On Twitter/X this past week I shared a chart that showed the performance of three retirement portfolios, at three different risk levels. The time frame for the Cut The Crap Investing core ETF portfolio models was the last 10 years. I asked “what do you notice?”. The main observation was that the balanced portfolios worked, very well. Also, that retirees were rewarded by taking on additional risk, thanks to the growth provided by equities. Another core learning from that chart is that 2016 offered a very fortunate start date for retirees. We’re looking at retirement funding at four risk levels on the Sunday Reads.
Here’s the money chart, the topic of the day.
The Portfolios are each providing retirement funding at a 4.8% spend rate, meaning a $1,000,000 portfolio is providing $48,000 in annual income, before taxes. Fees for the ETFs are accounted for. There is an inflation boost each year, for spending. Remember, your fees subtract from your spend rate in full. Fees are a wealth destroyer in retirement and in the accumulation stage. If you were looking to use an account to fund retirement at a 4.8% spend rate but have 2.0% in investment and advisory fees, your spend rate becomes 2.8%. You took a 42% retirement pay cut. Ouch! Of course the typical Canadian cannot afford those fees.
Retirement funding observations
Here are some key findings.
- Balanced portfolios worked very well
- Taking on more risk created the potential for greater spending
- Riskier portfolios had greater drawdowns
- Lower fees are crucial to retirement funding success
- 2016 offered a very favourable retirement start date
Once again the main observation (and very good news) is that simple works. A simple but effective global balanced portfolio with low fees works. That was the key theme in this video I created for the retirement stage.
For the portfolio models used in the chart check out the ETF model portfolio page. Of course the asset allocations are suggestions, or ideas for consideration. You may choose to equal weight the U.S. and international, you might choose to lower the Canadian equity exposure. You might equal weight the three baskets of U.S. / International / Canadian equities. It’s a personal call.
A look at the Conservative ETF Portfolio
Here’s a look at the Conservative Portfolio, that holds 60% bonds. We see that it might be too conservative for a portfolio designed to create durable income for 30 years or more. Well at least at that 4.8% spend rate. Depending on the financial plan, a Conservative model might be appropriate for a shorter time horizon (quicker depletion of account), or again, used with a lower spend rate. Keep in mind that 2016 offered a very good start date.
Not so fortunate start dates
We can look to this post for a very unfavourable start date.
Why retirees hold bonds, cash and GICs.
That post offered this chart.
We see the all-equity model fail.
Just out the CIG rates at EQ Bank
Whereas a 60/40 balanced portfolio model was more than up to the task of taking on the dot com crash era.
There are so many more lessons from the above balanced portfolio chart. To maintain the spend rate and retirement lifestyle, the retiree would have had to spend while the portfolio(s) was down over 50%. Very few retirees would have that level of risk tolerance and faith that the markets would allow the portfolio to recover in incredible fashion.
Given that, a retiree who hits an unfortunate start date (or severe correction in the early retirement years) would likely spend less – they would adopt a variable spend rate. Those with every conservative portfolios might continue on with their spend rate plans. Studies show that retirees with more conservative portfolios spend more than those with aggressive portfolios.
Here’s a must read that shows the success of a Canadian balanced portfolio at various spend rates from 1994.
Creating retirement income from your portfolio.
And the killer chart courtesy of Norm Rothery.
Yes it’s all about that important (luck of the draw) start date.
Seek out a retirement cash flow plan
While it is useful as a framework on durable spend rates, no one with a financial plan uses the 4% rule for an extended period, or in absolute fashion. Remember, the 4% rule suggests that we can start spending at a 4.0% – 4.2% spend rate in year one, add in an inflation adjustment each year, and create durable income for 30 years or more with a high level of success.
When we adopt a more optimized retirement cash flow plan, our spend rates are going to be ebb and flow to plan. Retirement funding between account types (RRSP/RRIF/LIF/TFSA/Taxable) working in concert with pensions and government programs such as CPP and OAS more of a dance.
RRSP meltdown
The most favourable retirement hack is a RRSP/RRIF meltdown, where we spend more heavily from those registered accounts in the early years to allow for the considerable income boost offered by delaying CPP and OAS. The spending plan might look more like this.
We see the RRSP/RRIF accounts (pink and red) are tapped aggressively in the early years, with an aggressive spend rate, to allow for the much greater CPP payments (orange bar) at age 71. We see that after age 71 the heavy lifting is done by CPP and OAS while the TFSA picks up the slack. The above scenario may not be the absolute optimal scenario, but it demonstrates the benefit of the meltdown strategy. I used the free-use MayRetire retirement calculator. You can run various strategies to see what delivers the most optimal cash flow plan. It’s very intuitive and easy to use. We are testing all of the leading retirement calculators at Retirement Club.
The above chart was offered in a Retirement Club newsletter.
Also, we do not spend in linear fashion. Let life shape your retirement cash flow plan and spend rates. We might create a “U-shaped” retirement plan, with more spending up front, possibly drawing down registered accounts (both RRSPs and TFSAs). We’re deferring OAS and CPP if there’s a reasonable expectation of collecting them. Spending might then dip in the slow-go years and increase again in the no-go years as retirement home and other healthcare costs require an income boost.
It’s not just about punching the numbers into a calculator.
Use the contact form if you have questions on how retirees who self-direct their portfolios can create a sensible spending plan. Or, fire away with questions and thoughts in the comment section of this post. Make sure you’re doing retirement right.
The Sunday Reads
What kind of investment world have we been living in?
Technology is transformational. The internet and now AI is transformational. It’s not that we can’t make money off of other sectors (we can), but we should recognize the home of growth.
The Bank of Canada held steady once again with the overnight rate at 2.75%. There’s economic softness in Canada that is showing its face. It is only inflation fears that are holding back more rate cuts. It’s likely a good guess that more rates cuts are on the way in 2025 and 2026. But inflation will have to behave.
The not so beautiful One Big Beautiful Bill Act (OBBBA) in the U.S. might increase taxes on your U.S. equity holdings. That’s a very good post from Scotiawealth that outlines the current state and the potent tax hit, should the beautiful bill become law. My take is that even if it becomes law, there will be no reason to take action. The dividend on the U.S. market is very low, the hit would be minor in context of the total return potential of U.S. stocks. It is STILL where they keep most of the best companies on the planet. That said, if one is income-chasing in the U.S. (never a good idea anywhere) they might take note and adjust the stratety to lower yield, growth-oriented.
The wealth transfer
At Findependence Hub a look at transferring wealth to your children, sensibly. Here’s a snip, from Steve Lowrie (CFA) …
And speaking of tech and growth investing, Dan at Stocktrades give us the top Canadian AI stocks. Here’s a look at AI adoption from Isabelnet …
Tech was a solid contributor when we looked at Canadian stocks moving to all-time highs.
Dividend Hawk looks at his portfolio for the week. We shared some Enbridge (ENB.T) dividends. And dividend-cutter Algonquin has seen some recent respect from the markets.
Algonquin Power & Utilities Corp. (AQN) Announces Financial Outlook for 2025 through 2027; AQN announced its “Back to Basics” utility customer-centric capital plan aimed at “delivering steady predictable returns for investors through focused utility execution and capital discipline.” AQN guided for current-year adjusted earnings of $0.30-$0.32/share, mostly above FY 2024 adjusted earnings. The company also said it expects operating expenses as a percentage of revenue to improve by 5%-7% by the end of 2027, and anticipates its earned return on equity will improve by ~300 bps to ~8.5% by 2027.
AQN is part of the Beat The TSX Portfolio that is having a very nice 2025. The returns are updated to the end of April. I’ll be sure to update that post to the end of June this week.
At Banker on Wheels, it appears that the beautiful bill has its eyes on European investors as well.
Also in the mix from Banker, Early Retirement Now sees no value in small cap value stocks for retirees. I would have to agree. We are better to add gold and defensive equities.
Last week we saw defensive equities were more than up to the challenge of the tariff tantrum.
And – Europe is becoming more attractive? … as an investment destination.
I liked Dividend Boomer’s take on wealth and the home …
The home can certainly be a wonderful creator or tax-free wealth (when done sensibly), but it’s a home first. Our home has been an accidental investment, but its greatest value is as a home and community.
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That cash went into my TFSA account to help buy some CBIL-T and HUTS.T.
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