# The psychology of retirement payments



## james4beach (Nov 15, 2012)

I'm not retired, but have some things in common with retired people. Because my consulting income is volatile, I'm partially living off my investments. This is giving me a taste of what it's like to completely live off your investments.

The hardest thing to wrap my head around has been the perception (versus reality) of taking withdrawals out of a portfolio! And I know I'm not alone.

The example I keep coming back to is some [private] equity I have in the US. This is an equity holding which is similar to the S&P 500, but it's kept at arm's length and I don't see its details too often. As it gets liquidated, I receive a cheque each year. *These payments feel very satisfying!* It's steady and reliable, and causes me no anxiety. What's interesting is that this private equity is actually riskier than the US index, and won't last forever. Each payment erodes the balance. And yet, I don't feel anxiety about it.

Now shifting to my own brokerage holdings. I hold more or less _the exact same stuff_ in my personal accounts. Actually my own holdings are superior in every way, far better diversified. To generate income for myself, I can sell shares of these public equities. It's exactly the same thing as above, but it doesn't feel as satisfying. It even makes me more anxious.

I think that's very interesting. It shows that this is entirely mental.

Why do the liquidations I do myself feel less satisfying? Why do the external, arms-length payments FEEL so much nicer? The withdrawals I do myself are actually much more sustainable than my external ones... but I'm trying to understand what's behind these feelings.


----------



## livewell (Dec 1, 2013)

I think you can see some insight into why dividend investments are so favored by retirees. The dividend payments take away the (unnecessary but real) anxiety over what/when to sell. Funny that, given your previous views on dividends (It was you that had a zero dividend portfolio experiment a couple of years back). 

Even if you go totally hands off with a asset allocation ETF like VBAL in retirement, you still get decisions on when to sell each year, (And anxiety for some over being forced to sell 60% equities in a bear market situation.) For myself I keep several years cash wedge I use for withdrawals and top it up (Re-balance) in growth years.


----------



## sags (May 15, 2010)

Maybe an annuity sufficient to cover monthly expenses would provide some anxiety relief.

Maybe dividing money up between dividends and an annuity would be a possible scenario.

Or....a four way split between an annuity, dividends, GICs, and equities to cover all the bases.


----------



## james4beach (Nov 15, 2012)

livewell said:


> I think you can see some insight into why dividend investments are so favored by retirees. The dividend payments take away the (unnecessary but real) anxiety over what/when to sell. Funny that, given your previous views on dividends (It was you that had a zero dividend portfolio experiment a couple of years back).


Yes I definitely see the appeal of dividends. Those automatic payments (which don't require any effort) alleviate the burden on the investor -- which is great. I still have a low dividend portfolio by the way, which is more tax efficient in my case.

If one has a huge portfolio, or enough CPP + OAS + other pensions, then I suppose you can get enough payments out through dividends and that's fine. However in my case, the dividends cannot provide large enough payouts for my needs. I'm also not comfortable with 100% equity risk, so that's another reason to rule out dividends in my case.



livewell said:


> Even if you go totally hands off with a asset allocation ETF like VBAL in retirement, you still get decisions on when to sell each year, (And anxiety for some over being forced to sell 60% equities in a bear market situation.)


I've found ways to make this easier in practice. I only do my selling once a year, on a fixed schedule. This way it's more automatic and routine and doesn't require decisions to be made.



sags said:


> Maybe an annuity sufficient to cover monthly expenses would provide some anxiety relief.
> 
> Maybe dividing money up between dividends and an annuity would be a possible scenario.


Those are good ideas too. I'm getting used to selling the securities, so I think I'll just do it that way as the method is completely fine. The only hangups and hesitations are in my head, and I've partially solved that.


----------



## james4beach (Nov 15, 2012)

By the way, another solution to this kind of problem is using something like VRIF or another one of the "monthly income" funds. One I looked at before and liked was BMO Monthly Income, Series D but the MER is still too high. It's the right idea though.

VRIF is the lowest fee version of this idea, but is quite new and there isn't much history for it yet.

These funds are balanced funds, and take care of the liquidation for you so I think they address the psychological hangup. In my case I plan to still do it myself and save the fees of using an intermediary. Though VRIF doesn't seem like such a bad idea.


----------



## Ponderling (Mar 1, 2013)

We are easing into the issue. 

We have a non reg account that spits out about $27k a year in dividends from mostly blue chippish stocks and a managed preferred shares ETF. 

The RRSP's also hold REIT's that pay dividends every month. 

So far all the dividends get reinvested. But once fully retired they will mostly cover the annual living expenses

But I hear you about the concept of selling to fund living expenses, and how it feels wrong, even though intellectually I know that that was what I accrued these assets in my working years to do.

In fact years when I am fully retired to age 70 I will be rater aggressively selling off my RRSP to the next tax increment annually to fully fund TFSA accounts of us, and likely our two kids as well and also with proceeds go towards living expenses. Because if I don't get it balance down some, the mandated pay outs when it becomes a RRIF are going to be more in a year than I want. 

Used to be I had bond funds in the RRSP's that paid out monthly too, but recently I sold a whack of them and almost entirely stepped into a 1, 2 3 year GIC ladder to try to mute the pain that BOC rate rises will take on bond funds in the next 1-2 years at least.


----------



## cainvest (May 1, 2013)

james4beach said:


> The only hangups and hesitations are in my head, and I've partially solved that.


It's really just a question of making it analytical and not emotional.


----------



## ian (Jun 18, 2016)

Milvesky and MacQueen, in their book Pensionize Your Nest Egg recounted some work that has been done on this.

For some there are definite psychological benefits to have some sort of annuitized stream of income in retirement. Not all, but some. They indicated that those with it were much more inclined to spend whereas some others without tended spend less (to the point of depriving themselves of certain pleasures) in the fear that their money would run out.

For a number of reasons I decided to take the DB portion of my pension as an annuity rather than the commuted value. It surprises me sometimes how pleased I am to see that payment hit my current account each month. It may be why I have no issue drawing down on our equity from time to time for extended travel, gifts to children, etc.. I also view it as part of the fixed income allocation of our portfolio.


----------



## peterk (May 16, 2010)

james4beach said:


> Why do the liquidations I do myself feel less satisfying? Why do the external, arms-length payments FEEL so much nicer? The withdrawals I do myself are actually much more sustainable than my external ones... *but I'm trying to understand what's behind these feelings.*


Other than people are bad at math - I think the main answer is: Because everyone, or most people anyways, simply can't fathom that they're actually going to die someday, and that "someday" is quite soon in terms of the years or decades upcoming, not an infinite amount of time...

Withdrawing 3-4% from your accounts through selling off will literally last at least 30 years even with piss-poor returns. Internally acknowledging that 30 more years of heavy spending is plenty for your remaining lifetime is a tough pill to swallow.


----------



## like_to_retire (Oct 9, 2016)

peterk said:


> .....everyone, or most people anyways, simply can't fathom that they're actually going to die someday, and that "someday" is quite soon in terms of the years or decades upcoming, not an infinite amount of time...


For sure, it's difficult to frame things into the number of years you have left to live if you're in the "older generation". It's definitely a mind shift that takes a while to get used to.

But I do think those who need to sell equities to create income have to always be aware of market price, so as not to sell into a depressed situation where they throw away extra shares. Doing so on some fixed schedule is a terrible idea. Sellers of equity have to remain flexible and watch the market much more than a dividend investor. Companies will continue to pump out their dividends even during a protracted market downswing as they are loath to reduce dividends while the sellers of equity give up shares at terribly reduced prices.

People that sell equity for income, should smartly have a larger cash position than those that enjoy dividend income to weather the many volatile reductions in share prices. This cash position is a drag on total returns, but alternatively, the seller of equities may offset this drag since they only sell into the cash flow that they actually require to live, compared to the dividend investor who receives their income whether they need it or not.

ltr


----------



## james4beach (Nov 15, 2012)

ian said:


> Milvesky and MacQueen, in their book Pensionize Your Nest Egg recounted some work that has been done on this.
> 
> For some there are definite psychological benefits to have some sort of annuitized stream of income in retirement. Not all, but some. They indicated that those with it were much more inclined to spend whereas some others without tended spend less (to the point of depriving themselves of certain pleasures) in the fear that their money would run out.


Yes exactly. Annuitizing the stream appears to really change perception. This part about being comfortable with spending is very important I think.

When a person directly holds and manages their own money, they always fear that the money will run out. But hand that money to someone else, who does exactly the same mechanical operations, and somehow that fear and anxiety is alleviated.



ian said:


> For a number of reasons I decided to take the DB portion of my pension as an annuity rather than the commuted value. *It surprises me sometimes how pleased I am to see that payment hit my current account each month*. It may be why I have no issue drawing down on our equity from time to time for extended travel, gifts to children, etc.. I also view it as part of the fixed income allocation of our portfolio.


Not a bad idea, taking the annuity option.

I think we can all agree that, mathematically, the commuted value is equivalent and you could have self-managed the whole portfolio. But you said it yourself: those payments are satisfying. There's an endorphin release or something.

For the same reason, I think it might be neat if there was a way to make extra CPP contributions, to get higher CPP payouts at retirement. Sure I could invest the equivalent money myself, but I think there's something very nice about the CPP / pension / annuity paying it out later.

By the way, Macqueen used to post at CMF as I recall. Is she still around?


----------



## james4beach (Nov 15, 2012)

cainvest said:


> It's really just a question of making it analytical and not emotional.


I agree and the more I have read about this, and looked at the math, the more comfortable I get. But I'll share one "mental trick" I've been using, in case it helps others as well.

I have set up a recurring monthly cash payment from my investment account into my daily use chequing account. Since the chequing account is what I mostly interact with, this gives me a totally steady monthly cash payment... kind of like an annuity or pension.

Now I have fixed payments showing up in my account. I enjoy getting these monthly payments.

Then, I have to make sure there's enough of a cash buffer in that investment account to fund those payments. Some of that cash comes from dividends, others from maturing GICs, some comes from selling securities. I will only sell securities if the cash buffer drops below a predetermined level.


----------



## Retired Peasant (Apr 22, 2013)

james4beach said:


> By the way, Macqueen used to post at CMF as I recall. Is she still around?


MoneyGal hasn't been at CMF for 8 years. She's still alive if that's what you mean.


----------



## james4beach (Nov 15, 2012)

Retired Peasant said:


> MoneyGal hasn't been at CMF for 8 years. She's still alive if that's what you mean.


I was wondering about CMF involvement, but happy to hear she's still alive as well.


----------



## Beaver101 (Nov 14, 2011)

^ You'll find her giving her opinions in the G&M from time to time.


----------



## GreatLaker (Mar 23, 2014)

Retired Peasant said:


> MoneyGal hasn't been at CMF for 8 years. She's still alive if that's what you mean.


She is @MoneyGal on Twitter


----------



## londoncalling (Sep 17, 2011)

GreatLaker said:


> She is @MoneyGal on Twitter


Thanks. Like many others, she was very helpful in my financial education journey. I will definitely follow her.


----------



## Gator13 (Jan 5, 2020)

A good topic. We have been fortunate and have built up our savings to the point where we should be able to comfortably live off the dividends, distributions and interest from our investments. Many of the points above are what drove us to become dividend investors and focus on the the annual income our investments produce. While planning for retirement I assumed we would spend 100% of the dividends from our taxable accounts and withdraw about 80% of the income produced within our RRSP's. I have now come to terms with withdrawing 100% of the income produced within our RRSP's.

TFSA's still remain untouched in planning and I still think of making the maximum annual contribution to them. For me, I think it's the need for safety nets and the difficulty of transitioning my mindset from needing to save.


----------

