A Simple Retirement Plan Using T-Bills/GICs

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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby AltaRed » 22 Feb 2011 11:08

What one's asset allocation is also depends considerably on one's age and employment status. Once one is totally in withdrawal phase, with no employment income coming in, it would be natural for asset allocation to become more conservative. I observe this is often a significant component of the difference in posted opinions on FWF and one in which many of us talk past each other a lot of the time.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby twocentsworth » 22 Feb 2011 12:34

Indeed, and I'd love to see an automatic "Recipient of DB pension" or "Recipient of DC plan (it ain't no pension)" label/flag on posters' contributions, too. There is a vast difference in attitude/safety between the two groups and that isn't apparent when folks are doling out opinions.

It would be enlightening for the more gullible/less knowledgeable to know which crowd they are hearing from.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby freedom_2008 » 22 Feb 2011 13:02

twocentsworth wrote:
AltaRed wrote:
twocentsworth wrote:Wrong crowd? Better re-read ltr's comment.

Good on ya, freedom2008! If you don't mind my asking, how much did you two sock away before packing it in?


Same as the Minellis in one of your posts. But I think how we got there is probably more important than the final number. We did have very good paid jobs (very stressful as well) and one child (supported him through university and graduate degrees, mostly independent now). We lost a small bundle in high-tech stocks when we didn't know better, gained a samll bundle on sales of our principal residences due to moving. The most important thing is that we always, always live the way as we live now (while, with one less car and perhaps one less trip per year, but have to pay MSP and dental work now). We spent more than the Minellis, but have never let any stuff taking over our lives.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby BRIAN5000 » 22 Feb 2011 13:10

twocentsworth wrote:Indeed, and I'd love to see an automatic "Recipient of DB groups and that isn't apparent when folks are doling out opinions.

It would be enlightening for the more gullible/less knowledgeable to know which crowd they are hearing from.


It would be nice to hover over a User name and have approximate NW, DB, Retired or not etc.

Good on ya, freedom2008! If you don't mind my asking, how much did you two sock away before packing it in?


How much income per year are you looking for?
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby freedom_2008 » 22 Feb 2011 13:54

BRIAN5000 wrote:
twocentsworth wrote:Indeed, and I'd love to see an automatic "Recipient of DB groups and that isn't apparent when folks are doling out opinions.

It would be enlightening for the more gullible/less knowledgeable to know which crowd they are hearing from.


It would be nice to hover over a User name and have approximate NW, DB, Retired or not etc.

Good on ya, freedom2008! If you don't mind my asking, how much did you two sock away before packing it in?


How much income per year are you looking for?


For us, $40K-$45K/yr is what we spend on normal living per year for pre/post stopping work (excluding child tuitions/trips).

It is a good idea to know which group (DB, ...) people are from to understand their posts better. But after a while (say 10 or 15 posts), one could have a good sense of the status of a "poster" :wink:
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby BRIAN5000 » 22 Feb 2011 15:14

For us, $40K-$45K/yr is what we spend on normal living per year for pre/post work (excluding child tuitions/trips).


What are you using for inflation protection?
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby freedom_2008 » 22 Feb 2011 16:06

BRIAN5000 wrote:
For us, $40K-$45K/yr is what we spend on normal living per year for pre/post stopping work (excluding child tuitions/trips).


What are you using for inflation protection?


Good question. RRB, indexed annuities, CPP/OAS, plus higher GIC ladder rate with higher inflation. We only plan to leave paid off house and TFSAs to the "child" if we don't need the funds, so there should be enough in non-reg portion to see us through in extreme cases, I think 8)
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby twocentsworth » 22 Feb 2011 17:49

BRIAN5000 wrote:It would be nice to hover over a User name and have approximate NW [Net Worth], DB, Retired or not etc.

Agreed. That way you wouldn't have to read the requisite 10 to 15 background posts. :D
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby twocentsworth » 22 Feb 2011 17:59

freedom_2008 wrote:
BRIAN5000 wrote:
For us, $40K-$45K/yr is what we spend on normal living per year for pre/post stopping work (excluding child tuitions/trips).


What are you using for inflation protection?


Good question. RRB, indexed annuities, CPP/OAS, plus higher GIC ladder rate with higher inflation. We only plan to leave paid off house and TFSAs to the "child" if we don't need the funds, so there should be enough in non-reg portion to see us through in extreme cases, I think 8)


Well, I'm no financial planner, but you seem to have your house in order, freedom2008. It's even plausible that Adrian would be happy with the mix because you include indexed annuities. :)
We're in about the same situation but a few years older and haven't retired and traded down in housing yet. We have an offspring with a medical condition that may mean permanent residency with us, so we're topping up a bit more to cover that possibility.

Thanks for sharing!
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby mrhead » 22 Feb 2011 19:33

twocentsworth wrote:We're in about the same situation but a few years older and haven't retired and traded down in housing yet. We have an offspring with a medical condition that may mean permanent residency with us, so we're topping up a bit more to cover that possibility.


Excuse my noseyness, but how do you plan to take care of a disabled child in retirement? They must be enough to deal with when you're younger, so dealing with them when you're old is not going to be possible. Do you have plans to institutionalize at some point? Is that going to cost you out of pocket, or does the government pay for it?

Even if you can deal with them as you age, at some point you may die before your child. At that point, there better be some kind of plan to institutionalize, even if you'd prefer not to do it yourself. Unless another child or grandchild volunteers to take over, but that's expecting WAY too much.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby freedom_2008 » 23 Feb 2011 00:09

I believe after certain age, it is government's responsibility to take care a disabled adult. This is one part made us feel better when paying those 6 figure income taxes year after year.

There are probably some other benefits that have disabled dependent treated as spouse (say passing RRSP?) . It is not easy even with government's help, parenthood is a life long thing, regardless.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby twocentsworth » 23 Feb 2011 10:18

Not disabled, just a medical condition which may or may not pass. We're adding enough to the pile to be on the safe side.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby BRIAN5000 » 23 Feb 2011 11:06

Good question. RRB, indexed annuities


I'd be interested in an idea the indexing percentage you used/chose and how much per $100,000 you were able to get out of those indexed annuitites at your age? I'm a similar age.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby freedom_2008 » 23 Feb 2011 14:05

BRIAN5000 wrote:
Good question. RRB, indexed annuities


I'd be interested in an idea the indexing percentage you used/chose and how much per $100,000 you were able to get out of those indexed annuitites at your age? I'm a similar age.


Wrt Annuities, we are not there yet, too young now :wink: . Plan to start after 60, if things make more sense then. Probably do it slowly, and probably about 50% or a bit more with indexed, probably the Escalating type, or some Escalating some real CPI indexed.

There are not many vendors offer the product and we are still learning. Last time I checked, if one put money in at age 53 and started collecting at age 60, for $100K joint with 10 year guarantee, he/she could get around $550/m for normal, $400/m with 2.5% Escalating, $360/m for CPI. Hopefully the rate would be better 10 years from now, but with so many baby boomers off the wheel then, not sure what will happen. Maybe we could form a FWF group plan, shop together to get better group rates? :)
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby adrian2 » 23 Feb 2011 15:12

twocentsworth wrote:It's even plausible that Adrian would be happy with the mix because you include indexed annuities. :)

What I'm seriously considering for myself in the not too distant future are not indexed annuities (too young for them) but GLWB plans. Most of these pay a guaranteed non-indexed 5% of the initial investment for the rest of your life, regardless how young you are when you sign the contract. You retain exposure to the stock market and your estate receives the remaining balance in your funds, as opposed to nothing in the case of straight annuities (you can also get out at any time, subject to paying relevant commissions and fees).
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby mrhead » 23 Feb 2011 16:35

adrian2 wrote:What I'm seriously considering for myself in the not too distant future are not indexed annuities (too young for them) but GLWB plans. Most of these pay a guaranteed non-indexed 5% of the initial investment for the rest of your life, regardless how young you are when you sign the contract. You retain exposure to the stock market and your estate receives the remaining balance in your funds, as opposed to nothing in the case of straight annuities (you can also get out at any time, subject to paying relevant commissions and fees).


I expect the remainder for your estate will be $0. Aren't the fees for those funds/plans quite high, when compared to traditional mutual funds?

You might be better off simply buying a bond ladder, and with a bit of remaining cash buy some options on the stock market. That's likely all they do, and sock away a huge MER for doing it.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby DavidR » 23 Feb 2011 18:18

mrhead wrote:You might be better off simply buying a bond ladder, and with a bit of remaining cash buy some options on the stock market. That's likely all they do, and sock away a huge MER for doing it.

How does a bond ladder provide longevity insurance? The point of the GLWB is that is it similar to a life annuity - it protects you from running out of money if you live longer than you expect.

And there is no need of course to put all your money into a GLWB, just as you mignt not put all your money into a plain-vanilla life annuity.

There is a thread around here somewhere on "Pensionize Your Nest Egg" by Moshe Milevsky and Alexandra Macqueen
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby adrian2 » 24 Feb 2011 11:52

mrhead wrote:I expect the remainder for your estate will be $0. Aren't the fees for those funds/plans quite high, when compared to traditional mutual funds?

Yes, the fees are quite high, but there is a long way for an equity investment to go to zero, while sucking away 3% for fees and 5% for the guaranteed withdrawal. Variables are:
- raw returns from stocks (can be abysmal, can be very good)
- sequence of returns (big unknown)
- longevity (big unknown)
Back of the envelope guess, for 4 decades of life remaining, 25% chance of ruin. For 3 decades, 15%. But your guess may be better than mine; even though 100% chance of ruin seems too high.

mrhead wrote:You might be better off simply buying a bond ladder, and with a bit of remaining cash buy some options on the stock market. That's likely all they do, and sock away a huge MER for doing it.

That's precisely how it's not being done in case of these products. I'm well versed in options but they do very little for longevity insurance/
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby mrhead » 24 Feb 2011 13:57

Okay, maybe you're right and it's a great deal. But unless the company really screwed up (like Manulife), I have a hard time believing that they're offering this product if it's not making them a lot of money. The more money it makes for them, the less it's making for you.

Sticking with a basic life annuity is probably a far better deal. Less complicated, which means there's less ways for the company to hide additional fees. So unless a life annuity gives you less than 5% of your initial contribution, it's probably better.

I think longevity risk is overrated. Unless you have a family history of living long, healthy lives, you can probably figure mid 80's is about as long as you're going to live.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby Flights of Fancy » 24 Feb 2011 15:26

mrhead wrote:I think longevity risk is overrated. Unless you have a family history of living long, healthy lives, you can probably figure mid 80's is about as long as you're going to live.


Although this is not how actuaries talk about longevity risk, the standard deviation of life expectancy is on par with stock market risk - there's a pretty wide dispersion of results around the mean. (Pensionize Your Nest Egg has a couple of charts which demonstrate this - in the chapter on longevity risk.)

If you buy a life annuity with "most" of your nest egg, you risk losing it all if you die early. If you use a GLWB, you retain some estate value if you die early, as well as the payout should you end up on the other side of the bet. There are strong intuitive and practical reasons for dividing your nest egg amongst different products which protect against the differing risks in retirement.

Here is a short piece from Milevsky on the topic of how much to annuitize...the rough model set out in this piece is 1/3 to longevity-insured products (plain vanilla annuities), 1/3 to sequence-of-returns-protected products (GLWBs), and 1/3 to non-guaranteed products (stocks and bonds). One note: this model assumes a holistic view of your financial capital, including pre-pensionized income such as (in Canada) CPP and OAS.

As an aside, and as we've discussed before, if you annuitize a fraction of your nest egg sufficient to cover your basic living expenses, you can afford to take more risk with the non-annuitized portion.

That piece is reprinted from Milevsky's series on annuity analytics for ResearchMag in the U.S.; the whole series is worth reading.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby adrian2 » 24 Feb 2011 16:23

mrhead wrote:I have a hard time believing that they're offering this product if it's not making them a lot of money. The more money it makes for them, the less it's making for you.

Of course they are making money, on average. But each one of us is not the average; this is how mortality credits come into play for annuities, those who die early subsidize those who live a long life.

mrhead wrote:Sticking with a basic life annuity is probably a far better deal. Less complicated, which means there's less ways for the company to hide additional fees. So unless a life annuity gives you less than 5% of your initial contribution, it's probably better.

A life annuity gives your estate nothing after you die (beyond the guarantee period, if any); the "hidden fee" for such an annuity is 100% if you die young. A GLWB will give your estate a substantial amount in the first few years and an unknown amount (could be quite higher than the original capital, could be nothing) after you die.

As FOF writes, don't put all your eggs in one basket type of product.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby BRIAN5000 » 24 Feb 2011 17:15

As FOF writes, don't put all your eggs in one basket type of product.


We're talking about someone with @ 1.8 million and only wanting @ $45,000 income? About a 2.5% withdraw rate (without CPP & OAS), why would they need more then rolling 5 year GIC's, CPP & Maybe OAS?
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby DavidR » 24 Feb 2011 17:25

BRIAN5000 wrote:
We're talking about someone with @ 1.8 million and only wanting @ $45,000 income? About a 2.5% withdraw rate (without CPP & OAS), why would they need more then rolling 5 year GIC's, CPP & Maybe OAS?

Maybe such a person doesn't need annuities, etc.

However the recent posts have been discussing Adrian's post of Wednedday afternoon at 2:12
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby mrhead » 24 Feb 2011 17:26

adrian2 wrote:A life annuity gives your estate nothing after you die (beyond the guarantee period, if any); the "hidden fee" for such an annuity is 100% if you die young. A GLWB will give your estate a substantial amount in the first few years and an unknown amount (could be quite higher than the original capital, could be nothing) after you die.


Yes, very true. All I'm saying is that I'd consider the final value of the GLWB to be $0. I think the company will eat up the rest with over-inflated fees. IOW, figure that you'll only get 5% for life (or whatever the percentage they state), and nothing more.

Instead of putting $1,000,000 into a GLWB to pay you $50,000/year, why not buy a life annuity that pays you $50,000/year and then with the rest of the money place a bet on the stock market? It's probably a cheaper way to play it.

If you want to leave money as an inheritance, then forget the annuity altogether. Just invest in stocks and bonds, and draw down only what you need. That will be cheaper still, unless you live to 100. You take a small risk of going broke before you die, but life is full of risks.
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Re: A Simple Retirement Plan Using T-Bills/GICs

Postby Flights of Fancy » 24 Feb 2011 22:21

mrhead wrote:Instead of putting $1,000,000 into a GLWB to pay you $50,000/year, why not buy a life annuity that pays you $50,000/year and then with the rest of the money place a bet on the stock market? It's probably a cheaper way to play it.


Because (depending on your gender and when you buy the annuity) there's no "rest of the money."
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