The Plight of the Y2K Retiree

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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ghariton
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Re: The Plight of the Y2K Retiree

Post by ghariton »

Norbert Schlenker wrote:All other portfolios - in fact, any portfolio worth more than about $575 today - will survive the remaining period without risk if they are converted ("defeased") into RRBs at current rates.
Thank you for the update.

I feel quite lucky upon seeing that.

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Re: The Plight of the Y2K Retiree

Post by Norbert Schlenker »

You're much too modest, George. Your concentration in RRBs was surely skill, n'est-ce pas? ;) In fact, since the RRB portfolio is more than twice the $575 cutoff, someone who was smart enough to park everything in RRBs in August 2000 should, at this point, be doubling their withdrawal rate because the money ain't gonna run out before August 2030.
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Re: The Plight of the Y2K Retiree

Post by Norbert Schlenker »

Two years since my last update. We're now more than halfway through the 30 year standard SWR period for a Canadian who retired at the very top of the tech market bubble in August 2000 and started withdrawing 4% every year adjusted for inflation. Here's where the various asset mixes are now ...
y2k retiree 2015.png
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Re: The Plight of the Y2K Retiree

Post by kcowan »

The volatility of that RRB performance really reinforces the need to stay the course!
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Re: The Plight of the Y2K Retiree

Post by pmj »

Do the graphs include reinvested dividends? EG TSX total-return or TSX price-only? Or maybe the dividend incomes are similar enough across the five benchmarks that they wouldn't significantly affect the comparisons?
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Re: The Plight of the Y2K Retiree

Post by Norbert Schlenker »

Peter, it's all total returns.
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Re: The Plight of the Y2K Retiree

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kcowan wrote:The volatility of that RRB performance really reinforces the need to stay the course!
Well, that's one way to look at it, but not a recommended one.

If you had a systematic-withdrawal-rate (SWR) of 4% real starting today, with real-return rates of, say, 0.64%, your all-real-return-bond portfolio would be expected to decline by 3.36% per year (along with your real income, i might add). Your portfolio - and your real income - would be expected to have declined by about 40% after 15 years.

Now, after a few years of real-life experience with that, you could be brave and decide to "stay the course", expecting the bond prices to soar to compensate you for your discipline and perseverance, but good luck with that. There is a lot less room for that with real-returns at 0.64% than there was at 4.00%...

Not that real-return bonds don't play a role in a portfolio, but looking at that historical volatility in isolation to the current real-return rates is misleading.
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Re: The Plight of the Y2K Retiree

Post by ghariton »

I'm still happy. :wink:

The biggest benefit of my RRB holding is that it lets me invest in equities and still sleep at night. IOW I don't hold them for their return (although that is nice), I hold them for their risk reduction.

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Re: The Plight of the Y2K Retiree

Post by trf1066ca »

ghariton wrote:I'm still happy. :wink:

The biggest benefit of my RRB holding is that it lets me invest in equities and still sleep at night. IOW I don't hold them for their return (although that is nice), I hold them for their risk reduction.
Well, yes, you would be, and good on you, but you would also already be 15 years into the 30 years and the beneficiary of a 40% increase in the real-value of the portfolio even after withdrawals.

The dynamics are completely different now.

Yes, they reduce risk in the portfolio. But like other risk reduction strategies, they aren't expected to provide much return (it''s arguable that the 4% real-rates of yesteryear were one of the greater mispricings of risk ever).

I know that the point of the update is not to recommend a strategy now. just document what the real-life experiences would have been at specific points in time, but the plot of the RRB is almost useless as a guide for today. (Other than rightfully demonstrating how volatile they are currently - a function of the price sensitivity to interest rate changes of any fixed-income security when interest rates are particularly low. That kind of volatility on top of a contracted 0.64% return makes them even more problematic as a choice in SWR today.)

As Buffett (I think) says, the price you pay will determine your rate of return.
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Re: The Plight of the Y2K Retiree

Post by ghariton »

trf1066ca wrote:The dynamics are completely different now.
Yes.

You will notice that I've effectively stopped posting about RRBs. Certainly I haven't recommended them to new investors in over a decade.

That said, I still believe that, if one wants to hold fixed income, and one is in the accumulation stage, RRBs are a much more attractive choice than nominal government bonds of the same duration. At today's prices they are providing insurance against unexpected inflation, essentially for free. True, they carry liquidity risk, but in the accumulation stage we shouldn't care. If we are holding to maturity -- building a retirement nest egg say -- volatility shouldn't matter either.

All fixed income instruments have pitifully low returns and are in fact exposed to significant interest rate risk right now. The only way to get a decent return is to take on large amounts of credit risk.

If I were thirty again and had some money to invest, in today's environment I would be 100% equities -- say VT -- and forget about fixed income, given today's dynamics as you say.

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Re: The Plight of the Y2K Retiree

Post by Norbert Schlenker »

At this point, I think there is an extremely high probability of portfolio failure before the 30 year deadline for the TSX (and pretty high for the FPX Growth portfolio). You can't keep pulling $40 every year out of a $400 stack (all figures real dollars) and expect it to last another 15 years, especially when it's invested in a volatile asset. The next serious bear market in Canada means the $400 turns into $200 after the required withdrawal that year. At that point, you're likely within five years of ruin. The probability of no serious bear market occurring before 2025 is vanishingly small.

A few morals to the story here:
  • Diversify. The worst scenario always comes from exposing yourself to a single asset class. That's true for the best scenario too, but ask yourself the Dirty Harry question. "Do ya feel lucky, punk?"
  • As in everything, if you pay too high a price, things will not go well, which is trf's point. Unfortunately, distinguishing expensive from inexpensive isn't an exact science except in hindsight. Don't take the wrong lesson from that pretty green RRB line, which has been so successful, because how can you know that it isn't today's equivalent of the TSX in August 2000.
  • Keep some options in mind if things do go wrong. No matter how good the boat looks when you climb onto it, if the hole gets big enough, you'll need to swim.
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Re: The Plight of the Y2K Retiree

Post by AltaRed »

trf1066ca wrote:Not that real-return bonds don't play a role in a portfolio, but looking at that historical volatility in isolation to the current real-return rates is misleading.
What the chart really shows is 'sequence of returns' risk, i.e. what can happen very shortly after retirement, and as Norbert says, especially with a lack of diversification.

I suspect if Norbert chose to show 1/1/2008 as the starting point of a 30 year retirement, there would be some sobering lessons there as well for someone fully invested in FPX Growth in particular.

Added: Yes, I know the dividend junkies will protest that if one only has to draw on their income, i.e. dividends, there would be no problem. True perhaps for the 1-2%ers, but few are in the position of not having to draw on capital.

Added yet again: My largest single income stream is also dividends from US and Cdn equities. Thus I am also a dividend junkie, but not a portfolio strategy that can be achieved, or counted on, by the vast middle class.
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Re: The Plight of the Y2K Retiree

Post by izzy »

Here's where a ruin contingent annuity would be useful.
I previously suggested that with a minor adjustment CPP and possibly OAS could fill this role,in fact this might be the time to lobby for the necessary changes since changes to CPP are "on the table".
See:-
Mon Dec 27, 2010 9:55 pm

Flights of Fancy wrote:

izzy wrote:
And IMHO it would be better if it were possible to further defer CPP,as in the UK (although not currently otherwise the best example of wise provision for pensions) as long as desired and obtain a correspondingly increased CPP pension at a later age for the remainder of one's life after having spent one's retirement savings.I'm sure the heirs would disagree but the purpose of the savings was after all to finance the annuitants retirement not to enable him/her to leave a bigger estate.



This is the notion of a ruin-contingent life annuity: i.e., an annuity which springs into action when the retirement savings portfolio has been exhausted


The point is that in the UK this type of annuity is currently available without paying fees to anyone just by deferring the state pension until one's other assets are exhausted.This option is not available in Canada past age 70 and the increase in the pension achieved by deferral currently does not reflect the reduced time span over which the resulting pension is payable with any degree of realism so current advice is always to claim the CPP pension as early as possible.
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Re: The Plight of the Y2K Retiree

Post by NormR »

Can we get a version of the graph with a 1% annual management fee and another with a 2% annual fee? :)
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Re: The Plight of the Y2K Retiree

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izzy wrote:... I previously suggested that with a minor adjustment CPP and possibly OAS could fill this role,in fact this might be the time to lobby for the necessary changes since changes to CPP are "on the table".
... just by deferring the state pension until one's other assets are exhausted.This option is not available in Canada past age 70 and the increase in the pension achieved by deferral currently does not reflect the reduced time span over which the resulting pension is payable with any degree of realism so current advice is always to claim the CPP pension as early as possible.
Any idea how many in the UK choose to defer their state pension? In the past, only about 5% in Canada have chosen to defer CPP until after 65 and fully 65% choose to take it before age 65. Not sure if those stats have changed recently.
I suspect that only a very small number can afford or can have the 'fiscal discipline'' to defer collecting their CPP. It is seen as the bird in the hand that you've paid into for all those years.
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Re: The Plight of the Y2K Retiree

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OnlyMyOpinion wrote:Any idea how many in the UK choose to defer their state pension?
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Re: The Plight of the Y2K Retiree

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OnlyMyOpinion wrote: Any idea how many in the UK choose to defer their state pension? In the past, only about 5% in Canada have chosen to defer CPP until after 65 and fully 65% choose to take it before age 65. Not sure if those stats have changed recently.
I suspect that only a very small number can afford or can have the 'fiscal discipline'' to defer collecting their CPP. It is seen as the bird in the hand that you've paid into for all those years.
Oh I agree entirely but then many don't contribute to RRSPs either .One trades the certainty of current income for protection from longevity risk.
Deferring CPP could provide the same protection as buying a life annuity without having to provide profits to an insurance company!Most people don't buy life annuities either but they are available to those who want them.Why not provide the option? In real dollar terms the cost would be minimal unless life expectancy were to increase tremendously.
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Re: The Plight of the Y2K Retiree

Post by OnlyMyOpinion »

adrian2 wrote:
OnlyMyOpinion wrote:Any idea how many in the UK choose to defer their state pension?
Google is your friend.
No, you are my friend :wink: . Thanks. I did do a search but obviously not thorough enough.
If I read correctly, 91.1% and 88.8% of 'All' had not deferred their state pensions for the 6mo periods to Mar.2010 and to Sept.2010.
The other ~10% had either deferred their pension or taken a lump sum payout :shock: or a combination of deferral/lump sum?
Seems that 4.6% and 6.4% took a lump sum only.

So not too dissimilar to the 5% of Canadians who defer their CPP.
Boy, think how much larger IG might be if we could take our CPP as a lump sum to invest :roll:
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Re: The Plight of the Y2K Retiree

Post by OnlyMyOpinion »

izzy wrote:...Why not provide the option? In real dollar terms the cost would be minimal unless life expectancy were to increase tremendously.
I've no argument with that. As you point out, the deferral already exists to age 70. Sounds like some adjustment would be needed to make it worthwhile choosing though.

Surprised the UK seems to have a lump sum option. Wouldn't that work against the effort to ensure seniors have enough 'guaranteed' income to live on - or am I misinterpreting it?
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Re: The Plight of the Y2K Retiree

Post by kcowan »

AltaRed wrote:Added: Yes, I know the dividend junkies will protest that if one only has to draw on their income, i.e. dividends, there would be no problem. True perhaps for the 1-2%ers, but few are in the position of not having to draw on capital.
Thanks to us living in Mexico for about 6 months and renting our place in Vancouver for 4-5 months every year, we have gotten our WR down to almost nothing. And that is really good in these trying times. We have been doing it for 7 years and have found a pleasant equilibrium. (It would be less than nothing except for the OAS clawback but I am not complaining!)

DW and I have had the conversation about what we would do with another million, and concluded that the answer is nothing (except maybe increase charitable contributions). It includes an annual trip to Europe and substantial gifts to my offspring from the portfolio. (The RESP contribution is not counted in my budget. Partly because I don't consider it it be part of my portfolio. I manage it for the GCs.)

What I recommend to any other retirees is to look at realistic alternative lifestyles that can drop your nut. It is amazing if you live in a high cost environment like Toronto or Vancouver!
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Re: The Plight of the Y2K Retiree

Post by izzy »

OnlyMyOpinion wrote:
izzy wrote:...Why not provide the option? In real dollar terms the cost would be minimal unless life expectancy were to increase tremendously.
I've no argument with that. As you point out, the deferral already exists to age 70. Sounds like some adjustment would be needed to make it worthwhile choosing though.

Surprised the UK seems to have a lump sum option. Wouldn't that work against the effort to ensure seniors have enough 'guaranteed' income to live on - or am I misinterpreting it?
There are a lot of problems with the UK system including a plethora of almost random and contradictory changes over the past 10 years and I suspect this has generated a lot of mistrust in government intentions so they had to include a lump sum option to reassure pensioners.The one feature which does seem worth emulating is the indefinite deferral feature which could be self financing if age appropriate adjustments were made in line with life expectancy.
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Re: The Plight of the Y2K Retiree

Post by newguy »

I don't get it. The title says under 4% inflation. Is that for the swr only? If there really was 4% inflation the bonds would have cratered and the stocks would be kicking butt. Not to mention the 80 yo geezer is now living it up with his ever increasing real income (yaay, go divvies!).

It seems like there's confusion around the RRB performance. It's all due to the fact that everyone looks at long durations for RRBs. Here's a fair comparison from iShares, but they only have data back to 06 so I can't really compare from 2000.
xrbxlb.png
They only out perform when inflation is higher than expected. Here's an update of cpi vs break even spread from some R code I posted somewhere.
Rplot.png
If the red line now is below the black line back when you bought it, then your better off with regular bonds. Unless you want the insurance.

It looks like the black line, which supposedly predicts inflation over the next 20 yrs, does a good job of averaging out today's inflation. They've both taken a dive recently.

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Re: The Plight of the Y2K Retiree

Post by StuBee »

newguy wrote:I don't get it. The title says under 4% inflation.
I think the title means an initial withdrawal of 4% which is subsequently annually increased according to inflation.
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Re: The Plight of the Y2K Retiree

Post by SQRT »

AltaRed wrote:
Added yet again: My largest single income stream is also dividends from US and Cdn equities. Thus I am also a dividend junkie, but not a portfolio strategy that can be achieved, or counted on, by the vast middle class.
I don't really understand your position that a person has to have a very large portfolio to be able to take an income approach to withdrawals. It's not difficult to get a current div yield around 4%. If you assume Max CPP and perhaps a smaller DB pension there would be little need for much FI in a modest retirement portfolio. Thus 4% yield could be a reasonable SWR. The real problem occurs whe a higher level of FI is required which would bring the average yield on the portfolio down. But if you assume a 25% allocation to FI (give notional credit re AA to CPP) a weighted average yield could be around 3.5% which isn't too far off a reasonable WR. In addition given the current market, it wouldn't be too difficult to get a higher yield on equities.
So, in summary, I think an income approach to withdrawals in retirement is a stategy that works for more people than you suggest? I am not saying that an income stategy is the best or even good strategy, just that it could work for quite a few ordinary retirees.
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Re: The Plight of the Y2K Retiree

Post by AltaRed »

I doubt very much there are many people with the resources that you suggest. Almost everyone has CPP and OAS but few have good DB pensions and fewer yet have more than low 6 digit RRSPs. Those folks will always have 'sequence of returns' risk from a dividend paying stock portfolio, and especially so if they do not have proper diversification.

What can one really do with, for example, $35k/yr in pension payments (CPP/OAS/DB) and perhaps $200k in RRSP assets? Swing for the fences with $200k in 4% yielding blue chip dividend stocks and having to tap into capital to stay solvent? What would that person do in 2008 and 2009?
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