Withdrawal Strategies to Avoid

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. 

Though I did find a semi-critique of my method in the book Retirement Income for Life by Frederick Vettese, the former chief actuary at Morneau Shepell. Vettese knows his stuff. In a chapter entitled Strategies to Avoid he discusses the Withdrawing Only the Interest strategy.

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?

• At 71 you convert your RRSP to an RRIF.
• There is no minimum withdrawal in the first year. This mean any and all fund withdrawn in the first year are subject to withholding tax. 
  
• At 72 one withdraws the minimum amount in-kind by transferring equities from the RRIF to a TFSA. If there is not enough contribution headroom in the TFSA, the excess funds are deposited as in-kind transfers into a non registered account. There is no withholding tax on minimum withdrawals. But be aware that tax must be paid in the following year.
  
• Next, four percent of the RRIF value is withdrawn in cash. Knowing this cash would be needed, dividend income was allowed to collect in the RRIF. As my dividends at the moment yield more than four percent annually, there is always adequate cash in the RRIF for the withdrawals. These funds, which are over the minimum, are fully exposed to withholding tax. I have the maximum, 30 percent, withheld.
  
• The goal is to lower the value of the RRIF in anticipation of the approaching higher and higher withdrawal demands of the government. A side benefit is the rapid increase in the value of one's TFSA. All dividends removed from TFSAs are tax-free: a nice bonus. As dividend cash is removed, contribution room is created in the TFSA to be used in the following year. 

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.)

Fisher Investments Canada 15-Minute Retirement Plan

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.

 

The screen grab below shows the balance as of Saturday, June 26th.

Fisher Investments Canada sent me its 15-Minute Retirement Plan. It was a very informative brochure. The well respected investment management firm examined various investment and withdrawal strategies appropriate for retired seniors. 

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.

• 1940 shares ALA. Annual yield: $1862.40
• 410 shares BMO. Annual yield: $1738.40
  
• 150 shares BNS. Annual yield: $540
• 810 shares BCE. Annual yield: $2835
• 330 shares CM. Annual yield: $1927.20
  
• 615 shares EMA. Annual yield: $1568.25
  
• 925 shares ENB. Annual yield: $2997
  
• 620 shares FTS. Annual yield: $1252.40
• 1135 shares H. Annual yield: $1146.35
  
• 275 shares IGM. Annual yield: $618.75
• 500 shares NA. Annual yield: $1420
• 640 shares NTR. Annual yield: $1540
• 350 shares RY. Annual yield: $1512
• 655 shares TRP. Annual yield: $2122.20
• 1420 shares T. Annual yield: $1661.40
  
• 565 shares TD. Annual yield: $1785.40
  
• 2400 shares ZDJ. Annual yield: $2112
• 1000 shares ZPAY. Annual yield: $1920
  
• 3870 shares XUS. Annual yield: $3908.70
  
• 2500 shares VIU. Annual yield: $1600

• Plus there's more than $90,000 in cash. It's good to have some cash for unseen disasters.
• Anticipated Annual Dividend Income: $36,067.45. (Yield is 3.6% on original million dollars.)

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.