A Simple Retirement Plan Using T-Bills/GICs

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Re: A Simple Retirement Plan Using T-Bills/GICs

Post by mrhead »

Flights of Fancy wrote:
mrhead wrote:Instead of putting $1,000,000 into a GLWB to pay you $50,000/year, why not buy a life annuity that pays you $50,000/year and then with the rest of the money place a bet on the stock market? It's probably a cheaper way to play it.
Because (depending on your gender and when you buy the annuity) there's no "rest of the money."
I strongly suspect that is not a problem for most (all?) people of retirement age.

If you're buying a life annuity or GLWB product when you're young, then you're nuts.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Post by marty123 »

mrhead wrote:
Flights of Fancy wrote:
mrhead wrote:Instead of putting $1,000,000 into a GLWB to pay you $50,000/year, why not buy a life annuity that pays you $50,000/year and then with the rest of the money place a bet on the stock market? It's probably a cheaper way to play it.
Because (depending on your gender and when you buy the annuity) there's no "rest of the money."
I strongly suspect that is not a problem for most (all?) people of retirement age.

If you're buying a life annuity or GLWB product when you're young, then you're nuts.
It depends on how you define "young". At 65, a joint annuity returns 6%, so there still isn't much left (~$170,000). At 70, we're talking closer to $250,000. http://www.canadianbusiness.com/my_mone ... /index.jsp.

However, you're probably correct to say that this $170,000 (or $250,000) in the stock market will probably create more value and carry less risk in the stock market when compared to the GLWB potential of $1,000,000 (if one is not concerned about a low estate value in case of an early death). It will also allow a bit of dividend income ($5,000-$6,000 is not unreasonable from a $170,000 dividend portfolio).
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Re: A Simple Retirement Plan Using T-Bills/GICs

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But is anyone (here, or anywhere else) advocating the wholesale annuitization of a portfolio, or the use of one retirement income product exclusively?

The Milevsky link I posted earlier suggested (as a rough rule of thumb) 1/3 of the portfolio to non-guaranteed investments, 1/3 to GLWBs, and 1/3 to plain vanilla annuities (taking CPP and OAS into account in that third)...and that's the approach, more or less, we used in Pensionize Your Nest Egg (dependent on your resources, spending level relative to wealth, and legacy versus sustainability preferences).
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Re: A Simple Retirement Plan Using T-Bills/GICs

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Flights of Fancy wrote:But is anyone (here, or anywhere else) advocating the wholesale annuitization of a portfolio, or the use of one retirement income product exclusively?

The Milevsky link I posted earlier suggested (as a rough rule of thumb) 1/3 of the portfolio to non-guaranteed investments, 1/3 to GLWBs, and 1/3 to plain vanilla annuities (taking CPP and OAS into account in that third)...and that's the approach, more or less, we used in Pensionize Your Nest Egg (dependent on your resources, spending level relative to wealth, and legacy versus sustainability preferences).
I'm not suggesting dumping everything into one asset class, such as a life annuity. But I am skeptical that GLWBs have any place in most people's portfolios, at any age. Maybe if the fees came down to reasonable levels they might make sense. But now, I think they're just a financial product to make money for the company and salesmen, not the policy holder.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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mrhead wrote:I'm not suggesting dumping everything into one asset class, such as a life annuity. But I am skeptical that GLWBs have any place in most people's portfolios, at any age. Maybe if the fees came down to reasonable levels they might make sense. But now, I think they're just a financial product to make money for the company and salesmen, not the policy holder.
If I were a GLWB salesman, I'd push them to retirees that won't annuitize because they are worried about depriving their estate. There are no life annuities out there that carry residual value, and none that allow a guarantee that exceeds one's life expectancy (you can't get a 30-year guarantee at 65, or a 25-year guaranteed annuity at 70).

They may not be better than non-annuity alternatives. As a matter of fact, there are better ways to replicate the cash flow while increasing the potential for residual value. However, these better ways don't all involve a life insurance salesperson, so for them, they are a good offering for annuity-skeptic customers looking for a similar product that is more friendly to the estates. In other words, they are designed to prevent people from seeking a better solution outside the LifeCo world.
Also, I'm a BMO and Manulife shareholder, so if people want to give me easy money, I'll take it :wink:
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Re: A Simple Retirement Plan Using T-Bills/GICs

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Flights of Fancy wrote:But is anyone (here, or anywhere else) advocating the wholesale annuitization of a portfolio, or the use of one retirement income product exclusively?
No. I could not imagine doing that.
The Milevsky link I posted earlier suggested (as a rough rule of thumb) 1/3 of the portfolio to non-guaranteed investments, 1/3 to GLWBs, and 1/3 to plain vanilla annuities (taking CPP and OAS into account in that third)...and that's the approach, more or less, we used in Pensionize Your Nest Egg (dependent on your resources, spending level relative to wealth, and legacy versus sustainability preferences).
I believe a blend is good. In my case, at the current time, about half of my income stream comes from pensions (DB and early CPP) and half from cash flow* generated from non-guaranteed investments (including GICs here for the moment). I am marginally able to not tap into capital just yet (but will with major expenses such as a vehicle). That will change over time as my DB pension is not indexed. Whether I annuitize part of my assets when I turn 75-80 will depend on how much I am dipping into capital at that point to sustain my lifestyle, i.e. degree of perceived or real vulnerability.

* The dividend crowd here who are relying on increasing cash flow streams from a dividend paying portfolio (without dipping into capital) will probably find that cash flow stream will not keep up 15 years hence. It is a nice concept when one is in accumulation mode as an armchair quarterback, but that thought process will likely change several years into retirement
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Re: A Simple Retirement Plan Using T-Bills/GICs

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marty123 wrote: If I were a GLWB salesman, I'd push them to retirees that won't annuitize because they are worried about depriving their estate. There are no life annuities out there that carry residual value, and none that allow a guarantee that exceeds one's life expectancy (you can't get a 30-year guarantee at 65, or a 25-year guaranteed annuity at 70).

They may not be better than non-annuity alternatives. As a matter of fact, there are better ways to replicate the cash flow while increasing the potential for residual value. However, these better ways don't all involve a life insurance salesperson, so for them, they are a good offering for annuity-skeptic customers looking for a similar product that is more friendly to the estates. In other words, they are designed to prevent people from seeking a better solution outside the LifeCo world.
Ah but there is a product available - the 'insured annuity'.

[I don't recall a mention of insured annuities in Pensionize Your Nest Egg - did I miss it, FoF, or is it considered to be so sub-optimal that it didn't deserve much ink? Jamie Golombek gave them a mention in today's Globe]
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Re: A Simple Retirement Plan Using T-Bills/GICs

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mrhead wrote: ...I am skeptical that GLWBs have any place in most people's portfolios, at any age. Maybe if the fees came down to reasonable levels they might make sense. But now, I think they're just a financial product to make money for the company and salesmen, not the policy holder.
I have become less skeptical now that I have read Pensionize Your Nest Egg, as well as other books and papers by Milevsky over the years. I have a great deal of respect for his work.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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AltaRed wrote: The dividend crowd here who are relying on increasing cash flow streams from a dividend paying portfolio (without dipping into capital) will probably find that cash flow stream will not keep up 15 years hence. It is a nice concept when one is in accumulation mode as an armchair quarterback, but that thought process will likely change several years into retirement
I believe that many of us here are part or this dividend crowd (perhaps the majority). Could you please elaborate a bit on your statement. Up until recently, I have been planning for real growth (in excess of CPI) of 3% in my dividend stream. Now before you laugh, I would like to let you know that I am seriously questioning my current line of thinking... However, I continue to think that real growth of 1% is quite reasonable. This, of course is not constant. There will be periods of no growth interspersed with periods of growth (much in the same way that the economy in general evolves). It is hard to imagine profits (which are roughly linearly related to dividends) to not follow a growing economy. Perhaps, you are advocating a period of prolonged stagnation in world growth. If that is the case, interest rates should not provide for any more upside than dividend income. In addition, how likely is it after tax and inflation that FI can be anything more than a savings vehicle (i.e. no real growth).

Admittedly, I am not yet retired and I can see your logic in the last sentence of the above quote.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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DavidR wrote:
mrhead wrote: ...I am skeptical that GLWBs have any place in most people's portfolios, at any age. Maybe if the fees came down to reasonable levels they might make sense. But now, I think they're just a financial product to make money for the company and salesmen, not the policy holder.
I have become less skeptical now that I have read Pensionize Your Nest Egg, as well as other books and papers by Milevsky over the years. I have a great deal of respect for his work.
Ditto. I'd suggest mrhead reads the book to get a better understanding of GLWBs, a relatively new product in the Canadian market. Both authors have no reason to "push" that product as they are not even licensed to sell it and pocket any embedded commission.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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StuBee wrote:However, I continue to think that real growth of 1% is quite reasonable. This, of course is not constant. There will be periods of no growth interspersed with periods of growth (much in the same way that the economy in general evolves). It is hard to imagine profits (which are roughly linearly related to dividends) to not follow a growing economy.
In the long run, you are right, but in that time we are all dead eventually. :)

In a shorter time frame, which can last decades, anything can happen.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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StuBee wrote:I believe that many of us here are part or this dividend crowd (perhaps the majority). Could you please elaborate a bit on your statement. Up until recently, I have been planning for real growth (in excess of CPI) of 3% in my dividend stream. Now before you laugh, I would like to let you know that I am seriously questioning my current line of thinking... However, I continue to think that real growth of 1% is quite reasonable. This, of course is not constant. There will be periods of no growth interspersed with periods of growth (much in the same way that the economy in general evolves). It is hard to imagine profits (which are roughly linearly related to dividends) to not follow a growing economy. Perhaps, you are advocating a period of prolonged stagnation in world growth. If that is the case, interest rates should not provide for any more upside than dividend income. In addition, how likely is it after tax and inflation that FI can be anything more than a savings vehicle (i.e. no real growth).
There has been some people who have been pretty firm on suggesting they would rely on a dividend income stream to fund their retirement. That, to me, infers, 100% reliance (in the absence of saying anything else) and is what prompted me to even mention it here (FoF's question). There *may* be some people here who think their stock picking ability will permit them to maintain real growth in their dividend stream, and I applaud those who will be successful. But any single minded strategy works only while it works.

There were many dividend cuts in 2008 and 2009 from companies considered blue chip. Not only did dividends get cut, but stock prices collapsed as well. In many cases, new equity was issued to shore up the balance sheets, e.g. MFC, BAC and a host of others. There will many more such periods during 30 or more years of retirement.

When one is working, it is easy to say.... drop the loser and move into something else, because employment earnings will more than recover from that lesson over a short period of time. That is no longer the case once employment earnings stop. Not only does the retired person have potentially permanent loss of dividend income (or a loss that will take corporate performance well beyond GDP growth to recover), he/she also has loss of capital subject to the same vulnerabilities. Yes, I do believe the heyday of dividend paying blue chips may be over. Further, there is no guarantee dividend paying companies' performance can/will exceed CPI or GDP growth. Much of the growth will be from new companies not publicly traded and/or not yet available in the public market. The best bet for most to try and emulate your dividend growth rate plan might be to own the 'entire' market.

Fixed income is a necessary component to carry one through severe periods of economic non-performance (to avoid having to cash in equities when they are down and out). It is not overly difficult to get almost a 4% return (inflation + 1-2) on fixed income at this time. A 10 year bond ladder (including a mix of corporate bonds) will do it.

Disclosure: Most of my current income cash flow stream (beyond pensions) comes from dividend streams, some of it from selective stock picking, but most of it from broad market ETFs. So I do rely quite a bit on a dividend stream as well, but I do not have illusions of it necessarily keeping up with my cost of living. It will be interesting to look at it 10 years from now to see just how well that dividend stream has performed for me over that period.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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DavidR wrote: Ah but there is a product available - the 'insured annuity'.

[I don't recall a mention of insured annuities in Pensionize Your Nest Egg - did I miss it, FoF, or is it considered to be so sub-optimal that it didn't deserve much ink? Jamie Golombek gave them a mention in today's Globe]
I've never heard of a "productized" insured annuity - I only know this as a back-to-back SPIA (single premium life annuity) + life insurance estate-maximization strategy.

Why did we not include discussion of this strategy? The basic reason is that we didn't include discussion of ANY strategies. We described the "new risks" in retirement, and how new products AND the "strategy" of product allocation writ large respond to those strategies. We wanted to introduce concepts at a high level, and leave all the implementation questions to ... well, I don't know who we left them to, exactly, we just decided very early on that we were not going to address implementation.

One comment on fees: Milevsky has long advocated for disentangling the GLWB rider fees from the portfolio management. The rider fees for the lifetime income benefit average about 85 bps in Canada (that's the figure we used in the book). When people describe GLWBs as "too expensive" I'm not clear that they are clear that the high MERs on the underlying mutual funds contribute the majority of the bps to those fee levels. The rider fees, considered in isolation (although you cannot buy them in isolation - yet) are actually relatively modest, given what they provide: longevity insurance. (Milevsky has also advocated for being able to purchase "ruin insurance" - the "ruin contingent life annuity" - that would ONLY spring into action if and when your portfolio hit zero.)
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Re: A Simple Retirement Plan Using T-Bills/GICs

Post by Bylo Selhi »

Flights of Fancy wrote:One comment on fees: Milevsky has long advocated for disentangling the GLWB rider fees from the portfolio management. The rider fees for the lifetime income benefit average about 85 bps in Canada (that's the figure we used in the book). When people describe GLWBs as "too expensive" I'm not clear that they are clear that the high MERs on the underlying mutual funds contribute the majority of the bps to those fee levels. The rider fees, considered in isolation (although you cannot buy them in isolation - yet) are actually relatively modest, given what they provide: longevity insurance.
So what we need is for an index purveyor like Blackrock (or better Vanguard should they ever come to Canada), to offer GLWB'd portfolios of ETFs for ~100 bps. (Yes, I know I'm dreaming.)
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Re: A Simple Retirement Plan Using T-Bills/GICs

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From Milevsky's "Frustrations of a Variable Annuity Advocate:"

...I think that in order to attract a much larger universe of financial advisors and their clients, the insurance industry should cater to the possibility that widespread alpha is nearly impossible to achieve and hence not worth paying for. Ergo, offer guaranteed living income benefits (GLiBs) on S&P 500, Russell 3000 and MSCI index funds. Advertise them widely and market them aggressively. They might not compensate as well, but I reckon that the volume of new converts will help offset the reduced margins. To be clear, let me repeat. This is not just a question of offering one or two low-cost index funds as part of the infinite multitude of choices available within the sub-accounts. I am talking about a dedicated suite of index fund VAs with GLiBs.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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AltaRed wrote:Fixed income is a necessary component to carry one through severe periods of economic non-performance (to avoid having to cash in equities when they are down and out). It is not overly difficult to get almost a 4% return (inflation + 1-2) on fixed income at this time. A 10 year bond ladder (including a mix of corporate bonds) will do it.
Here in Quebec, the lowest MTR on interest (or RRSP) income is 29%. I think, MTR is an appropriate argument since eventually, most of us will be receiving pension income (I include here CPP and OAS) which will offset any effect of the majority of tax credits. The 4% (quite reasonable) yield becomes (after tax) less than 3%. At less than 3%, there is no real growth (with inflation of 2 to 3%).

Yes, FI is a great savings vehicle, I personally plan on spending close to 300K$ of my fixed income (capital and interest) while I bridge between my retirement date and age 65 (around 10 years).
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Re: A Simple Retirement Plan Using T-Bills/GICs

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Flights of Fancy wrote:
DavidR wrote: Ah but there is a product available - the 'insured annuity'.

[I don't recall a mention of insured annuities in Pensionize Your Nest Egg - did I miss it, FoF, or is it considered to be so sub-optimal that it didn't deserve much ink? Jamie Golombek gave them a mention in today's Globe]
I've never heard of a "productized" insured annuity - I only know this as a back-to-back SPIA (single premium life annuity) + life insurance estate-maximization strategy.

Why did we not include discussion of this strategy? The basic reason is that we didn't include discussion of ANY strategies. We described the "new risks" in retirement, and how new products AND the "strategy" of product allocation writ large respond to those strategies. We wanted to introduce concepts at a high level, and leave all the implementation questions to ... well, I don't know who we left them to, exactly, we just decided very early on that we were not going to address implementation.
Thanks for the reply. OK, I guess it is a ‘concept’ rather than a ‘product’.

But I’m making a note to self: When the time comes for me to consider pensionizing my nest egg, I am sure that the concept will be presented to me as an option if I want want to both leave an estate and maximize the annuity stream… Depending on life insurance and GLWB costs at the time, it might even be a better deal than a GLWB. (But I won't be crunching any numbers myself for a few years yet - hoping to leave that to Unbiased Experts !)

BTW, I like the ‘get the kids to pay the insurance premium’ idea, as is often suggested when life insurance is sold to deal with the capital gains liability on a family cottage….
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Re: A Simple Retirement Plan Using T-Bills/GICs

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DavidR wrote: BTW, I like the ‘get the kids to pay the insurance premium’ idea, as is often suggested when life insurance is sold to deal with the capital gains liability on a family cottage….
General comment on that: Why make your kids pay insurance premiums so they get to inherit more? Whether you pay them or they pay them makes no difference. If you pay them, they get to keep more money now but get a little less later.

BTW, I'm not a fan of paying insurance premiums for anything, unless it's absolutely necessary to prevent financial ruin in case of an unlikely event (like car liability insurance). It's far better to self-insure: you keep the "premiums", you keep the "adminisrative overhead", and you keep the "profits". I've never understood why people buy extended warranties, have low deductibles for home and auto, buy life insurance when they're no longer working, etc.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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Regardless...and back to my premise....

GLWB?? I prefer K.I.S.S. = Save a Bundle and then use T-Bills, GICs, MBSs, RRBs and Govt Bonds, with CPP and OAS as additional inflation protection. No insurance companies and all govt guaranteed.
$1.5mil @ 4% = $60,000
$1.8mil @ 4% = $72,000
$2.0mil @ 4% = $80,000
10yr provincial bonds are paying more than 4% right now. After tax, a normal thrifty couple would do okay and even have enough to reinvest a bit for inflation.

This assumes at least a third of the stash is in RRSPs with untaxed compound interest and RRBs to pick up inflation damage.

Doable?
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Re: A Simple Retirement Plan Using T-Bills/GICs

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mrhead wrote:
DavidR wrote: BTW, I like the ‘get the kids to pay the insurance premium’ idea, as is often suggested when life insurance is sold to deal with the capital gains liability on a family cottage….
General comment on that: Why make your kids pay insurance premiums so they get to inherit more? Whether you pay them or they pay them makes no difference. If you pay them, they get to keep more money now but get a little less later.

BTW, I'm not a fan of paying insurance premiums for anything, unless it's absolutely necessary to prevent financial ruin in case of an unlikely event (like car liability insurance). It's far better to self-insure: you keep the "premiums", you keep the "adminisrative overhead", and you keep the "profits". I've never understood why people buy extended warranties, have low deductibles for home and auto, buy life insurance when they're no longer working, etc.
Agree with you on self-insuring. I will likely drop my term life insurance in a few more years - the kids are getting older, net worth is growing... Life insurance won't be needed for much longer.

I think in the case of the family cottage held by a low-income elderly senior citizen (asset rich/cash flow poor), the cost of annual life insurance premiums may be completely unmanageable out of the senior's cash flow. So the kids have a choice - purchase life insurance and pay the premiums themselves, or find some other way to pay the capital gains tax on the death of the parent. (Mortgage the cottage or sell it.)
It's not a scenario that I forsee for myself - no cottage in the family.

(I think there have been threads here on the webring in the past arguing that purchasing life insurance in order to fund a future tax liability is not necessarily a good idea - but life insurance salespeople sure love to trot it out! I guess I was being a little facetious with that comment)
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Re: A Simple Retirement Plan Using T-Bills/GICs

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mrhead wrote:BTW, I'm not a fan of paying insurance premiums for anything, unless it's absolutely necessary to prevent financial ruin in case of an unlikely event (like car liability insurance). It's far better to self-insure: you keep the "premiums", you keep the "adminisrative overhead", and you keep the "profits". I've never understood why people buy extended warranties, have low deductibles for home and auto, buy life insurance when they're no longer working, etc.
There is no easy alternative to self insure equities against longevity risk causing financial ruin. It's not an "extended warranty" type of insurance.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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$1.5mil @ 4% = $60,000
$1.8mil @ 4% = $72,000
$2.0mil @ 4% = $80,000
Not doable for most people I know.

To get here you need to do something different then most, lets say its a high savings rate. Now you have to learn to spend after 30-40 years of savings. Is it easy to spend, not if your afraid of running out of money.

It would cost me about $400,000 to provide a reasonable secure $60,000. seems like a steep cost.

DB $30,000
GLWB $200,000 to yield $10,000? (5%)
Annuity $200,000 at 60 to yield $12,000 (6%)
CPP $600/mth $7200

If this was a base I could maybe force myself to spend every nickel of this.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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BRIAN5000 wrote:DB $30,000
.....
CPP $600/mth $7200
Don't most DB plans include the CPP? ie. If your plan says you get a DB pension of 30k, you don't get CPP on top of that.

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Re: A Simple Retirement Plan Using T-Bills/GICs

Post by AltaRed »

As I understand it, most DB plans are integrated with CPP so that at age 65, the DB payment drops in tandem with receiving CPP. Mine is certainly that way.
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Re: A Simple Retirement Plan Using T-Bills/GICs

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My plan has 32 or is it 28 different options from non intregration or with just CPP or integration with CPP & OAS.
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