might get help along the way but maybe if she's interested get the portfolio in the end to do with whatever. With a 2% draw she could maybe pass it on each generation would have it easier and easier. :)
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Re: Asset Allocation during retirement?

Post by DenisD »

Another decision after retirement is, for those without a pension, if, when and how much of an annuity to purchase. How will asset allocation change? Purchase the annuity with proceeds of bonds or equities? Registered or nonregistered funds?
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Re: Asset Allocation during retirement?

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pmj wrote:As an aside to the original Q, I think it's a fair comment on the investment industry that there is nowhere near enough info on the different process of divestment during retirement.

I hadn't given this too much thought until a friend asked "so what happens when I retire?"
I have been building an income portfolio for many years, reinvesting dividends, etc, so I "know" that "all" I have to do is to stop investing the dividends. I don't use ETFs (much), and that was my first suggestion - but not many of them provide dividends as high as (selected) stocks. MFs are worse.

The different focus of divestment is a significant contrast to the savings phase ... it's a learning process.
I recently started thinking about the same thing.
I am pushing 50 and so far it was - save, save, save, invest...
I just read Victory Lap retirement. For those not familiar, the basic idea is once you reach Findependence (your basic needs are covered) you can switch careers, downshift and continue earning 'extra' doing something you like.
I never really considered that I would be able to do any of that in foreseeable future, say at 55, but then I'd need to change my portfolio to income generation...
Lots of variables here - taxes, age (CPP/OAS), RSP vs taxable accounts (TFSA..?) etc
I can't find a lot of info on this and I checked the wiki.
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Re: Asset Allocation during retirement?

Post by AltaRed »

It is likely (partly) because every situation is....well...situational, depending on the relative mix of taxable vs registered funds vs DB pension vs portfolio size vs spending needs as a percentage of net worth vs... .?? Programs like RRIFMetic or FIRECalc, etc. can likely help in some of the modelling but I'd suspect the variables (what ifs) vastly outweigh fine tuning of the numbers.

I still believe that one should look at the macro results and when one thinks they are in the ballpark, then do some variations on what/how/where to withdraw. Remember that governments can change the tax rules at any time, especially around things like the dividend tax credit (as a result of corporate tax changes), inclusion rates for cap gains, etc. which brings yet more uncertainties. It will all give you a headache if you try to identify every tree in the forest.
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Re: Asset Allocation during retirement?

Post by kcowan »

One of the things we consider is that our heirs are going to get the benefit of our portfolio and they are young enough that they do not want it invested in income-generating holdings. So we are investing for our heirs and charities in addition to our own income needs.
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Re: Asset Allocation during retirement?

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hamor wrote:I recently started thinking about the same thing.
I am pushing 50 and so far it was - save, save, save, invest...
I just read Victory Lap retirement. For those not familiar, the basic idea is once you reach Findependence (your basic needs are covered) you can switch careers, downshift and continue earning 'extra' doing something you like.
...
Thanks for reminding me about this book. Have placed it on hold at the library. I'm more or less the same age and have already begun to "downshift"
but am worried about possible changes to the tax regime. Maybe this book can steady my nerves.
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Re: Asset Allocation during retirement?

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pmj wrote:If one's portfolio is large enough that 4% is sufficient income for one's needs, then an income-oriented portfolio is viable.
Not a recommendation, but at the simplest level, BCE, the banks, and a couple of pipelines would meet those objectives ...

IMO, this is where a "keep it simple" approach is valuable. It's definitely easier to withdraw dividend income than it is to be regularly selling stocks. Not just easier from a no-transaction perspective, but also because it eliminates the need to decide, on an ongoing basis, what to sell. And the additional worry of "should I sell?" when the market is down.

If the efficient market theory tells us that total return should be the same whether a portfolio is CG-oriented, or income-oriented, or a mixture - then why not select the type of portfolio that is easiest to manage?
Over the years, I have gotten the sense this is a reasonably popular approach in this community. I considered it, but I don't think I would be able to do it. It's just way too risky for me.

I think the security/market/diversification risk is covered as long as you buy enough good dividend payers (10-20), but the problem is that they are all the same type of investment - high dividend payers. If the government makes even the slightest change to the dividend tax law, the entire portfolio gets hammered. For example, while everyone else in the world laments a change to the DTC and the market's reaction/slight change in their finances, I would receive a silver bullet to the heart of my portfolio. Permanently lost share value relative to the market overnight, AND loss of the golden DTC goose.

It sure is appealing though. 4% of our current nestegg would certainly provide enough income after taxes. However, the 2.1% I get from broad market indices would not come close.
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Re: Asset Allocation during retirement?

Post by Mordko »

Rather than assigning a fixed percentage of the total, I am thinking of allocating ~3-5 years' worth of living expenses to bonds.

During the "good years" for the stockmarket I would use up the interest, dividends and equity - as required. During the years when the stocks fall, I would sell bonds. Once the stocks (eventually/hopefully) rise again, I will replenish the rainy day bond reserve.

This should deal with the problem of a major stockmarket fall during the early years of your retirement leading to an early erosion of stock portfolio. There is always that chance of a 30-year bear market but this should reduce the chances of a poorhouse.
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Re: Asset Allocation during retirement?

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I started preparing seriously for the transition around 2009. I retired (sort of) in 2015. So, as you can see, this transition can be a rather drawn out process as you slowly become comfortable with a plan. Personally, I am of the opinion that there is no specialized software that will prepare an individual for retirement. I have used EXCEL (as I said, over a period of years...) to develop a plan that is specific for myself.

I have done my best to split wealth between me and my spouse. I have done my best to be tax efficient. I have estimated (over and over again) the amount of future income needs. I have estimated (over and over again) the amount of capital necessary to bridge me over to a pensionable age. This "bridge fund" is mostly FI. The remainder of my income is dividends from a substantial Canadian dividend portfolio of individual stocks. Finally, I have been fortunate enough to have been able to set aside a few 100K$ which hopefully will not be needed.

I am one of those types who has a love for EXCEL which has been a tremendous help to me and without which I would not have been able to bring to fruition my current, pleasant, state of affairs. Interestingly, now that I am into net withdrawal, all of these spreadsheets are becoming less important. They have done what they were meant to do. So be it.

Best of luck to the OP.
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Re: Asset Allocation during retirement?

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We are gradually shifting our AA from 68/32 by replacing the maturing bonds with good performing dividend stocks. The bond portfolio was not supplying capital preservation as we had hoped so we are willing to put up with the higher volatility of stocks for the better overall yield in good times.

We also have the benefit of $24000 in Cola-adjusted FI from CPP/OAS and a non-Cola company pension. So we can absorb a few years of down market with an SWR of under 2%. LBYM seems to be the secret even after RE.
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Re: Asset Allocation during retirement?

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kcowan wrote:We are gradually shifting our AA from 68/32 by replacing the maturing bonds with good performing dividend stocks.
I think certain retirees with the appropriate resources find that after a period, e.g. 10 years, of retirement, they can get into a 'comfortable rhythm' with respect to spending and their portfolios, such that they can adjust their AA, given market conditions, over time like you have to optimize returns vs risk vs spending.

I have reached a similar conclusion after almost 11 years of retirement whereby pension income plus some FI provides a basic insurance policy for base spending, allowing one to allocate the remainder to dividend paying equities. My equity allocation has crept up slowly over the past 5 years to find that 'sweet spot' recognizing however, that should the bond yield curve take a nasty turn, dividend paying stocks will take a price hit and dividend increases may stall indefinitely. Some may call that risky and foolhardy BUT we are the same people who were already in retirement when the financial crisis hit and weathered that just fine. We've had the trial by fire.

Investors still in accumulation mode (not retired) don't have the luxury (agony?) of that particular experience and thus may have to stay with more classic patterns of asset allocation until they too, can find their sweet spot in retirement. Which is a long way of saying that AA can and likely should change depending on personal circumstances and experience.
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Re: Asset Allocation during retirement?

Post by SQRT »

StuBee wrote: I have used EXCEL (as I said, over a period of years...) to develop a plan that is specific for myself.


I am one of those types who has a love for EXCEL which has been a tremendous help to me and without which I would not have been able to bring to fruition my current, pleasant, state of affairs. Interestingly, now that I am into net withdrawal, all of these spreadsheets are becoming less important. They have done what they were meant to do.
Likewise. I had to bridge the first 6 years of my retirement through incentive comp (mostly options) cash outs. I had a whole slew of excel spreadsheets which helped me manage this. Now it's simpler but I still use 4 spreadsheets on a daily basis. Highly personal approach for sure. I'd be lost without them.
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Re: Asset Allocation during retirement?

Post by SQRT »

AltaRed wrote:
kcowan wrote:We are gradually shifting our AA from 68/32 by replacing the maturing bonds with good performing dividend stocks.
I think certain retirees with the appropriate resources find that after a period, e.g. 10 years, of retirement, they can get into a 'comfortable rhythm' with respect to spending and their portfolios, such that they can adjust their AA, given market conditions, over time like you have to optimize returns vs risk vs spending.

I have reached a similar conclusion after almost 11 years of retirement whereby pension income plus some FI provides a basic insurance policy for base spending, allowing one to allocate the remainder to dividend paying equities. My equity allocation has crept up slowly over the past 5 years to find that 'sweet spot' recognizing however, that should the bond yield curve take a nasty turn, dividend paying stocks will take a price hit and dividend increases may stall indefinitely. Some may call that risky and foolhardy BUT we are the same people who were already in retirement when the financial crisis hit and weathered that just fine. We've had the trial by fire.

Investors still in accumulation mode (not retired) don't have the luxury (agony?) of that particular experience and thus may have to stay with more classic patterns of asset allocation until they too, can find their sweet spot in retirement. Which is a long way of saying that AA can and likely should change depending on personal circumstances and experience.
Agree with the tenor of this post. I am much more sanguine about div stocks in a rising rate envireonment though. In my opinion div growth stocks will not take much of a hit in a rising rate envireonment. Utilities and pipes moreso but banks and Insurance not at all. In fact they will greatly benefit from higher rates. So on average, not much of a hit in my opinion.
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