Annuities

I don't like annuities. And I'm wrong. I'm not alone in passing on annuities. We may all be wrong. As we age we lose some of our mental capabilities. Lose enough and you become a senior mark easily snookered by smooth talking relatives or swindlers. An annuity purchased between age 75 and 80 may make a lot of sense as insurance against being ripped off. 

I'd say more but why bother? I found a great site: 7 Best Annuity Calculators in Canada. If this site just talked about annuity calculators it would be a good site to visit. But it also examines some common questions raised by those thinking of buying an annuity.

• Is an annuity your best option?
• How large an annuity do you need?
• What's the best online annuity calculator for Canadians?
• When should one buy an annuity?
• How does one purchase an annuity?

There is a very good book on Retirement Income for Life by Frederick Vettese. It has an excellent section looking at annuities. This book changed my mind when it comes to annuities. Depending on our finances when I turn 75, I have my fingers crossed, I may buy an annuity despite having bad mouthed them for years.

Another attempt at a 4% yield portfolio

I created a million dollar portfolio in response to advertising bumph sent to me by Fisher Investments Canada. It was well written; it was well researched; it was accurate. And I thought I could do better. Why? Because over the past decade I have. If you'd like to read more, please click the LINK.

But how many of us have a million dollars in savings when we retired? Not the majority of retirees, I'd wager. So, I have designed a second retirement portfolio but this time it is a much more modest portfolio of only $340,000. I will be following this portfolio in the coming months and we'll see how well it performs.

To create a portfolio I use a spreadsheet. I believe my spreadsheet is self-explanatory. I am posting a screen grab of my spreadsheet which I have named in honour of couple facing retirement.

To track the performance of this portfolio over time, I have created an emulation account using TD WebBroker Portfolio Manager. I have invested in nine Canadian dividend-paying stocks and four ETFs to add diversity to this portfolio. I have not invested in bonds. I don't believe bonds will add balance in the near future but will act as anchors pulling portfolios down. Every January I am going to withdraw 4% in cash to emulate the money withdrawn from real portfolios used to fund retirement. 

(And yes I know that there is one error. VDY cost $9.99 to buy and not $12.22. Oops! I confess that I entered the data, I created the jpg and I'm simply too bushed to fix this inconsequential error. It will have no effect on the success or failure of this portfolio. None.)

May 1st        Portfolio Value       $340,000

May 3rd        Portfolio Value       $341875 (Jumped $1875 after Monday open.)

Keep it simple, cheap and diversified

This was written with a relative who is nearing retirement in mind. They are considering dumping their mutual funds in favour of opening a self-directed portfolio account with TD WebBroker.

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There is a belief that new investors when starting out should steer clear of individual stock purchases. Not true. Some carefully chosen, dividend-paying stocks are an excellent addition to any portfolio with one caveat: the new investor's portfolio must have enough value to make diversification possible. Diversification is the "free lunch" of investing. The less money an investor has the more money that should be directed ETFs.

A small portfolio, $25,000 or less, can be well diversified if one buys just three ETFs: 

• VDY (35%)
  
• VFV (40%)
  
• VIDY (25%)
• the percentage in each ETF is flexible
  

VDY (Vanguard Cdn. High Dividend Yield Idx ETF) contains 48 stocks. The MER is only .21% and the annual yield is 4.16%. The top ten holdings are:

• Royal Bank of Canada (RY)
• Toronto-Dominion Bank (TD)
• Bank of Nova Scotia (BNS)
• Enbridge Inc (ENB)
• Bank of Montreal (BMO)
• TC Energy Corp. (TRP)
• Canadian Imperial Bank of Commerce (CM)
  
• Manulife Financial Corp. (MFC)
• BCE Inc. (BCE)
• Canadian Natural Resources Ltd. (CNQ)

VFV (Vanguard S&P 500 ETF) contains 509 stocks. The MER is only .08% and the annual yield is 1.28%. The top five holdings are:

• Apple Inc. (AAPL)
• Microsoft Corp. (MSFT)
• Amazon.com Inc. (AMZN)
• Facebook Inc. Class A (FB)
• Alphabet Inc. Class A (GOOGL)

VIDY (Vanguard Developed ex North America High Dividend Yield Idx ETF) contains 533 stocks. The MER is only .30% and the annual yield is 3.44%. The top five holdings are:

• Nestle SA(NESN)
• Roche Holding AG(ROG)
• Toyota Motor Corp.(7203)
• Novartis AG(NOVN)
• Unilever plc(ULVR) 
• Personally, I own VIU but I've noticed that between the two, VIDY is often the best performer.

A new investor should always keep in mind that professional investors, financial advisors paid to beat the market, often fail. Why should a newbie think they can do better than the pros? So stick to the basics, keep it simple, cheap and diversified. For a few individual, high yielding Canadian stocks consult the Morningstar Canada Income Pick List for suggestions like the following:

• Enbridge yielding 7.3%
• BCE yielding 6.17%
• Emera yielding 4.56%
• IGM Financial yielding 5.87%.
  

Following the above advice, a new investor with a small portfolio ($75,000) could realize an annual income of $3190 or 4.25%. (10% of the portfolio in each of the four stocks and remainder divided among the three ETFs.) If the investor has more funds available, up to $20,000, keep this in a cash fund (TDB8150) and have some money available for emergencies or for buying stock in a bear market.

Successful investing is about losing money with aplomb

Two friends are preparing for retirement and they are thinking of investing. I'm worried. They have never paid attention to the market. They are newbies and the market devours newbies. Folk who enter the market in their 60s have stayed out of the market for a reason. They are smart enough to see gamblers as marks and, admit or not, in their gut they see the market as a place for gamblers.

When the market goes down, they bail. It is hard to tough out a bear market. It is tough to see 20% or more of your money disappear and this is what happens during a bear market. The market is up about twice as often as it is down. Bull markets follow bear markets. Period. Investors know this. Investors buy when stocks are on sale. Newbies bail, lick their financial wounds, take their remaining money and head for the door.

The market is a place to invest and investments go up and down. Buy good companies that pay good dividends and which don't tend to cut the dividend during down times and one will be fine. Just don't put any money into the market you may need at some point in the next few years.

And all companies can suffer unforeseen serious financial problems. Limit the amount invested in any one company. If the company folds, so be it. C'est la vie.

The answer is to diversify. Invest in fifteen or twenty great companies. Morningstar posts an excellent portfolio for Canadian investors looking for dividend income. Some banks post the Morningstar suggestions or make them available to those with self-directed portfolios.

The saying if you can't stand the heat stay out of the kitchen applies when it comes to the market. If you can't stand the heat, read huge losses, then stay out of the market.

• Invest in good, solid, dividend-paying companies
• Buy and hold
• Do not try trading. Trading is not for the inexperienced.
• Do not try timing the market. Most of us do and most of the time it does not work.
  
• Diversify: buy stock in a dozen or more companies in different sectors of the market.
• Set limits: Most agree one should not invest more than five percent to 10% of a portfolio in any one company.
• Do not invest money you may need in the next few year. Bear markets can last years.
• Keep a minimum of five percent in cash for emergencies. I have about ten percent at the moment.
• And be prepared to buy and hold in good times, easy, and in bad times, hard.

 

On a positive note. The market is up approximately twice as often as it is down. The up times tend to last longer than the down times. The market tends to go higher in bursts. 

Still, the down times are killers. I cannot emphasize this enough. Understand your risk tolerance. (My risk tolerance is rather poor. My wife is the gutsy one. She steers us through the bad times with aplomb.)

And I must give much deserved attribution for the two images to QuoteInspector.com.

My Million Dollar Retirement Portfolio after four months

I wrote a post entitled "Fisher Investments Canada 15 Minute Retirement Plan." I had read the Fisher brochure of the same name and disagreed with it. Disagreeing was easy but was I right in disagreeing? Could I do better? I decided to find out.

That was a little more than four months ago. I designed my own Million Dollar Portfolio based on what I had read in the Fisher brochure. Today I am up $148,750.39 and I've withdrawn $3,330 each month to emulate the money a retiree would require in order to live.

I am using the Portfolio Manager software supplied by TD Waterhouse. It is specifically designed to allow one to test their personal investment theories. If you are interested, here is the report. Click on the image, you will see the whole, uncropped image. Tap the three keys (Shift and Control and +/=) and do this all at once. The image should enlarge.

I know: "Past performance is not indicative of future results." But, it does give one a buffer. That is a fact. A nasty bear market may cut 25% from a portfolio's value--maybe even more. Clearly it is better to enter the bear market with more rather than less.

If such a catastrophe should befall my portfolio tomorrow, I would expect to bottom out at around $875,000. That's the bad news. The good news is that my income should not get cut by more than 15%. I would still see a dividend income of $31,300. 

I did the math and I should be able to invest about $26,460 in the bear market, one must take advantage of the sale on investments, and still be keep ample cash to cover the shortfall for the next four years. 

With some luck, when the bear market lumbers off, my Million Dollar Retirement Portfolio might actually be able to deliver on its 4% promise. If not, I may well still have a little cash to cover some shortfalls in the following years.

My little test has shown one thing, when you get into the market is important. In other words, luck is important. What puzzles me is this: a big firm like Fisher can, to a certain extent, make its own luck. It can under promise and then meet its self-set easy goals. Clients would be happy and Fisher would have added investment room when compared to a single investor like me.

My gut fear is that financial advisors are tempted to skim off the extra profits generated by bull markets for themselves and pass the losses of the bear markets on to the clients. I knew an advisor once who loved black and white and only black and white. Heck, even his huge, backyard pool was black with white accents. Being so addicted to fashion demanded a lot of green and this financial advisor did not seem to want in that area. My bet is not one of his clients had a pool coordinated to their favourite colour.

As portfolio values climb, dividend yields calculated as a percentage shrink

I like to say I can withdraw four percent annually from my retirement portfolio. Well, I could, in the past. Now? Maybe not. Why? The world's stock markets have soared in value. Stock prices are way up, some by more than thirty percent. But dividends have not increased lock step with the price of stock. While yields expressed in dollars have remained constant; percentage returns have tumbled.

I will withdraw only slightly more from my retirement portfolio come next January than I withdrew this year.  Stock values have climbed but the dividends as a percentage have stalled. This is not a big problem in the short term. I feel confident that there will be a correction, I will buy more stock and my dividend income will go up. As the stocks recover, I will make sure to keep about 10% in cash. Check the example:

• If holdings are worth $800,000 and dividends are $32,000, the dividend yield is four percent.
  
• If markets boom and the portfolio value climbs to $1,000,000, dividends may only grow to $33,500 and so the yield is only 3.35% .

If one is running their own retirement portfolio, they can keep an eye on the yields and make adjustments to the withdrawals when necessary. It is mainly a problem on paper.

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.