Total Return or Distribution Income in Retirement

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gaspr
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Total Return or Distribution Income in Retirement

Post by gaspr »

Nice article by retirement research specialist Wade Pfau

https://retirementresearcher.com/makes- ... portfolio/

My comment is that whether or not you prefer dividends over total returns, it is only long term, after tax, total returns that ultimately matter.
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Re: Total Return or Distribution Income in Retirement

Post by SQRT »

gaspr wrote: 26 Apr 2017 13:06 Nice article by retirement research specialist Wade Pfau

https://retirementresearcher.com/makes- ... portfolio/

My comment is that whether or not you prefer dividends over total returns, it is only long term, after tax, total returns that ultimately matter.
Agree. Can't really argue with this.
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Re: Total Return or Distribution Income in Retirement

Post by Taggart »

We're retired and lucky that we don't have to reach for high yielding stocks. A mix of both Canadian low and higher yielders in the taxable portfolio. The income from this portfolio feeds the maximum allowable contributions to the TFSA's on a yearly basis with a little bit extra to re-invest into the taxable account.
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Re: Total Return or Distribution Income in Retirement

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Quote: "With an income perspective, the last thing you want to do is consume your principal, so you would instead re-arrange your investments to provide enough income so you wouldn’t have to sell any assets to meet spending needs.
In other words, you chase higher yields than a total market portfolio (capitalization-weighted on all investable assets) can provide."

Writer does not really understanding investing for Income and assumes the only way to achieve sufficient income is to buy Higher Yielding, therefore more risky, stocks. That is exactly what Not to do. The key is to buy stocks with a long history of paying and growing their dividend. These companies will not be the high yielding ones. In fact many will offer very low yields but offer high growth, such as MRU and CNR. However, I prefer the ones in the middle, medium yield with medium div growth.
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Re: Total Return or Distribution Income in Retirement

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cannew wrote: 28 Apr 2017 11:44 Quote:

Writer does not really understanding investing for Income and assumes the only way to achieve sufficient income is to buy Higher Yielding, therefore more risky, stocks. That is exactly what Not to do. The key is to buy stocks with a long history of paying and growing their dividend. These companies will not be the high yielding ones. In fact many will offer very low yields but offer high growth, such as MRU and CNR. However, I prefer the ones in the middle, medium yield with medium div growth.
Your'e saying that the renowned academic Wade Pfau does not understand what he wrote???
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Re: Total Return or Distribution Income in Retirement

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gaspr wrote: 28 Apr 2017 11:50

Your'e saying that the renowned academic Wade Pfau does not understand what he wrote???
Isn't that what academic means :D
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Re: Total Return or Distribution Income in Retirement

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gaspr wrote: 28 Apr 2017 11:50
cannew wrote: 28 Apr 2017 11:44 Quote:

Writer does not really understanding investing for Income and assumes the only way to achieve sufficient income is to buy Higher Yielding, therefore more risky, stocks. That is exactly what Not to do. The key is to buy stocks with a long history of paying and growing their dividend. These companies will not be the high yielding ones. In fact many will offer very low yields but offer high growth, such as MRU and CNR. However, I prefer the ones in the middle, medium yield with medium div growth.
Your'e saying that the renowned academic Wade Pfau does not understand what he wrote???
He might understand what he wrote and probably believes it, I just don't agree with his assumption: that the only way to achieve sufficient income is by chasing higher yielding investments. It's not the yield that will generate the income but the growth of the income over time. Chasing higher yields will probably do the exact opposite.
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Re: Total Return or Distribution Income in Retirement

Post by BRIAN5000 »

She spoke with The American College on these matters in an interview from 2012. I will summarize her key points here.
He didn't write it and doesn't say if he agrees or not. I found it a very generalized article which could be countered many ways by individual circumstances or desired outcomes hard to write something general otherwise.
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Re: Total Return or Distribution Income in Retirement

Post by AltaRed »

Cannew, your thesis is a scenario that is highly dependent on long elapsed times to generate enough dividend increases to make the cash flow stream tenable for when it is needed. It doesn't work for those who want/need that 'high' income stream sooner rather than later, e.g. in 5 years. Those latter folks need to 'start' with a higher aggregate dividend yield. There are more than solutions than the one an individual chooses.
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Re: Total Return or Distribution Income in Retirement

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AltaRed wrote: 28 Apr 2017 12:24 Cannew, your thesis is a scenario that is highly dependent on long elapsed times to generate enough dividend increases to make the cash flow stream tenable for when it is needed. It doesn't work for those who want/need that 'high' income stream sooner rather than later, e.g. in 5 years. Those latter folks need to 'start' with a higher aggregate dividend yield. There are more than solutions than the one an individual chooses.
Agreed. Investment timeframe, amount available to invest, price one pays and other factors may come into play, as well as ones objective.
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Re: Total Return or Distribution Income in Retirement

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The single paragraph quoted was taken out of context. Look at the broader scope of what was written.
If your asset allocation is designed from a total-return perspective and you can live off the income provided by the portfolio and other income sources from outside the portfolio (e.g., Social Security), then everything is fine.

The problem is what to do when the total-return portfolio does not generate the desired income. In such a situation, a total-return perspective would have you maintain your strategic asset allocation while consuming your principal.

With an income perspective, the last thing you want to do is consume your principal, so you would instead re-arrange your investments to provide enough income so you wouldn’t have to sell any assets to meet spending needs.

In other words, you chase higher yields than a total market portfolio (capitalization-weighted on all investable assets) can provide.
To paraphrase, if a portfolio does not generate enough income, the investor (possibly at an adviser's recommendation) may choose to chase yield, which can be risky. How many people are early in their retirement and suddenly realize their balanced portfolio is not yielding enough to live on. So they choose to buy high yield stocks and REITs, thinking those are good fixed income substitutes and the dividends are just as safe as bond or GIC yields. And from an adviser's perspective is there a conflict in recommending equities instead of fixed income?
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Re: Total Return or Distribution Income in Retirement

Post by cannew »

GreatLaker wrote: 28 Apr 2017 13:02 The single paragraph quoted was taken out of context. Look at the broader scope of what was written.
If your asset allocation is designed from a total-return perspective and you can live off the income provided by the portfolio and other income sources from outside the portfolio (e.g., Social Security), then everything is fine.

The problem is what to do when the total-return portfolio does not generate the desired income. In such a situation, a total-return perspective would have you maintain your strategic asset allocation while consuming your principal.

With an income perspective, the last thing you want to do is consume your principal, so you would instead re-arrange your investments to provide enough income so you wouldn’t have to sell any assets to meet spending needs.

In other words, you chase higher yields than a total market portfolio (capitalization-weighted on all investable assets) can provide.
To paraphrase, if a portfolio does not generate enough income, the investor (possibly at an adviser's recommendation) may choose to chase yield, which can be risky. How many people are early in their retirement and suddenly realize their balanced portfolio is not yielding enough to live on. So they choose to buy high yield stocks and REITs, thinking those are good fixed income substitutes and the dividends are just as safe as bond or GIC yields. And from an adviser's perspective is there a conflict in recommending equities instead of fixed income?
"How many people are early in their retirement and suddenly realize their balanced portfolio is not yielding enough to live on"

Sad to imagine one would wait till they are in early retirement to suddenly see the light?
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Re: Total Return or Distribution Income in Retirement

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cannew wrote: 28 Apr 2017 13:14 "How many people are early in their retirement and suddenly realize their balanced portfolio is not yielding enough to live on"

Sad to imagine one would wait till they are in early retirement to suddenly see the light?
Few people really pay attention until they are near, or into, retirement. FWFers are a distinctly different class for the most part.
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Re: Total Return or Distribution Income in Retirement

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The "Die Broke" crowd plans on depreciating capital.
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Re: Total Return or Distribution Income in Retirement

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gaspr wrote: 26 Apr 2017 13:06My comment is that whether or not you prefer dividends over total returns, it is only long term, after tax, total returns that ultimately matter.
From a practical perspective, in withdrawal phase, it is easier to spend income then total return. Withdrawing income generated cash is easier than deciding what needs to be sold to generate the necessary cash in order to meet spending requirements.

The key is to be sufficiently diversified and to not stretch for yield. We have fourteen individual Canadian stocks (this is our entire non-registered portfolio). Yields vary from 1.4% (SAP) to 4.8% (BCE) with an average yield of 4%. All of the income is spent.

At this time, the TSX composite dividend yield (according to the most recent Saturday edition of the G&M) is 2.7%. I (a number of years ago) decided that a reasonable yield for a dividend portfolio was about 125% of the TSX composite dividend yield. This comes out to 3.4%. At the time, my argument was that the 0% yielders should be weeded out from the TSX composite yield to give a true dividend yield. This is where my 125% comes from and represents a calculated guess. At the time, this decision forced me to sell a number of my higher yielders and purchase some lower yielders. I have always given myself a 20% latitude around this 3.4% (so as not to be constantly buying and selling). I have tended to be between 100% and 115% of my target (though I am now at 118%...)

The article claims that dividend producers do not in a general way outperform non dividend producers (my paraphrase). I am quite sure that there are others who do not share this opinion.
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Re: Total Return or Distribution Income in Retirement

Post by DenisD »

StuBee wrote: 28 Apr 2017 14:21From a practical perspective, in withdrawal phase, it is easier to spend income then total return.
I disagree. I've been retired for 25 years and my income has never covered my spending needs. You just need a plan.
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Re: Total Return or Distribution Income in Retirement

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DenisD wrote: 28 Apr 2017 14:47
StuBee wrote: 28 Apr 2017 14:21From a practical perspective, in withdrawal phase, it is easier to spend income then total return.
I disagree. I've been retired for 25 years and my income has never covered my spending needs. You just need a plan.
I agree those that have a well thought out plan do not see difficulty with the concept of spending Total Return. That is what the majority of retirees must do in any event.

The easy plan is to simply count on income generation through dividends and interest/other income....but that only works if one has the wealth to actually do that. Take that one step further. Imagine the absurdity of 20-30 years of potentially unrealized capital gains if one does nothing to crystallize and spend/donate/gift some of one's wealth. The joy of retirement is spend/donate/gift one's financial blessings while alive. No beneficiary really gives much of a shit after you are dead.
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Re: Total Return or Distribution Income in Retirement

Post by StuBee »

I like to think of it as being that capital appreciation takes care of inflation and that the income is the icing that I get to eat.
DenisD wrote: 28 Apr 2017 14:47
StuBee wrote: 28 Apr 2017 14:21From a practical perspective, in withdrawal phase, it is easier to spend income then total return.
I disagree. I've been retired for 25 years and my income has never covered my spending needs. You just need a plan.
I have only been semiretired for 2 years.

It is my hope that in the unregistered portion of my portfolio that I will be able to avoid spending capital (and only spend the income). This approach is part of my safety net. My safety net is part of my plan.

In my registered portion (including TFSA's), the situation is entirely different. Here, a fixed amount is liquidated each year be it FI or equity. The way that I have planned things is that if I require 20K$ and the registered allocation, at the time of withdrawal, is 75:25 FI:Eq then 15K$ withdrawn is from FI and 5K$ withdrawn is from the sale of equity.
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Re: Total Return or Distribution Income in Retirement

Post by DenisD »

StuBee, I'm not saying you have a poor plan. It may work out very well for you. I'm just saying it's not the easiest plan. I think a 3 ETF Couch Potatoe portfolio rebalanced​ once a year with cash withdrawn for spending would be easier.
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Re: Total Return or Distribution Income in Retirement

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AltaRed wrote: 28 Apr 2017 15:20 Imagine the absurdity of 20-30 years of potentially unrealized capital gains if one does nothing to crystallize and spend/donate/gift some of one's wealth. The joy of retirement is spend/donate/gift one's financial blessings while alive. No beneficiary really gives much of a shit after you are dead.
That's one point of view. As we don't have any pension, other than cpp\oas, Being in our mid 70's and knowing many people in their 80's and 90's, I'd rather have the assurance that I won't run out of funds or not have enough funds to meet our needs regardless of how long we live. If it means leaving a pile at the end, no problem. At some point we may wish to gift/donate but I'll look after us first.
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Re: Total Return or Distribution Income in Retirement

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DenisD wrote: 28 Apr 2017 15:52 StuBee, I'm not saying you have a poor plan. It may work out very well for you. I'm just saying it's not the easiest plan. I think a 3 ETF Couch Potatoe portfolio rebalanced​ once a year with cash withdrawn for spending would be easier.
On this point I am increasingly inclined to agree. If I were to start over again... I would have aimed for something simpler than my current situation. In your example, the rebalancing manoeuvre would offer the perfect opportunity to generate the necessary cash.
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Re: Total Return or Distribution Income in Retirement

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cannew wrote: 28 Apr 2017 16:45 That's one point of view. As we don't have any pension, other than cpp\oas, Being in our mid 70's and knowing many people in their 80's and 90's, I'd rather have the assurance that I won't run out of funds or not have enough funds to meet our needs regardless of how long we live. If it means leaving a pile at the end, no problem. At some point we may wish to gift/donate but I'll look after us first.
Sure thing. I don't mean spend/donate/gift it all. Everyone wants a substantial cushion IF they have the ability to do so.

But think it over. Let's say someone has that kind of portfolio at age 65, i.e. $1 million market value (in dividend yield stocks) giving a 4% yield. What do you think the market value of that portfolio will be in 25 years if one just spends all the income (cash flow) and leaves the capital alone? Probably in the order of $3 million give or take.... What will you do with that? It would have been a heck of a lot more fun to have siphoned capital off the top along the way and enjoyed it in some fashion....and still have $1 million at age 90 to pay for all those things end-of-life brings.
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Re: Total Return or Distribution Income in Retirement

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AltaRed wrote: 28 Apr 2017 18:35
cannew wrote: 28 Apr 2017 16:45 That's one point of view. As we don't have any pension, other than cpp\oas, Being in our mid 70's and knowing many people in their 80's and 90's, I'd rather have the assurance that I won't run out of funds or not have enough funds to meet our needs regardless of how long we live. If it means leaving a pile at the end, no problem. At some point we may wish to gift/donate but I'll look after us first.
Sure thing. I don't mean spend/donate/gift it all. Everyone wants a substantial cushion IF they have the ability to do so.

But think it over. Let's say someone has that kind of portfolio at age 65, i.e. $1 million market value (in dividend yield stocks) giving a 4% yield. What do you think the market value of that portfolio will be in 25 years if one just spends all the income (cash flow) and leaves the capital alone? Probably in the order of $3 million give or take.... What will you do with that? It would have been a heck of a lot more fun to have siphoned capital off the top along the way and enjoyed it in some fashion....and still have $1 million at age 90 to pay for all those things end-of-life brings.
that's my plan. i'd like to live entirely off of interest/dividends and not touch capital but my portfolio is not big enough at current dividend yields and bond yields. unless yields go up to 6% again i have to take capital out along the way. depending on what the market does i may take less capital in one year than the other but it would have to be a pretty big permanent drop for me to do that.
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Re: Total Return or Distribution Income in Retirement

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AltaRed wrote: 28 Apr 2017 18:35
cannew wrote: 28 Apr 2017 16:45 That's one point of view. As we don't have any pension, other than cpp\oas, Being in our mid 70's and knowing many people in their 80's and 90's, I'd rather have the assurance that I won't run out of funds or not have enough funds to meet our needs regardless of how long we live. If it means leaving a pile at the end, no problem. At some point we may wish to gift/donate but I'll look after us first.
Sure thing. I don't mean spend/donate/gift it all. Everyone wants a substantial cushion IF they have the ability to do so.

But think it over. Let's say someone has that kind of portfolio at age 65, i.e. $1 million market value (in dividend yield stocks) giving a 4% yield. What do you think the market value of that portfolio will be in 25 years if one just spends all the income (cash flow) and leaves the capital alone? Probably in the order of $3 million give or take.... What will you do with that? It would have been a heck of a lot more fun to have siphoned capital off the top along the way and enjoyed it in some fashion....and still have $1 million at age 90 to pay for all those things end-of-life brings.
If one is in that position, say 65 or older with a portfolio that generates enough income to meet their needs, than their options are open. Continue to let it grow, spend some if they wish, gift some to kids\grandkids, make larger donations or just gradually draw down more each year so they have cash to do what they wish. There is also peace of mind especially if there is a market correction where the value of the portfolio drops 30% to 50% for who knows how long, that their income will continue or even grow during those periods.
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Re: Total Return or Distribution Income in Retirement

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AltaRed wrote: 28 Apr 2017 18:35
cannew wrote: 28 Apr 2017 16:45 That's one point of view. As we don't have any pension, other than cpp\oas, Being in our mid 70's and knowing many people in their 80's and 90's, I'd rather have the assurance that I won't run out of funds or not have enough funds to meet our needs regardless of how long we live. If it means leaving a pile at the end, no problem. At some point we may wish to gift/donate but I'll look after us first.
Sure thing. I don't mean spend/donate/gift it all. Everyone wants a substantial cushion IF they have the ability to do so.

But think it over. Let's say someone has that kind of portfolio at age 65, i.e. $1 million market value (in dividend yield stocks) giving a 4% yield. What do you think the market value of that portfolio will be in 25 years if one just spends all the income (cash flow) and leaves the capital alone? Probably in the order of $3 million give or take.... What will you do with that? It would have been a heck of a lot more fun to have siphoned capital off the top along the way and enjoyed it in some fashion....and still have $1 million at age 90 to pay for all those things end-of-life brings.
I agree. I have a relatively large taxable portfolio which generates something like 3.5% current yield. This along with my pension gives me enough to cover my current lifestyle. Portfolio has grown a lot since retirement 10 years ago. Currently 66. So what do I do? Carry on and leave one very large legacy? Would be too much and hopefully too late. Or start to liquidate some stock, up spending and gifting now? I've chosen the latter. I still expect to leave a legacy at the current portfolio level inflation adjusted. It is nice to have choices but sometimes you have to decide.
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