Following on our last post, here's an even simpler strategy! The aim is that everyone can do this and it will perform fine.
You are about to retire or are in early retirement and want to set up your finances with the utmost simplicity to ensure you will have enough money for as long as you live.
Step 1 Cover your essential living expenses
Take your bank and credit card statements for the past 12 months. Go through the spending. Eliminate the big-ticket non-essential luxury items, like holidays abroad, that you could defer for years or never do at all. What's left is food, rent, clothing, house repairs and insurance, taxes, car payments and repairs, dentist, physio, eating out, loan repayments, all the spending of your existing life. It's your basic lifestyle, and you want to maintain it, right? That is the essential income goal.
Now comes the key principle: you will match the critical spending with income that is similar in terms of: lasting as long as you live; security and safety or guarantee of payment; automaticness - it's deposited in your bank account without you needing to do anything after setting it up; frequency, i.e. every month.
Next, list any income you have that meets those criteria. A Defined Benefit pension does. Obtain your retirement payment income amount from your employer or pension plan administrator. The Canada Pension Plan (CPP) meets the criteria, as does Old Age Security (OAS), both paid by the federal government. In Quebec, the Province has its own identical parallel substitute version of CPP (politics!). If you have not yet asked to start CPP and OAS, see whether you can get your essential income with the annuity purchase described below first. Defer CPP and OAS to age 71 if you possibly can, it's very worthwhile since you get a lot more income later that fights the inflation devil.
A Defined Contribution plan does not, it's not a pension. A pension is regular guaranteed income for your lifetime. A DC plan is the same as an RRSP (we'll use this as shorthand as the same goes for all the related RRIF, LIF, LRIF account types) in this regard. Same for a TFSA. They're just accounts holding savings and investments.
Find a local life insurance agent who is licensed to sell annuities. Find one that sells annuities from all the insurance companies, not just one. Get quotes for a single life, if you're single, joint life if you're married. Take the version with no guarantee period of years to pay out. Take the highest income quote. Buy enough, to a maximum amount per insurance company of $100,000, to cover your annual essential expenses.
Note: If that totally depletes your savings, you obviously have too high spending, too high "essential" expenses. Fixing that might be possible in multiple different ways: stricter definition of essential expenses, working longer, taking CPP and/or OAS right away, house downsizing. In this version of a retirement plan, it's assumed you have saved enough. The task is to make sure it lasts as long as you do. Step 1 is complete, more or less. There's always a limitation, in this case it's inflation, which will inexorably eat away at the purchasing power of the fixed-for-life annuity payments. On to step 2.
Step 2 Investing during retirement
First, the one-time setup process. Unless you have a whopping bank balance, you probably already have an RRSP and/or a TFSA account. If such accounts are not already in place at the discount brokerage arm of the bank you deal with, go open one or both. If already open, sell all the holdings and transfer the entire cash balances to the discount brokerage account RRSP or TFSA. If it's an RRSP be careful to transfer direct and not to withdraw the cash as that would entail a large income tax bill.
If you have an ordinary taxable account as well, it's probably better not to sell all the holdings if there are significant unrealized capital gains. Those capital gains mean that those investments have been reasonably successful, so there's no crying need to ditch them. Selling will provoke capital gains income tax to pay. Always defer taxes if you can. If the ordinary account total of unrealized gains and losses is small, then by all means sell all the holdings and transfer the cash over to the discount broker account.
Once all the cash is over at the same institution's discount brokerage accounts, if any of it is in an ordinary taxable account, check if you if you have any remaining contribution room for your RRSP (shown on your tax return notice of assessment) or your TFSA (total cumulative max up to 2025 of $102,000 minus whatever you have already contributed over the years). Fill the RRSP first, then the TFSA, then the surplus stays in the ordinary account.
Next, in each of the RRSP, TFSA and ordinary accounts, use all the cash to buy at the then current market price, this Exchange Traded Fund: iShares Core Growth ETF Portfolio with TSX trading symbol XGRO.
Ta da, you are done. That is the one and only investment you will ever need to own. There are other fancier more sophisticated investment portfolio strategies, especially as your investable money climbs. But they take more time, effort and attention. At $100k to invest just do this, it is not worth the hassle to do more. Even double it to $200k or triple the amount, it's still a very good investment strategy..
Sign up for the broker's optional Dividend Reinvestment Plan (DRIP). Cash received from distributions is automatically used to buy more shares of XGRO.
Receive more money to invest? Buy more XGRO in the tax-advantaged RRSP/TFSA accounts first.
Want to withdraw money to spend on discretionary items or through forced withdrawals after age 71 from RRSP-type accounts? Sell some XGRO.
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Why this income and investing strategy?
Simplicity - essential income is deposited automatically every month; only one tax slip to fill out; no tricky involved decisions for ever after during your life
Guaranteed income for life - no worries about market ups and downs for your essential living expenses; no worries about how long you will live and trying to figure out how much you can spend each year
Peace of mind - financial worries are drastically lessened, you can focus more on meaningful aspects of life; statistically, people with annuities live longer! Not being obliged to sell during a severe market downturn like the 2008 financial crisis makes riding it out much much less stressful
Legacy / inheritance funds - the XGRO fund provides for leaving an inheritance if you wish, since that is the part you do not absolutely require to live off
Inflation compensation - fixed annuities progressively lost value from inflation; even at the government annual 2% target, over 30 years of retirement it is huge; in the long term (say 10 years, to be conservative), equities do recover their value; that is why the fund choice is heavily slanted to equities - more equities means more long term portfolio growth
Portfolio growth - in addition, equities not only compensate for inflation, they provide real growth over time, which is what XGRO should do over years despite up and down bumpiness
Automatic & no decision - as we get older, some of us lose our mental faculties; dementia is an increasingly common old age retirement disease; fewer decision to make results in fewer bad decisions and should help reduce exploitative abuse; for those with power of attorney, it is easier to check and control finances; settling an estate is also far easier
Reasonable fees - at an annual 0.2%, XGRO's fees are not far above rock bottom fees of 0.05% for some of the individual funds, but they are a good trade-off for the convenience of portfolio management services, such as rebalancing and foreign exchange exposure and conversion. It is impressive value considering that XGRO, through the multiple sub-funds, allows us ordinary people investors, to own slices of more than 21700 different stocks and bonds. That very broad diversification reduces risk.
Non-critical negatives, just so you know - the downsides of XGRO are not so bad that they overwhelm the positives:
higher fees, as noted;
sub-optimal income tax structure - foreign equity funds within a RRSP/TFSA accounts pay non-recoverable (invisibly to the investor but it does inevitably occur!) foreign government witholding taxes; similarly having XGRO's bond holdings would be better split off in a RRSP/TFSA to help protect against taxation of interest income
missing real estate exposure - most standard classic portfolios include some portion of real estate holdings as a useful diversifying holding, but XGRO has none
non-adjustable proportions of holdings - XGRO maintains a 36% weight of its holdings in USA stocks and 21% in Canadian stocks; we would prefer a greater weight in Canadian stocks than in USA on the principle that money spent by a Canadian should mostly match up with Canadian sources, but that is my personal judgement
no low volatility fund holdings - it is a longggggg technical story but there is a good argument that ETFs which construct their portfolio holdings and weights by favouring stocks with lower day to day historical ups and downs of price, perform better than the market capitalization selected and weighted funds within XGRO; given that a retired person's objective is more wealth preservation than growth, lower volatility with the same returns is a desirable feature.
Missing gold as a holding - gold is an eternal store of wealth that assists with wealth preservation in certain circumstances; we would prefer to have a portion of the XGRO portfolio fund dedicated to gold.
What circumstances might make this a poor strategy?
Poor health and short life expectancy - Obviously, if you have terminal cancer and know you are going to die in a few months, handing over a large chuck of cash to an insurance company that you cannot get back makes no sense; annuities are priced fairly for the remaining life expectancy at your age; check out some online life expectancy calculators to your number based on various factors, like lifestyle, family history, current health - note that the results vary quite a bit
Disclaimer: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.
