Investment changes in retirement

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

Post by SQRT »

DenisD wrote: 10 Jul 2017 16:41 If I buy an annuity in my 70's with FI money, I guess I'll eventually be increasing my FI as I run down the rest of my portfolio.
I think the present value of your annuity would also decrease over time? I have a generous pension which I view as a proxy for FI. As I age the present value of the pension decreases since I have fewer years left to collect it. As luck would have it, my equity portfolio has also increased quite a bit as I have mostly only spent divs to date. If this continues (hopefully) my AA will skew towards equities. I am considering whether I should continue on this glide path, or whether at some point purchasing more annuities would make sense. Currently, almost 67.
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Re: Investment changes in retirement

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deaddog wrote: 10 Jul 2017 22:05 Becoming a market timer when you have accumulated your nest egg is easier than you think.

You look at the overall portfolio, not individual stocks. Taking a loss on an individual stock doesn't have a great big influence on the whole portfolio. In unregistered accounts you write the loss off. In a lot of cases you are just protecting profits.

At the end of the day there is a lot less stress, no worrying about where your investments might end up if you do nothing. You are in control, not the market.
I did it for 3 years just after retirement. It worked out well. It just did not feel like retirement so I relaxed. I suppose now, 15 years later, it is easier to do.
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Re: Investment changes in retirement

Post by longinvest »

SQRT wrote: 11 Jul 2017 08:22
DenisD wrote: 10 Jul 2017 16:41 If I buy an annuity in my 70's with FI money, I guess I'll eventually be increasing my FI as I run down the rest of my portfolio.
I think the present value of your annuity would also decrease over time? I have a generous pension which I view as a proxy for FI. As I age the present value of the pension decreases since I have fewer years left to collect it. As luck would have it, my equity portfolio has also increased quite a bit as I have mostly only spent divs to date. If this continues (hopefully) my AA will skew towards equities. I am considering whether I should continue on this glide path, or whether at some point purchasing more annuities would make sense. Currently, almost 67.
I prefer to consider guaranteed lifelong income (including any ladder used to fill a gap before the start of a pension) separately from the rest of the portfolio.

This eliminates a few problems:
  1. While guaranteed lifelong income is stable, its present value fluctuates. The volatility of this present value has no impact on the income stream and is of no interest for retirement funding*.
  2. The present value of a lifelong income streams decreases with time. Yet, again, this is of no interest for retirement funding*.
  3. It is often impossible to rebalance the present value of lifelong income (especially when in the form of a pension) with the rest of the portfolio.
  4. The present value of guaranteed lifelong income is seldom readily available, except for the present value of a non-rolling RRB/GIC/bond ladder used to fill the gap until the start of a pension. On the other hand, future payments are known (until death).
  5. As for the rest of the portfolio, its current value is readily available on monthly brokerage statements.
  6. The income that could be extracted from the rest of the portfolio (the portfolio excluding any bridging non-rolling ladder), when widely diversified, is variable and can't be fully known in advance**, due to the uncertainty of future asset returns.
* I am assuming that the income stream has already been acquired. If not, of course this value is of interest and can be used as a gauge to determine retirement readiness.
** At any point in time, one could fix part of the income by using some of the money to buy a life annuity (preferably inflation-indexed), but this is an irreversible operation that sacrifices liquidity.

It seems much simpler, to me, to consider stable guaranteed lifelong income streams for what they are (including any bridging non-rolling ladder), and the rest of the portfolio (excluding any bridging non-rolling ladder) as a big pot of money which fluctuates in value with markets. Let's call this big pot of money a non-liability-matched portfolio.

It is with the non-liability-matched portfolio that asset allocation becomes useful, in my view. Adding bonds (and cash) to it acts as a ballast that dampens the volatility of stocks. It reduces the size of potential short-term and longer-term gains and losses, as well as the volatility of the variable income that could be extracted from that portfolio using a method such as VPW. Using leverage, instead, increases its volatility as well as the size of potential short-term and longer-term gains and losses.

For the non-liability-matched portfolio, I suggest selecting an asset allocation one is able to commit to through thick and thin, and then sticking to it forever. It's a buy, hold, and rebalance portfolio with a fixed asset allocation.

There are many rebalancing approaches. I'm a fan of anything that keeps emotions out of it. So, I've discarded band-triggered rebalancing, as it involves constantly checking the market to identify a rebalancing trigger in the hope of potentially increasing gains relative to a simpler rebalancing method. Instead, I think that one could increase potential gains (and losses) by simply increasing the stock allocation (or leverage), eliminating the need to constantly monitor the market. I much prefer to have a fixed, pre-determined, and infrequent rebalancing schedule, in addition to the partial rebalancing achieved by simply directing new portfolio contributions into lagging assets and taking withdrawals from over-target assets.

I am a fan of simple good-enough solutions to complex problems.
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Re: Investment changes in retirement

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longinvest wrote: 10 Jul 2017 21:59 Do you have a suggestion of better wording? I don't want to use the term "bucket" because those who promote bucket systems usually have money migrating between buckets. There's no such thing, here. The lifelong income part is isolated and never replenished.
Well, English is my third language, so I'm not that good at it. I personally think of this as my "sleep-at-night" money. How about the "safety component of a portfolio"?

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Re: Investment changes in retirement

Post by DenisD »

SQRT wrote: 11 Jul 2017 08:22
DenisD wrote: 10 Jul 2017 16:41 If I buy an annuity in my 70's with FI money, I guess I'll eventually be increasing my FI as I run down the rest of my portfolio.
I think the present value of your annuity would also decrease over time?
Yes, I should have thought of that.
AltaRed wrote: 10 Jul 2017 16:08Is anyone here in the circa 75-80 yr old bracket actually reducing their FI percentage component recognizing this concept?
Does it depend on the size of your portfolio? If I expect my portfolio to grow indefinitely, I can increase the equity percentage. If I have to run down my portfolio as I age, increasing the equity percentage would be risky.
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Re: Investment changes in retirement

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DenisD wrote: 11 Jul 2017 13:48 Does it depend on the size of your portfolio? If I expect my portfolio to grow indefinitely, I can increase the equity percentage. If I have to run down my portfolio as I age, increasing the equity percentage would be risky.
For the most part, I think so, but perhaps a matter of degree. I think the simplest approach, paticularly for those that are unsure, is to perhaps keep the asset allocation constant as one draws down the portfolio, especially if they have CPP and OAS as a backstop for a $20k base of 'guaranteed' income. The old rules of increasing FI with age have had the rug pulled out from under them given pathetic FI returns (and disparity with equity income) and one has to wonder if FI will ever 'come back'.
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Re: Investment changes in retirement

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FI is there for safety, not income.
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Re: Investment changes in retirement

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ghariton wrote: 11 Jul 2017 11:43
longinvest wrote: 10 Jul 2017 21:59 Do you have a suggestion of better wording? I don't want to use the term "bucket" because those who promote bucket systems usually have money migrating between buckets. There's no such thing, here. The lifelong income part is isolated and never replenished.
Well, English is my third language, so I'm not that good at it. I personally think of this as my "sleep-at-night" money. How about the "safety component of a portfolio"?

George
Reliable Income? (see post in clippings thread) PDF has a chart which expands on this.
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Re: Investment changes in retirement

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Shakespeare wrote: 11 Jul 2017 15:22 FI is there for safety, not income.
Surely not.
I believe you are reaching for a definition of FI that both provides an income that is fixed and some assurance of capital preservation.
I'm in agreement that a portion of your portfolio should satisfy this definition but maybe we need to call it something else.

Junk bonds could be called FI but are they safe?
Preferred shares could be called FI but are they safe given the adventure in pricing we experienced circa 2008-9?
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Re: Investment changes in retirement

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Larry Swedroe, IIRC, argues that only government bonds should be on the fixed income side. Rick Ferri includes junk bonds; others disagree. Cases can be made for preferreds either as equity or income.

The important thing to note is that, IMO, safety, not income, should be looked after first. The risk should come from the equity side.
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Re: Investment changes in retirement

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Certainly semantics is at play here. Looking at my last two tax returns line 121 Int. etc/line 150 total income the average is 15%. And my LIF payment comes from all FI and my RRIF payment partially so.
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Re: Investment changes in retirement

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Longinvest: that was a thoughtful reply and describes a reasonable approach as long as one takes his guaranteed income stream into account when he determines his AA. I have chosen to do this directly by actually PV'ing my pension. Maybe the end results are similar?
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Re: Investment changes in retirement

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SQRT wrote: 12 Jul 2017 08:24 Longinvest: that was a thoughtful reply and describes a reasonable approach as long as one takes his guaranteed income stream into account when he determines his AA. I have chosen to do this directly by actually PV'ing my pension. Maybe the end results are similar?
Do you use actuarial date for your best before date in that assessment....or something longer? I've seen the argument made both ways. Do you have a COLA'd pension and if so, what COLA do you use? And what discount rate do you use - i.e. annuity discount rate? Or do you not get that precise?

For myself, I wet my finger and put it in the breeze for a WAG multiplier. Currently I use a WAG multiplier of 12 (no COLA - BB date of 15 years). Orginally started with a multiplier of 18 when I retired at 57.... 11 years ago. Whether that is out 30% or not...doesn't matter to me since I don't know my expiry date anyway.
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Re: Investment changes in retirement

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AltaRed wrote: 12 Jul 2017 12:09
SQRT wrote: 12 Jul 2017 08:24 Longinvest: that was a thoughtful reply and describes a reasonable approach as long as one takes his guaranteed income stream into account when he determines his AA. I have chosen to do this directly by actually PV'ing my pension. Maybe the end results are similar?
Do you use actuarial date for your best before date in that assessment....or something longer? I've seen the argument made both ways. Do you have a COLA'd pension and if so, what COLA do you use? And what discount rate do you use - i.e. annuity discount rate? Or do you not get that precise?

For myself, I wet my finger and put it in the breeze for a WAG multiplier. Currently I use a WAG multiplier of 12 (no COLA - BB date of 15 years). Orginally started with a multiplier of 18 when I retired at 57.... 11 years ago. Whether that is out 30% or not...doesn't matter to me since I don't know my expiry date anyway.
No cola. I don't try to be precise. 100% survivor benefit to spouse so I use her actuarial info. I ignore the possibility that I might live longer than her ( small chance). Do it two ways-one using appropriate discount rate and expected lifespan and secondly use annuity prices. Sorta average the two. Multiplier in my case more like 18-20 as she is not quite 60. Certainly good enough in my view.
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Re: Investment changes in retirement

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I use the median life expectancy for my current age then add the years to get to 80% (since median is 50%). I project CPP for DW and I using 5 years average CPI. I also do this for OAS for DW. I use 4% discount rate. The company pension is non-COLA. I update the calculation every 2 years. I do bonds at face value.
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Re: Investment changes in retirement

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kcowan wrote: 12 Jul 2017 12:55 I use the median life expectancy for my current age then add the years to get to 80% (since median is 50%). I project CPP for DW and I using 5 years average CPI. I also do this for OAS for DW. I use 4% discount rate. The company pension is non-COLA. I update the calculation every 2 years. I do bonds at face value.
For the company non-COLA pension, why not use the Gobe Investor's Annuity page, instead, to get the retail price of an equivalent annuity?
Last edited by longinvest on 12 Jul 2017 13:29, edited 1 time in total.
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Re: Investment changes in retirement

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I use the median life expectancy for my current age then add the years to get to 80% (since median is 50%). I project CPP for DW and I using 5 years average CPI. I also do this for OAS for DW. I use 4% discount rate. The company pension is non-COLA. I update the calculation every 2 years. I do bonds at face value.
Too much effort. I figure pension/CPP/OAS approximately equals house at a reasonable multiplier (15x) and leave out both from the AA.

(But then I have a modest pension and live in a modest house. Like Churchill's opponent, I have much to be modest about. :wink: )
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Re: Investment changes in retirement

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What intrigues me, in the above, is why people try to calculate the present value of lifelong income, instead of the reverse, which is to estimate the lifelong income that their fluctuating portfolio can add to their existing lifelong income, and its variability. The income seems more actionable to me than a present value. What am I missing?
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Re: Investment changes in retirement

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longinvest wrote: 12 Jul 2017 13:32 What intrigues me, in the above, is why people try to calculate the present value of lifelong income, instead of the reverse, which is to estimate the lifelong income that their fluctuating portfolio can add to their existing lifelong income, and its variability. The income seems more actionable to me than a present value. What am I missing?
Only PV pension for AA purposes. Makes it more comparable to someone without a pension and the collective wisdom of rule of thumb AA percentages ie 60/40, 100 minus age, etc. A material pension does increase your ability to assume risk, all else being equal.
I ignore personal use real estate (expense not FI) and CPP as it will be immaterial.

Agree that the most important thing to keep your eye on in retirement is cash flow. Ie where will I get the cash flow to support my desired lifestyle.
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Re: Investment changes in retirement

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kcowan wrote: 12 Jul 2017 12:55 I use the median life expectancy for my current age then add the years to get to 80% (since median is 50%).
Not sure why you would do that? It would give a higher PV, no?
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Re: Investment changes in retirement

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SQRT wrote: 12 Jul 2017 17:43 Only PV pension for AA purposes. Makes it more comparable to someone without a pension and the collective wisdom of rule of thumb AA percentages ie 60/40, 100 minus age, etc. A material pension does increase your ability to assume risk, all else being equal.
I ignore personal use real estate (expense not FI) and CPP as it will be immaterial.
I look at it differently. The person without a pension could use part of her portfolio to buy an equivalent annuity and, thus, get the same guaranteed income I will get with mine.

Saying that I can put more money in stocks than this person implies a disturbing assumption; it means that the residual portfolio (after buying the annuity) would be invested 100% (or mostly) in stocks. Why should I accept such an assumption?
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Re: Investment changes in retirement

Post by longinvest »

SQRT wrote: 12 Jul 2017 17:49
kcowan wrote: 12 Jul 2017 12:55 I use the median life expectancy for my current age then add the years to get to 80% (since median is 50%).
Not sure why you would do that? It would give a higher PV, no?
Isn't there a big spread in the pricing of guaranteed life income? I mean that the commuted value of a pension is usually much lower than the price of an equivalent annuity bought on the open market.

If one intends to buy an annuity, one should plan to accumulate the higher price (ask). If one intends to receive a commuted value, one should plan on receiving the lower price (bid).

So, when someone already has a pension and tries to calculate its present value, I think that it's most appropriate to use the bid price (the lower one). Estimating that is an open question, unless the amount is provided on one's annual personal pension statement.
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Re: Investment changes in retirement

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longinvest wrote: 12 Jul 2017 18:11
SQRT wrote: 12 Jul 2017 17:49
kcowan wrote: 12 Jul 2017 12:55 I use the median life expectancy for my current age then add the years to get to 80% (since median is 50%).
Not sure why you would do that? It would give a higher PV, no?
Isn't there a big spread in the pricing of guaranteed life income? I mean that the commuted value of a pension is usually much lower than the price of an equivalent annuity bought on the open market.

If one intends to buy an annuity, one should plan to accumulate the higher price (ask). If one intends to receive a commuted value, one should plan on receiving the lower price (bid).

So, when someone already has a pension and tries to calculate its present value, I think that it's most appropriate to use the bid price (the lower one). Estimating that is an open question, unless one gets it on his annual personal pension statement.
Ok but why would Kcowan use a higher age for pricing than the expected? By doing so he will increase the PV of his pension?
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Re: Investment changes in retirement

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SQRT wrote: 12 Jul 2017 18:15 Ok but why would Kcowan use a higher age for pricing than the expected? By doing so he will increase the PV of his pension?
Maybe I wouldn't use his method to price his pension? :wink:
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Re: Investment changes in retirement

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longinvest wrote: 12 Jul 2017 18:06
SQRT wrote: 12 Jul 2017 17:43 Only PV pension for AA purposes. Makes it more comparable to someone without a pension and the collective wisdom of rule of thumb AA percentages ie 60/40, 100 minus age, etc. A material pension does increase your ability to assume risk, all else being equal.
I ignore personal use real estate (expense not FI) and CPP as it will be immaterial.
I look at it differently. The person without a pension could use part of her portfolio to buy an equivalent annuity and, thus, get the same guaranteed income I will get with mine.

Saying that I can put more money in stocks than this person implies a disturbing assumption; it means that the residual portfolio (after buying the annuity) would be invested 100% (or mostly) in stocks. Why should I accept such an assumption?
Sorry but you lost me. I have a generous pension from my employer. It covers most of my personal expenses in retirement. I feel I can take more risk with my portfolio(if I wanted to) than someone who has no pension and has to cover his expenses from his portfolio?
Last edited by SQRT on 13 Jul 2017 07:06, edited 1 time in total.
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