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 This mean any and all fund withdrawn in the first year are subject to withholding tax.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• Next, four percent of the RRIF value is withdrawn in cash.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.)

What extremes has the TSX hit since the mid '50s?

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

Increasing TFSA contribution headroom in anticipation of 2021

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.

My best posts are my last ones

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.

Let me list my recent posts:

• How much one can safely withdraw from an RRIF: Fisher Investments Canada 15- Minute Retirement Plan
• Before you can withdraw, you must have a retirement account loaded with money. Starting early really is the key here. Read the following four entries.

1. Step one when considering investing: Get a handle on your finances
2. Step two is to consider a self-directed plan
3. Step three looks at how to quickly and easily create that first portfolio
4. And after you've done all the above, you are not done. Now, you must learn how to hold and let time do its magic. This is a lot tougher than it sounds and because of this there are two posts: Sticking to the plan and How to get through a bear market.

Cheers!

Don't lose sleep over an approaching bear

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:

On planning and sticking to the plan -- for years!

 https://www.quora.com/Why-are-stock-investors-unable-to-beat-the-S-P-in-the-long-run

Christopher Welsh

·

Updated May 5

Attorney

Why are stock investors unable to beat the S&P in the long run?

Originally Answered: Why do stock investors not able to beat S&P in 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.

Building a portfolio with stocks and/or ETFs

To recap:

• First: Understand your finances.
• Next: Open a self-directed investment account. For most of us, this will be an RRSP account but in some cases it will be a TFSA. Try and avoid paying an annual $100 administrative fee.
  
• Lastly: buy some stocks or ETFs to begin the actual process of investing.

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.

One of the easiest ways to quickly build a complete portfolio is by following the advice found on the Canadian Couch Potato site. I have had Couch Potato portfolios and I've been very pleased with the results.

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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Writing this made me decide to run an experiment. Friday I started tracking the performance of my Million Dollar Portfolio.

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.