Investment changes in retirement

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vince2
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Re: Investment changes in retirement

Post by vince2 »

Prior to retirement at age 65, my main concern was the small FI producing portion of our investments. This was largely due to our late immigration to Canada (me at age 54yrs) and consequently a small RRSP, no OAS, and no DB pension. There was a small income producing annuity in our country of origin and we did bring over about $500,000 which was invested initially in mutual funds.

Starting a CCPC was extremely helpful, as I was in a high earning profession and was not restricted by RRSP rules as to how much we could retain in the CCPC. After retirement I converted the CCPC into a Holding Company, and as the bond ladder elements matured, that money was invested into high grade preferreds (the punitive taxation on FI in a CCPC/HoldCo is simply too much). Other than the Holdco portfolio, I also have a Non-registered portfolio which predominantly holds small cap Canadian companies. I hold 1-2 years on cash on hand to even out fluctuations on the stock market and will buy an annuity from the RRSP proceeds at 71 years of age.

My holdings are heavily skewed to dividend paying companies, all blue chip. After burning my fingers several times with mining companies, and experiencing the disastrous effect of the low price of oil on all companies in Alberta, I have eschewed investment in mining stocks, severely curtailed investments in energy stocks and all companies dependent on the energy sector. I have heavily invested in the USA (about 50% of the portfolio) and largely in industrials, healthcare and technology companies, all blue chip companies and lately I have also reluctantly invested in technology companies that pay no dividend. Our investments, largely in dividends with a little interest bearing income, more than covers our expenses in retirement and we have been able to travel overseas yearly, snowbird in Mexico (I concur with kcowan that it saves money), contribute to charities and also help out our kids financially.

We consider ourselves fortunate, for us, even at such a late age, immigration has worked out.
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Re: Investment changes in retirement

Post by Koogie »

AltaRed wrote: 09 Jul 2017 21:17 This is not a time to follow hot tips on speculative stocks.
When is it the time to do that ?? ... :P
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Re: Investment changes in retirement

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Koogie wrote: 10 Jul 2017 14:07
AltaRed wrote: 09 Jul 2017 21:17 This is not a time to follow hot tips on speculative stocks.
When is it the time to do that ?? ... :P
Ha! IMO, never..... but that doesn't stop some investors from talking walks on the wild side. Best that lesson be learned early enough in life so as to have the recovery time necessary to overcome the experience.
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Re: Investment changes in retirement

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vince2 wrote: 10 Jul 2017 13:50 Prior to retirement at age 65, my main concern was the small FI producing portion of our investments. This was largely due to our late immigration to Canada (me at age 54yrs) and consequently a small RRSP, no OAS, and no DB pension. There was a small income producing annuity in our country of origin and we did bring over about $500,000 which was invested initially in mutual funds.

Starting a CCPC was extremely helpful, as I was in a high earning profession and was not restricted by RRSP rules as to how much we could retain in the CCPC. After retirement I converted the CCPC into a Holding Company, and as the bond ladder elements matured, that money was invested into high grade preferreds (the punitive taxation on FI in a CCPC/HoldCo is simply too much). Other than the Holdco portfolio, I also have a Non-registered portfolio which predominantly holds small cap Canadian companies. I hold 1-2 years on cash on hand to even out fluctuations on the stock market and will buy an annuity from the RRSP proceeds at 71 years of age.

My holdings are heavily skewed to dividend paying companies, all blue chip. After burning my fingers several times with mining companies, and experiencing the disastrous effect of the low price of oil on all companies in Alberta, I have eschewed investment in mining stocks, severely curtailed investments in energy stocks and all companies dependent on the energy sector. I have heavily invested in the USA (about 50% of the portfolio) and largely in industrials, healthcare and technology companies, all blue chip companies and lately I have also reluctantly invested in technology companies that pay no dividend. Our investments, largely in dividends with a little interest bearing income, more than covers our expenses in retirement and we have been able to travel overseas yearly, snowbird in Mexico (I concur with kcowan that it saves money), contribute to charities and also help out our kids financially.

We consider ourselves fortunate, for us, even at such a late age, immigration has worked out.
Good for you. You have indeed done very well, congratulations.
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Re: Investment changes in retirement

Post by AltaRed »

I agree. Congratulations.

Another concept worth considering during retirement, and I agree it is situational, is at some point, one could start decreasing their FI component commensurate with decreases in remaining lifespan as one ages. That is simply because there are less years left to rely on one's portfolio, allowing one to perhaps allow the FI component to decrease more quickly than the equity component. Using rough numbers....
- at age 65, the actuarial best before date is circa 85 yrs old (a 20 year spread)
- at age 80, the actuarial best before date is circa 90 yrs old (a 10 year spread)
- at age 90, the actuarial best before date is circa 95 yrs old (a 5 year spread)

Is anyone here in the circa 75-80 yr old bracket actually reducing their FI percentage component recognizing this concept?
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Re: Investment changes in retirement

Post by DenisD »

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.
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Re: Investment changes in retirement

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Is anyone here in the circa 75-80 yr old bracket actually reducing their FI percentage component recognizing this concept?
I'm only 60 and sort of doing the opposite(increasing EQ)/something like that. I retired at 55 with 35% equity I have let the equity grow now 40% and the plan is to spend the fixed income. The plan at the moment is to let the equity allocation increase about 1% a year till I reach 50/50 then see what happens. I may have a little bit to much FI for most people's liking but it's just like playing poker, sometimes it's better to take your chips off the table and just go home.
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Re: Investment changes in retirement

Post by longinvest »

AltaRed wrote: 10 Jul 2017 16:08 one could start decreasing their FI component commensurate with decreases in remaining lifespan as one ages.
... because the risk of stocks losing 80% or 90% of their value (significantly impacting portfolio withdrawals) decreases along with the remaining lifespan of the retiree...? Really? :?:

I am not a fan of increasing (or decreasing) stocks with age. I'm more in favor of an investor choosing the allocation to stocks according to his level of comfort and sticking to it forever. If his level of comfort changes with age, he could adjust the portfolio accordingly, but that's a dangerous proposition: I would be wary that the comfort level might be affected by market performance, which would lead to counterproductive behavior (buy high, sell low).

Stocks are risky, in the short and in the long term. And by risk, I mean real a chance to significantly underperform a bond or cash investment. If it wasn't so, they would be priced at par with equivalent bonds. Think about it: if it was certain that $250 in stocks will necessarily become $1,000 in 30 years (4.73% compound rate), at a time when zero-coupon bonds of the same maturity totaling $1,000 in face value cost $500 (2.34% compound rate), arbitrageurs would see the huge profit opportunity and exploit it. As a result, prices would adjust; it's the beauty of open markets. Of course, there's no such certainty and this is why stocks are, often enough (but not always), priced such as to return more than bonds.

I'm not a fan of sliding asset allocations, even when based on bequest motives (e.g. leave the extra money, not needed by the retiree, growing in stocks). Imagine the following situation: The retiree passes away and markets crash deeply (80% or 90%) quickly after. Big parts of the remaining portfolio have to be sold at very low prices to pay for the taxes on capital gains in non-registered accounts at the time of death, before the crash. This could cause a lot of tension between financially-clueless heirs and the executor.

I'd rather gradually give the money when I'm still alive and let heirs do their own investments. Should a heir choose to invest 100% of the money into speculative stocks, no problem: it won't affect the bequest of other heirs, if (or when) it crashes and burns.

Added clarification: For planning purposes, I generally assume that stocks could easily lose 50% of their value any day. I consider the 80% to 90% loss scenario as an unlikely (but possible) catastrophic scenario.
Last edited by longinvest on 10 Jul 2017 17:27, edited 1 time in total.
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Re: Investment changes in retirement

Post by kcowan »

Well done Vince. We love to hear such success stories.

AR, I have been reducing the FI component mainly driven by conversions of debentures to stock and maturing of longer FI corporates (in the 4% range). I have $130k in conversions plus $70k is maturing bonds in the next couple of years. Not sure what I will do but at least have some time to see what is happening...

I know my kids want to me keep up the equity efforts....they are joint executors and willing to shoulder the risks as needed. We will have a discussion during this next market swoon.
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Re: Investment changes in retirement

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The retiree passes away and markets crash deeply (80% or 90%) quickly after. Big parts of the remaining portfolio have to be sold at very low prices to pay for the taxes on capital gains in non-registered accounts at the time of death, before the crash.
How likely is this? Say starting with 1 million with a $500,000 cost base and the portfolio doubles twice to 4 million (20 years of growth - 80%?), $300,000 capital gains to pay taxes on out of an $800,000 portfolio?
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Re: Investment changes in retirement

Post by longinvest »

Brian,
BRIAN5000 wrote: 10 Jul 2017 17:31
The retiree passes away and markets crash deeply (80% or 90%) quickly after. Big parts of the remaining portfolio have to be sold at very low prices to pay for the taxes on capital gains in non-registered accounts at the time of death, before the crash.
How likely is this?
I've added a clarification to my post.

It's not likely, but it's possible.

Actually, in real life, things don't have to be as dramatic as a illustrated to cause lots of grief with financially-clueless heirs. As for financially-responsible heirs, they'll appreciate whatever they get, but they're likely to prefer seeing the retiree enjoy his money while alive, instead.
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Re: Investment changes in retirement

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Correct me if I'm wrong but can't capital losses in the first year of the estate be carried back to offset capital gains on the final return?
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Re: Investment changes in retirement

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longinvest wrote: 10 Jul 2017 17:10 I'm not a fan of sliding asset allocations, even when based on bequest motives (e.g. leave the extra money, not needed by the retiree, growing in stocks). Imagine the following situation: The retiree passes away and markets crash deeply (80% or 90%) quickly after. Big parts of the remaining portfolio have to be sold at very low prices to pay for the taxes on capital gains in non-registered accounts at the time of death, before the crash. This could cause a lot of tension between financially-clueless heirs and the executor.
I suspect that was aimed at me :wink:

Most people talk of asset allocation in terms of percentages of total portfolio. Another way, and one that I find much more congenial, is to work with fixed dollar amounts (adjusted for inflation). Suppose I plan my retirement and I estimate that I will require $1 million at age 65 so that I can retire and live off the interest and principal, until age 95 (a 30-year horizon). To me, de-risking my plan requires me to build up assets of $1 million in fixed income by age 65, if I can. (I may not be able to, in which case I may have to take on more risk to obtain the income stream I want, but that's a fall-back position.) Anything left over goes into equity. It's nice-to-have money, not need-to-have money, and I feel comfortable taking more risk with it.

Now time progresses. I retire and start drawing down my savings. I know how much I can draw from my fixed income each year, and have it last until age 95, and I do so. Necessarily, the amount of fixed income in my portfolio will decrease year by year.

If I live frugally, I spend mostly on necessities (covered by the fixed income), with extra spending coming from drawing down equities. Both sides will decrease over time, with equities decreasing at a rate depending on how frugal I am and how well the equity markets do. In some scenarios that will lead to an increasing percentage of fixed income, in others a decreasing percentage. I find that number irrelevant. What matters is that I am spending down my fixed income according to plan.

As to the bequest motive, most of it is going to charities that have no idea that it is coming. So they can't be disappointed. My children are getting theirs while I'm still alive, and so should have little reason to complain. Anyway, I find it most improbable that equity markets should crash just between the time of my death and the time that my executor liquidates my estate -- let alone crash by more than 50 per cent. The risk is not zero, but it should be kept in perspective.
I'd rather gradually give the money when I'm still alive and let heirs do their own investments.

You're assuming that they have an interest in investing the money. The vast majority do not. There's always the possibility of setting up a trust, but that can be very expensive.

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Re: Investment changes in retirement

Post by Joebaba »

Scenario…..

A person retires at the age of 60 with a portfolio of 2 Million dollars.
They feel they might live to 100.
They feel they’ll need a minimum of $30,000 per year (inflation adjusted) for the rest of their lives. That’s the floor.
He/she is concerned that at some point all stocks will become worthless and they'll have to live only on their Fixed Income investments. Therefore, at age 60, they’ll need $1,878,301 in FI so that they can live out their days at $30,000 per year. So they need 94% FI and could have up to 6% equities.

At age 70, the same retiree will only need $1,549,809 to live out their days at 30,000 inflation adjusted dollars per year. So they need 77% FI and could have up to 23% equities.

At age 80, the same retiree will only need $1,149,380 to live out their days at 30,000 inflation adjusted dollars per year. So they need 57% FI and could have up to 43% equities.

At age 90, the same retiree will only need $661,258 to live out their days at 30,000 inflation adjusted dollars per year. So they need 33% FI and could have up to 67% equities.

At age 99, the same retiree will only need $131,184 to live out their days at 30,000 inflation adjusted dollars per year. So they need 7% FI and could have up to 93% equities.

So I think that’s the point AltaRed is making – the older you get, the less time you have to worry about stocks becoming worth less, or worthless – ergo, the less Fixed Income monies you need as a percentage of your whole portfolio.
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Re: Investment changes in retirement

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I'm not a fan of sliding asset allocations, even when based on bequest motives
Well I'm a fan of sliding asset allocations at least at the moment.

Generally a lot of information is available about retirement at a "typical" retirement age, 65. From 65 to about 75 sequence of returns risk within this time can greatly affect your overall retirement plan. What happens with your 50/50 portfolio if the 80-90% market correction happens just past retirement when you have little to no human capital left? What happens if you retire earlier say 55 are you willing to adjust your spending lower in your early years so you can maintain longevity protection.
financially-clueless heirs
I only have one financially clueless heir so the inheritance situation is simplified for me. I hope to have enough flexibility in my plan to give as I go but I hope to be able to slowly teach how to fish instead of just giving her the fish. If I give her some and she uses it for what I may consider unwise* it may educate me that a trust fund with limited withdrawals may have to be considered.

*lately the thought had crossed my mind that I could give her an allowance or trust so she wouldn't have to work and could travel the world while she's young. Then I gave myself a smack in the side of the head maybe wifey and I should do that first.
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Re: Investment changes in retirement

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My holdings are heavily skewed to dividend paying companies, all blue chip. After burning my fingers several times with mining companies, and experiencing the disastrous effect of the low price of oil on all companies in Alberta, I have eschewed investment in mining stocks, severely curtailed investments in energy stocks and all companies dependent on the energy sector.
Just curious vince, do you also shun ENB and TRP because they are energy? Or do you think of them as blue chip dividend paying companies?
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Re: Investment changes in retirement

Post by vince2 »

JaydoubleU wrote: 10 Jul 2017 19:35
My holdings are heavily skewed to dividend paying companies, all blue chip. After burning my fingers several times with mining companies, and experiencing the disastrous effect of the low price of oil on all companies in Alberta, I have eschewed investment in mining stocks, severely curtailed investments in energy stocks and all companies dependent on the energy sector.
Just curious vince, do you also shun ENB and TRP because they are energy? Or do you think of them as blue chip dividend paying companies?
I own both but will not be adding to them, and regard them as less vulnerable to a low oil price. I regard them as infrastructure entities similar to other infrastructure ( sort of similar to the railways) and we all know how difficult it has become to build new infrastructure that transcends provincial boundaries, let alone national boundaries.
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Re: Investment changes in retirement

Post by longinvest »

George,
ghariton wrote: 10 Jul 2017 18:33
longinvest wrote: 10 Jul 2017 17:10 I'm not a fan of sliding asset allocations, even when based on bequest motives (e.g. leave the extra money, not needed by the retiree, growing in stocks). Imagine the following situation: The retiree passes away and markets crash deeply (80% or 90%) quickly after. Big parts of the remaining portfolio have to be sold at very low prices to pay for the taxes on capital gains in non-registered accounts at the time of death, before the crash. This could cause a lot of tension between financially-clueless heirs and the executor.
I suspect that was aimed at me :wink:
Not necessarily... :wink:
ghariton wrote: 10 Jul 2017 18:33 Most people talk of asset allocation in terms of percentages of total portfolio. Another way, and one that I find much more congenial, is to work with fixed dollar amounts (adjusted for inflation). Suppose I plan my retirement and I estimate that I will require $1 million at age 65 so that I can retire and live off the interest and principal, until age 95 (a 30-year horizon). To me, de-risking my plan requires me to build up assets of $1 million in fixed income by age 65, if I can. (I may not be able to, in which case I may have to take on more risk to obtain the income stream I want, but that's a fall-back position.) Anything left over goes into equity. It's nice-to-have money, not need-to-have money, and I feel comfortable taking more risk with it.

Now time progresses. I retire and start drawing down my savings. I know how much I can draw from my fixed income each year, and have it last until age 95, and I do so. Necessarily, the amount of fixed income in my portfolio will decrease year by year.
OK, let me look at your arrangement from a different angle. In my first answer, in this thread, I laid out my plan. Mostly, I view retirement funding as composed of two main ingredients:
  1. Guaranteed lifelong income.
  2. Fluctuating income from a pot of money, which I call a portfolio.
In my view, your liability-matched non-rolling RRB ladder with the last payments expiring at age 95, is part of the "Guaranteed lifelong income" part*. Why? Because we know, today, how much inflation-adjusted income it will be able to provide until then. While it is true that the market-value of each RRB fluctuates, you don't plan to trade them; you'll hold them until maturity and won't reinvest the proceeds. You already know how much it will deliver in coupons and maturing payments (in constant dollars, of course).

* In other words, I do not consider the RRB ladder as part of the portfolio. Maybe I should find new vocabulary to describe this, to avoid misunderstandings. I'll think about it. Reader suggestions are welcome.

A casual observer could consider the age 95 target as low. But, I look at it differently. I see that at age 80, the average maturity of the ladder will be 7.5 years, which means that unless the real-yield curve changes a lot, the ladder will have an average yield to maturity close to 0% real, or possibly less. This means that you'll be spending 1/15 = 6.7% per year. I suspect that at that point, or soon after, as long as you or your wife are still healthy, you'll find it hard to resist the sirens of inflation-indexed annuities offering a higher payout which you could buy with the proceeds of selling the remaining rungs of your ladder. (If the real-yield curve significantly changes, I suspect that payouts will probably adjust accordingly).

To summarize, I view your situation as having guaranteed lifelong income on one side (including the non-rolling RRB ladder), and a 100% stocks portfolio on the other side, from which you probably take discretionary withdrawals, as it is bigger than what you need. It all comes down to whether your guaranteed lifelong income is sufficient by itself or not. If it is, then you don't care about the portfolio; stocks could crash and it wouldn't affect your ability to live comfortably.

So, in my view, you have a non-sliding allocation of 100% to stocks in your portfolio.
ghariton wrote: 10 Jul 2017 18:33
I'd rather gradually give the money when I'm still alive and let heirs do their own investments.

You're assuming that they have an interest in investing the money. The vast majority do not. There's always the possibility of setting up a trust, but that can be very expensive.
If a heir is not interested in investing today, why should he be interested in investing when getting a big amount of money after death?

Or, maybe it's because it avoids the pain of seeing the money being squandered (and possibly hurting the heir) while alive?
Last edited by longinvest on 11 Jul 2017 01:20, edited 6 times in total.
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Re: Investment changes in retirement

Post by longinvest »

Joebaba wrote: 10 Jul 2017 19:28 Scenario…..
Unless your fixed income (FI) is liability matched, you have no guarantee that it will provide sufficient lifelong income.

Now, if you liability-match part of your FI, then you have to separate that part from the rest of your portfolio.

It's my mistake, I should have been clearer. When I say that I am not a fan of sliding asset allocations, I mean the asset allocation of the portfolio excluding any liability matched assets. Maybe this is clearer?
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Re: Investment changes in retirement

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BRIAN5000 wrote: 10 Jul 2017 19:34What happens with your 50/50 portfolio if the 80-90% market correction happens just past retirement when you have little to no human capital left? What happens if you retire earlier say 55 are you willing to adjust your spending lower in your early years so you can maintain longevity protection.
I would have thought that everybody on this board had worked out the scenarios for dealing with a massive meltdown. Is that not a part of building a plan?

In our case, we move to our home in Mexico where costs are half what they are in BC. That includes return trips to airbnb places in Canada. Would I become a market timer? I don't know. It is a lot of undoing.
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Re: Investment changes in retirement

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BRIAN5000 wrote: 10 Jul 2017 19:34 *lately the thought had crossed my mind that I could give her an allowance or trust so she wouldn't have to work and could travel the world while she's young. Then I gave myself a smack in the side of the head maybe wifey and I should do that first.
I agree with the underlined part. Enjoy!
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Re: Investment changes in retirement

Post by ghariton »

longinvest wrote: 10 Jul 2017 20:20So, in my view, you have a non-sliding allocation of 100% to stocks in your portfolio.
I agree with your analysis. I just hadn't understood it from your choice of words.

FWIW I used to calculate the rate of return on what I call my portfolio after backing out the RRBs and the coupons they paid. I guess that is exactly the concept you are using. (I don't do this any more because, frankly, my rate of return is not that important to me.

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Re: Investment changes in retirement

Post by longinvest »

ghariton wrote: 10 Jul 2017 21:54
longinvest wrote: 10 Jul 2017 20:20So, in my view, you have a non-sliding allocation of 100% to stocks in your portfolio.
I agree with your analysis. I just hadn't understood it from your choice of words.
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.
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Re: Investment changes in retirement

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kcowan wrote: 10 Jul 2017 21:00
I would have thought that everybody on this board had worked out the scenarios for dealing with a massive meltdown. Is that not a part of building a plan?

In our case, we move to our home in Mexico where costs are half what they are in BC. That includes return trips to airbnb places in Canada. Would I become a market timer? I don't know. It is a lot of undoing.
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.
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Re: Investment changes in retirement

Post by Sensei »

Hello,

Lots of fascinating reading and lots of ideas. Thanks. It seems as though others are learning from this too.

As you can guess, I'm treading water for now. The only concrete things I've done are:
1. Gone to cash for awhile. This is to do with protecting what I've got while I figure out the next plan.
2. Bought a new car which I hope will last into our 70s. (It's a Fit, so inexpensive and reliable) This is mainly to get to the hospital in an emergency.
3. Stopped active investing for now. This year the only thing I've bought is AbbVie.
4. Got the documentation together for various pensions. CPP was super-helpful in this respect.

I feel some encouragement to return to dividend investing, but much later on. Anyway, I'll keep watching. This is seems like a rare opportunity to see what others are really doing or have done.
Cheers

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