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 $3,330 was withdrawn monthly to cover living expenses in retirement.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.

Self-directed investing with TFSAs or RRSPs

I'm not familiar with all the options for running a self-directed investment account. I know many banks charge an annual fee that can be as much as $100 annually. 

But once the portfolio value exceeds $25,000, the annual fee is often waived. This cutoff point is not etched in stone. Pay close attention to the fee schedule when pricing out all the costs

For instance, CIBC Investor's Edge self-directed TFSA and RESP accounts have no annual administrative fee. Investor's Edge also charges $3 less than many others for each online equity trade. That may not a lot but the $3 is better in your pocket than the bank's.

I understand Questrade charges no annual administrative fee for RRSP and TFSA accounts. Familiarize yourself with the rules governing TFSAs and RRSPs. As a new investor, you may find opening a TFSA is your best option. 

The last time I checked, one could contribute up to $6000 annually to one's TFSA but there is a possibility that you can contribute much more. Read what the Motley Fool said in January of 2020:

Here’s the catch: the annual TFSA contribution limit may not apply to you. That’s because the lifetime TFSA contribution is the number that really matters.

Unused contribution room rolls over from year to year. So if you didn’t max out your contributions in past years, that room is added to this year’s maximum.

For example, if you started a TFSA today and had yet to make a single contribution, you could potentially contribute $69,500, the sum of each year’s contribution maximum since the TFSA was first launched.

So, if your finances allow, make sure to hit the 2020 contribution maximum of $6,000. But if you left contribution room in past years, you may be able to contribute even more.

The other option is an RRSP. Funds contributed to an RRSP are not subject to income tax. The tax is not waived forever but only put on hold until the funds are withdrawn. If withdrawn in retirement, your tax rate may well be lower than that paid during your working years.

When retired, you may find you need three portfolios: an RRSP, converted to an RIF at 71, plus both a TFSA and a non-registered account. I can envision situations where this could be advantageous for younger investors as well.

To recap:

• Maintain a personal budget to know the state of your finances
• Open either a TFSA or an RRSP
• Manage your saved funds with a self-directed investment account. Use the lowest-cost provider. This may be CIBC or  Questrade.

If you don't know how to check your TFSA contribution room, Wealthsimple has a clear explanation. The entire article is worth a look but here is the core of their advice.

1. Go to the CRA My Account login

2. Log in with your preferred method. If you've set up your bank as a sign-in partner, this is the simplest way to access your CRA account.

3. Under the tabbed header, navigate to "RRSP and TFSA"

4. Click "Tax-Free Savings Account (TFSA)"

5. Click "Contribution Room"

6. Click "Next" at the disclaimer

7. I understand this value does not reflect any contributions or withdrawals made in the present year.

Interested in investing? First, understand your finances.

A close friend told me they want to invest in the stock market. Why? They hope to retire at fifty. I'm concerned. The stock market is not a get-rich-quick scheme. If it were, we would all be rich. On the other hand, the market may treat reasonable investors very generously. We cannot all be like Warren Buffets but we can all be like me.

The first thing any would-be investor must do is get their present financial life in order. To this end, I advise a spreadsheet. Many of us have computers preloaded with Excel, the excellent Microsoft spreadsheet.

That said, I use the LibreOffice spreadsheet. My copy of Excel expired and Microsoft asked for a lump of cash for renewal. I moved to LibreOffice and sent the Europeans a donation in support of the open source movement.

 

You can design your own budget spreadsheet or you can use a downloaded spreadsheet template.  All spreadsheets require a little tweeking. 

To find a budget template, search the LibreOffice Extensions or check out the Vertex42 offerings. McAfee checked the Vertex42 site, determining that Vertex42 is a good company posting threat-free software. McAfee gave the site their SECURE certificate.

Here is a link to the Vertex Personal Budget Spreadsheet shown on the right. Remember all spreadsheets can use a little tweeking. It isn't difficult. If I run into a problem, I run with the problem to Google and it quickly delivers a solution.

What is risk? And do bonds lessen risk?

If you try talking to bank reps about investing for the long haul, creating a portfolio that will provide adequate income while not being too risky, the bank rep will immediately launch into a discussion of buying bonds to lowering risk. Huh?

Let's say you have $100,000 at retirement and you were to need $6000 annually to balance your books. What do you do. Back in March,  I told a friend who had this exact problem to buy the top five Canadian banks in equal amounts. At the time do this would have provided a yield greater than 7%.

If one did this, one could remove $500 a month for 20 years while increasing the amount removed by the rate of inflation. I used 2% as the annual inflation rate and at the end of the 20 years I calculated that you would still have a balance of $90,189.79. It would take until the 15th year before the portfolio balance dropped below the original balance value of $100,000.

To assume that during those 15 years the five banks would never increase their dividends is crazy. Most likely the dividends would slowly climb and your withdrawal would never reach the point of decreasing the balance. At the end of 20 years you would still have your complete balance, quite likely more.

Two concerns must be addressed:

Is it possible the dividend income will be cut? Possible? Yes, but unlikely. There is some risk but very little. If there is a dividend cut, chances are only one bank will be involved. Remember, the Bank of Montreal has gone almost 200 years without cutting its dividend. The top five Canadian banks prefer to issue more equity rather than reducing the dividend yield.

Is it likely the value of the bank stock will fall? Yes. That is probably not so much a risk as a given. But who cares? It is the dividend income that you need. The value of the stock itself is not the concern. And with a 20 year time frame, the chance is very, very slim that the bank stock will be worth less than when purchased.

Now, what happens when you buy bonds paying .95%? In your 15th year, the money runs out.

Oh, the interest paid by bonds may go up but no one knows when this will happen nor by how much the rate will climb.

Talk about risk. It seems to me the more bonds you buy, the more risk you assume. The world is a risky place. No investment is totally risk free but as you can see buying stocks may be as good a bet as one can make. If I'm wrong, I will let the bank reps have the last word. I doubt I'll hear from any.

Let me add, I have all my retirement funds in equities. I have done quite nicely over the past 11 years. If I'd have stayed with bonds, I would not be doing as well. Yet, the bank reps insist that I should own some bonds. Why?

I wish I had more of these stocks.

ALA: AltaGas

I have owned AltaGas off and on for sometime. Right now I own some and I'm glad I do. It is up 52% and it pays a damn fine dividend as well: 5.5%. It is in the $17 range today and many see it going as high as a $22. On the low end, its target is still higher than where it is selling today but not by even a buck. If the market pulls back, and it always does, I'm buying more.

 NTR: Nutrien

Another stock I like, and this one I own as much as I am willing to hold in my portfolio, is Nutrien. It is a Canada-based producer and distributor of potash, nitrogen and phosphate for agricultural, industrial and feed customers worldwide. Its dividend isn't all that great but at 4.8% it is enough to pay me to hold and wait. As I won't be needing my capital for years and so for me this as an almost risk-free investment.

Now, there are investments with which I wish I had less involvement. REITs for instance. But, I cannot time the market and I cannot tell the future. Unless all becomes very clear and without the requirement of a crystal ball, I will continue to hold my BPY.UN, XRE and ZRE and enjoy the dividends. BPY.UN is paying 11.5%, XRE 6.2% and ZRE 5.35%. If you are an investor, you have to learn to look on the bright side. Sometime, that can be hard. Practise! (That said, some would say accept the losses, cash out and run. If you wait, it will get worse. They might be right. We'll see. Come back in a couple of years.)

Luck has a big role in investing

I feel that I am still a newbie when it comes to investing. Oh, I hit a lot right but I feel I benefit more from luck more than smarts.

I got out of the market in March as although I agree that one cannot time the market, I believe one can time a fast approaching virus.

COVID-19 was a clear threat and I took cover. It was, for me, a no brainer. This decision was based on what I believed to have been common sense. And in retrospect, I appear to have been right. My portfolios are doing wonderfully.

Do I have any advice? Oh, I'd say, if you are a Canadian investor, check out the Morningstar Canadian Income Portfolio that is updated monthy on TD WebBroker. It has been the one source of advice that I have found to be of generally excellent quality. A lot of my portfolio falls in line with the Morningstar suggestions and most of my most successful stock buys can be found in the Morningstar portfolio.

Newspapers are poor sources for financial advise.

With the recent crash, newspapers dusted off the traditional horror story reporting that seniors who had foolishly put their retirement money in the market now faced financial ruin. It is not exactly a myth but it isn't the whole story either. A more complete story would report that folk frightened by what they have read in their daily paper or those who get their financial advice from the daily paper may well have invested unwisely.

Let's say you were a senior in early 2008 and you put all your retirement savings, $100,000, into the TD Monthly Income fund. It is a simple balanced fund investing primarily in Canadian stocks along with a conservative percentage devoted to bonds.

You needed that money to live in retirement and were going to remove $450 every month to balance your budget in retirement. And that money was coming out no matter what. You could not meet your expenses in retirement without it.

Unfortunately, the stock market crash of 2008 happened just days after you put all your money into the fund. Wham! And you were out tens of thousands of dollars. The daily paper told you what you already feared, "You are toast!"

Left numb by the loss you did what you always do when faced with an insurmountable problem, you did nothing. And you did the right thing. Look at the following chart.

Yes, you were able to remove $450 from your investment every month for almost a dozen years and your finances were looking quite good until covid-19 caused the market to crash. $450 a month is an annual 5.4% withdrawal rate. This is a lot more than the 4% that the newspapers often claim is your maximum rate of withdrawal.

Your goals was to live on an amount similar to what was being offered by an annuity but keeping the principal to pass on to the children. After ten years the annuity would continue to pay a weekly amount but there would be no benefit to the kids after the death of the annuitant. There were other benefits from going the mutual fund route, such as the surviving partner continues to draw the monthly income even after the death of the one whose savings was used to make the purchase.

With the market crashing, you noticed stories in the media warning retirees that they were now at risk of running out of money. Post Media carried a particularly worrisome story.

The media giant reported: For example, if a 75-year-old had $500,000 and was planning to live on this cash for 10 years at a rate of $50,000 annually, a 20 per cent drop in capital would reduce that annual income by $10,000 to $40,000.

Huh? Why? What is this fellow doing with his massive stash of cash? Is it simply hidden under his mattress? Suspicious, you crunched the numbers. You discovered that if the fellow put $500,000 in the TD Monthly Income fund just days before the historic  market crash of 2008 and then immediately started removing $50,000 annually, after 12 years of withdrawals he would have something like $67,556.25 today.

When the blue line, the TD Monthly Income line, ends there is still a balance of $67,556.25 remaining.

It must be said that some newspaper articles are better than other. The London Free Press carried an article that had some good advice. It was a little self serving as it was written by a financial advisor and spoke very highly of using these whiz kids to direct your investments. https://lfpress.com/opinion/columnists/thompson-dont-panic-and-overcome-covid-19-market-fears/wcm/f88ab65d-18a2-4960-9443-05ad73014278/

The biggest problem with newspapers is the editors may have no opinion on the subject and so publish what they feel are balanced articles but, in fact, they are running bunkum and truth and giving both the same weight. If the editors were more knowledgable, I'm sure they would make different decisions.