I recently offered a 7-ETF model portfolio for retirement. It’s a common question “How do I use ETFs to fund my retirement?” Here’s The Simple 7 ETF Portfolio For Canadian Retirees. And the good news is that simplicity and simple asset allocation has worked wonders for North American retirees. We don’t have to get too fancy.
Retirement funding comes down to portfolio total returns and the risk level of the portfolio. The basic building blocks of Canadian, US and International stocks with bonds as the shock absorbers might continue to do the trick. The popular One Ticket Asset Allocation Portfolios in Canada will use Canadian and US bonds. Vanguard also adds an International bond component.
From that Globe and Mail article, here’s the asset makeup for Vanguard, iShares and BMO.
It’s a simple formula for successful retirement funding. There’s the growth from the stocks with the drawdown risk (portfolio decline) managed by those bonds. When we use core asset allocation portfolios there is certainly sequence of returns risk. That means that the order of returns can greatly affect your success rate. If you are unlucky and retire in a year when the stock markets are throwing a hissy fit or three your portfolio might suffer permanent damage.
For example, if you want to spend 5% of your portfolio value and the underlying income yield of your portfolio is 2.5%, you would then need to sell shares of your stock and bond ETFs to make up for that other 2.5%. As ETF prices are falling, you are greatly reducing your ownership of the stocks and bonds.
That sequence of returns risk needs to be managed. In this article for Seeking Alpha I showed how Vanguard’s simple asset allocation funds did the trick historically. Here’s How Retirees Made It Through the Last 2 Recessions. The last 20 years has delivered a few more than trying start dates for retirees as we’ve experienced 2 major corrections with stock market returns cut in half. But those Vanguard Funds did the trick with a combination of US and International large cap stocks with bonds managing the risks.
As always past performance does not guarantee future returns.
For the level of income that you might be able to harvest from your portfolio please have a read of Is The 4% Rule Dead? Is There a New Normal for Canadian Retirees? There is a retirement rule of thumb that we might be able to harvest approximately 4.5% of portfolio assets (spend rate) each year, inflation adjusted. Of course, we need a sensible portfolio with low fees. When considering the 4% rule, taxes and fees need to be taken into account.
And keep in mind that we might need to be flexible when it comes to our portfolio spend rate. That’s a key theme in Retirement Income For Life: Getting More Without Saving More. In fact there are so many moving parts and retirement funding options and solutions that it’s likely impossible that a self-directed investor could create the most optimal retirement plan. Unless your retirement situation is dead simple, you should consider contacting a fee-for-service retirement specialist. I can offer some names and services.
The One Ticket Portfolios For Retirement.
Out of the gate I would eliminate the latest offerings from Vanguard, the Vanguard Conservative Income Portfolio and the Vanguard All-Equity Portfolio. The Conservative Income Portfolio is too conservative in my opinion. There’s not enough growth potential within the portfolio (stocks at 20%) to compensate for the low bond yields of the day.
If you have a very low tolerance for risk I’d suggest that you consider a combination of GICs and Life Income Annuities. You might then add a modest amount to a One Ticket Portfolio in the 40%-80% stock allocation area. As always a growth component can be more than useful to fight off inflation and longevity risks. There is risk in not taking on any risk.
And certainly some retirees don’t have to take on any risk. They have ‘enough’
With respect to the All-Equity Vanguard Portfolio it’s simply missing those shock absorbers. An investor might go that growth route with a pot of monies; but keep in mind that stock market corrections could cause those monies to be exhausted in quick order. 50% haircuts do not look good on a retirement portfolio. As an advisor I would tell retirees, sure you can keep those monies in the Equity Growth Portfolio, just be prepared to watch those funds disappear, or you might have to wait it out for a few years if we see a major correction.
Juicing the Yield with a One Ticket Core Portfolio.
Historically a well-balanced asset allocation model has worked quite well even though the portfolio income does usually not meet the spending requirements. That said, we know that a more generous yield can help with the sequence of returns risk. The greater the total portfolio income the lesser the number of One Ticket share sales that are required.
BMO has a suite of higher income ETFs that includes covered call strategies for Canadian, US and International assets with yields in the range of 4.4% to 7.3%. A retiree could certainly add an income booster to work in concert with a One Ticket offering. One might also have a core of GICs and annuities and pensions.
I’ve Seen This Simple Approach Work Before.
At Tangerine there are many clients who use the Tangerine Portfolios in RRIF and TFSA and non registered accounts designed for retirement funding. I’ve seen the Balanced Asset Allocation models work very well. Here’s the returns history of the Tangerine Balanced Portfolios to end of January 2019. Inception is January of 2008.
We see that over the last 10 years, even the most conservative Balanced Income model has delivered returns near 5.5%. That portfolio is 70% bonds. Again the portfolios have an MER of 1.07%. The One Ticket fee advantage may come into play delivering great returns. The One Ticket portfolios also include some more growth-oriented assets.
Are they perfect?
Well certainly perfect does not exist. The asset allocation portfolios will have some minor weaknesses with respect to tax efficiency and withholding taxes on US dividend income. One could strip out all of the individual ETF assets and arrange everything in the most optimal fashion. That said, not many investors have the time or inclination. Great might be better than perfect. I am with Dan Bortolotti who wrote in that Globe and Mail piece …
Are they perfect? No, but neither is any other option. And here’s the thing: You don’t need an optimal portfolio, you just need an excellent one. No one has ever failed to meet their financial goals because they had exposure to only 94 per cent of the world’s stock and bond markets, or because they failed to keep their investing costs lower than 0.18 per cent. Countless millions have failed by trying to do better.
And once again, if you have a more complicated situation you might seek that fee-for-service advice. You might even approach the Robo Advisor that offers the most ETF portfolios that includes tax efficient models, tax loss harvesting and more. This Robo will even write-up a full plan for you. Please have a read of Justwealth, the Robo Advisor that Knows When to Get Personal.
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