It is a common question from readers. How do I create reliable retirement income with ETFs? It is a simple answer if we consider the last 40 years. A simple mix of Canadian, U.S. and International stocks has provided the necessary growth component. Core bond funds have offered the required risk management. Stocks for offense. Bonds for defense. A typical balanced or balanced growth couch potato portfolio did the trick. Today, we’ll look at the 2022 returns for retirement ETF portfolios.
In early 2019 I posted the simple 7-ETF portfolio for retirees. Please have a read of that post for background on the ETFs, risk, and the retirement scenario.
Seek retirement and investment advice
You can self-direct your investments if you have the knowledge and you understand your risk tolerance level. But I’d suggest that you contact an experienced fee-for-service financial planner who has expertise in the retirement arena. With a fee-for-service advisor you will pay as you go. You can pay by the hour, or perhaps pay a flat fee for the evaluation and plan. You might then set off on your own to build the portfolio with all the right pieces in the right place.
I’d also suggest that you read my review of Retirement Income For Life: Spending More Without Saving More. That’s a wonderful staple read for retirees and retirement planners. The author, Frederick Vettese, was the chief actuary at Morneau Shepell.
Your retirement ETF will be one piece of the retirement funding plan.
Many Cut The Crap Investing readers visit Cashflows & Portfolios to uncover the a more optimal order of asset harvesting. That is, how much to take each year from RRSP vs TFSA vs Taxable acccounts while taking pensions and other income into consideration.
Retirement Zoom chat and presentation.
I co-hosted a retirement-focused Zoom presentation and Zoom chat with a reader Q&A. I covererd the retirement basics, a few key considerations, plus retirement ETF portfolio construction.
Here is the link to the retirement video. Or you can click on the VW van.
Here’s the reader Q & A session via the Retirement Zoom chat video link.
The 7-ETF Portfolio for Canadian retirees
Keep in mind that two of the assets are in U.S. Dollars. You can substitute and use Canadian Dollar holdings for VIG and international real estate. See the original 7-ETF post.
You may choose to go more aggressive or more conservative in your approach. And keep in mind the above is not advice, but ideas for consideration. That said, I do see it as a sensible conservative mix. You may decide to add more inflation protection by way of energy stocks or commodities.
Stock markets do not like robust and unexpected inflation. Canadian markets typically are better-positioned than U.S. markets, but they do not ‘do the trick’. That was demonstrated again in 2022.
This post is under construction/update – January 30/23
The ETF portfolio for retirees 2022 update
For 2022, global stocks and bonds both had a terrible year. It is a rare event when bonds do not come to the rescue of stocks. But that can happen in a period of unexpected and robust inflation, when rates are increasing in the attempt to cool the economy and bring down inflation. REITs also had a very weak year. Normally, REITs would perform well during a period of unexpected inflation. The fastest rate hike regime in memory spooked REITs. Also, recession fears also weighed on the real estate market.
The 7-ETF retirement portfolio was down 10.5% in 2022.
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Here’s the returns of the individual assets for 2022. Charts and tables are courtesy of portfoliovisualizer.com
We see that the only asset (almost) working in 2022 is Canadian high dividend stocks. They have outperformed the market. The TSX Composite was down 5.8% in 2022. The U.S. market was down 18.2% in U.S. Dollars.
The suggestion of the U.S. Dividend Appreciation ETF (VIG) also demonstrated its worth by offering less draw down in the correction of 2022. That ETF also has a very good history of delivering increasing dividends over time. During the financial crisis (2008-2009) VIG experienced a very small decline and then quickly went back to generous dividend growth in 2010 and beyond. VIG also offered a lesser draw down in the financial crisis, compared to market.
The Canadian high dividend space continues to outperform the market.
Adding dedicated inflation fighters
If a retiree was to bolt-on additional inflation protection, as I do, the returns would be down by about 1.9% in 2022. I hold near 10% in Canadian energy stocks and another 5% in PRA and PRA ‘stuff’ such as gold and commodity stocks. If a retiree had 20% of dedicated inflation fighters (10% oil and gas and 10% PRA) returns would be flat for the year.
Energy stocks (oil and gas producers) were up 53.40% in 2022.
The Purpose Real Asset ETF (PRA) was up 15.90% in 2022.
Readers will know that I am a fan of building an all-weather portfolio for retirement.
The 2021 retirement ETF portfolio update
Here’s the returns for the 7-ETF portfolio for retirees for 2021. Charts and tables are courtesy of portfoliovisualizer.com
Yup, that simple mix delivered a return of 13.8% in 2021. That is a very good return for a conservative mix that has a 45% bond allocation.
For risk and return benchmarks have a look at …
The ultimate asset allocation ETFs page.
Here’s the returns of the individual assets for 2021.
With inflation fears dominating the back half of 2021 the inflation-sensitive assets of the Canadian High Dividend VDY and REITs performed very well. Keep in mind that two of the assets are in U.S. Dollars. You can substitute and use Canadian Dollar holdings. See the original 7-ETF post.
AT QUESTRADE YOU WILL HOLD DUAL CURRENCY (U.S. AND CANADIAN DOLLAR) ACCOUNTS. YOU CAN BUY ETFS FOR FREE.
In 2021 Canadian energy stocks delivered 83.80%.
A real asset basket such as the Purpose Diversified Real Asset ETF (PRA.TO) delivered 23.80% in 2021.
The retirement ETF portfolio is not impaired
If we run the portfolios from 2017 through to the end of 2022, with an aggressive spend rate of 4.8% with an inflation adjustment, the portfolio has delivered the income and the portfolio value would now be just below the starting amount.
In the above, based on a hypothetical $1,000,000 portfolio, the retiree is removing $4000 per month from the portfolio. Of course there will be tax considerations.
More growth, more income
If we ratchet up the equity (growth) component of the portfolio, we would see an even greater portfolio value. Meaning, the retiree could have enjoyed a slightly higher spend rate, aka more prosperous retirement.
The more aggressive Balanced Growth Model had an end value for the period of over $1.2 million. Of course, that retiree would need to have a higher tolerance for risk.
And keep in mind that when we move through major corrections, retirees are happy to hold those bonds.
In the above chart we are spending at a more modest 4% rate. We see there was no advantage to holding more stocks. And not very many retirees would be able to watch their portfolio value almost get cut in half.
Vanguard VRIF ETF for retirement
Recently I also looked at Vanguard’s VRIF Retirement ETF. That retirement funding ETF delivered a very nice income increase for 2022. That said, being a traditional balanced portfolio (but built to provide regular income), VRIF was down by 10.50% in 2022. The income payment will be reduced by that rate. I will confirm that amount when Vanguard updates the VRIF page.
Here’s the VRIF distribution scorecard
Distributions per share.
- 2020 0.83
- 2021 0.87 (4.5% increase)
- 2022 0.94 (7.6% increase)
- 2023 0.85 (10.5% decrease)
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Creating that retirement income
You may choose to ‘fund as you go’. While you will have portfolio income (from bonds and dividends) that is accumulating, you will likely have to sell assets to create the desired portfolio income. The basic idea of asset harvesting would be to keep the portfolio close to the original asset weighting. You do not have to be exact in this regard.
You may choose to sell assets monthly, quarterly, or you may even move the assets to a cash (ETF) at the beginning of the year to ensure that you have your retirement income for the year safely stored in cash. Of course, consider fees and taxes.
So the good news for this simple mix of ETFs is that you would have enjoyed a decent spend rate and the portfolio value would have increased. Of course it is favorable to have a buffer to weather the storms such as the great financial crisis that began in 2008, or the dot-com crash of the early 2000’s. An increasing portfolio value will offer that much-welcomed cushion.
The bonds and cash help in that regard as well – to protect against severe market corrections.
Sequence of returns risk
We need to manage the sequence of returns risk in retirement.
And keep in mind that we enter the retirement risk zone about 10 years previous to our retirement start date. We need to de-risk and prepare the portfolio well in advance.
And here is an interesting approach. You can remove sequence of returns risk (entirely) by going very conservative as you begin retirement. You would then increase your stock allocation (and growth potential) in retirement. That is called a retirement equity glidepath.
A portfolio spend rate example
Here’s an example with the 4.8% spend rate from the year 2000. That is a very unfortunate start date as 2000 is the first year of the dot-com crash. U.S. markets were down three years in a row. Canadian markets suffered as well.
We see that the Balanced Portfolio is still chugging along in 2021, while the all-equity global portfolio went to zero in 2017. We have to protect against an unfortunate start date.
Keep in mind that there are many periods when the most optimal option is an all-equity or equity-heavy portfolio that would provide greater retirement income. But with an aggressive portfolio you run the risk of retiring and running head first into a severe market correction. You don’t want to gamble and hope that you get lucky. Most retirement specialists would recommend a Balanced or Balanced Growth model.
Recessions and deflationary periods might also ‘kill’ the aggressive portfolio.
Variable withdrawal method
You might consider a variable percentage withdrawal (VPW) approach.
With a VPW you would adjust your withdrawal percentage based on market returns. Think of it as guardrails so that your retirement funding does not go off the rails. In periods of market declines you would spend less from your portfolio. When the markets are roaring, spend more. Think of it as a ‘take what the stock market gives you’ approach.
Of course if you had de-risked enough, you would likely not have to worry about poor stock market returns. You would likely continue to with your initial spending targets that were set pre-retirement.
I will be back soon with a post on this VPW retirement strategy.
Pensionize more of your income
Portfolio risk can be minimized by way of pensions and other income. Of course you can pensionize more of your retirement income by way of annuities. You might consider the Purpose Pension Longevity Pension Fund.
Annuities and the Purpose fund can work in concert with your portfolio, pensions and other income.
Use some income boosters
You may decide to shade in greater income by way of individual stocks, or you might bump up that Vanguard VDY and BMO Income ETF weighting. Retirees can certainly take comfort in seeing greater income enter the portfolio, and by having more of their spending needs covered by portfolio income.
That approach did compensate for the lower bond yields available in 2022. We can use these conservative high dividend stocks and ETFs as ‘bond substitutes’, potentially replacing a portfion of your bond allotment. It’s nice to see that bond yields have increased greatly through 2022 and should help the cause for retirees.
That said, we should not forget the importance of total returns. Growth is good in any stage, especially in retirement. But there is nothing wrong with slanting the portfolio to some greater income. You may even consider some of the specialty income ETFs on the BMO site.
Get a retirement funding plan
Once again, retirement funding is more than tricky business, and the risks are incredible. You should strongly consider connecting with an advice-only planner. You’ll receive a plan that should provide the optimal order of retirement income harvesting (RRIF vs TFSA vs Taxable vs pensions vs other income). The plan will also create tax efficiency. There are many other financial planning considerations.
The self-directed investor might also consider the service provided by Mark Seed from My Own Advisor. He runs Cashflows & Portfolios where they will provide options for that optimal retirement funding strategy. That service is provided for a very reasonable fee.
If you do head to Cashflow & Portfolios, be sure to tell them Cut The Crap Investing sent ya 🙂
Thanks for reading. Please leave a comment with your ideas, concerns or questions. Or feel free to send me a note by way of that contact form.
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