Asset Allocation during retirement?

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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AltaRed
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Re: Asset Allocation during retirement?

Post by AltaRed »

I was going to include long term care insurance in my original post but I am not convinced it is worth it. Anecdotes I have heard is insurance companies get very picky on just what one has bought (or not bought) and what is actually paid for vs assumptions., for the price paid for that incurance That said, they are alternatives to self-insurance particularly in a long drawn out end-of-life event and should at least be considered. Such insurance is not on my radar...at least not yet.

A key point Keith mentioned is one that many here have discussed before and that is to downsize (adjust) your lifestyle in event of a major financial event. Longinvest has discussed many times a variable withdrawal method that i believe has considerably more merit than the standard inflexible SWR concept. It is what I would do if I had insufficient cash or near-cash cushion to see myself through a tough equity downturn.

FWIW, within 3 years of my retirement, I went through a divorce (early 2008) and went through the 2008-09 financial crisis. That could have been a major 'sequence of returns' risk event that could have hammered my capital. As it was, I was flush with cash and weathered it just fine.
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Re: Asset Allocation during retirement?

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We are 5 years from retirement and I am currently changing our asset allocation to a conservative portfolio. We don't want to lose money this close to retirement and we are comfortable with the baseline return as the cost of living. Research shows the largest risk to a portfolio is losses at the start of retirement, due to the difficulty of making back the losses during the withdrawal phase.

I am well aware that holding on during the financial crises worked out, however, the research is solid and history is uncertain, so we are adjusting 60% asset allocation to fixed income in GIC's, very short term bonds, and 3-5 year investment grade strip bonds. A good portion of the equity pays dividends or income from REIT's.
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Re: Asset Allocation during retirement?

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Research shows the largest risk to a portfolio is losses at the start of retirement,
I think this info is based on a "regular" retirement date of 65 years old and risk lasts for about the first 10 years IIRC. So what about someone who retires at 55 there risk period is 20 years?
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Re: Asset Allocation during retirement?

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The risk period is primarily 'sequence of returns' risk and it starts the moment one retires (regardless of age) and is drawing from his/her portfolio. It could be argued that an early retiree might be able to overcome some of the damage with enough years to recoup some losses, or go back to work. A late retiree who isn't going to live very long thereafter just has less years in which to suffer, or run out of money.

Hence why I, and some others, espouse having enough in cash, or cash equivalents upon retirement to weather 2-3 years of dismal equity markets. That would have worked for the 2008-2009 crisis but doesn't work so well with Japan. There is no perfect answer. All one can do is to mitigate to some probability.
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Re: Asset Allocation during retirement?

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The most withdrawal risk is through sequence of returns immediately prior to and after retirement. Time is a factor but losses or gains immediately after retirement is the primary risk.
This risk is specifically increased if during the first years of retirement you should you go through a downturn in the stock market, where you are making withdrawals from a depleted portfolio.

The risk is mitigated when withdrawals are made during years of market gains immediately after retirement as the initial portfolio amount is not impacted. The impact of either can be significant. Obviously we want market gains.

The rub is which scenario you find yourself in immediately after retirement. Who can tell? A conservative portfolio prior to retirement provides some cover if it's a downturn, assuming you can live with a conservative portfolio.

Riding into retirement on a high market can be dangerous. Many retirees or potential retirees had to return to work after the financial crisis due to poor portfolio mix.
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Re: Asset Allocation during retirement?

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Hence why I, and some others, espouse having enough in cash, or cash equivalents upon retirement to weather 2-3 years of dismal equity markets. That would have worked for the 2008-2009 crisis but doesn't work so well with Japan. There is no perfect answer. All one can do is to mitigate to some probability.
Just been thinking about this a bit not enough brain/brian power to sort through it. There are a lot of factors at play. Just using XIU as an example peak to recovery is five to six years same with the correction in 2000. With the XIU high/peak in about April 22 2015 twenty months to recovery seems to me 2-3 years may not be long enough I've seen 5 years mentioned in some material, as you say no perfect answer.
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Re: Asset Allocation during retirement?

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No perfect answer but 2-3 years of cash, or cash equivalents will go much of the way of mitigating sequence of returns risk. Think about the overall recovery in 2009 for example, or the 12 months from March 2009. Or the 24 months to Mar 2011, the TSX composite was almost back to its previous peak. It did slump again thereafter..but so what?

One does not have to get back to the previous highs to mitigate the damage. After all, it wouldn't be unusual to have a +/-5% variation in the market in any given year, i.e. no one should be worrying about that kind of variance in any period....so why the need to have 100% recovery before tapping into some equities after a big bear market?

If one wants to be really conservative with 5 years of cash, or cash equivalent, that may work for some, but it is worth remembering that amount of cash is going to impact overall portfolio returns. It is never quite as bad as it seems IF folks also have investment income coming in (dividends et al) and the natural tendency to pull in one's horns in 'bad' times.
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Re: Asset Allocation during retirement?

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SQRT wrote:
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.
100% DG equities and only require a portion of our dividends, the rest get reinvested to continue to grow the income. For the past five years, the income has risen at a fantastic rate. Guess the compounding really kicks in at a certain point. Glad we discouvered this strategy early and don't have to worry about selling stocks or switching strategies, to meet our needs.
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Re: Asset Allocation during retirement?

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SQRT wrote:Anyway, I love my SS and I suspect many here do as well. Nothing sad about it at all.
As we are fully invested with no further additions all we have to do is record the dividends, re-investments and record the growth of the dividends. We have set up a number of different worksheets but most are just for fun and are not really needed. For something to do we worked on a Dividend Meter, different from the google one as we use Excel. Though the needle moves slowly, it's still nice to look back and see that the dividend income needle has moved quite a bit for the past 5 years.
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Re: Asset Allocation during retirement?

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cannew wrote:
SQRT wrote:
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.
100% DG equities and only require a portion of our dividends, the rest get reinvested to continue to grow the income. For the past five years, the income has risen at a fantastic rate. Guess the compounding really kicks in at a certain point. Glad we discouvered this strategy early and don't have to worry about selling stocks or switching strategies, to meet our needs.
I'm glad your strategy has worked so well. As has our's. I certainly don't need to liquidate anything. Problem is the inefficient tax strategy re dividends (for high earners) vs liquidation. As well, if I don't start to liquidate, my estate will be much too large in my opinion. For most people with smaller portfolios and lower incomes, not so much of an issue.
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Re: Asset Allocation during retirement?

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SQRT wrote:Problem is the inefficient tax strategy re dividends (for high earners) vs liquidation. As well, if I don't start to liquidate, my estate will be much too large in my opinion.
There are literally thousands of charitable causes, endowment possibilities, etc, etc. to solve annual tax problems. It is relatively easy to reduce one's tax bill on an annual basis by setting up an endowment and contributing funds to it each year. I've spent some time looking at credible foundations in BC in which to set up an endowment and how to structure it and whether to be part of the governance, etc, etc. I hopefully will land on something this year. IOW, there is really no such thing as a tax inefficiency problem for medium/high wealth individuals.
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Re: Asset Allocation during retirement?

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AltaRed wrote:
SQRT wrote:Problem is the inefficient tax strategy re dividends (for high earners) vs liquidation. As well, if I don't start to liquidate, my estate will be much too large in my opinion.
There are literally thousands of charitable causes, endowment possibilities, etc, etc. to solve annual tax problems. It is relatively easy to reduce one's tax bill on an annual basis by setting up an endowment and contributing funds to it each year. I've spent some time looking at credible foundations in BC in which to set up an endowment and how to structure it and whether to be part of the governance, etc, etc. I hopefully will land on something this year. IOW, there is really no such thing as a tax inefficiency problem for medium/high wealth individuals.
Agree that charitable giving can effectively deal with an "over large" estate but my real issue relates to dividends received while alive. These are now taxed quite high as compared to taxes usually paid on stock liquidations. This is the inefficiency I am thinking about. Tax credits for charitable giving won't change this. I guess if I gave enough away to cease to be a high earner that would "solve" the problem, but then I wouldn't be able to pay my bills.
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Re: Asset Allocation during retirement?

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SQRT wrote:Agree that charitable giving can effectively deal with an "over large" estate but my real issue relates to dividends received while alive. These are now taxed quite high as compared to taxes usually paid on stock liquidations. This is the inefficiency I am thinking about. Tax credits for charitable giving won't change this. I guess if I gave enough away to cease to be a high earner that would "solve" the problem, but then I wouldn't be able to pay my bills.
ISTM the goal should perhaps to bring back the 'effective tax rate' of your eligible dividend stream to about what your cap gains tax rate is. OTOH, if Morneau ups the cap gains inclusion rate to 66.7 or 75%, or decreases corporate income tax rates to reduce the dividend gross-up, you won't feel so bad about your effective tax rate on dividends.

We need to remember that tax rates are not static and if the two 'effective tax rates' are in the same ballpark, surely we don't have anything to complain about. Additionally, you have the opportunity to tinker with your stock selection too with perhaps one annual trade per year despite the size of the realized cap gains. Shift some funds from a high yield stock into a low yield/zero yield high growth stock each year and make a stock transfer charitable donation big enough to offset the cap gains tax. Easy enough to iterate such a case with tax software* (of your own or at taxtips)....

* Or take a simplified 'what if' approach to see the effect using a 'donation tax calculator' such as the one I've played with on the Vancouver Foundation website for stock transfers. Easy enough to set up a personalized endowment, contribute to it while living (to solve the problem above) and then add to it as a legacy upon death.
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Re: Asset Allocation during retirement?

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AltaRed wrote:
SQRT wrote:Agree that charitable giving can effectively deal with an "over large" estate but my real issue relates to dividends received while alive. These are now taxed quite high as compared to taxes usually paid on stock liquidations. This is the inefficiency I am thinking about. Tax credits for charitable giving won't change this. I guess if I gave enough away to cease to be a high earner that would "solve" the problem, but then I wouldn't be able to pay my bills.
ISTM the goal should perhaps to bring back the 'effective tax rate' of your eligible dividend stream to about what your cap gains tax rate is. OTOH, if Morneau ups the cap gains inclusion rate to 66.7 or 75%, or decreases corporate income tax rates to reduce the dividend gross-up, you won't feel so bad about your effective tax rate on dividends.

We need to remember that tax rates are not static and if the two 'effective tax rates' are in the same ballpark, surely we don't have anything to complain about. Additionally, you have the opportunity to tinker with your stock selection too with perhaps one annual trade per year despite the size of the realized cap gains. Shift some funds from a high yield stock into a low yield/zero yield high growth stock each year and make a stock transfer charitable donation big enough to offset the cap gains tax. Easy enough to iterate such a case with tax software* (of your own or at taxtips)....

* Or take a simplified 'what if' approach to see the effect using a 'donation tax calculator' such as the one I've played with on the Vancouver Foundation website for stock transfers. Easy enough to set up a personalized endowment, contribute to it while living (to solve the problem above) and then add to it as a legacy upon death.
Right, valid points. But even if cap gains rates moved up to approach div tax rates, the fact that much of the proceeds on stock sales are tax free as a return of ACB will preserve the difference. Have been donating appreciated shares and will continue to do so but not really material to my total portfolio. Also, since donations are tax credits you need to give away a fair bit to offset other tax owing. This cuts into ongoing future income.

I am a little concerned that Mr Trudeau would like to tax the rich more and may see the div tax credit and cap gains inclusion rate as ways to achieve this. After all only rich people get divs and have investments, right?
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Re: Asset Allocation during retirement?

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I don't think the dividend gross-up concept will change. There would be an uproar of double taxation. To me, the odds are that the gross up will go down IF corp income tax rates HAVE to come down for our companies to compete with US companies (if their tax rates are reduced). More likely to be a cap gains inclusion rate boost.

Back to our discussion, why would you worry about reduced income if you are in that bracket? Maybe your objective should be to spend all income AND perhaps also portfolio cap gains each year on some rolling average basis. Appreciation of your capital base and dividend growth does not appear to be doing you any favours long term. I recognize donations are tax credits but the objective isn't necessarily to eliminate tax. Thought the objective was to bring down your 'effective tax rate' on eligible dividends.

Anyways, we each have to tackle our specific issue in our own way and for my own stock buys (or swaps), or shedding of outsized positions, I am now focusing more on growth (low yield) stocks to replace higher yield dividend stocks. That is a shift in my 'tactical asset allocation strategy' (per longinvest in another thread) in the last 5 years.
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Re: Asset Allocation during retirement?

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AltaRed wrote:
Back to our discussion, why would you worry about reduced income if you are in that bracket?
Well, I have an expensive lifestyle that I quite enjoy. Would rather not restrict it at this point.
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Re: Asset Allocation during retirement?

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SQRT wrote:
AltaRed wrote:Back to our discussion, why would you worry about reduced income if you are in that bracket?
Well, I have an expensive lifestyle that I quite enjoy. See no reason to restrict it at this point.
If they are intent on taxing capital gains higher, I would favour them setting a date like June 1 or whenever the budget is promulgated, and that becomes the basis for new higher inclusion rates. It should also include principal residences in order to cool down the rampant speculation that is hurting families needing places to live. That would also catch all the foreign speculators who are hurting Canadians.

(Of course, since it makes sense, the government is unlikely to do it!)

(And of course the lower income for OAS clawback which also makes sense!)

What me worry? If it gets too bad. I might just stop being a Canadian Taxpayer! I only do it for the medicare now. We spend 5 months here (365-212 days).
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Re: Asset Allocation during retirement?

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There has always been historical provision for different inclusion rates in tax calculations (for those that bought a very long time ago). Then there was the grandfathering in Feb 1994 when they took away the lifetime $100k cap gain exemption but allowed one to 'reserve' unrealized cap gains up to Budget Night for use over the next 10 years.

There would most likely be some accomodation again, e.g. all unrealized gains up to Budget Night would eventually be taxed at 50% inclusion...and all unrealized gains after that date at the new inclusion rate. It is likely the fairest way to punch someone in the nose, i.e. give them a Tylenol and a towel first before hitting it.
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Re: Asset Allocation during retirement?

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AltaRed wrote:There would most likely be some accomodation again, e.g. all unrealized gains up to Budget Night would eventually be taxed at 50% inclusion.
Depends on how much money the government needs and especially on how fast it needs it.

David Duff, my teacher when I was studying tax law, has published a column recently, recommending that the inclusion rate reflect historical inflation. To keep things simple, he recommends a single rate that would reflect asset-weighted inflstion rates. He comes up with 80 per cent. Ouch!!

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Re: Asset Allocation during retirement?

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ghariton wrote:To keep things simple, he recommends a single rate that would reflect asset-weighted inflstion rates. He comes up with 80 per cent. Ouch!!

George
Well a portion of the capital gain itself reflects inflation. So following his logic, they are going for 100% inclusion but acknowledge that 20% is caused by inflation!
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Re: Asset Allocation during retirement?

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AltaRed wrote:
There would most likely be some accomodation again, e.g. all unrealized gains up to Budget Night would eventually be taxed at 50% inclusion...and all unrealized gains after that date at the new inclusion rate. It is likely the fairest way to punch someone in the nose, i.e. give them a Tylenol and a towel first before hitting it.
Good analogy. :lol: Hope you are right.
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Re: Asset Allocation during retirement?

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kcowan wrote:
ghariton wrote:To keep things simple, he recommends a single rate that would reflect asset-weighted inflstion rates. He comes up with 80 per cent. Ouch!!

George
Well a portion of the capital gain itself reflects inflation. So following his logic, they are going for 100% inclusion but acknowledge that 20% is caused by inflation!
That view is more popular in academia than outsiders might think. It was first articulated, very forcefully, in Canada by the Carter Commission on taxation, which recommended that all income be taxed the same no matter what the source: A dollar is a dollar is a dollar.

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Re: Asset Allocation during retirement?

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With marginal tax rates over 50%, the loss of integration in small companies in NDP alberta, carbon taxes, financial repression that eliminated any real returns on GICs, if they continue with new taxes on our savings, I can understand why they are finding so many people into tax evasion by hiding money outside Canada in low tax jurisdictions.
Perhaps a new thread should explore ideas of moving money out of the country as a necessary part of "Asset Allocation during retirement".
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