What will I do if the market drops? Hold on for dear life. Look to my wife for strength. She has nerves of steel. Vanguard has an excellent site looking at this situation: Remember, this has happened before.
Vanguard agrees with me: ". . . do nothing. This may seem to fly in the face of reason . . . (but) this is great news for those of us who are saving for retirement . . . " Never ever forget that when the market drops stocks are on sale. Buy. You are getting a great deal.
The longer you can run your retirement portfolio successfully, the longer your money will last according to the Monte Carlo calculators I have consulted. This one, posted by Vanguard, indicates I am actually much better off today in my 70s than I was more than a decade ago in my early 60s.
My portfolio is almost twice its size today as compared to its size at my retirement. And although I have more funds, these funds do not have to last anywhere near as long. As time passes, it looks more and more like my wife and I will make it through our retirement years without running out of money.
Take a look at the calculator and see what it tells you.
Read the following story. It was published as part of a Canadian bank's presentation explaining investing to newbies.
Meet Lisa… - she is 64 and wants to retire next year. She recently inherited 80 thousand dollars, She has average knowledge of investing and she also has 50 thousand dollars saved in her RSP Lisa runs through these questions before she sets out to create her portfolio…
How much money does she need? And how often does she need it? After going through her budget, she estimates that she needs an extra 500 dollars a month on top of her pension. How long does she need this income? She thinks her lifestyle and budget won't change over the next ten years. How much does she have to invest right now? She will invest the inheritance of 80 thousand dollars, plus the 50 thousand dollars in her RSP.
How much risk can she tolerate? Lisa needs this income because she is retired but she also wants to minimize losses to what she has now. Because of this her risk tolerance is low. What are the implications to her income taxes? Lisa is also in a low-income tax bracket. She decides that the amount of money she receives from her investments is more important than how the income is taxed.
Since her risk tolerance is low, she rules out investing in stocks for dividends. She decides that she will focus on different bond and cash products instead. This income investment strategy may be ideal for Lisa . . .
Did you read the bank-posted story and say, "Whoa!" This lady needs $500 a month or $6000 a year. She has some $130,000 in cash. She could divide her investment among six stocks and keep $10,000 in cash to get her past the rough spots.
She could easily make 5.0% in dividends or $6000 in cash. This just gets her by. Bonds and GICs are clearly out. Stock ownership is the only way for Lisa to go. The bank must explain this to Lisa, hold her hand during the rough spots and nurse her along. An acceptance of low risk tolerance will not pay the bills.
BCE (Bell) yields 6.08% today.
ENB (Enbridge) yields 8.10% today.
CM (CIBC) yields 5.29% today.
EMA (Emera) yields 4.73% today.
T (Telus) yields 4.87% today.
ALA (AltaGas) 5.34% today.
The above portfolio should give Lisa 5.72% yield on her stock holdings or $6864 annual income or $572 per month. Her $10,000 can be put in a cash account yielding about .75% and her extra cash income from her dividends can be saved, as well. Her cash reserves will grow by about $939 or 9.4% on her $10,000 in cash savings. (Some of this will disappear to pay some income tax fees. The exact amount to be determined by Lisa's tax bracket.)
I posted a take on a Million Dollar Portfolio Demo I set up in response to a brochure from Fisher Investments Canada. You can read that post HERE. I based my piece on the approach I am using to withdraw funds from my own RRIF. I had hoped to hear from Fisher but I didn't.
He writes that spending only the investment income might make some sense for the lucky retirees with six-figure investment income but that is not me. Still, it appears I am not alone in pursing this strategy. Vettese calls the approach "popular" and a crude form of risk management.
Vettese writes the withdrawing-only-the-interest strategy looks better in theory than it does in practice. He makes it very clear this strategy is not one of his preferred approaches. To read about these, buy his book. I did and I consider it money well spent.
That said, I'm sticking with my variation on the withdraw-only-the-interest approach. It has worked for me for more than a decade. Although I have to admit to being worried that one success is not an adquate test. Am I being fooled by randomness? I did retire in 2009, near the depths of an historic stock market retreat. One couldn't ask for a better time to be entering the market with oodles of fresh "buyout" cash.
So, how does my approach work exactly?
My big question is: Can this method, with all RRIF funds in equities except for the approximately 10 percent in cash, survive the ups and downs, especially the downs, corrections and bears, encountered by stock market investors? All I can say is that so far it has worked well for me for eleven years.
I'm optimistic. Why? Check the chart below. Bulls tend to be stronger and longer lasting than bears. If one can ride out the bad times, I believe one can survive the downturns. This is one reason I have a maximum of ten percent or a little more in cash. That cash, plus my dividends, should protect my equity holdings from any forced liquidation. (I have my fingers crossed.)
I need an editor. My original post was riddled with math errors and bull/bear confusion. If you read this post and find an error, please comment. I don't mind criticism. Thank you.
The average bear market decline between1956 and October 31, 2008 was a drop of 28%. The worst decline was 46% between September 2000 and July 2002. It was a bear with a run of a month shy of two full years.
Two bear market tied for the weakest bear market position with falls of only 17%. One lasted only seven months and the other lasted eight. But, these two were not close to the shortest bear markets. That achievement belongs to a three month long bear market that ran from August to October of 1987. It was short but the decline hit 31%.
A bear market is inevitably followed by a bull market. The best bull (before our recent record run) ran for 48 months from December 1976 to November 1980 and reached a gain of 161%. The November 1990 to April 1998 bull had a gain that was almost as good at 160% but it took 90 months to hit this peak. One can take comfort in the knowledge that the average bull market sports an impressive gain of 79%.
If you play with the numbers you will find that a few bad, deep bears interspersed with weak bulls could leave one with a severely weakened portfolio. The whole success of the portfolio would come down to the dividends. If a lot of the dividends got reduced, one could be in serious trouble. But, many of the stocks in my million dollar portfolio demo are famous for weathering bad bears without cutting the dividends.
The three longest bear markets in Canada lasted 23, 19 and 17 months. Not a one lasted even two full years! Bears tend to be on the short side. On the other hand, the longest bull markets in Canada went for 90, 64 and 48 months. The three shortest bull markets went on for 5, 16 and 18 and 18 and 18 months. Yes, there were three bulls of the same duration: 18 months. Timewise, bulls tend to outlast bears. Bulls historically have had more staying power.
I cannot tell the future. No one can. But, it is reasonable to believe that there is a fair chance a million dollar portfolio with a yield approaching five percent would last a person through their retirement, no matter how long they lived.
My Million Dollar Portfolio Demo has about $60,000 in cash. That cash is unaffected by bear declines. Only the equity portion of the portfolio suffers from the bear drop. The cash holds its value and even grows a little thanks to dividends.
That cash, when considered in tandem with the dividend income, should guarantee, well pretty much guarantee, that no equities would face fire-sale liquidations. That small amount of cash in a million dollar portfolio plays an important role that is all out of proportion to its small value.
Bull and Bear Markets in Canada since 1956
It is late November. It is time for me to withdraw all the cash dividends earned in 2020 by my TFSA. I have adequate cash in my account to withdraw in advance any dividends being paid in December.
I don't like to make my last withdrawal in December. Although this is allowed, I prefer to keep December as a buffer between the last withdrawal of 2020 and the beginning of the new, fresh year of 2021.
If I don't need the money now, why make the withdrawal now? Why not wait until 2021? The money withdrawn in one year from a TFSA can be returned, recontributed, to the plan the following year. The withdrawal from one year become additional contribution headroom in the following year. It augments the $6000 of headroom added this Jan. 1st following government rules.
I want as much contribution headroom as possible to facilitate the maximum in-kind transfer from my RRIF to my TFSA. Any over-flow that I am unable to transfer to my TFSA goes to my non-registered account.
Income tax must be paid on the in-kind withdrawal but as the amount transferred meets the minimum withdrawal criteria, there is no withholding tax. The tax itself does not become due until the following year when the tax must be paid in full.
I think my posts discussing how best to withdraw cash-to-live from a RRIF in retirement are my best posts thus far. They certainly have attracted more attention than usual. The most popular one is the post looking at how much can safely be withdrawn from a RRIF.
I'm running a demo portfolio based loosely on my own portfolio. The big difference is in total investment. I'm not a millionaire. But, I am withdrawing a full four percent. So far, this withdrawal rate has worked for me for eleven years and now we'll see if the magic will come through again. So far so good, but a month is hardly enough time to make a firm judgment.
I'm a natural worrier. I think many of us are. When times are good, I worry how long until they turn bad. When times are bad, I worry how long until times get really get bad. But, to others, I often present a positive face, a person confident-in-the-future.
Whenever I have stopped to examine these conflicting feelings, I have come to the conclusion that one must keep emotions in check. Stay focused on the problem at hand, the stock market. React with thought, THINK, don't let fear be the driver.
How likely is a bear market? Not very. How often does the market correct? Fairly frequently. For the record, a correction is a drop in the market's value from the high reached in the past year by a minimum of 10% but less than 20%. When the losses pass 20%, the market is officially in bear market territory.
According to Investopedia:
Between 1926 and 2017, there have been only eight bear markets, ranging in length from six months to 2.8 years, and in severity from an 83.4% drop in the S&P 500 to a modest decline of only 21.8%. It should be mentioned that the correlation between these bear markets and recessions is imperfect.
The Stock Market Crash of 1929 was the central event in a bear market that lasted 2.8 years and at its worst sliced 83.4% off the value of the S&P 500.
Sounds awful but I was left wondering what happened to dividend income? According to my grandfather, the crash wasn't as bad as many today claim. I believe many of his stocks continued to pay dividends throughout the Great Depression, although the payments may have been reduced. But the cut in dividend income may have been softened by the deflation of the time.
I discovered that Mark Hulbert, writing for The New York Times, claimed dividends during the Great Depression averaged a 14% yield. I can understand that. The value of a stock collapses but the dividend is not cut, or is not reduced to the same extent. The math causes the dividend yield to skyrocket. Many would argue, this is a good time to buy.
Hulbert has argued that an average investor could have fully recovered from the 1929 crash in only four-and-one-half years. Many investors would have benefited from the fact that within the broader market there were some quick-recovery stocks. There were other forces at work as well. Think deflation again. The total recovery time when all stocks are considered was arguably 12 years. A long time but nowhere near as long as many claim.
Presently I have 12% of my portfolio in cash. I've kept lots of powder dry, as they say. My dividends today completely cover my income needs. In fact, my dividends presently supply me with 8% more dividend income than I need to live. If the market crashed but dividends were not cut drastically, I could live quite nicely on my remaining dividend income.
If my dividend income was slashed by a third, it would take about 11 years or so for me to exhaust my stash of cash. By that time there is a good chance my portfolio would have completely recovered, my dividend income would again cover all my expenses and then some and all would be fine.
In other words, don't panic. A bear market is not the end of the world for a well positioned retired senior with a solid, portfolio. It may look bad but looks can be deceiving. My advice, crunch some numbers and satisfy yourself that you too can survive a worst case scenario. I can but I don't expect that I will ever find myself in that position. Even I am not that negative.
In researching this, I came across the following posted by Invesco:
https://www.quora.com/Why-are-stock-investors-unable-to-beat-the-S-P-in-the-long-run
Here is a great chart we show our clients that was done by JP Morgan:
This shows the average annualized return had you bought and held an asset for 20 years.
Do you notice what the WORST performer is? The average investor.
Put your hands up….how many people out there developed an investing plan and stuck to it for 20 years? Or did you constantly change as you tried to find something “better”?
There is a gigantic difference between investment return and INVESTOR return. It is not hard to design a portfolio that should perform very well over a long period of time (e.g. 20 years or so), even when compared to the S&P 500 . But it is IMPOSSIBLE to get a client or individual to stick to that plan.
Click on the link and read the whole story in Quora.
To recap:
Buying stock and ETFs is both hard and easy. If you insist on doing all the research yourself, it can be very time consuming. As a novice investor, why bother? Find some good guidance, follow it and as you gain experience and confidence, break out on your own.
Click the first link, sit back with your notebook or iPad and read. I cannot say enough good things for the Couch Potato site. It is just chock full of good information.
Then click on this link and go to the 2020 portfolios, all based on various ETFs. This is index investing and it works.
Warren Buffet, the Wizard of Omaha, has said most average, long-term investors are best served by investing in low-cost index funds. Following his famous recommendation to buy the S&P index, simply buy an ETF tracking the S&P 500, such XUS or VFV.
Pretty cool, right? Buy one ETF and you are done. If you like the idea on buying just one ETF but you'd like a little more diversity in your portfolio, buy a portfolio in an ETF like ZGRO from the Bank of Montreal. If you want less volatility, then move to a more balanced portfolio like ZBAL. iShares and Vanguard Canada also have portfolios in an ETF. All are quite similar.
The nice thing about going this route is that you will have exposure to all the best places to put a little money. For instance, XGRO has about 35% exposure to the S&P 500. The S&P was Buffet's fave.
It will take a few years, but eventually you will have sufficient money to make buying individual stocks an attractive option. Today, I'd simply consult the Morningstar Canadian Portfolio recommendations. Sooner or later one or more of the suggested stocks will dip in price, if the dip brings it into 5* territory according to Morningstar rules, buy. I try to keep each individual stock I own to no more than 5% of my entire portfolio value. Even good stocks can get into big trouble. Think Nortel. I don't want to face that risk.
To see a stock-based portfolio, click this link: 15-Minute Retirement Plan.
Why would one want a stock-based portfolio? When I think about this logically, I have to admit that I am not too sure why. It does give one the feeling of having control but so what? I have not checked but my guess is that most folk would do better just putting all their money into ZGRO and leaving it there.
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Originally, I wasn't posting anything for a couple of months. But, this Monday my Million Dollar Portfolio took a big jump as the market responded to an announced possible COVID-19 vaccine. The election win by Biden in the U.S. presidential race seems to have been positive as well.
My Million Dollar Portfolio hit $1,031,461.54. I'm posting this because of what it says about volatility. Money invested in the market is volatile. It is far more volatile than you may think. Its leaps, both up and down, leaving you breathless. Be prepared. Always keep in mind that a bear market can easily diminish a portfolio value by a full 20% or more. Refrain from gloating when the market goes up and keep your finger off the sell button when the market crashes. Volatility is normal.
CLOSED - CLOSED - CLOSED - CLOSED
On Sat., July 31th, my Million Dollar Portfolio DEMO sat at $1,237,441. This is after making PAPER monthly withdrawals totalling $29,970. $3,330 was withdrawn monthly to cover living expenses in retirement.
I was surprised the strategy I am using was not among those that Fisher examined. Why the surprise? A fellow at TD told me that he had other clients using the same withdrawal approach. He considered my approach a reasonable withdrawal strategy for a RRIF holder.
My strategy? I meet the mandatory withdrawal rules by transferring investments in-kind from my RIFs and LIF into TFSAs and non-registered accounts. I never sell equities or ETFs to meet the annual mandatory withdrawal requirements. As these in-kind transfers are made to cover mandatory withdrawal demands, there is no immediate withholding tax. But note, the tax must be paid the following year.
To cover living expenses in retirement, I withdraw dividend income. I have 30% withheld on these cash withdrawals. By making these tax payments quite generous, the withdrawals essentially cover the future income tax due on both the cash withdrawals and in-kind transfers.
I have used this RIF and LIF withdrawal approach with success for over a dozen years in retirement.
Fisher Investments Canada warns, "One of the biggest risks an investor faces is running out of money in retirement." I agree. As the Fisher brochure points out, someone who is 65 years old can reasonably expect to hit 85. A 65-year-old must plan for the retirement portfolio to last two full decades. More would be nice. Fisher Investments Canada is offering some good advice here. No argument.
Fisher looked at five scenarios but I was interested in only one. The first two scenarios were too generous as Fisher itself pointed out. Fisher calculated that if one withdraws 10% annually, or even just 7% annually, the money will not last. The third scenario used a 5% withdrawal rate but even at 5% the Fisher portfolio could be depleted before the passing of two decades.
For a safe withdrawal rate, Fisher Investments Canada seems to be recommending 3%. With a million dollar portfolio at retirement that would mean one is only allowed a withdrawal of $30,000 a year. I could not get by on such an amount and I don't. And I don't have a million dollar portfolio either.
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Here, I am inserting my latest feelings on the 3% withdrawal rate recommended by Fisher Investments Canada. The percent one can withdraw, before one must sell some equities, varies. If one is lucky enough to buy when the market is down, removing 4% or more may be quite reasonable. If the market is roaring to new highs with equities fully valued and then some, even a 3% withdrawal rate can be tough to achieve if one is just entering the market.
When I retired, my dividend paying investments were, for the most part, all yielding well above 4%. After more than a dozen years in retirement, my portfolio has grown and although the income has also grown in absolute numbers, my dividend income has not grown enough to maintain the 4% yield. My yield today is 3.3%
Does this mean it impossible to design a portfolio today to support a 4% withdrawal rate? It may be harder but it is not impossible. The telecoms are still paying better than 4%. Telus yields 4.07%, BCE yields 5.39%. Pipelines are another place to find yield. Enbridge yields 6.14% and TC Energy yields 5.3%. The REITS are another good source for yield. I like two ETFs: XRE and RIT. Both yield more than 4% today. A few Canadian banks are still yielding more than 4%. CIBC delivers 4.53%. Some utilities also meet out 4% yield requirement. For instance, Emera is yielding 4.27% today. Toss in an ETF like XUS for some exposure to the American market and you might have a workable portfolio.
Companies like Fisher seem to know their stuff. No argument. Still, I am happy not paying a financial advisor. My gut tells me the cost of a financial advisor would be a big burden on my retirement portfolio. Only time will tell.
And now to return to my original post . . .
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I decided to try my hand at investing a million dollars with the goal of growing the portfolio while simultaneously providing income throughout the retirement years. I created a demo portfolio using TD WebBroker software. I took two cracks at doing this with the second attempt using a more diverse selection of stocks. I looked carefully at my own holdings to create my posted Million Dollar Portfolio. I tracked this demo portfolio for more than a year before software glitches caused me to stop.
My Million Dollar Portfolio had no bonds. Interest rates were simply too low. I didn't have bonds in my personal portfolio and I didn't miss them. My personal retirement portfolio is a mix of stocks and ETFs and it is larger today than when I retired eleven years ago. This is despite my having withdrawn cash every year to cover living expense in retirement.
To clarify what I wrote earlier, I withdrew all the dividend income up to a maximum of 4%. I also met my mandatory withdrawals from my RIFs and LIFs by making in-kind withdrawals with the transfers going to either a TFSA or a non-registered self-directed account. Because these are mandatory withdrawals, no tax is withheld but the tax must still be paid in the following year.
The goal of making these in-kind withdrawals/transfers is to deplete the RIFs and RLIFs while retaining all the investments: equities and ETFs.
Up until recently, my portfolio had no problem delivering more than 4% in annual dividend income Not today. A $50 stock that a few years ago which was paying a $3 annual dividend for a yield of 6% is today selling for $100. The $3 dividend now yields 3%. The dividend income remained constant in dollars but as yield expressed as a percentage it shrunk.
Thus far, this constant dollar income has not caused me any problems. For one thing, because I transfer so much to my TFSA annually, I have an annually increasing tax-free income. The same income goes farther and farther with each passing year.
Both Telus and BCE have announced dividend increases and Fortis is likely to up its dividend. These little bumps in dividend income help when it comes to income in retirement but these do not neutralize the effect skyrocketing equities values have on my portfolio.
I was able to validate some of Fisher's claims. It may be true that slavishly withdrawing a full 4% annually from a retirement portfolio could threaten its very existence over time. I prefer to focus on the amount to be withdrawn from the portfolio.
I retired in 2009. Today I withdraw more money from my portfolio than I did when I retired but the percentage number has shrunk. Yes, that's right. My withdrawal in dollars has climbed while the percentage withdrawn has slid.
Now, without further adieu, a drum roll please, I present my Million Dollar portfolio with the annual yields expected as it existed in June 2021.
Thanks to the cash balance, when I must, I can withdraw close to the 4% amount.
Let me point out that as funds are transferred to the TFSA, more and more future withdrawals become tax free income. A nice perk. When the in-kind withdrawals must go into a non-registered portfolio, the withdrawals will be taxed but as dividend income from Canadian companies. There may be some tax benefits.
Warning: One must be prepared for volatility. A correction is a fall value of 10% or more. A bear market kicks in when the market drops 20% or more in value. Corrections and bear markets are expected. Relax. You're an investor and not a speculator or gambler. You realize money is only lost when one sells. Your goal is to live on the dividends.
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If you've gotten this far, here's a financial advisor site that seems to offer a lot: Bellwether Investment Management. I liked the retirement calculator. And for another view on retirement, an absolutely excellent book is Retirement Income for Life by Frederick Vettese. He was the Chief Actuary at Morneau Shepell. His approach is different than mine but, unlike Fisher, he also sees four or even five percent withdrawals as possible.
I like Vettese and I may modify my own retirement plans based on his views. His argument for buying an annuity at some point, no later than the age of 80, is very persuasive.
