Investment changes in retirement

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
longinvest
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Re: Investment changes in retirement

Post by longinvest »

ghariton wrote: 14 Jul 2017 13:19 I found out my level of tolerance for risk in 2000 -- 2002, and I invest accordingly. In a way, I was very lucky. My loss was significant enough to be meaningful, but early enough so that I could make the money back through working (and saving).
I am trying to avoid learning about my tolerance level the hard way.

It's true that I went through 2008-2009 with a 100% stocks portfolio. My wife and I kept investing our money with every paycheck, and we slept well at night. But, the context is not the same. Our retirement money seemed like money thrown-away forever into a black box; we didn't really care. Now that I understand how we will be using this money, it doesn't seem like money in a black box, anymore. It has become something much more concrete, even though we don't plan on using it any time soon.
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AltaRed
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Re: Investment changes in retirement

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BRIAN5000 wrote: 14 Jul 2017 17:48 Now my equity portfolio is substantially larger with about $500,000 in CG I sometimes wonder if I could stand losing 1/2 mil in gains and a few hundred thousand more in principal, we shall see I guess.
I think your experience was typical in terms of being down 30-40%. Mine was similar.

How much of that would be unrealized CG depends on one's investing philosophy. I never thought about my 30-40% experience in terms of how much was CG or not. Never looked at it that way.. Portfolio value is capital. Whether it is unrealized CG or principal is of no real consequence other than for tax considerations.

FWIW, and we've discussed this before, absolutes don't mean nearly as much to me as percentages. So if I'm down $300k on a $600k portfolio, or down $1000k on a $2000k portfolio, it really is the same to me. Both have equal opportunities to gain it all back in the same time frame. Multi-millionaires would drive themselves over the deep edge if they thought in absolute numbers.
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Koogie
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Re: Investment changes in retirement

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AltaRed wrote: 14 Jul 2017 18:10 How much of that would be unrealized CG depends on one's investing philosophy. I never thought about my 30-40% experience in terms of how much was CG or not. Never looked at it that way.. Portfolio value is capital. Whether it is unrealized CG or principal is of no real consequence other than for tax considerations.
This is what I was trying to explain in a conversation with you elsewhere. I am more of the same sort of mindset as Brian. I count my invested capital in one pile and the CG on top of that. I will admit to adding received dividends and interest to the invested capital pile. Retirement calculations (I am still working part time) are based on the invested capital. This is purely the result of being conservative (or pessimistic). As a pessimist, I just don't trust the CG to be there.
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AltaRed
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Re: Investment changes in retirement

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What about the CG that would have been captured had you had sold that investment and put it into another investment that you believe will perform* better? What is the invested capital then? Are you going to consider that CG that you realized as new capital?

People who have a different investing philosophy like DenisD, Deaddog (and others) that likely have a lot of buy/sells based on screens or stop losses and get to $X for a portfolio value with relatively little unrealized CG, and you who might have a buy and hold and dividend re-investment policy and get to the same $X portfolio value that way with a lot of unrealized CG..... What is the difference? Don't you think it would be bizarre to treat them differently (other than for tax purposes).

* And to carry on that previous argument, how can you compare the value of existing Investment A today (based on years of cap gain) with a possible better Investement B today of equivalent value unless you ONLY look at the fundamentals of both investments today? Yesterday's (or the 2010) decision really is water under the bridge.
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AltaRed
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Re: Investment changes in retirement

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Koogie wrote: 14 Jul 2017 18:23 As a pessimist, I just don't trust the CG to be there.
You can't trust your original invested capital to be there either. The investment TOTAL value to any one, including you, is only paper until it is sold for cold hard cash. Example: ENB stock you paid $35 for years ago and is worth $55 today could go to $10 due to some fatal flaw. IF you sold then, it is thus worth only $10 regardless of how you got there.
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Re: Investment changes in retirement

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My goodness. The rules of compound interest, inflation and taxation/clawbacks (fed&prov) are known. Likewise your current capital (reg/non/tfsa). You have a current salary and a retirement age in mind, future capital gain (selling your summer home or an expected windfall), outstanding loan, pension and CPP/OAS entitlements.... Why on earth don't you calculate a plan/projection? It is not rocket science. (well....not quite)
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Re: Investment changes in retirement

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AltaRed wrote: 14 Jul 2017 18:48
Koogie wrote: 14 Jul 2017 18:23 As a pessimist, I just don't trust the CG to be there.
You can't trust your original invested capital to be there either. The investment TOTAL value to any one, including you, is only paper until it is sold for cold hard cash. Example: ENB stock you paid $35 for years ago and is worth $55 today could go to $10 due to some fatal flaw. IF you sold then, it is thus worth only $10 regardless of how you got there.
Quite true. The original invested capital is an arbitrary number. But so is the value of your portfolio on any given day. If you use almost any withdrawal formula, you generally base the withdrawal on an arbitrary value of the portfolio on that given day you make the calculation (say Jan. 01)

It's just that the arbitrary number I chose to use is much more pessimistic.
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Re: Investment changes in retirement

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Try VPW methodology during withdrawal and you take out the prescribed percentage of the market value of the portfolio on Jan 1 of year 1. Let's say the market drops 50% during the year. That means the percentage you take out on Jan 1 of year 2 will be based on the market value on Jan 1 of year 2, and if nothing else changes, that means about half of that of the previous year.

VPW takes account of many of the key moving parts, including age, asset allocation, and market value of the portfolio. How much better can it get than that?
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Re: Investment changes in retirement

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AltaRed wrote: 14 Jul 2017 21:21Let's say the market drops 50% during the year.
If the market drops 50% during the year, shouldn't you increase your projected equity return for the rest of the VPW plan? If so, your withdrawal might not be reduced by much.
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Re: Investment changes in retirement

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Why would you project a higher equity return for the rest of the plan? You don't know that is fact.

VPW assumes historical rates for bonds and equities and that is what the percentages are based on to begin with. It is designed to not lead you down that dangerous path.... To the extent equities do recover in year 3 or 4 or 5, then the withdrawal amount will obviously go back up as recovery occurs.
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Re: Investment changes in retirement

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My rule of thumb, whether retired or not, has always been:

- money that you will absolutely depend on within 5 years should be in something very safe (eg. cash investments)
- money that you will absolutely depend on within 6-10 years should be in something reasonably safe (eg. gov bonds)
- the rest should be in equities

Given that definition some would have to change their allocation during retirement and some would not - for example if you have adequate pension income to cover your absolute necessities you could go 100% equities. Mind you the determination of what is "absolute necessities" will vary from person to person.
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Re: Investment changes in retirement

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Spidey wrote: 15 Jul 2017 07:40 My rule of thumb, whether retired or not, has always been:

- money that you will absolutely depend on within 5 years should be in something very safe (eg. cash investments)
- money that you will absolutely depend on within 6-10 years should be in something reasonably safe (eg. gov bonds)
- the rest should be in equities
This is what is usually called buckets. What are your rules for refilling the first two buckets? The model seems to rely on stocks recovering from a crash within 10 years. What would happen in a Japan-like situation where stocks crash and don't recover for over 25 years?
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Re: Investment changes in retirement

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longinvest wrote: 15 Jul 2017 08:16
Spidey wrote: 15 Jul 2017 07:40 My rule of thumb, whether retired or not, has always been:

- money that you will absolutely depend on within 5 years should be in something very safe (eg. cash investments)
- money that you will absolutely depend on within 6-10 years should be in something reasonably safe (eg. gov bonds)
- the rest should be in equities
This is what is usually called buckets. What are your rules for refilling the first two buckets? The model seems to rely on stocks recovering from a crash within 10 years. What would happen in a Japan-like situation where stocks crash and don't recover for over 25 years?
Not totally risk-free to be sure but life is always a risk-reward balance.

Filling buckets - In strong equity years this would, of course, be easy. The worst case scenario is that you would have to last over 10 years and then eat into your equities at perhaps depressed prices- in other words you would not be able to refill the buckets. Some risk involved but historically pretty sound.

Japan-like scenario - You would have an international portfolio and not in one isolated market like Japan. Again historically pretty sound but no guarantees.

Also considered is that basically all Canadians have some level of pension money which provides some minimum income guarantee. Of course, if one could not accept the above risks they could deviate but depending on their circumstance there may be even more risk in doing so.
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Re: Investment changes in retirement

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Sigh.
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Re: Investment changes in retirement

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I think that longinvest has found the right approach for him. The fact that other investors might not agree means that they have found different approaches that are right for them, and never the twain shall meet!

I think George agrees with you (although George has not said that).

(I know that convertibles are my chosen FI because they are the right combination of risk/reward but I am frustrated trying to buy them at IPO because they all sell out in hours, even the bad ones!)

I also think that Buffett is the wisest in his statements about investing strategy.
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Re: Investment changes in retirement

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steves wrote: 15 Jul 2017 10:08Sigh.
What are your views on investment changes during retirement?
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Re: Investment changes in retirement

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I don't have an investo-centric point of view. I am more interested in the timing and scale of investing (and de-investing) over time.

To look at investments in a vaccuum without including the effect of salary profile (full retirement and partial), loans being paid off, entitlements kicking in, taxation effects, anticipated cash windfalls, etc seems wrong headed. (to me anyway)
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AltaRed
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Re: Investment changes in retirement

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Steve, this thread is specifically about investment changes during retirement. It has nothing to do with pre-retirement stuff nor much to do with retirement planning itself. While I agree with you that taxation effects are fundamentally important to get to AT cash flow, most people IN retirement are already collecting (or will soon collect) OAS and CPP and perhaps an annuity. Except for early retirees, those decisions have already been made for the most part.

The OP has a legitimate question with respect to changes in asset allocation and/or even assets and products during retirement. It can be a relatively important subset of cash flow generation within the overall retirement plan. Specific investments at, for example, age 65-70 might be quite different from the products one has at 85-90.

I have migrated more towards income (cash flow) generating products as I age in my Canadian holdings. A REIT or pipeline stock is quite different from a junior mining speculative stock or a tech stock with no dividend. An AA rated bond is quite different than a junk bond. What about currency hedging vs non-hedging one's ex-Canada holdings as one gets older. The degree of certainty after 20 years of retirement could be quite different.
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Re: Investment changes in retirement

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OK, sorry. Remove the full employment and leave in partial retirement. Everything else stays.
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Re: Investment changes in retirement

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The main uncertainty in many scenarios in this thread is investment returns. No matter how accurately you can calculate taxes and the effects of having $42,331.66 in investment income vs. $39,332.64, that is only marginally useful if you don't know the investment income in more detail than 'most likely somewhere between - $30,000 and +$80,000'.
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Re: Investment changes in retirement

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OK, so you run it out at a best, worst, average rate projection. Or MonteCarlo it.
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Re: Investment changes in retirement

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longinvest wrote: 15 Jul 2017 08:16 This is what is usually called buckets. What are your rules for refilling the first two buckets? The model seems to rely on stocks recovering from a crash within 10 years. What would happen in a Japan-like situation where stocks crash and don't recover for over 25 years?
If we had a Japan like situation in Canada (+ USA) for over 10 years, then I will be screwed and likely going back to work in a low paid job at age 65-70. I am retired (now 4 years) at age 57 (No pensions), but there is no way I could stay retired and spend to the level I do without structuring my portfolio such that it 'has' to recover in 5-10 years. That is the 'risk' that I have chosen to take.
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Re: Investment changes in retirement

Post by Taggart »

I think there's a lot of underestimating on here about how long equities can show negative real returns. I mean historically in some major countries out there it's been basically an investor's entire lifetime. Canada just happens to be one of the few lucky countries of the world that has done really well for it's investors.
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Re: Investment changes in retirement

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Taggart wrote: 16 Jul 2017 04:11 I think there's a lot of underestimating on here about how long equities can show negative real returns. I mean historically in some major countries out there it's been basically an investor's entire lifetime. Canada just happens to be one of the few lucky countries of the world that has done really well for it's investors.
That's very true, but what can anyone do about it?
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Re: Investment changes in retirement

Post by Shakespeare »

Well, I keep telling everybody that bonds are for safety.... :wink:
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