One of the best things you can do in the accumulation stage is ‘set it and forget it’. That is, put your investments on auto pilot as much as you can. Set up direct transfers from your chequing account to your RRSP, Group RRSP, and TFSA (and perhaps taxable) and then if possible automate the funds to move into your investment accounts. Many retirees like the idea of ‘hands off’ in retirement as well – with income flowing on a monthly basis. They don’t want to think about it. They don’t want to manage the selling of assets. They’re too busy living life, and perhaps they don’t want the stress or distraction. For these retirees there are some well-diversifed global balanced portfolio monthly income ETFs that will deliver income straight to their chequing accounts. We’re creating monthly income in retirement, on the Sunday Reads.
Think of it as getting a monthly pay cheque in retirement. Aside from the ease and simplicity, there can be an emotional benefit to the hands-off approach to receiving what feels similar to pension-like income. Vanguard embraced the monthly RRIFs for retirees concept when they launched the Vanguard VRIF asset allocation ETF.
The 4% rule
VRIF is a modified concept on the 4% rule for retirement. That ‘rule’ suggests that with respect to your portfolio accounts, you can spend at a 4% – 4.5% rate in year one, and then increase spending at the rate of inflation. The portfolio models used in the core studies are conservative models at 50% stocks to 50% bonds. Hypothetically your spend rate can increase as you increase risk (equities) and as you manage risk accordingly.
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For the history of spend rates over the last few decades be sure to check out creating retirement income from your portfolio. There is a tell-all chart in there courtesy of Norm Rothery at the Globe and Mail and the Stingy Investor. Vanguard’s VRIF is even more conservative in that it will spend at 4% of the portfolio value each year, with no inflation adjustment. The increase or decrease in spending is at the mercy of the fund’s total return performance. If the fund goes up 5%, the income should go up 5%. That said, the fund managers have the discretion to modify that strategy and spend rate. For more details, see that Vanguard VRIF review that I linked to above.
Nodody uses the 4% rule
It would be very rare to emply the 4% rule for an extended period. Just as no one with a financial plan is going to “live off of the dividends”, no one with a financial plan is going to set and forget accounts using the 4% rule. Retirement funding is much more nuanced than that. We can do much better than those two strategies.
We’re going to run the software to develop a more optimized retirement cash flow plan. You can look to free-use retirement calculators such as mayretire, milestones and moneyreadyapp. You may choose to hire an advice-only retirement planner to help you with that cash flow plan and the greater retirement financial and life plan.
That said, that doesn’t mean that you can’t put the monthly income funds to use. You just might have to be a little bit creative at times, using other income or cash to bridge any gaps.
The BMO T-Series, paying at 6%
For instance you might put the BMO T-Series funds to use. We looked at VRIF and the BMO funds in a recent Zoom presentation for Retirement Club.
From the monthly Retirement Club newsletter – BMO has offered a solution on that front by creating T series ETFs that pay out at a 6% rate. They are essentially selling shares for you and moving it to your cash pile.
For example here the BMO ZBAL.T ETF. It pays out at a rate of 6% annual, on a monthly basis. They can be tax efficient given the potential for return of capital tax treatment. There is also a ZGRO.T that is in the balanced growth camp. That may be more suitable for a 6% distribution, with the longevity consideration. But both are wonderful options IMHO.
And of course, you could combine VRIF and a T-series BMO ETF to boost the income. A 50/50 split would give you a potential 5% annual spend rate distribution. Both are well-balanced, managed global asset allocation portfolios / ETFs.
Tax efficient and greater income
If monthly income is your thing you might look to Vanguard’s Canadian High Dividend VDY or iShares’ XEI if you’re looking for some tax efficiency by way of qualified Canadian dividends. You might shade in a covered call ETF or two that offer a generous income boost and some potential tax efficiency. You might combine the monthly income ETFs with annuities your super bonds.
For more pension-like income with longevity protection, you can also look to the Purpose Longevity Fund. It’s a pension for self-directed retirees with a generious mortality credit. That might be very useful, used in modest fashion. I will update that post this week, but check in on the latest from Purpose.
There are many options. And that’s why it’s crucial to do the research, or of course sign up for the next session of Retirement Club, ha 😉 That’s where retirees who manage their own portfolios make sure they’re doing retirement right.
Simplifying retirement
While retirement is more complicated than the accumulation stage, retirement success can come down to paying attention to and understanding some key basic concepts.
We’re going to run a retirement cash flow calculator or two to understand the optimal spend rates and order of account harvesting. That is, when and how much to take from RRSP / RRIF / LIF / TFSA / Taxable and other sources. That process will include a look at when to take CPP and OAS. For most, there will be a considerable benefit to delaying those government programs for the much greater payments. You might consider an ‘RRSP meltdown’ strategy. That’s when your portfolio bridges the gap, allowing you to delay those programs.
We’re going to income split, take advantage of the first $2000 pension income tax credit, match the portfolio construction to the task for each account, consider tax efficiency, longevity, the estate, gifting, insurance needs and more.
We’ll consider the life plan that shapes the spending plan.
Creating your own retirement income strategy
Personally, I will not employ income funds as a strategy to fund retirement. Heck, our largest stock holding is Berkshire Hathaway (BRK-B) that does not pay a dividend. One of my favourites for creating homemade dividends is Apple (AAPL) that has a very low yield. Ditto for companies such as Lowes (LOW), Microsoft (MSFT), BlackRock (BLK), Texas Instruments (TXN), Walmart (WMT), Pepsi (PEP), or a Canadian holding such as the consumer staples (XST-T) that has a sub 1% yield.
XST is part of the strategy of using defensive equities in retirement.
Retirement portfolio success will come down to total return and the risk level, that’s it! The yield is irrelevant except for tax treatment. And of course the success comes back to the retirement master plan.
That said, there’s nothing wrong with the monthly income approach, if it removes the stress and makes it hassle free, it if provides the income you need for a certain period.
How are you creating retirement income? Do you have a retirement plan? Have you considered your life plan? Offer your thoughts and suggestions in the comment section.
More Sunday Reads
At Findependence Hub ideally, what does a balanced portfolio look like?
AT Stocktrades Dan looks at Canada’s blue chip powerhouses. Remember, in a look at Canadian stock portfolios we learned that simply buying enough of the big blue chips is historically enought to beat the market. From that post …
On the Canadian stock front, I Tweeted …
At Dividend Hawk’s weekly portfolio review I see that we shared in dividends from Pembina Pipelines, Pepsi, Telus and Canadian Natural Resources.
At The Retirement Manifesto and for American readers (happy July 4 weekend), how social security spousal benefits may change my claim date.
We spin over to the Banker on Wheel’s weekly reads and podcasts to check out – lost decades are more rare than you think.
Here’s a chart on 20-year rolling periods, in real inflation adjusted returns.
I have long reminded investors about the lost decade for U.S. stocks. Lost decades may not be a concern for accumulators with decades to go, but they can certainly knock retirees off course.
BOW also linked to – Is there any such thing as a safe investment? Of course not. It is only diversifcation and perhaps an all-weather portfolio model that gets us close to using the word “safe”.
From Booming Encore – can we predict a sliding door moment?
A “sliding door moment” refers to a pivotal moment in your life when a small decision or action may lead to a significant, often unpredictable result.
I think we just had a sliding door moment when we took in Max, a wonderful but high-needs dog rescued from northern Ontario.
He’s anxious and needs constant attention. It will be hard to find pet-sitters to allow us to vacation. Our travel options in retirement have certainly just been reshaped. All said, we love him. And no regrets.
GenYMoney takes a look at the Scotiabank Visa Infinite Credit Card.
Isabelnet. What typically happens after a poor first quarter and a robust second quarter?
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