Golden rule of asset allocation

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
User avatar
Springbok
Gold Ring
Gold Ring
Posts: 5049
Joined: 22 Mar 2005 16:47

Golden rule of asset allocation

Post by Springbok » 09 Jun 2014 22:28

I know this has been discussed numerous times before, but I could not find a good thread to post to.

One golden rule of asset allocation is/was to have approx your age in fixed income. So someone or a couple with average age of 70 should have just 30% in equity and the rest in fixed income and cash.

I am sure that with the low returns on fixed income, many of us are not following that golden rule.

The golden rule should include an allowance for pension income and that would presumably include CPP/OAS. So, if a couple are receiving, say $30k in CPP/OAS, what amount should be included in asset allocation to account for these pensions? I seem to recall a 15X to 20X multiplier being used for indexed pensions. That would put the value of $30k pa CPP/OAS at $450k - $600k.

For a $1Million portfolio, we could add say $500k for cpp/oas for a total of $1.5 Million. A 70 year old using the golden rule, would need to have $1.05Million in Fixed income/cash. Or $550,000 plus the cpp/oas allowance. This would result in a 45% equity/55% FI/cash portfolio allocation.

This is very rough and perhaps what I am doing is trying to justify our lower than recommended fixed income allocation :cry:. We (ave age 73) are at about 60/40 equity/fixed income, not accounting for pension income.

One other factor, is that we, and I am sure others, hold our fixed income in registered accounts while a good part of equity is in unregistered accounts. Perhaps those fixed income amounts should be adjusted for future taxation when withdrawn?

I realize I am rambling. I just wish there was a golden rule that worked for us ;)

User avatar
AltaRed
Diamond Ring
Diamond Ring
Posts: 18626
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Golden rule of asset allocation

Post by AltaRed » 09 Jun 2014 23:29

The multiplier of 15x-20x for Present Valuing pension income was, I believe, based on age 65. The multiplier would have to come down as one gets older. For example, once one reaches the average age of when one is supposed to be actuarily dead (on average), that multiplier might only be 1-2 times. Ultimately, the multiplier also depends on full indexing, versus partial indexing, versus no indexing (this latter case being my case). I never included OAS in my scenario due to clawback provisions and the relatively minor contribution in the overall scheme of things, i.e. if I got it, that was extra entertainment, if I didn't get much, c'est la vie.

I think it is non-productive to get too caught up in specifics, i.e. rounding off in very general terms is probably as good as anything. Just like asset allocations are very approximate things. For example, what makes 60/40 any better than 55/45, or 65/35, or ? The sleep-at-night factor is probably more important. I am 65 and running about 65/35 in equity/fixed income.... which is probably closer to 50/50 when I factor in my pension income. I don't see myself changing that for another 10 years or so perhaps....just because I feel I can handle that range of volatility for the foreseeable future. When I start feeling a little more vulnerable or more conservative in my old(er) age, e.g. 75-80, I suspect I will naturally want to become more conservative in my holdings. How much I don't know until I get there. C'est la vie.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom

User avatar
Flaccidsteele
Gold Ring
Gold Ring
Posts: 2367
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: Golden rule of asset allocation

Post by Flaccidsteele » 09 Jun 2014 23:47

I probably have too much fixed income for my age. I'm in my early 40s and my allocation is 50/50 of equities/fixed income. I barely have any pension. I didn't exactly plan it that way. That's was what my "circle of competence" allowed me to extract from the market.
Retired @ 40 after reading Munger/Buffett. I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation). "Put 90% in a very low-cost S&P 500 index fund...the long-term results will be superior" - Warren Buffett

User avatar
Dejavu
Silver Ring
Silver Ring
Posts: 504
Joined: 20 Jan 2008 00:09
Location: Winnipeg

Re: Golden rule of asset allocation

Post by Dejavu » 10 Jun 2014 00:39

I am 68 this year and DW is 55. I use the median, which this year is approx. 62. This becomes the FI % for the year. I was 75/25 originally, and will keep adjusting as we age until 25/75 equities to income is reached.
I use Quicken to monitor, and to keep whole number percentages, I adjust the target bi-annually
I have found this to be my sleep well factor.YMMV, Dejavu.
Whatever you can do, or believe you can, begin it, for boldness has genius, power and magic in it. - Goethe

User avatar
scomac
Gold Ring
Gold Ring
Posts: 5951
Joined: 19 Feb 2005 09:47
Location: The Greenbelt

Re: Golden rule of asset allocation

Post by scomac » 10 Jun 2014 08:15

There is no golden rule anymore; certainly not in this environment. To my way of thinking, the golden rule will be the asset allocation that yields a 95% survivability probability for a plan to age 95. That's quite likely to be different things for different people depending upon pension entitlements. Perhaps the biggest risk to survivability will be the lack of return provided by fixed income components rather than the volatility of riskier components.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830

User avatar
Springbok
Gold Ring
Gold Ring
Posts: 5049
Joined: 22 Mar 2005 16:47

Re: Golden rule of asset allocation

Post by Springbok » 10 Jun 2014 08:55

Thanks for the input. Glad to see I have company.
AltaRed wrote:The multiplier of 15x-20x for Present Valuing pension income was, I believe, based on age 65. The multiplier would have to come down as one gets older.
I put 2% interest (is that real or nominal?), 20 years and $30k into this simple calculator and it came up with $490.5k or about 16.5 multiplier. This of course assumes longevity.
http://www.investopedia.com/calculator/ ... z1Xqs7Gxjl

And you are right, a rule like this is just a very rough guide and likely different for different people.

The other thing that throws this sort of rule out, is the state of the markets. During the recession, our fixed income percentage increased dramatically. And I was glad to have it!

Perhaps Equity/FI allocation should rather be based on income produced by the FI? For example, maintaining sufficient fixed INCOME that when combined with pension INCOME will provide just enough cash flow to live on. With fixed income at say 2-3% even this means a much higher FI allocation.

Say we, as a couple, have $30k in pension income and we feel we need a minimum of another $30k to cover basic no frills living expenses (both before tax). Using 2.5%, this would indicate we need $30k/0.025 = $1.2Million in fixed income. Or at 3.5% (about where we are) $857k.

Without dialing in taxes, this is very rough. We are forced to withdraw from our RRIFs and pay tax on that as income regardless, and that puts us into a high tax bracket. That $60k of minimum income becomes something like $36k after tax. Property tax would take another $5k . There would hopefully still be income from the equity side, but this would not be included in this income based "rule".
Last edited by Springbok on 10 Jun 2014 08:59, edited 1 time in total.

User avatar
Descartes
Gold Ring
Gold Ring
Posts: 1158
Joined: 03 Nov 2008 09:59

Re: Golden rule of asset allocation

Post by Descartes » 10 Jun 2014 08:58

I would think that with any rule there should be some consideration for the absolute amount of assets.

As an example, while I personally try to maintain a 65-70% in equities as I enter my 50's, I also have a maximum threshold on fixed income measured in years of estimated annual expenses. Should I exceed it, I'm perfectly willing to exceed the equity percentage.
"A dividend is a dictate of management. A capital gain is a whim of the market."

User avatar
Peculiar_Investor
Gold Ring
Gold Ring
Posts: 7189
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: Golden rule of asset allocation

Post by Peculiar_Investor » 10 Jun 2014 09:13

Some of the ground is covered in the "Rules of thumb" section of Asset allocation - finiki, the Canadian financial wiki. As this discussion shows, a rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation.

Personally I've become more inclined to follow a hybrid of Ben Graham's policy and the age in bonds guideline.

A corollary that has been previously discussed on FWF, The Iron Rule.
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams

SQRT
Gold Ring
Gold Ring
Posts: 1954
Joined: 01 Nov 2012 11:33
Location: Alberta/Ontario/Arizona

Re: Golden rule of asset allocation

Post by SQRT » 10 Jun 2014 09:18

scomac wrote:There is no golden rule anymore; certainly not in this environment. To my way of thinking, the golden rule will be the asset allocation that yields a 95% survivability probability for a plan to age 95. That's quite likely to be different things for different people depending upon pension entitlements. Perhaps the biggest risk to survivability will be the lack of return provided by fixed income components rather than the volatility of riskier components.
I agree. Rules like "you need 70% to retire". Age in FI, buy in May and go away, are just designed to get you thinking. Wouldn't the macro envirement(very low rates for a long time) have an impact on this "rule".
Anyway, in our case valuing our pensions at 18x (wife is 56 with full survivorship I am almost 64, little indexing,ignoring CPP/OAS) we are about 60/40 equity/FI. Actual portfolio is all equities. This ratio is really coincidental as I have never owned, nor intend to own for a long time, much FI.

BRIAN5000
Gold Ring
Gold Ring
Posts: 5918
Joined: 08 Jun 2007 23:27

Re: Golden rule of asset allocation

Post by BRIAN5000 » 10 Jun 2014 14:17

A corollary that has been previously discussed on FWF, The Iron Rule
I think my Iron Rule is a little different why would I base it on a basic no frills living expenses especially if I didn't need to?
Seems to me the need to take risk is often forgotten on here.

Iron Rule equals - 50% Equity + Fixed Income = Same lifestyle as if their was no market crash.
Say we, as a couple, have $30k in pension income and we feel we need a minimum of another $30k to cover basic no frills living expenses (both before tax). Using 2.5%, this would indicate we need $30k/0.025 = $1.2Million in fixed income. Or at 3.5% (about where we are) $857k.
So before tax you want to generate the ability to have about $100,000 to spend in a low risk portfolio? With or without Legacy will make a big difference?
“Sometimes you are going to sell early and wish you would’ve held on, other times you will hold on a
little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

User avatar
Springbok
Gold Ring
Gold Ring
Posts: 5049
Joined: 22 Mar 2005 16:47

Re: Golden rule of asset allocation

Post by Springbok » 10 Jun 2014 17:56

BRIAN5000 wrote:
Say we, as a couple, have $30k in pension income and we feel we need a minimum of another $30k to cover basic no frills living expenses (both before tax). Using 2.5%, this would indicate we need $30k/0.025 = $1.2Million in fixed income. Or at 3.5% (about where we are) $857k.
So before tax you want to generate the ability to have about $100,000 to spend in a low risk portfolio? With or without Legacy will make a big difference?
Nope. $60k before tax in dire circumstances (markets have tanked)

User avatar
6miths
Silver Ring
Silver Ring
Posts: 181
Joined: 21 Jan 2010 00:07

Re: Golden rule of asset allocation

Post by 6miths » 10 Jun 2014 20:26

Depends very much on circumstances. If you have excess assets over what you expect your expenses to be then one could argue that this should be invested 100% equities at is for future generations. Phil DeMuth writes about this in 'The Affluent Investor', basically saying that early and late in your investing life that you should be higher in equities and that your highest FI amount as a percentage should be right around the time you retire with FI then decreasing with increasing age. The arguments for this are fairly compelling in many respects. So rules are more like guidelines, especially for low and high income individuals I would expect.

User avatar
ghariton
Diamond Ring
Diamond Ring
Posts: 11918
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: Golden rule of asset allocation

Post by ghariton » 10 Jun 2014 21:27

6miths wrote:Depends very much on circumstances. If you have excess assets over what you expect your expenses to be then one could argue that this should be invested 100% equities at is for future generations.
This backs into Shakespeare's version of the Iron Rule, at least as I interpret it. Just generalize a bit. If you have excess assets over what you need to spend to be comfortable, you can afford to invest all of the excess in equities. That's independent of whether you intend to leave the money as an inheritance.

Once you have enough, you have enough. I measure that as an income flow, because that's what I live on. Any assets not needed to generate that income flow can go 100% into equities. And when I spend on "luxuries" such as a new car, that is funded by selling some of those equities.

The other issue is that, if you have enough, plus a reasonable reserve, why not give some of the excess away now? My children can put that money to better use than I can, and the same holds for a number of charities I give to.

Phil DeMuth writes about this in 'The Affluent Investor', basically saying that early and late in your investing life that you should be higher in equities and that your highest FI amount as a percentage should be right around the time you retire with FI then decreasing with increasing age. The arguments for this are fairly compelling in many respects. So rules are more like guidelines, especially for low and high income individuals I would expect.
That's happening to us now. It's not a question of risk. Rather, there are two different factors at play: (1) As we grow older, we need less future cash flow, and so less fixed income to help fund it (2) A year into retirement, I find that we are spending less than we are making (including all those nice capital gains), and since the excess is going into equities, the ratio of fixed income assets to total assets is dropping.

When the market crashes, as it will undoubtedly do eventually, the second mechanism will reverse, and the proportion of fixed income will likely rise again.

As for my version of the Golden Rule, which I learned in 2000: Invest so that financial worries don't keep you awake at night.

George
The plural of anecdote is NOT data.

User avatar
Flaccidsteele
Gold Ring
Gold Ring
Posts: 2367
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: Golden rule of asset allocation

Post by Flaccidsteele » 11 Jun 2014 01:16

ghariton wrote:
6miths wrote:Depends very much on circumstances. If you have excess assets over what you expect your expenses to be then one could argue that this should be invested 100% equities at is for future generations.
This backs into Shakespeare's version of the Iron Rule, at least as I interpret it. Just generalize a bit. If you have excess assets over what you need to spend to be comfortable, you can afford to invest all of the excess in equities. That's independent of whether you intend to leave the money as an inheritance.
I really find myself agreeing with ghariton's posts and I used to strongly believe in this as well. Now I'm not so sure. Before the 2008 crash this was exactly what I thought. Any 'excess' should be put into equities for maximum compounding.

During the 2008 downturn I became tormented. There was a lot of opportunity in equities but there was also a lot of opportunity in real estate as well. I originally purchased equities, but the prices rebounded before I deployed all my capital and then I sat around doing nothing. Stocks appear to rebound very quickly after downturns. Meanwhile, real estate continued to fall.

Although I was (am?) still young, if the media was to be believed this Great Recession was only surpassed in severity by the Great Depression; something society supposedly hadn't experienced in over 80 years.

In the end, I couldn't resist 'asset allocating' my portfolio from 100% equities (ultimately to ~50%/50% equities/real estate) as I poured whatever I had into property. I was unable to resist the lure of buying homes in nice neighbourhoods for less than $60-$80k each. How could I? I was looking at literally thousands of MLS listings that defied reason. Thousands. Everywhere.
Descartes wrote:I would think that with any rule there should be some consideration for the absolute amount of assets.

As an example, while I personally try to maintain a 65-70% in equities as I enter my 50's, I also have a maximum threshold on fixed income measured in years of estimated annual expenses. Should I exceed it, I'm perfectly willing to exceed the equity percentage.
Only speaking for myself, I have never tried to maintain a percentage of assets in any particular asset class. Initially I put everything in equities because that's all I knew. Now, I simply take whatever the market gives me (and that I am able to understand) and let the percentages fall where they may.
ghariton wrote:Once you have enough, you have enough. I measure that as an income flow, because that's what I live on. Any assets not needed to generate that income flow can go 100% into equities. And when I spend on "luxuries" such as a new car, that is funded by selling some of those equities.

The other issue is that, if you have enough, plus a reasonable reserve, why not give some of the excess away now? My children can put that money to better use than I can, and the same holds for a number of charities I give to.
I agree with this as well. I think it makes sense to give some of the excess away while I'm alive. Part of it is because of the selfish reason that it makes me feel good. Or perhaps that's the only reason. Who knows. I'm sure the recipients of the money don't care.
6miths wrote:Phil DeMuth writes about this in 'The Affluent Investor', basically saying that early and late in your investing life that you should be higher in equities and that your highest FI amount as a percentage should be right around the time you retire with FI then decreasing with increasing age. The arguments for this are fairly compelling in many respects. So rules are more like guidelines, especially for low and high income individuals I would expect.
Again, in general I agree with this. But when a generation has been hit with stock and real estate downturns as severe as those seen during 2008, simultaneously I might add, those rules don't seem so iron-clad to me as they once did...

Having said that, it is supposedly unlikely that we will see something like that again, so I am quickly reverting back to my "all equities" stance and basically ignoring "fixed income" assets.
ghariton wrote:That's happening to us now. It's not a question of risk. Rather, there are two different factors at play: (1) As we grow older, we need less future cash flow, and so less fixed income to help fund it (2) A year into retirement, I find that we are spending less than we are making (including all those nice capital gains), and since the excess is going into equities, the ratio of fixed income assets to total assets is dropping.
Completely agree.

With regards to "financial worries" that may "keep me up at night"...although I have been through only a handful of downturns/crashes, I was kept up at night worrying that I would be unable to take full advantage of the gift that the markets were giving me.

During bull markets, I sleep very soundly, but during downturns you would find me browsing financial statements (or MLS listings in the case of the Great Recession) until at least 4am in the morning because my mind was just racing! I couldn't sleep even if I wanted to.
Retired @ 40 after reading Munger/Buffett. I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation). "Put 90% in a very low-cost S&P 500 index fund...the long-term results will be superior" - Warren Buffett

2 yen
Gold Ring
Gold Ring
Posts: 2653
Joined: 09 Apr 2005 09:15

Re: Golden rule of asset allocation

Post by 2 yen » 11 Jun 2014 07:34

Age 53 - 27% bonds / cash / prefs. 73% equities. My father had 100% equities at his passing in his 80's which provided a good income.

Question: If an extreme, long downturn hits, how are the bonds/cash/prefs part of my portfolio really going to help a retiree like me survive? I've never been able to get my head around this?

2 yen

User avatar
Springbok
Gold Ring
Gold Ring
Posts: 5049
Joined: 22 Mar 2005 16:47

Re: Golden rule of asset allocation

Post by Springbok » 11 Jun 2014 08:02

ghariton wrote:

Once you have enough, you have enough. I measure that as an income flow, because that's what I live on. Any assets not needed to generate that income flow can go 100% into equities. And when I spend on "luxuries" such as a new car, that is funded by selling some of those equities.

George
As mentioned in an earlier post, using income generated as the basis for determining our FI allocation means that at times of low interest rates and strong equity markets, we should, for both reasons, be moving more of our assets into FI!

That sort of goes against the grain, but is presumably part of the reason bond prices are high (The so called flight to safety).

like_to_retire
Gold Ring
Gold Ring
Posts: 4664
Joined: 27 Feb 2005 07:14
Location: Canada

Re: Golden rule of asset allocation

Post by like_to_retire » 11 Jun 2014 08:11

2 yen wrote:If an extreme, long downturn hits, how are the bonds/cash/prefs part of my portfolio really going to help a retiree like me survive?
Presumably, the low equity share prices and decreases in dividends would not be appropriate at that time to sell, so you would turn to fixed income.

The preferred shares would hopefully maintain their high dividends, and bonds would continue to throw off their cash without interruption. The cash would be unaffected.

The asset allocation amount of fixed income should of course be sufficient to provide you with your expenses until the downturn is over. That way, no equities (with their depressed share prices and possible loss of dividends) would need to be sold and they would begin to recover.

ltr

User avatar
Springbok
Gold Ring
Gold Ring
Posts: 5049
Joined: 22 Mar 2005 16:47

Re: Golden rule of asset allocation

Post by Springbok » 11 Jun 2014 09:36

like_to_retire wrote:
2 yen wrote:If an extreme, long downturn hits, how are the bonds/cash/prefs part of my portfolio really going to help a retiree like me survive?
Presumably, the low equity share prices and decreases in dividends would not be appropriate at that time to sell, so you would turn to fixed income.

The preferred shares would hopefully maintain their high dividends, and bonds would continue to throw off their cash without interruption. The cash would be unaffected.

The asset allocation amount of fixed income should of course be sufficient to provide you with your expenses until the downturn is over. That way, no equities (with their depressed share prices and possible loss of dividends) would need to be sold and they would begin to recover.

ltr
That's a good answer.

SQRT
Gold Ring
Gold Ring
Posts: 1954
Joined: 01 Nov 2012 11:33
Location: Alberta/Ontario/Arizona

Re: Golden rule of asset allocation

Post by SQRT » 11 Jun 2014 10:16

The idea of "enough is enough", is something we have been thinking about. Our portfolio is up over 40% in the last 2-3 years and divs are up about 35% You would think that would result in excess income, but there always seems to be something new to spend it on. New cars, renos, daughters wedding, etc. You would think at some point you run out of things to spend it on and then you give more away. Having such a run up in assets makes giving it away easier. Good problem to have.

hamor
Silver Ring
Silver Ring
Posts: 305
Joined: 09 Mar 2013 23:12

Re: Golden rule of asset allocation

Post by hamor » 11 Jun 2014 22:29

We are forced to withdraw from our RRIFs and pay tax on that as income regardless, and that puts us into a high tax bracket. That $60k of minimum income becomes something like $36k after tax.
how is it possible to have 40% tax on 60K..?
I need to understand RRIF better... is it a bad thing to have sizable RSP? (I am in mid 40s)

User avatar
Springbok
Gold Ring
Gold Ring
Posts: 5049
Joined: 22 Mar 2005 16:47

Re: Golden rule of asset allocation

Post by Springbok » 11 Jun 2014 22:47

hamor wrote: how is it possible to have 40% tax on 60K..?
I need to understand RRIF better... is it a bad thing to have sizable RSP? (I am in mid 40s)
Withdrawals from a RRIF are initially just a transfer of assets from the RRIF to a taxable account. If the RRIF is quite large, the amount that has to be withdrawn is large too (In our case about 7.6% of the RRIF). Even although we don't consider it income we will spend, the withdrawal is fully taxed and is added to our taxable income from other sources such as CPP/OAS/Pensions and investment income from taxable accounts. This puts us into a higher tax bracket.

I don't think it is a bad thing to have a sizeable RRSP considering that income is sheltered. But I believe it is best to first maximize TFSAs and pay down debt on mortgages and credit cards. Then if you have low income years, such as in early retirement, early withdrawal at lower tax rates can be beneficial. But there is only so much you can do. We withdrew enough from RRSPs to keep our taxes in the 30-35% range in early yeras before compulsory RRIF withdrawal.

User avatar
Flaccidsteele
Gold Ring
Gold Ring
Posts: 2367
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: Golden rule of asset allocation

Post by Flaccidsteele » 12 Jun 2014 01:30

hamor wrote:how is it possible to have 40% tax on 60K..?
I need to understand RRIF better... is it a bad thing to have sizable RSP? (I am in mid 40s)
This is a great question.
Springbok wrote:Withdrawals from a RRIF are initially just a transfer of assets from the RRIF to a taxable account. If the RRIF is quite large, the amount that has to be withdrawn is large too (In our case about 7.6% of the RRIF). Even although we don't consider it income we will spend, the withdrawal is fully taxed and is added to our taxable income from other sources such as CPP/OAS/Pensions and investment income from taxable accounts. This puts us into a higher tax bracket.
Thanks for making a RRIF easier to understand.

Question: Would the manditory withdrawal from the RRIF cause you to pay back the OAS? And/or more? Or is paying back the OAS sufficient?
Springbok wrote:I don't think it is a bad thing to have a sizeable RRSP considering that income is sheltered. But I believe it is best to first maximize TFSAs and pay down debt on mortgages and credit cards. Then if you have low income years, such as in early retirement, early withdrawal at lower tax rates can be beneficial. But there is only so much you can do. We withdrew enough from RRSPs to keep our taxes in the 30-35% range in early yeras before compulsory RRIF withdrawal.
I found it interesting that you listed paying down debt on mortgages and credit cards second to maximizing the TFSA. My question is, the interest rate on mortgages compared to credit cards are massively different. In the current low interest rate environment (some say this environment will persist for years), there doesn't seem to be any urgency to pay down the mortgage at the moment is there?
Retired @ 40 after reading Munger/Buffett. I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation). "Put 90% in a very low-cost S&P 500 index fund...the long-term results will be superior" - Warren Buffett

like_to_retire
Gold Ring
Gold Ring
Posts: 4664
Joined: 27 Feb 2005 07:14
Location: Canada

Re: Golden rule of asset allocation

Post by like_to_retire » 12 Jun 2014 08:46

Flaccidsteele wrote:Question: Would the manditory withdrawal from the RRIF cause you to pay back the OAS? And/or more? Or is paying back the OAS sufficient?
For every dollar your net income is above the OAS clawback threshold ($70954) your OAS will be reduced by 15 cents. It matters not the source of income that pushes you over the threshold (RRIF, etc).
Flaccidsteele wrote: In the current low interest rate environment (some say this environment will persist for years), there doesn't seem to be any urgency to pay down the mortgage at the moment is there?
Paying down your mortgage is a completely safe, tax free investment with a guaranteed rate of return.

If you can find an investment that is better, then you have your answer.

ltr

User avatar
Springbok
Gold Ring
Gold Ring
Posts: 5049
Joined: 22 Mar 2005 16:47

Re: Golden rule of asset allocation

Post by Springbok » 12 Jun 2014 09:30

Flaccidsteele wrote: I found it interesting that you listed paying down debt on mortgages and credit cards second to maximizing the TFSA. My question is, the interest rate on mortgages compared to credit cards are massively different. In the current low interest rate environment (some say this environment will persist for years), there doesn't seem to be any urgency to pay down the mortgage at the moment is there?
LTR answered most of your questions.

I lumped CC and Mortgage together as debt. There could be other types of debt too, such as car loans etc. No doubt CC debt should be paid off as soon as possible regardless because of the high interest rates. We have never ever had any CC debt. Always paid the account when due. It just makes no sense to accumulate CC debt at the rates charged. But if you have it, pay it down first.

hamor
Silver Ring
Silver Ring
Posts: 305
Joined: 09 Mar 2013 23:12

Re: Golden rule of asset allocation

Post by hamor » 12 Jun 2014 19:44

Thanks. I see now. I also did some reading on RSP to RRIF conversions and min w/d.
Turns out there's max w/d too on locked-in accounts. Good to know as I have one.
Fascinating... makes my head hurt.

Personally, the only debt I have is the mortgage
I prefer to put money into RSP before TFSA because I am in high tax bracket and I expect to be in much lower tax bracket in retirement, so it makes sense for me.
Also, if I suddenly kick the bucket, my family will have more $$$ this way.

Thanks again, never stops to amaze me the things I pick up on this forum :)

An observation, if I may 8) I feel pretty smart in everyday life (in fact pure genius if I talk finances to anyone :ugeek: ), but when I come to this forum, I am truly humbled. Enviable collection of contributors :thumbsup:
Last edited by hamor on 14 Jun 2014 14:13, edited 1 time in total.

Post Reply