Hey Uncle! I'm facing retirement. Any suggestions?

Retirement can be tough. Facing a life without a job is not something many of us can easily handle. What can we do to ease ourselves into retirement with a modicum of personal turmoil? Do a little planning. Take some simple actions to prepare for the inevitable -- like relax with a good book.

Hopefully, your retirement planning started decades ealier. You have opened an RRSP and possibly a TFSA, right? If you don't keep a household and personal budget, start. You must know, really know, how much you (and your partner) make and how much you (and your partner) spend.

Shortly before retiring, prepare a retirement budget. List all sources of income and all anticipated expenses. This is easier than you may think. There are lots of examples of budgets posted online. Here is a link to but one source: Get Organized (TD Canada Trust) Click on orange rectangle in top right corner.

 

Income sources:

• company pension(s)
• CPP payments
• OAS payments
  

Expenses

• income taxes
• housing related costs
  
• transportation (automobile) charges
  
• personal living expenses
  
• and more
  

If the calculations show a positive balance, you can breathe easier. If, on the other hand, the result is in the negative, this is the amount that must come from your savings that you have earmarked for retirement. It is that simple

Options:

• buy an annuity with your retirement savings
  
• work with a financial advisor
• open one or more* self-directed portfolio accounts

I believe any other options can be folded into one of the above categories. If I'm wrong, let me know. I'll correct my list.

Annuities were once the option of choice for many. Today, with interest rates so low and the risk of inflation always present, annuities are no longer the clear favourite. I will put off buying an annuity until I am between 75 and 80. At that point, I fear the risk of my losing my mental smarts is too great to ignore. An annuity supplies some insurance against future mismanagement of the wealth needed for future income.

I hate financial advisors. I was badly burned by Freedom Fifty-five and London Life. I suffered through decades of incompetence. While my personal investments were growing by leaps and bounds, my Freedom Fifty-five investments were wilting. When I retired I had to wait about a decade for London Life to release the funds and when they did they only returned 75% of my original investment. My Freedom Fifty-five RRSP investment lost money in the four digits! I'd have done better just putting the money under my mattress. That's crazy.

My favourite option is opening one or more self-directed investing accounts. An average couple in which both partners had jobs could find they need six accounts. Sounds complicated but it isn't. In fact, my investing rule is KISS (Keep It Simple Stupid). 

The easiest answer is to invest in some good, high dividend paying stocks and put the remainder in an All-in-One ETF. There are a number of these complete portfolio ETFs. Do your research and take your pick. The three ETFs listed below all exhibit low bond content. For more bond exposure, look for the BAL rather than GRO ending. (Note: The TD ETFs do not follow this pattern.)

• TOCA
• VGRO
• XGRO
• ZGRO

If skipping all investment in bonds is your goal, do not despair. There are pure equity All-in-One ETFs. The iShares offering is XEQT. It delivers lots of exposure to U.S. equities and Canadian plus lots of international exposure as well and no bonds. None. XEQT yields 2.14% today. This changes daily.

• United States 45.97%
• Canada 23.15%
• Japan 5.99%
• United Kingdom 3.17%
• Switzerland 2.25%
• France 2.23%
• China 2.19%
• Germany 2.00%
• Australia 1.95%
• Netherlands 1.24%
• Cash and/or Derivatives 0.72%
• Other 9.11%
  

I could not live on a yield of three percent, as suggested to me by a number of financial advisors. I must have a minimum of 3-4% to balance my books in retirement. And getting by on 3-4% is just that--getting by. I'd have go cut my expenses to the bone. It would be painful. I aim to withdraw at least four percent annually from my retirement savings and have done so for the past 12 years. And despite the withdrawals, my principal has almost doubled during my retirement. 

The recent exceedingly high stock prices are driving down dividend yields when expressed as a percentage yield. This is putting lie to my claim of insisting on a 4% yield. The cash payments have gone up a little, not much, but a little. If these payments were adequate in 2020, these payments will be fine in 2021 as well and falling percentage yield be damned.

If I were just starting out and I wanted a true KISS portfolio, I'd mix XEQT, or something like it, with a good mix of the highest dividend paying stocks on the Morningstar Canada Income Pick List. Always use the most up-to-date list. There is a new list released every month. 

I'd keep at least 10% in cash, maybe more today, in anticipation of a correction. I would then buckle my seat-belt and prepare for the ride of my life. And never ever forget that oh-so-applicable advice from The Hitchhiker's Guide to the Galaxy: "Don't Panic!"

 

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* It is not difficult for a husband and wife to find themselves with six self-directed accounts.

1. Husband's RIF account. An RRSP becomes a RIF (Retirement Income Fund) at age 71.
   
2. Wife's RIF account.
3. Husband's TFSA.
4. Wife's TFSA.
5. Husband's non-registered account. Called cash accounts.
6. Wife's non-registered account. 

And be aware that a company pension plan may convert into an LRIF at retirement. An LRIF is a Locked-in Retirement Income Fund. That LRIF could become a seventh self-directed portfolio.

Some stocks are on sale

Some of the dividend paying stocks that I watch are presently on sale and I think the bargains may get even better in the coming days.

• BCE has a dividend yield of 6.38% and is off its high of the past year by 14.8%.
  
• EMA has a dividend yield of 5.10% and is off its high of the past year by 17.8%.
• ENB has a dividend yield of 7.52% and is off its high of the past year by 18.8%.
• FTS has a dividend yield of 4.05% and is off its high of the past year by 15.2%.
• TRP has a dividend yield of 6.14% and is off its high of the past year by 25%.

Nothing in life is one hundred percent safe. There is always risk. Think Nortel if you need an example to encourage you to set limits on how much you invest in any one equity. That said, I have no problem investing up to five percent of my portfolio in any of the above stocks.

If you invested $10,000 in each of the five stocks, you would reap an annual payment of something in the neighbourhood of $2919 (5.838% averaged dividend yield).

If you still have money to invest, be patient. I'm sure there will be opportunities to buy Telus and a number of the Canadian banks on dips. I insist on a 4% dividend yield. After that, I'm cool. (For instance, Telus today is yielding 4.80%.)

And if investing in a pipeline like Enbridge (ENB) seems wrong to you, you don't know Enbridge. The pipeline giant is building wind farms off the French coast. Enbridge is going green.

https://renewablesnow.com/news/edf-enbridge-and-wpd-ready-to-start-building-450-mw-french-wind-farm-732022/

Useful

https://www.td.com/ca/en/asset-management/resources/graphing-tool/

 

https://einvestingforbeginners.com/lump-sum-calculator-ashul/Lump Sum Calculator: Investing Now vs Later (with Dollar Cost Averaging) 

With each year that passes, the difference between the strategies increases more and more in favor of the lump sum investing style. 

 

 https://www.aaii.com/journal/article/13583-how-much-risk-can-you-handle-and-still-meet-your-goals

How Much Risk Can You Handle and Still Meet Your Goals?

 

Read the not so fine print

Banks are not out to bamboozle you. That said, the English language as used by financial institutions does not always mean what you may think. Growth can mean increased risk and a managed income portfolio fund can be a warning to look carefully. It may be heavily weighted towards bonds.

The above graph shows the growth of two similar investments made in early 2013. The green line represents an investment in the simple, relatively inexpensive fund: TD Monthly Income fund (TDB622). The original investment can be as little as $100.

The purple line shows the growth of the TD Managed Income Portfolio. An investor in this fund had to make a minimum $150,000 initial investment. As can be seen from the above graph the TD Monthly Income fund is up 34% today. The fund that points out that it is managed, aren't most mutual funds in one way or another, and insists on an initial deposit of $150,000, is up only 22% over the same time period. Why? Bonds. The managed fund contains far more bonds. 

The names are similar but these funds are not comparable.

Does this mean one should own TDB622? I think not. I'd look for something that doesn't hold a lot of bonds, something like XEQT. This iShares ETF holds only equities, and it's a good mix of equities with U.S., International and Canadian companies all represented.

 If you insist on holding some bonds, I'd be more inclined to put a small amount in a GIC or even in a cash account where it could await a correction and be available for immediate redeployment back into the market at fire sale prices. 

There are some extremely short term bond ETFs for die hard bond fans. Let me suggest looking at XSQ, the iShares Short Term High Quality Canadian Bond Index. It is yielding 2.19% today. (In the interest of full disclosure, I once owned XBB and was satisfied with its performance. Today XBB is yielding 2.81%. XBB is more volatile than XSQ but it is nowhere near as volatile as equities.

It's still a good time to open a self-directed investment account

GICs are not safe. The amount they earn in interest does not match the rate of inflation. Buy a GIC, keep it for a year and when you cash it it will have lost buying power. This is almost guaranteed.

My answer: accept a bit more risk, open a self-directed portfolio account and invest with care. All the big North American markets are at all time highs. A correction is likely. At the very least, a pullback from the recent highs is likely.

My answer, buy enough good, dividend-paying investments to get you by and keep the balance of your money in a money market account paying .25% daily interest. This is the same rate as paid by a 1 year term GIC!

I'm tracking a demo portfolio to show a friend exactly what I mean. They can show this post to the bank at their next meeting.

Total amount of money to invest: $60,000.

• Invest $25,000 immediately. Do not try to time the market. I have the following in my demo account:
• 46 shares of Canadian Imperial Bank of Commerce (a bank)
  
• 192 shares of Emera Inc. (a utility)
• 88 shares of Enbridge Inc. (a pipeline)
• 252 units of  iShares Core Growth ETF Portfolio
• The balance, $35,000, is in the money market account TDB8150 paying daily interest of .25%
  

• This portfolio delivers 2.09% annual dividend income calculated on the original $60,000 investment.
• This dividend income amounts to $1255.96 annually.
  

Even in a severe bear market, I expect this self-directed account to retain more than 85% of its value. And in a bear market is the best time to get into the market, one can immediately invest the balance. The cash is not tied up, out of reach, in a GIC. (In reality, I'd invest half the balance and then invest the other half when I felt confident that I knew where the market was heading: rebounding or testing new lows. I'd be hoping for another drop. I like stocks that are not only on sale but ones that carry Further Reduced red tags.)

When the market rebounds out of correction territory, I'd sell a little, converting a minimum of 5% into cash which I would put in a money market account. 

And how is my demo account doing? I'm in the black and I'm collecting dividends. If this demo was the real deal, I'd be happy.

Look before you leap

The chart above is a little difficult to read but if you click on it it should enlarge.

Now, I like ETFs and I am not alone. That said, lots of folk are still buying mutual funds. To be honest, some mutual funds do just fine. One must do their homework and stay away from the funds that show signs of being dogs. For instance, with interest rates where they are I'd minimize my exposure to bonds. In the above chart, the bright purple line at the bottom is tracking a bond fund.

Is there anything positive one can say about such a flat line? Yes. It's flat. It shows minimal volatility. When equity based mutual funds are crashing, the bond funds hold their value. This lack of volatility is the reason many mutual funds contain bonds. The bonds in the fund prevent the fund from losing too much in a down market. Sadly, the bonds also limit the upside potential.

Historically, the U.S. market outperforms the Toronto Stock Exchange. The green line at the top of the chart tracks the performance of TDB3091 - a U.S. blue chip equity fund. It holds no bonds. Mutual funds that do exceedingly well in comparison to other funds often contain lots of exposure to U.S. equities and hold few, if any, bonds.

Doing better than the bonds but not as well as the U.S. based fund are a couple of Canadian funds: the Mackenzie Canadian Growth Fund and the Manulife Dividend Income Fund.

So, when investing in funds, check the holdings of the funds you are considering. A generous exposure to U.S. equities, a minimal exposure to bonds and a middling amount of exposure to Canadian high quality dividend stocks is my preferred mix.

One warning: A five star mutual fund bragging that it has done better than any other fund this year may well be a mutual fund to ignore. A solid four or five star fund is often a much better choice. Why? Funds rarely get to first place because of brilliance. The funds occupying the top rung are there because someone made a very bold and very lucky move. It is almost impossible to repeat such a feat two years in a row. It not uncommon for the year's best performing fund to get buried in the pack in the following year.

Spreadsheets are cool!

I call spreadsheets cool. My wife, when she me hears me say this, calls me a nerd, an old, slightly senile nerd.

I track my investments using a spreadsheet linked to my online self-directed accounts. Why? Because numbers, once moved to a spreadsheet, just beg to do more. Let me give you an example.

Recently I lightened my investments. The market was awfully high and my spreadsheet indicated that rebalancing for increased cash would be in keeping with my goals. Also, my wife agreed that selling was a good idea. I might ignore the spreadsheet but never the wife.

After selling, the market climbed and then it started its decline. My spreadsheet has fields that can be programmed to turn red when the price of a stock falls lower than its recent sale price. So far, only four stocks have triggered the switch in colour. This is not a signal for me to take any action. The increasing number of red rectangles simply alerts me to the falling values.

If the price falls into bear territory, another colour is triggered. Whether I buy more or not is my decision but my spreadsheet alerts me to the stocks-are-on-sale situation. (I've defined a bear market as a price 20 percent less than the stock's highest price in the past 12 months. I'm tempted to move the alert moment to 25% less but for now I'll leave the alter boundary unchanged.)

Almost everyone has Microsoft Excel. It often comes preinstalled on computers. If your version of Excel has expired, I suggest taking a look at LibreOffice shareware. I use it and like it.