Do retirees really need income?

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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expilot
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Post by expilot »

Maybe not, if they plan to live off their capital. I don't think I have ever generated enough income to cover my retirement expenses; although, I don't really keep track of it. Any income is usually in the registered account and not available for spending at this time, anyway.

The problem with focusing on income is the likelihood that returns will suffer, just to accommodate that particular strategy. Spending capital instead, allows a broader range of investment choices without worrying about the type of return, except for tax considerations.

I am starting my 14th year of retirement, and lack of income has never been a problem. I pay all my expenses from the margin account and I periodically siphon off trading proceeds to cover any shortfall. Any income goes back into the capital pool. When I turn 70, the mandatory RRIF withdrawals will more than cover my expenses.

So, any prospective retiree planning to live on capital withdrawals, can probably dismiss the need for income and avoid the low returns and the taxation associated with it. The mechanics of withdrawing capital work effortlessly with a margin account, and RRIF withdrawals should be equally painless--except for the extra tax. Of course, fixed income may still be chosen for safety rather than cash flow reasons.

And a very generous pension would render all of this irrelevant. :)
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Post by like_to_retire »

The problem with focusing on income is the likelihood that returns will suffer, just to accommodate that particular strategy
You're making the assumption that going forward an all growth portfolio will outperform one that takes advantage of income, dividends and ROC. Who's to say that will happen. The income producing portfolio doesn't have the need to sell low. The same can't be said for your scenario, although I guess it's worked out for you. :roll:

I'll sleep a lot better knowing that if the market pulls back for a few years (or more) that a fairly steady and predictable income will keep rolling in even though the capital value of my portfolio has been temporarily reduced.

If you have to sell securities that have been beaten up by a few bad years to make your needed income, it could be unrecoverable.

ltr
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Post by The Wealthy Boomer »

Someone at TWB1 suggested "money in the mattress" was a viable strategy. Imagine $500K in bills which were after-tax income and which you withdraw from at need. The stash doesn't generate taxable investment income but is essentially capital which can be drawn down as you suggest.

But I still think retirees need $2500/month in income or so: half can come from the Gov, a bit from private pensions and the rest from RRIF. Drawing down capital is fine for the childless but what about those who want to leave an estate? Life insurance?
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Post by Fredrik »

I understand what you are doing here, expilot, but definitely not for me! (Trying to count on capital gains for living expenses would create too much stress.) I realise you have some reserves (pension / rrsp), so it is less risky than appears at first glance.

Before I retired (10.5 years ago, age 43), I made sure I had enough income (100% from stocks) to cover my living expenses (and a bit of cash flow surplus beyond that). The main "risk" I took was the chance that my income wouldn't grow fast enough to cover expenses (inflation) over the ensuing decades. My "insurance" was an RRSP with a decent amount of money in it that I could draw upon if I really needed to.

In actual fact it has worked out remarkably well and some 10 years later I now have a large surplus cash flow vs. living expenses. (And I sleep quite well at night.)
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Post by martingale »

You should be holding all your fixed income products in your registered account to avoid taxation. As such, it does make sense that you would live off the gains produced by equities held outside the registered account, so as to maintain the maximum amount of money in the tax protected account.

That said, you certainly should be holding a significant portion of your portfolio in fixed income products in your 14th year of retirement, no matter whether you pay your living expenses with the interest or not.

Your equity position has a higher average growth rate because it can lose up to 60-70% of its value in a few days, and has done so often enough that it would not be surprising to see it happen again in your lifetime. You get the higher return by taking on the higher risk, and since you aren't working you won't be able to recover from such a loss.
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Post by expilot »

ltr:

I have never been able to generate enough of that income that you mention to cover my expenses and that is important when there is no other income. In 1992 there were no trusts available that I was aware of, and I was reduced to buying mortgage funds. Even today, most of the hield-yielding trusts generate more capital gains than income, if you use a tool like GloveInvestor to evaluate them. 16% of my capital is in BNS, but the dividend income is really insignificant compared to my expenses. Capital gains have been great though.

I am never willing to trade yield for capital depreciation no matter how "temporary" it is. How do you know it's temporary? Capital matters most to me, and I tolerate it's decline grudgingly. Give me capital and I can always generate some income; but not necessarily vice versa.

But, I concede your point that having income in the bad years is comforting. I have been though that already and I agree. Most everything I own produces some income, but not enough to live on. Still, as you say, I guess I sleep better too.

Boomer53:

I have an idea for your predicament, but I have to flesh it out.

"Drawing down capital is fine for the childless but what about those who want to leave an estate?"
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Post by blonde »

Cash Flow, yes, CASH FLOW, must never, ever be ignored.

My spouse and I have been retired 10 years and to date we have not touched our capital money, and we have no intention to ever touch that money. Since retirement, we have been able increase the capital money.

Our life style demands we have access to C$125,000.00/year (net), and to date, as a minimum, that amount has always been there to support our day-to-day living.

BTW, ret irement is the best job I ever had and it gets better with time.

BTW2, dividends shud not be ignored.
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Post by The Wealthy Boomer »

Maybe expilot or someone should create a poll to go with this thread. I'm not sure how it would be structured so will leave it to a wiser soul.
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Post by expilot »

"Drawing down capital is fine for the childless but what about those who want to leave an estate?"

All right, B53, this is the best I can do on short notice. It's essentially my own plan anyway. By the way, I can't get the "Quote" to work. How is that done?
.................................................................................................................................

So what exactly constitutes a safe withdrawal?

Is it that magic percentage which will erode the capital at just the right rate, so that none is left when none is required--or is that method vulnerable to longevity miscalculations? What if the money runs out just when it's needed most?

Perhaps, there is a safer approach?

My own average withdrawal for the last 13 years has been 4%, but I never planned it that way and it's only lately that I even bothered to calculate it. My concept of a safe withdrawal is any amount that allows me to pay the expenses and still grow the capital in real terms.

I did have one year that fell behind inflation and one year that just broke even. For the other eleven years, capital has increased steadily, but it is a tedious process. It took slightly more than ten years to double and will require a full 16 years to triple at the current rate.

However, this leisurely pace is not really a concern, and as long as I can maintain modest real growth, and I don't see any reason to impose arbitrary spending limitations or worry about percentages. By the time the growth tapers off, I should be old enough to tolerate some erosion of capital without worrying about running out of it.

Deliberately planning to run out of money at some specific age seems a dubious proposition to me, and one which would require inside knowledge and some pretty fancy footwork to co-ordinate the grand finale. I would prefer some wiggle room. :D

I would suggest that any percentage calculation be considered only a guide, and the real aim should be to ensure that the money does not run out before the Grim Reaper comes to collect--whenever that might happen. No predetermined exit.

So, as long as your capital keeps appreciating, your estate should be duly rewarded. That's my plan, anyway. Regards, Glen.
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Post by martingale »

Don't get too hung up over "capital", what matters is that you can live off your gains, no matter whether they are interest gains, dividend gains, or capital gains. Only the tax man cares.

Many people should be selling shares to pay their expenses, for purely tax reasons. It is more efficient to live off the investments you hold outside your registered account, and it is more efficient to hold equities outside your registered account. So your registered account will be growing on reinvested interest while you're drawing down your unregistered account to zero. After awhile you'll transfer some of the registered account growth to the non-registered account and repeat.

So long as the total draw is less than the total gains, no matter what form the gains took, you can keep that up indefinately.
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Post by DenisD »

By the way, I can't get the "Quote" to work. How is that done?
Cut your quote.
Click AddReply button.
Paste your quote into the text box.
Highlight the quote.
Click Quote button.
Type your reply.
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Post by expilot »

Fredrik:

Interesting to note that we took different paths, but managed to retire early anyway. My insurance is also my RRSP, but I never had the cash flow to cover my expenses, as you did. In fact, I would probably still be working if I had waited for sufficient cash flow. I have been essentially following an approach similar to this one of Martingale's:

"Many people should be selling shares to pay their expenses, for purely tax reasons. It is more efficient to live off the investments you hold outside your registered account, and it is more efficient to hold equities outside your registered account. So your registered account will be growing on reinvested interest while you're drawing down your unregistered account to zero. After awhile you'll transfer some of the registered account growth to the non-registered account and repeat.
So long as the total draw is less than the total gains, no matter what form the gains took, you can keep that up indefinitely."

Martingale:

I have been trying to follow that technique for the last 13 years, but the margin account confounds me and keeps growing. I was quite prepared to see it deteriorate and the RRSP appreciate, but they have both appreciated. That was unexpected, but welcome.

I pay very little tax at the moment, and the RRSP is still intact. Eventually the registered account will start migrating towards the margin account, but it won't be voluntary. It will be mandatory RRIF withdrawals and they will take over my expenses completely in my seventies. The tax bite will start then, but I have postponed it as long as I can.

As you say, I should be able to keep this up indefinitely now that I have the capital built up and the routine established; but the RRIF taxes will slow me down. Also, I have been ~50% in cash for over a year now and that is a drag. Regards, Glen.
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Post by Fredrik »

expilot said: "Interesting to note that we took different paths, but managed to retire early anyway. My insurance is also my RRSP, but I never had the cash flow to cover my expenses, as you did. In fact, I would probably still be working if I had waited for sufficient cash flow."

There were many times in my life when I said to myself, "This is crazy. You are NEVER going to be able to do this!" One friend, a very bright electronic engineer from Hungary, way smarter than I am, suggested in the early years that I put all my money into GICs and just do phantom transactions on paper with stocks (for five years or so), just as a game, rather than "lose all" my hard earned money. (Ha Ha. Very bad idea. The mkt was pretty awful then = the best time to buy!)

Anyway I just kept plugging away at it. Hopefully learning something from mistakes. [Heh, how come I still own so much NoTell?!! ]. Somehow the combination of 100% of investments in stocks, concentrating on dividend payers, the "magic" of dividend growth and compounding, well somehow it all worked out.

Finally I reached a rather crazy situation: Like a nuclear reactor, I had attained "critical mass". I was making more money from my stocks almost every year (capital appreciation + dividends) than I was from my pretty high paying job!! ( In addition I was getting taxed to death, especially living in Quebec, on the dividend cash flow, it being lumped on top of the salary. ) Even then the dividends were just barely adequate. So I took a long hard look at my portfolio (using a spreadsheet) and made a 1 - 2 year plan, selling a bit of some of the low yielders, pumping that and all new money into high yielders. Basically a final push to boost cash flow slightly above adequate, to produce a cash flow surplus, a "margin of safety".

Then one more hurdle to cross: Pulling the plug on my high paying job at age 43. Alas, I was a big chicken and dawdled around a bit. It was a very stressful job though. So it just happened one day I got good and mad over a typical indicident and just decided to DO IT!!! I needed a catalyst to jump off a cliff... the Tarot card "the fool". Ha Ha. No regrets. It is clear now that it was the right decision. Who knows how long one is going to live?
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Post by kiwidog »

expilot,

I think your lack of a long term strategic plan, this has helped your situation.
If we are too rigid in our thinking we have to follow a plan which in a lot of cases is not adaptable enough to the current situation.
I am not retitred yet but will be in 5 or 6 years. I run our non RSP account just the way you mention you do yours. I do however run a margin debt which creats an interest expense which is almost he same as the dividend income the account generates. At present I don't want more taxable income. I don't try and generate lots of dividend income but it rather comes from the type of postions I own. Banks, retailers, manufacturers, and insurance companies. They were bought for the capital appreciation potential but the dividend is a bonus. The dividend income covers the interest debt from the margin loan. This give some more capital to invest. It hasn't worked ever year, however over 15 years it has been very successful.
When I do retire I will get rid of the debt for the most part and do exactly like you do, run a margin for the living expenses and the transactions will cover it some times and other times I may have a cash balance or a debt. This makes perfect sense to me and can be adjusted to suit any particular year. (Note, at present I do only 2 or 3 transactions a year or less)

Your RSP strategy is also very sound as it is almost impossible to lose money ( I know someone will come down on this statement and comment about inflation taking away some of the return) in an RSP account with a decent position in strips and some shares in good businesses.
The annual returns are not important. Its important that you go ahead over the life of the RSP. IE it must grow larger over time at rate you are happy with never mind what anyone else is doing or says the return must be.

The idea is to pay as much TAX as possible.

As late as possible.


Thanks jb
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Post by expilot »

kiwidog says: "The idea is to pay as much TAX as possible."

Well, I can tell you how to do that: Move to Quebec! :)

Jon Chevreau mentioned one day on the old site that we really need to budget one million for taxes in retirement. So I had my spreadsheet sum up my likely taxes from age 70 to 90 after the RRIF cuts in. Sure enough ~$1.2 million, living in Quebec and using today's rates. I ran the same experiment using the B.C. numbers from Quicktax and I believe it was $300,000 less. The question is: do I move back to Vancouver or try Victoria this time?

I did have a very detailed plan before I retired, but none of it worked. Six months later I had scrapped the whole thing and started taking my expenses out of the margin account and I still do. It's a very simple way to handle the spending especially for someone who trades a bit, and the brokerage lends me money quite cheerfully, as required. No overdrafts. I use the margin as a convenience mostly. It sounds as though you are better organized for retirement than I was. Good luck.
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Post by Fredrik »

Kiwidog said: "When I do retire I will get rid of the debt for the most part and do exactly like you do, run a margin for the living expenses and the transactions will cover it some times and other times I may have a cash balance or a debt. This makes perfect sense to me and can be adjusted to suit any particular year."

As best as I understand tax law (Ha Ha = not very well), interest on money borrowed to earn investment income is tax deductible. In practice this means one can even buy garbage like NoTell Nitworks on margin and deduct the interest paid on the theory that perhaps someday (in another universe), NoTell will start paying a dividend "investment income" again.

Where this gets murky is if in the same account one is: a) owning stocks on margin and, b) yanking out money for personal expenses. Based on a tax case involving one of the Bronfmans, the interest on the yanked out money from a margin account is not tax deductible.

So if I was gonna do something like that, I'd have two margin accounts. One where I'd remove and replace money for personal expenses as events unfolded and any interest I paid there would not be tax deductible. The other would be a margin account used normally where the interest would be tax deductible.
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Post by expilot »

I remember reading on one of the Stockhouse boards that it is possible to have two linked margin accounts, one for business and one for personal use. The advantage of this is that the margin available in the business account can also be applied to the other account to buy groceries. Not deductible, of course. But don't quote me on this.

At one time interest could be used to offset capital gains on the presumption that the company would start to distribute income someday. I think that has changed and the deduction now can only be used to offset an equivalent amount of actual interest or dividends. But don't quote me on that either. Somebody may know more.
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Post by expilot »

Quote from here:

http://money.independent.co.uk/personal_fi...sp?story=570175
Can it be sensible or right to risk consuming capital to generate a return from an investment? In the 19th century, when inflation was largely nonexistent, capital values changed little and it was customary to measure your wealth only in terms of the income it generated. Consuming capital was widely seen as the ultimate sin.

But is that still the case today? In theory, there is no reason why an investor should not generate a return, whichever way is most appropriate. If you take the dividend from a share or investment fund and sell a small proportion of your holding each year to generate an additional cash return, it need not necessarily reduce your remaining capital if the underlying asset is growing faster in real terms than the slice you take out in this way.

In practice, for individuals, the choice of taking return as income or capital gain at the margin is heavily driven by tax considerations, and in the case of shares by transaction costs as well. Nevertheless, it may often be a better solution than doing what many people do, which is to put their money into instruments that have above-average yields but actually eat into their capital either surreptitiously (by returning capital disguised as income) or, worse still, by taking risks they do not appreciate.
Most of us have been conditioned from early days to think in terms of income. First we have our allowance, then employment income, then investment income, and finally pension income. It took me the first 6 months of retirement to start thinking in terms of capital rather than income, and that was a good thing, Martha, because I simply wasn't earning enough income to live on. So I started spending capital and never looked back.

I am now comfortable with the concept, but many still reject the idea and insist on chasing income rather than seeking better total returns elsewhere. Is income not a safer way to generate a return, they say? Not necessarily according to the author quoted above, as both the safety and the true yield of income instruments may be illusory. Could he have been thinking of our trusts? :)
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