Tuesday, October 21, 2014

Taking a breather from the corrrection

If that was a bear, it has gone back into hibernation. My retirement portfolio has gained thousands in the past few trading days. It looks quite likely that despite having to remove dividend money to live, my retirement portfolio will end the year with a nice gain.

I like my portfolio to make enough, at the very minimum, to end the year with the same amount it started plus enough to neutralize the effects of inflation. This, of course, is after I have removed some money to cover living expenses in retirement.

The rule-of-thumb governing withdrawals is: Only remove four percent per year if you want your portfolio to last. Good rule but almost impossible to follow. When my wife turns 71 we will both be forced to convert our RSPs into RIFs and remove a legislated amount each year. The very first year we must remove 7.38 percent this withdrawal rate will climb higher with every passing year. The government does not want RIFs to be going strong when folks are hitting 90. The government forces seniors to bleed retirement accounts until they wither away.

I'm trying to move as much money as possible into my wife's and my Tax Free Savings Plans. The money that one removes from either an RSP or a RIF counts as income and can trigger the old age security claw back if one has almost any company pension at all. Earn more than about $70,000 in retirement and you are in claw back territory. For many this is easier than you may think.

The Guaranteed Income Supplement (GIS) is paid to low-income Canadians age 65 or older. Like OAS, GIS may also be reduced, or even totally eliminated, by income generated by removal of funds from either an RSP or RIF.

For some people, paying income tax up front and sticking their retirement savings in a Tax Free Savings Plan rather than an RSP is a better way to save for retirement. I wish these had existed when I was saving for retirement.

As I said earlier, it is not too late to start building a TFSP. My wife's plan, is up more than 12 percent in just more than a year despite the recent pullback. It is a small plan and all the money is invested in one stock: D.UN. As the dividends come in, I immediately move the funds into a TD Investment Savings Account (TDB8150). Fully 12% of the plan is now in cash earning 1.25 percent. As the cash pours in the volatility of the plan drops, as well as the yield. Today the total plan is delivering more than seven percent. Nice.

Soon I will move the cash into the highest paying GIC I can find. This will kick the yield up a small notch. And folk say you can't get a good yield today. I'm happy. With time, this plan will get less and less volatile as the cash component grows with monthly dividend income.

Just a side note. Some are calling for D.UN to hit $35. It is at $28.48 as I write this. I'm in no hurry to sell. I can wait for this stock to gain in value. When it does, my wife will make out like the proverbial bandit.

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