Retirement Portfolio Comments Sought

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Retired Guy
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Retirement Portfolio Comments Sought

Post by Retired Guy »

In our mid 70s, my wife and I have been skating on thin ice, too long for comfort, with 100% stock portfolios in both our open and RIF accounts. We have fairly substantial assets with 76% in our open account invested almost entirely in blue chip Canadian dividend paying stocks. We appreciate the tax credit. The 24% registered has been entirely in VFV and VTI-N, however, I recently sold a lot of VFV to raise cash for the purchase of fixed income. We plan to melt our RIFs to $0 in 10 years.

We have done well with stocks but see a need to change the RIFs in the direction of perhaps 100% fixed income. To keep things simple as we age, we are thinking of using a single ETF such as XBB or VAB for our RRIFs. We realize that there are opinions about diversifying fixed income geographically and by style, necessitating the use of perhaps three bond ETFs rather than one, yet we hope for the simplicity of one bond ETF if that is not too far distant from a reasonable approach.

The Financial Forum has been very helpful. I hope for comments about our plan of keeping things simple with one bond ETF for the RIFs while maintaining the open account as is.

I realize that our investments would become 100% Canadian and that worries me. The dividend tax credit is very alluring but at the expense of zero geographic diversification. Got to say that the process of writing this has prompted a question: Does anyone know of a good fee for service advisor it the London area! :?

Thank you.
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Re: Retirement Portfolio Comments Sought

Post by Peculiar_Investor »

Retired Guy wrote: 28 Oct 2017 09:10 In our mid 70s, my wife and I have been skating on thin ice, too long for comfort, with 100% stock portfolios in both our open and RIF accounts.
Not sure I understand or concur with this statement. Is a 100% equity allocation too volatile for your "sleep a night" comfort level?
Retired Guy wrote: 28 Oct 2017 09:10 We have done well with stocks but see a need to change the RIFs in the direction of perhaps 100% fixed income.
That seems like a very dramatic shift. You might want to read through Journal Nearly Optimal Asset Allocations in Retirement by Wade D. Pfau, he's done lots of studies of this time of question.
Wade D. Pfau wrote:An important and frequently studied question for retirees is: What is the optimal asset allocation during retirement? This article provides a brief but simple message that conservative asset allocations in retirement are quite acceptable after all. A wide range of asset allocations tend to provide very similar results in terms of sustainable withdrawal rates for given probabilities of failure. For example, with Monte Carlo simulations based on historical data parameters, a 4.4 percent withdrawal rate for a 30-year horizon could be supported with a 10 percent chance of failure using a 50/50 asset allocation of stocks and bonds. But the range of stock allocations supporting a withdrawal rate within 0.1 percentage points of this maximum extend from 27 to 87 percent. Though asset allocation will also impact the amount that can be left as bequests, it is the case that relatively low stock allocations can support retirees just as well for a given failure rate and retirement duration.
Retired Guy wrote: 28 Oct 2017 09:10 I hope for comments about our plan of keeping things simple with one bond ETF for the RIFs while maintaining the open account as is.
That would be my approach, and as you suggest I'd pick a broad-based bond ETF such as XBB or VAB as the vehicle.
Retired Guy wrote: 28 Oct 2017 09:10 Does anyone know of a good fee for service advisor it the London area!
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Retired Guy
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Re: Retirement Portfolio Comments Sought

Post by Retired Guy »

Peculiar_Investor,

As a 76 year olds who have 100% in equities, I believe most would say we should have less equity and more FI. Definitely a sleep at night matter.
Thanks for the DanH information and the thumbs up re XBB and VAB.
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Re: Retirement Portfolio Comments Sought

Post by AltaRed »

There are different schools of thought on asset allocation (beyond the very important 'sleep at night' factor). A general 'well communicated' rule of thumb from the financial industry is equity should be limited to "100-age" or "110-age" or "120-age" with the latter two 'formulas' being more popular in recent times due to the low returns from fixed income.

Another school of thought is that when one first retires, that is when 'squence of returns' risk is highest because if one is tapping into equities too much in a down year, with another 20-30 years left to go in retirment, there is a good chance of running out of money. That would suggest one have a higher fixed income component earlier in retirement. As one progresses through retirement, e.g. into their '80s, there is less life left to cover with certainty and equity allocation of one's portfolio can actually increase over time. All of this may depend on how well resourced one's financial standing is relative to cash flow needs. Those operating with thin portfolios cannot afford too much volatility and/or risk. Those with flexibility in their financial resources, like you appear to have, can likely make some adjustments along the way and have the luxury of a number of workable scenarios.

I would enourage you to look at our financial wiki Finiki on asset allocation and portfolio design for some ideas. You might also consider Variable Percentage Withdrawal (VPW) Strategy for your future needs. http://www.finiki.org/wiki/Variable_per ... withdrawal

There is more than one way to plan for the next 20 years, but I am uncomfortable that an abrupt change to a fixed income portfolio is in your best interests, albeit reducing equity probably does make sense. You did not mention how much of your needs are covered by CPP, OAS or a DB pension so if you have quite a bit of 'annuity' income, you can certainly take more risk on equity allocation.
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Re: Retirement Portfolio Comments Sought

Post by Wallace »

At 72 I'm 100% in equities and feel ok about it. It produces enough in dividends each year for us to live on and keep portfolio stable. How did you manage in 2008 and 2013? If it was stressful and/or you weren't able to come out better financially it might be time to switch to FI, but prime rate would have to be around 7% before I started thinking about it as a reasonable alternative.

OTOH, if you have enough savings that you can maintain your lifestyle on FI alone, why not? If I had a net worth of $10-20m I wouldn't be in the stock market. I'd be in safe FI vehicles. For me, it's all about maintaining net worth. And each year since retirement it has increased. So far.
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Re: Retirement Portfolio Comments Sought

Post by deaddog »

A couple things come to mind.

Sounds like you have built up your stock portfolio over a period of time. What are the tax implications of selling stocks and buying bonds? Especially all at once. Is what you will pay in tax worse than a perceived drawdown?

Can you get an after tax return with Bonds that is better than the return you get with dividends.
Remember your bond yield will be on the after tax value of you stock portfolio.

What is it that you are afraid of?
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AltaRed
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Re: Retirement Portfolio Comments Sought

Post by AltaRed »

Performance return is not everything. Safety of capital, and/or reduction in volatility, is a legitimate concern, often trumping market returns in one's senior years.

That said, I am a supporter of dividend paying stocks, recognizing that while most of the time they will continue to grow, some of them can be cut during a financial crisis, aka 2008/2009. A good dividend stock portfolio might yield 3% in aggregate remembering that dividend growth and its proxy, Total Return, are key performance measures. I don't subscribe to dividend yield heavy stock portfolios since many of the high yield dividend stocks can be stinkers.
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Re: Retirement Portfolio Comments Sought

Post by ockham »

The OP says his portfolio is 75% in an open account and 25% in RRIF, all equity. All he's proposing is converting the all-equity RRIF to an all fixed income RRIF. There are no tax consequences to the conversion, and this still leaves him at 75/25 equity to fixed income. Seems like a no-brainer to me, if it means more sleep at night.
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Post by AltaRed »

ockham wrote: 28 Oct 2017 16:07 The OP says his portfolio is 75% in an open account and 25% in RRIF, all equity. All he's proposing is converting the all-equity RRIF to an all fixed income RRIF. There are no tax consequences to the conversion, and this still leaves him at 75/25 equity to fixed income. Seems like a no-brainer to me, if it means more sleep at night.
True, that puts it into perspective. At 68 years of age, I am 85/15 equity/FI with all FI (save for an HISA) in my RRSP. But I also have some DB pension.
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Re: Retirement Portfolio Comments Sought

Post by Retired Guy »

I am grateful for the comments. To be clear my intension is to maintain the open account in Canadian dividend stocks. A switch to FI would only occur in the RIFs which hold 24% of the overall total. So, the putative goal is 76% of the overall total, now in the open account, to remain in Canadian dividend stocks while the other 24%, now in the RIFs, slated to change completely from US ETFs (VFV and VTI-N) to either VAB or XBB. This plan gives me concern because of the loss of US diversification.

To answer some questions, there is $1.85M in the margin account and $858K in the RIFs. Quicken shows a 10.84% IRR for the period Jan. 2007 through Oct. 2017. We live on 12.5K pension income (no OAS) and $71.4K margin account CAD dividends. Generally, the RIF retirement payments are used to pay taxes and to add capital to the margin account. So far, we have not dipped into the margin capital that includes $570K of unrealized capital gains. We hope to melt the RIFs to $0 by our mid 80s, 10 yrs. from now.

As mentioned before, writing about this raises questions/concerns for me such as: 1) suffering a loss of diversification if I go entirely CAD bonds in the RIFs while maintaining the margin as it is now; 2) the possibly of switching to at least some US dividend stock in the margin account for diversification, knowingly suffering the loss of Canadian dividend tax credits; 3) spending some margin account capital for living expenses which would allow less reliance on CAD dividends, and in turn, increasing room for US diversification in the margin account. This would keep desirable bond diversification sheltered nicely in the RIFs.

The more I think about it, fee for service consultation seems be in order. :?
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Re: Retirement Portfolio Comments Sought

Post by AltaRed »

Not sure I'd worry that much about lack of diversification (US component). If you have an opportunity to add some US exposure in the margin account, then do so. But I don't think I'd crystallize urealized cap gains just to do that. At 76, it is not like you have 40 years of investing ahead of you.
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Re: Retirement Portfolio Comments Sought

Post by gsp_ »

What’s the end goal for this nice chunk of change? It doesn’t sound like you will ever come close to spending it, with which I empathize. Are there inheritance or charitable contribution motives? The purpose of the funds(apart from the security and income they bring today) seems like a good place to start when considering AA.

Not sure how your capital gains and eligible dividends marginal tax rates compare but a product like HXS can be quite tax efficient if capital appreciation is your goal. It does come with higher costs, some(limited) counterparty risk and regulatory risk. I own it for some of my US equity exposure, the larger chunk(VTI, VBR) would be too costly a switch. Then again, bonds can also be held similarly with HBB.

Not sure that what you do with a 24% allocation that will be reduced to 0 over the next decade will matter all that much. If you want or need fixed income, that need isn’t likely to be reduced yearly to disappear in a decade. I wouldn’t let tax considerations drive 100% of the AA decisions, some argue they shouldn’t even enter the picture until after AA has been determined.

It’s a drop in the bucket but his and hers TFSAs could be used for additional international diversification. Mine is filled with XEF.
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Re: Retirement Portfolio Comments Sought

Post by Taggart »

I would think having 100% bonds in a RIF would be way too risky. There would be less portfolio risk by just using a simple RIF portfolio like 60% bonds, 20% U.S. equity, and 20% international using broad based index ETF's or funds like TD e-Series. To make it even simpler you could go with just XAW for the equity portion. If that still sounds too risky for you then lower the equity percentage but don't bring it all the way down to zero.

Your Canadian equity portion in the taxable account is just fine and what I'll have in my own account for the rest of my life.
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Re: Retirement Portfolio Comments Sought

Post by northbynorthwest »

It sounds like you want to de-risk the all-equity portfolio by a healthy chunk, maintain Cdn dividend credit favoured income as much as possible, and not lose all your U.S. exposure.
The move to all FI in your RRIF makes sense to me. I also view the markets as frothy right now and am in a similar mood to de-risk.

Couple more ideas to chew on:

1. Consider shifting, perhaps gradually, some of your Cdn dividend payers in the taxable to a preferred shares ETF. While I wouldn't suggest preferreds substitute exactly for bonds, I consider them more like FI than equity, and they would certainly be less volatile in a broad market plunge than what you have there now. They would also continue to offer tax-advantaged dividend income covered by the credit. ZPR and CPD yield a little over 4 %. You could phase this in as you draw down your RRIF.

2. Buy a few U.S. stocks directly. If taxation of the dividends vex you, consider a non-dividend payer like GOOGL to eliminate that issue. Large cap non-/low-dividend payers also face less headwind from the expected trend of rising interest rates than higher yielding dividend stocks.
If choosing U.S. equities that are dividend payers, they could go in your RRIF instead if you're worried about minimizing tax on the dividends.

3. Deliberately put more emphasis on Canadian dividend payers in your taxable account that have significant U.S. revenues to juice your south-of-the-border exposure by proxy. ie TD Bank. Some other Cdn stocks with high U.S. exposure are discussed here: http://business.financialpost.com/inves ... ing-to-rbc.
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Re: Retirement Portfolio Comments Sought

Post by Retired Guy »

I am grateful for the thoughtful comments. Not certain what I'll do but I have more options to consider than before. Thanks again.
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Re: Retirement Portfolio Comments Sought

Post by Stan »

In my early 70's and do this with our investments:

2 years of Cash to fund expenses and then 65% equities and 35% fixed income. Seems to be working.
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