# Sequence of returns mitigation



## Bruins63 (Jan 18, 2018)

Folks, I’m getting ready to retire this year and last year my advisor knew I was going to retire in 1-3 years...the response from my advisor was “when you know u r going to retire, we will restructure the portfolio for retirement which is currently 75/25 equities/FI...” a month or 2 ago I mentioned my concern with sequence of returns (which at the time I couldn’t hardly articulate due to lack of knowledge) and I was told “you can’t think about it that way”...I also asked if they take into account sequence of returns when they do their 4 percent retirement growth projections and the answer was No...

So here we are today with a bit of a market correction...the nest egg is down about 3 percent from the high and I really can’t afford to lose capital as it is just enuf, with 3-4 percent annual growth, to eek out a retirement...my question is: what are the top 3 things you would recommend for me to do to mitigate against the sequence of returns, given I can’t afford to lose capital early in my retirement? I am meeting with my advisor a Monday to discuss...thanks folks


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## GoldStone (Mar 6, 2011)

Look into VPW strategy.

http://www.finiki.org/wiki/Variable_percentage_withdrawal


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## GoldStone (Mar 6, 2011)

4 Approaches To Managing Sequence Of Returns Risk In Retirement

by Wade Pfau, a top notch expert on retirement planning.


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## GreatLaker (Mar 23, 2014)

I saw your other thread but unfortunately did not have the time to respond.

Sequence of return risk comes from volatility of assets. Unfortunately it's just the way markets work. I believe the only way to reduce sequence of return risk is to hold lower volatility fixed income assets (bonds, GICs). It's a balancing act because too much volatility exposes you to sequence of return risk, but too much low volatility assets reduce return therefore reduces how much you can withdraw from your portfolio over the long term.

One thing to understand is how the "4% rule" was developed and how it really works. William Bengen’s 1994 study “Determining Withdrawal Rates Using Historical Data was based on starting with a withdrawal of 4% in the first year, and adjusting that amount by inflation each year afterwards. It states: “Assuming a minimum requirement of 30 years of portfolio longevity, a first- year withdrawal of 4 percent followed by inflation-adjusted withdrawals in subsequent years, should be safe. In no past case has it caused a portfolio to be exhausted before 33 years”. You can view the study here: http://www.retailinvestor.org/pdf/Bengen1.pdf

(It is important to recognize that Bengen's study found that between 50% and 75% had the best survival rates. If future returns are no worse than the worst returns during the study period then the "4% rule" should work. It was also based on a low-cost portfolio. Using high-cost mutual funds or a high-cost AUM based advisor would reduce the sustainable withdrawal rate.)


A 1998 analysis titled “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable”(also known as the Trinity Study) stated: “A sustainable withdrawal rate (as a percentage of initial portfolio value) is one that does not exhaust a portfolio of stocks and bonds despite the annual dollar withdrawals during a specified number of years”. You can see it here: https://incomeclub.co/wp-content/upl...ustainable.pdf

This is a good explanation of various withdrawal methods: https://www.bogleheads.org/wiki/Withdrawal_methods 

I found this article from MoneySense to be helpful in how to structure a portfolio and how to withdraw funds:
http://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/

Another approach is variable withdrawals, but to do that you need to have significant discretionary spending that can be cut when markets take a downturn. 
Here is a link to the VPW spreadsheet on Finiki: http://www.finiki.org/wiki/Variable_percentage_withdrawal
And a discussion of it on Financial Wisdom Forum: http://www.financialwisdomforum.org/forum/viewtopic.php?t=117200

There are no magic guaranteed solutions because markets do what they do. Even 100% GICs is not guaranteed to work because increased inflation could erode purchasing power. Experience and knowledge help me stick to my plan when markets get volatile. 

Good luck.


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## fireseeker (Jul 24, 2017)

Frankly, it sounds like your advisor is badly dropping the ball, presuming you have expressed to him/her everything you have expressed here.
Knowing that you're within a couple years of retirement, and that you are counting on all your assets working for you and that you have significant concerns about a big drop, and that markets have had a long bull run, it's really hard to see that he/she is responding to your needs.
Might be time for a firm discussion.


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## Bruins63 (Jan 18, 2018)

GoldStone said:


> 4 Approaches To Managing Sequence Of Returns Risk In Retirement
> 
> by Wade Pfau, a top notch expert on retirement planning.





GreatLaker said:


> I saw your other thread but unfortunately did not have the time to respond.
> 
> Sequence of return risk comes from volatility of assets. Unfortunately it's just the way markets work. I believe the only way to reduce sequence of return risk is to hold lower volatility fixed income assets (bonds, GICs). It's a balancing act because too much volatility exposes you to sequence of return risk, but too much low volatility assets reduce return therefore reduces how much you can withdraw from your portfolio over the long term.
> 
> ...


Thanks to everyone for their input...I really liked the MoneySense article....nice and simple for my simple mind...I find with much of this stuff, one needs to be a statistician, so simple is good for me BUT simple may not be the best approach, unfortunately


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## GreatLaker (Mar 23, 2014)

Investing can be very simple. A three fund index ETF portfolio, plus maybe a 5-year GIC ladder for people that want certainty of available finds is all many investors need. Simplicity is the enemy of many financial institutions and investment advisors. Many of them want to build complex portfolios with lots of funds and complex products to make it hard for the investor to understand so they are reluctant to leave or try to DIY. Plus it's hard to justify high fees and commissions with a very simple portfolio.

Retirement planning is, unfortunately, complex due to the different tax rates on different types of accounts, different income streams as things like CPP, OAS and workplace pensions can be received at different ages. Plus lifespans and investment returns are unpredictable.

Is your advisor giving advice on how to build a tax efficient retirement income with projections for assets and income based on an investment policy and reasonable assumptions for returns, lifespan and any desire to leave an inheritance?

Steven Brown has a good financial blog with several useful spreadsheets.
http://pabroon.blogspot.ca/p/financi...cs-series.html

His retirement forecaster spreadsheet is really good.
http://pabroon.blogspot.ca/2015/05/r...asting-20.html
http://pabroon.blogspot.ca/p/retirem...readsheet.html


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## Bruins63 (Jan 18, 2018)

GreatLaker said:


> Investing can be very simple. A three fund index ETF portfolio, plus maybe a 5-year GIC ladder for people that want certainty of available finds is all many investors need. Simplicity is the enemy of many financial institutions and investment advisors. Many of them want to build complex portfolios with lots of funds and complex products to make it hard for the investor to understand so they are reluctant to leave or try to DIY. Plus it's hard to justify high fees and commissions with a very simple portfolio.
> 
> Retirement planning is, unfortunately, complex due to the different tax rates on different types of accounts, different income streams as things like CPP, OAS and workplace pensions can be received at different ages. Plus lifespans and investment returns are unpredictable.
> 
> ...


Thanks for the continued great advise...all my retirement funds are sheltered so I think that negates any taxation strategies...correct me if I am wrong...also no kids, no nieces or nephews...yes the advisor is basing returns on 3-4 percent BUT not factoring in any sequence of returns...

Could u please elaborate on a 3 fund index etf portfolio...I’m tempted to take the portfolio over myself as it’s costing me 1k/mth in fees...


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## OnlyMyOpinion (Sep 1, 2013)

I suspect GL is thinking of a couch potato portfolio. The Canadian Couch Potato site is here: http://canadiancouchpotato.com/
And their etf portfolios are shown here:http://canadiancouchpotato.com/wp-content/uploads/2018/01/CCP-Model-Portfolios-ETFs-2017.pdf/

In just the last week however, Vanguard has come out with some new balanced etf's such a VBAL that eliminate the need for anything else (except IMO a cash cushion such as a 5yr GIC ladder): https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=12397

BUT, making wholescale changes at this point can be pretty unsettling, and could be costly depending on the nature of your investments. 
I like Fireseeker's advice above to bring your advisor to task. On the other hand, $1k/month is a totally obscene amount and cannot/should not be acceptable IMO. You don't say who you are with, if I had one guess it would be IG and many would suggest you leave them and go elsewhere. You are trying to fund your retirement - not theirs.


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## Bruins63 (Jan 18, 2018)

OnlyMyOpinion said:


> I suspect GL is thinking of a couch potato portfolio. The Canadian Couch Potato site is here: http://canadiancouchpotato.com/
> And their etf portfolios are shown here:http://canadiancouchpotato.com/wp-content/uploads/2018/01/CCP-Model-Portfolios-ETFs-2017.pdf/
> 
> In just the last week however, Vanguard has come out with some new balanced etf's such a VBAL that eliminate the need for anything else (except IMO a cash cushion such as a 5yr GIC ladder): https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=12397
> ...


Thanks, I’ll check out the links...I’m with TD Waterhouse...


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## Bruins63 (Jan 18, 2018)

OnlyMyOpinion said:


> I suspect GL is thinking of a couch potato portfolio. The Canadian Couch Potato site is here: http://canadiancouchpotato.com/
> And their etf portfolios are shown here:http://canadiancouchpotato.com/wp-content/uploads/2018/01/CCP-Model-Portfolios-ETFs-2017.pdf/
> 
> In just the last week however, Vanguard has come out with some new balanced etf's such a VBAL that eliminate the need for anything else (except IMO a cash cushion such as a 5yr GIC ladder): https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=12397
> ...


Ok, next question...can I just walk into saaaaaay TDBank and get their recommendation for 3 ETF funds and a 5 year GIC Ladder and if I like it just buy the ETF’s and GIC’s and ditch the grand a month I’m paying?


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## heyjude (May 16, 2009)

Bruins63 said:


> Ok, next question...can I just walk into saaaaaay TDBank and get their recommendation for 3 ETF funds and a 5 year GIC Ladder and if I like it just buy the ETF’s and GIC’s and ditch the grand a month I’m paying?


If you know what you want to invest in, and are comfortable ditching your advisor, you should be able to purchase the securities on TD Direct.


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## OnlyMyOpinion (Sep 1, 2013)

Bruins63 said:


> Thanks, I’ll check out the links...I’m with TD Waterhouse...


I should have looked in the mirror before I piped up. I'm with TDDI and had a bit over $400k in long-held TD Monthly Income fund (TDB622) with its 1.47% MER. Not bad performance for a Cdn Bal fund so I'd just let it grow over the years as another source of diversification. Then last year I realized I was giving them $500/mo for a fund that I had mostly duplicated through my other porfolio holdings. This was unregistered so I took some lumps on capital gains last year selling a large chunk of it off.

Added: 


Bruins63 said:


> Ok, next question...can I just walk into saaaaaay TDBank and get their recommendation for 3 ETF funds and a 5 year GIC Ladder and if I like it just buy the ETF’s and GIC’s and ditch the grand a month I’m paying?


Is this an account at the bank with a bank advisor or a TD Direct Investing self-directed account with a TD Wealth advisor/planner?
If at the bank, the investments available will be more limited, and no, an advisor there would not be putting you into anything but a TD product.


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## Bruins63 (Jan 18, 2018)

heyjude said:


> If you know what you want to invest in, and are comfortable ditching your advisor, you should be able to purchase the securities on TD Direct.


That’s the issue, I need someone to tell me what etf’s for a 3-4 percent return...I can figure the GIC ladder out...


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## GoldStone (Mar 6, 2011)

Bruins63 said:


> That’s the issue, I need someone to tell me what etf’s for a 3-4 percent return...I can figure the GIC ladder out...


Is that 3-4% nominal (including inflation) or real (after inflation)?

3-4% *nominal* should be fairly straightforward with a balanced portfolio. Vanguard all-in-one balanced ETF (VBAL) should be able to meet this goal, although I'm not going to offer any guarantees.

3-4% *real* may be a challenge in the next decade, because current valuations are very high for both stocks and bonds. The catch is, paying 1% to an advisor makes this goal even more challenging.


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## OnlyMyOpinion (Sep 1, 2013)

Bruins63 said:


> That’s the issue, I need someone to tell me what etf’s for a 3-4 percent return...I can figure the GIC ladder out...


I'm seriously considering the single etf VBAL to compete with the MAW104 I own. Goldstone has provided some good historical performance perspective here:

http://canadianmoneyforum.com/showthread.php/128849-Vanguard-Canada?p=1849913#post1849913



GoldStone said:


> Why wait?
> Past performance, as of December 31, 2017
> 
> ```
> ...


But you would need to migrate to a self-directed account if you currently are with a bank rrsp.


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## Bruins63 (Jan 18, 2018)

GoldStone said:


> Is that 3-4% nominal (including inflation) or real (after inflation)?
> 
> 3-4% *nominal* should be fairly straightforward with a balanced portfolio. Vanguard all-in-one balanced ETF (VBAL) should be able to meet this goal, although I'm not going to offer any guarantees.
> 
> 3-4% *real* may be a challenge in the next decade, because current valuations are very high for both stocks and bonds. The catch is, paying 1% to an advisor makes this goal even more challenging.


Hmmmn, all I know is they calculated an annual return of 4 percent and factored in inflation at 2 percent per year...what does that make it?


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## GoldStone (Mar 6, 2011)

Bruins63 said:


> Hmmmn, all I know is they calculated an annual return of 4 percent and factored in inflation at 2 percent per year...what does that make it?


Sounds like it's 4% above inflation (aka 4% real return).

Let's assume that you go with a balanced asset allocation: 60% stocks, 40% bonds.

Let's assume that bonds return 1% above inflation (aka 1% real).

60% stocks * X + 40% bonds * 1% = 4%

Solving for X, stocks have to return 6% above inflation (aka 6% real) to meet 4% overall goal. 

6% real is in line with past performance. If future returns are similar to past returns, you are in good shape. The problem is, many experts believe that future returns will be lower.

Can you live on 3% real or 5% after 2% inflation?

60% stocks * X + 40% bonds * 1% = 3%

Solving for X, stocks have to return 4.33% above inflation (aka 4.33% real) to meet 3% overall goal. 

4.33% required return vs 6% required return is a big difference.

You can try these calculations yourself to get comfortable with the numbers. For example, assume 0.5% real from bonds and GICs. What does that do to required stock returns?


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## OnlyMyOpinion (Sep 1, 2013)

I would reiterate Goldstone's point, that there is no single 'right' number. We need to consider a few scenarios such as a worst, median and best case, and understand how they would affect our income sources outside of CCP/OAS, DB pension, etc.
Here are some recent projected 10yr returns from Vanguard showing a global 60/40 porfolio in the range of say ~3% to 6% nominal (4.5% median). That's a real return of 1% to 4% (2.5% median) if the inflation we experience averages 2%.









https://pressroom.vanguard.com/nonindexed/Research-Vanguard-Market-And-Economic-Overview-120417.pdf


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## Bruins63 (Jan 18, 2018)

GoldStone said:


> Sounds like it's 4% above inflation (aka 4% real return).
> 
> Let's assume that you go with a balanced asset allocation: 60% stocks, 40% bonds.
> 
> ...


Wow folks, this is VERY helpful! Thanks to ALL! Yes we did run a real 3 percent scenario and it worked also...


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## Bruins63 (Jan 18, 2018)

OnlyMyOpinion said:


> I would reiterate Goldstone's point, that there is no single 'right' number. We need to consider a few scenarios such as a worst, median and best case, and understand how they would affect our income sources outside of CCP/OAS, DB pension, etc.
> Here are some recent projected 10yr returns from Vanguard showing a global 60/40 porfolio in the range of say ~3% to 6% nominal (4.5% median). That's a real return of 1% to 4% (2.5% median) if the inflation we experience averages 2%.
> 
> View attachment 17889
> ...


Thanks for the info...I WAS considering 3 percent GIC’s but with 2 percent inflation, hmnnnnn...not good


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## OnlyMyOpinion (Sep 1, 2013)

But I thought your GIC ladder was intended to provide a cash wedge and reduce sequence of returns risk - not provide a robust real rate of return.
I'm quite conservative, I have a 10yr ladder that renews at then-current rates. I accept just treading water with it, sometimes a bit better, sometimes getting a mouth full.


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## Bruins63 (Jan 18, 2018)

OnlyMyOpinion said:


> But I thought your GIC ladder was intended to provide a cash wedge and reduce sequence of returns risk - not provide a robust real rate of return.
> I'm quite conservative, I have a 10yr ladder that renews at then-current rates. I accept just treading water with it, sometimes a bit better, sometimes getting a mouth full.


Ok, that makes sense...I guess if the GIC’s tread water and I want a real rate of return of 3-4 percent, the stocks and bonds need to perform that much better...


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## olivaw (Nov 21, 2010)

Good thread. 

Sequence of returns risk is a significant problem for retirees. Moneygal (a respected certified financial planner and author) used to talk about it all the time on this forum. If you are forced to sell equities at a loss in the early years, the impact will be amplified throughout retirement. 

My current allocation is a conservative 50/50 and I rebalance annually. It is unlikely that I would be forced to sell equities at the bottom in a bear market. It can be frustrating to forego years of market gains but at least I don't have to fret about the inevitable market crash. 

I have no pension beyond CPP so I may consider an annuity when interest rates are more favourable. That's thanks to the book that Moneygal co-authored. 

Like Bruin63, I am always on the lookout for strategies to increase the sustainability of my nest egg without taking on excessive risk (volatility). Lots of good suggestions in this forum.


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## Bruins63 (Jan 18, 2018)

So I’d ask the question, if planning for sequence of returns is necessary, when is the right time to do it...2 years before retirement? 1 year? 3 years? My advisor seems to think the change in the portfolio should happen upon retirement, which IMO doesn’t allow for sequence of returns planning...


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## GoldStone (Mar 6, 2011)

Bruins63 said:


> So I’d ask the question, if planning for sequence of returns is necessary, when is the right time to do it...2 years before retirement? 1 year? 3 years? My advisor seems to think the change in the portfolio should happen upon retirement, which IMO doesn’t allow for sequence of returns planning...


I think it depends on how your portfolio looks now versus how it needs to look to mitigate SoR risk. The bigger the difference, the sooner you need to act.

On the other hand, maybe you don't need to do anything because the portfolio is already in the right shape.


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## Bruins63 (Jan 18, 2018)

GoldStone said:


> I think it depends on how your portfolio looks now versus how it needs to look to mitigate SoR risk. The bigger the difference, the sooner you need to act.
> 
> On the other hand, maybe you don't need to do anything because the portfolio is already in the right shape.


75 percent equities, 25 percent bonds...8 percent return annually the last 2 years...don’t think I’m setup right go forward for SoR’s...


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## james4beach (Nov 15, 2012)

Bruins63 said:


> what are the top 3 things you would recommend for me to do to mitigate against the sequence of returns, given I can’t afford to lose capital early in my retirement? I am meeting with my advisor a Monday to discuss...thanks folks


Sequence of return risk comes from volatility. If your portfolio has less volatility, it will also have less sequence of return risk/uncertainty. So the goal is to reduce volatility during retirement years. Generally this is done by reducing the equity component and 60/40 and 50/50 are two popular allocations.

In my opinion, if you know with high certainty that you will retire in 1-3 years, now is the time to start restructuring your portfolio closer towards 50/50 perhaps in little steps. However if you are not sure when you'll retire, and if it still might be 5-10+ years out, then there is no point in changing your allocation.



Bruins63 said:


> 75 percent equities, 25 percent bonds...8 percent return annually the last 2 years...don’t think I’m setup right go forward for SoR’s...


And look how you've benefited from the 75/25 allocation. That 8% return is very high, so you've gotten further ahead. If however you believe your retirement is imminent, then it's time to reduce volatility & risk by increasing fixed income..


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## GoldStone (Mar 6, 2011)

james4beach said:


> And look how you've benefited from the 75/25 allocation. That 8% return is very high, so you've gotten further ahead. If however you believe your retirement is imminent, then it's time to reduce volatility & risk by increasing fixed income..


I have some reservations about this piece of advice. It's quite possible that we are entering a period of rising rates and a bear market for bonds. Bond bear markets are not as sharp as equity bear markets, but they can be quite long in real terms. This is not a prediction. Just a possible scenario to be aware of. Of course, it's also possible that rising rates will stall or reverse.

One possible solution is to keep your fixed income short. For example, rebalance equities into a GIC ladder, not a broad-market bond fund. Stagger GIC maturities to match your income requirements when you retire.

Disclaimer: This is just me thinking out loud. I am not a financial advisor. My "advice" is worth what you paid for it.


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## james4beach (Nov 15, 2012)

GoldStone said:


> One possible solution is to keep your fixed income short. For example, rebalance equities into a GIC ladder, not a broad-market bond fund. Stagger GIC maturities to match your income requirements when you retire.


Some portion in GICs is never a bad idea. Bruins63 could start shifting some of the investment money into a GIC ladder, which has the effect of reducing his equity exposure and increasing safety in these critical years.


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## Bruins63 (Jan 18, 2018)

james4beach said:


> Some portion in GICs is never a bad idea. Bruins63 could start shifting some of the investment money into a GIC ladder, which has the effect of reducing his equity exposure and increasing safety in these critical years.


Thanks, that’s absolutely what I am going to do and perhaps some ETF’s also...as I only need 3-4 percent returns, the value of the advisor seems to diminish...I could be wrong though...


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## james4beach (Nov 15, 2012)

Bruins63: Retirement and portfolio planning is partly art, partly science. There is no single answer to all of this.

First can you tell us more about these 1K monthly fees? How does your advisor take the fees... is it a fixed % of total assets? Or are you counting the mutual fund fees (MERs) of what you currently hold? The total fees you pay are the sum of:

1. explicit fees you pay to the advisor for advice/services
2. trade and commission fees (might be included with #1)
3. mutual fund MER fees

I really think you should speak with your advisor more about the retirement strategy, get clarity on the fee structure, and consider switching to someone else if you're not getting good answers about the plan for retirement.



Bruins63 said:


> Thanks, that’s absolutely what I am going to do and perhaps some ETF’s also...as I only need 3-4 percent returns, the value of the advisor seems to diminish...I could be wrong though...


I think the following is going to be a bigger issue than the rate-of-return...

A typical retirement strategy is to withdraw a constant $ out of your investment portfolio each year in retirement, plus inflation adjustment as GreatLaker described in his first post. A typical strategy would be to start the annual withdrawals at 4% of capital value (there are variants but this is the core idea). A key number in all of this is the amount of capital you *start* retirement with. If you...

start with 400K, then 16K annual cashflow is feasible
start with 500K, then 20K annual cashflow is feasible

Along with your advisor, you should figure out how much annual cashflow you will need to provide out of your investments. Here's the important part: then *you must look at your capital level today and where it stands in relation to the starting amount you'd need at the time you retire*. If you are cutting it close to the amount of capital you need, then you must reduce equity exposure, because you can't afford to lose what you have over the next 1-3 years.

Example using the above numbers. Let's say I have 800K today and will need 20K annual cashflow in retirement. This means I must start retirement with at least 500K. In this case, I have a pretty healthy margin of safety. I'd have to lose 38% of my portfolio to wreck my retirement. In this case it's probably ok to stick to a 75/25 or 60/40 allocation.

Another example. Let's say I have 600K today and need 20K annual cashflow in retirement (meaning 500K needed). Now it would only take a 17% loss to wreck my retirement. This is a dangerous situation. The 75/25 allocation you have can lose 39% over a couple of years. In this scenario the equity allocation should be dramatically reduced, boosting bonds & GICs.

If you are willing to work more years to make up for a shortfall, then this doesn't matter so much.

These factors have a huge impact on what is the "right" strategy. If you haven't done this part yet, I strongly suggest (together with the advisor) figuring out where you stand today vs how much you absolutely need in retirement, to provide the cashflow you need. Then take into account that your 75/25 allocation can potentially decline 39% in the short term between now and the start of retirement.

A quick table of % equity/% bond allocations, and the historic max % loss they've had over a year or two:
75/25 , -39% drawdown
60/40 , -31% drawdown
50/50 , -25% drawdown
25/75 , -11% drawdown

If you're wondering how to approach your advisor, here's a little dialogue you can have with them:
_You_: Let's discuss my cashflow needs in retirement. How much would I need to withdraw each year from my investments?
_Advisor_: Based on our earlier discussion, you'd need to withdraw about 20K a year
_You_: How much capital would I need at the time I retire to make that happen?
_Advisor_: You'd need about 20 / 0.04 = $500K
_You_: Currently I'm in a 75/25 allocation and historically this can drop 39% in the short term. Where will I be if this happens?
_Advisor_: ...


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## Bruins63 (Jan 18, 2018)

james4beach said:


> Bruins63: Retirement and portfolio planning is partly art, partly science. There is no single answer to all of this.
> 
> First can you tell us more about these 1K monthly fees? How does your advisor take the fees... is it a fixed % of total assets? Or are you counting the mutual fund fees (MERs) of what you currently hold? The total fees you pay are the sum of:
> 
> ...


Awesome advice! Fees are a fixed percent of total assets...and yes I’m cutting it close on cash flow requirements and can’t afford to lose any $...I will re read your advice and let it sink in...


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## Bruins63 (Jan 18, 2018)

james4beach said:


> Bruins63: Retirement and portfolio planning is partly art, partly science. There is no single answer to all of this.
> 
> First can you tell us more about these 1K monthly fees? How does your advisor take the fees... is it a fixed % of total assets? Or are you counting the mutual fund fees (MERs) of what you currently hold? The total fees you pay are the sum of:
> 
> ...


Ok, I re read this...here is an analogous situation to my situation...let’s say I have 1 million...at 4 percent, that’s $40k/yr...I need $60k per year in retirement...given your recommendation, that would put me in the 25/75 equity/bond allocation?


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## james4beach (Nov 15, 2012)

Bruins63 said:


> Ok, I re read this...here is an analogous situation to my situation...let’s say I have 1 million...at 4 percent, that’s $40k/yr...I need $60k per year in retirement...given your recommendation, that would put me in the 25/75 equity/bond allocation?


If I understand this right, you're saying that currently you do not yet have enough to retire (assuming the 4% metric)? If I read that right, you need 50% more capital before you can retire?

If it's a matter of still having to gain more capital, that's the opposite of what I was reasoning through with losing capital so you might have to use different logic entirely.


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## Bruins63 (Jan 18, 2018)

james4beach said:


> If I understand this right, you're saying that currently you do not yet have enough to retire (assuming the 4% metric)? If I read that right, you need 50% more capital before you can retire?
> 
> If it's a matter of still having to gain more capital, that's the opposite of what I was reasoning through with losing capital so you might have to use different logic entirely.


I think I’m getting confused on the 4 percent of capital withdrawal rate vs the 4 percent of growth of my investments per year that is required...the analogy I provided is true...in addition to the 4 percent return off my investments giving me $40kof the required $60k, I would neeed to draw down $20k of the initial $1m per year...is that a bad situation to be in? What does that suggest for bond/equity allocation?

EDIT:Ok, re read some stuff...all the theory is built around a 4 percent of capital drawdown per year for safe retirement and that 4 percent should meet your needs w/o touching any capital...Really? If I have no one to leave anything to, why is it such a bad thing to include capital drawdown as part of retirement funding?


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## GoldStone (Mar 6, 2011)

Bruins63, I posted this link earlier in the thread. I strongly recommend that you take time to study this withdrawal strategy. I believe it's a good fit for your situation, where the level of capital is barely enough to meet your income requirements.

http://www.finiki.org/wiki/Variable_percentage_withdrawal

Yes, it requires that you use a spreadsheet.


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## Bruins63 (Jan 18, 2018)

GoldStone said:


> Bruins63, I posted this link earlier in the thread. I strongly recommend that you take time to study this withdrawal strategy. I believe it's a good fit for your situation, where the level of capital is barely enough to meet your income requirements.
> 
> http://www.finiki.org/wiki/Variable_percentage_withdrawal
> 
> ...


Thanks, Ok, will do but why does the basic premise seem to be not to deplete any of the original capital...? If my retirement plan was built around $1m in capital, and I had to dip into capital each year, is that a bad thing! Why else did I save the $1m for retirement if I wasn’t planning on dipping into it? Thanks again


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## GoldStone (Mar 6, 2011)

When they say "deplete", they mean "run out of money". If you withdraw more than your portfolio can safely sustain, there is a risk that a bad sequence of returns will inflict a permanent damage.

The goal is to keep a safe level of capital, not to keep the original $1M. You will absolutely draw down the original $1M.


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## Nerd Investor (Nov 3, 2015)

There's nothing wrong with dipping into capital. Those withdrawal rate rules and strategies are all about not running out of money during retirement. It's also entirely possible you might need more from the portfolio in early years and this drops as your CPP and OAS kicks in. This would all be part of the plan/projections it sounds like your advisor did with you. Step 1 may be revisiting that plan with him/her to make sure you understand everything.


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## GoldStone (Mar 6, 2011)

Bruins63 said:


> EDIT:Ok, re read some stuff...all the theory is built around a 4 percent of capital drawdown per year for safe retirement and that 4 percent should meet your needs w/o touching any capital...Really? If I have no one to leave anything to, why is it such a bad thing to include capital drawdown as part of retirement funding?


Again, your understanding is not correct. The goal is to keep a safe level of capital so you don't run out of money in your old age.


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## Bruins63 (Jan 18, 2018)

GoldStone said:


> Again, your understanding is not correct. The goal is to keep a safe level of capital so you don't run out of money in your old age.


Thanks, I’m sloooowly getting this...if I look at the table in the last link u sent me, I see at age 55,with a 50/50 mix I can draw down 4.3 percent per year for the next 30 years...Questions:

1) I’m assuming this dips into capital? I suspect I need to go into the spreadsheet to see the capital draw down?
2) what rate of return does it assume on the 50/50 split? I’m assuming it’s some sort of historical return? Also what does it assume for inflation?

Thanks again for allllllll the help folks!


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## GoldStone (Mar 6, 2011)

Bruins63 said:


> Thanks, I’m sloooowly getting this...if I look at the table in the last link u sent me, I see at age 55,with a 50/50 mix I can draw down 4.3 percent per year for the next 30 years...Questions:
> 
> 1) I’m assuming this dips into capital? I suspect I need to go into the spreadsheet to see the capital draw down?
> 2) what rate of return does it assume on the 50/50 split? I’m assuming it’s some sort of historical return? Also what does it assume for inflation?
> ...


1) Yes it does. You can see it in this picture:

http://www.finiki.org/wiki/File:VPW.jpg

The table in the lower left corner shows annual withdrawals and remaining balances in nominal and real terms.

2) I am at least five years away from retirement, so I haven't taken time to study the spreadsheet in every detail. I *think* it assumes 5.0% real for stocks and 1.8% real for bonds. You can override these parameters. VPW doesn't assume anything for inflation because it uses real rates of return. But again, I can easily be wrong because I haven't dug deeply into the spreadsheet.

To get definitive answers, ask VPW author directly. He posts as 'longinvest' on a different Canadian forum. Post your questions here:

http://www.financialwisdomforum.org/forum/viewtopic.php?t=117200


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## GoldStone (Mar 6, 2011)

Bruins63 said:


> Thanks, I’m sloooowly getting this...if I look at the table in the last link u sent me, I see at age 55,with a 50/50 mix I can draw down 4.3 percent per year for the next 30 years...


4.3% is what you can withdraw at age 55. If you go down the same column, you can see that withdrawal rate increases as you age.

Note the key difference between fixed 4% method and VPW:

*Fixed 4% method*

Your starting capital is $1M.
You withdraw 4% or $40K the first year.
You withdraw $40K indexed to inflation in the subsequent years, regardless of investment returns. Bad sequence of returns, combined with increasing withdrawals, can easily deplete the capital.

*VPW*

Your starting capital is $1M.
You look up your withdrawal rate in the VPW table each and every year.
You multiply your actual portfolio balance by the withdrawal percentage from the previous step.

If you have a series of bad investment returns, VPW will automatically reduce the amount you can withdraw and spend, in order to protect your capital.

On the other hand, if you have a series of great investment returns, VPW will give you a raise.


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## GreatLaker (Mar 23, 2014)

To understand the VPW method, consider if you wanted to spend $100 equally over 5 years. In each year you spend $20, so after 5 years you would have spent it all. Now look at it another way. Instead of spending a fixed dollar amount, spend a variable percentage amount. In the first year spend 20% ($20). Then in the 2nd year you have $80 left so you spend 25% ($20). In the third year you have $60 left so you spend 33% ($20). In the 4th year you have $40 left so you spend 50% ($20). In the 5th year you have $20 left so you spend 100% ($20).

The difference between the 2 calculation methods is that the first method cannot handle varying returns. The second method can handle investment rates of return that vary each year, and still enable spending the portfolio down to $0 after a set number of years. That is basically how the VPW spreadsheet works.

Over top of that it layers on rates of return based on historical data for varying percentages of stocks and bonds. I don't know how that calc is done. As Goldstone mentions it does not explicitly include any factor for inflation. Its ability to handle inflation is based on the fact that in most economic conditions a balanced portfolio of equities and bonds has historically grown at or faster than inflation.

It will deplete a portfolio to $0 (including original capital) by the expected age you set in the spreadsheet, so a conservative (long) lifespan should be used. If you set the expected lifespan to 90 and you live to 100 you will be hungry and cold for the last 10 years. 

One drawback of VPW is that the amount you can withdraw varies each year in response to the portfolio amount and rates of return. If the market crashes this year, the amount it will tell you to withdraw next year will be lower. Look at the backtesting tab of the spreadsheet to get an idea how variable the withdrawals can be. To successfully use this a retiree needs to have significant discretionary expenses that can be cut in market downturns. The author cautions that it works better with other guaranteed sources of income such as DB pensions, maximum CPP/OAS, and possibly an annuity.

The fixed 4% method gives an inflationary increase each year, has a small possibility of using up all of the portfolio, and a large possibility of having a much larger portfolio at end of life than at retirement (because it is designed to survive the worst of past economic conditions including the great depression and the stagflationary 1970s).

The VPW method will exhaust a portfolio by the selected age, and therefore enables spending more than the 4% method, but at the cost of variable spending.


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## gibor365 (Apr 1, 2011)

Interesting approach 
I run some backtests from 1970 and in 5 -7 years I should have withdraw just around 30K, but in my "potential" 90's - more than 100K... Not really balanced 
Also if you add Pension and Social securities, it will add this amount right away , even if you entered age 50 for start of retirement.
Just curious, in case you retire at 50, and start getting CPP/OAS/DB in 15 years, couldn't you withdraw more at the beginning?

What meaning of US/Canada dropdown?


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## GoldStone (Mar 6, 2011)

gibor365 said:


> Interesting approach
> I run some backtests from 1970 and in 5 -7 years I should have withdraw just around 30K, but in my "potential" 90's - more than 100K... Not really balanced


Are you quoting nominal or inflation-adjusted (real) values?



gibor365 said:


> What meaning of US/Canada dropdown?


The spreadsheet has two data sets built into it: Canada (1970-2015) and U.S. (1871-2015). You can pick one of the two to run backtests.


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## gibor365 (Apr 1, 2011)

GoldStone said:


> Are you quoting nominal or inflation-adjusted (real) values?


 Inflation adjusted, for 1M, I got in 13 years 26K , and in 43 years - 103K.



> The spreadsheet has two data sets built into it: Canada (1970-2015) and U.S. (1871-2015). You can pick one of the two to run backtests.


Ok, and if my allocation for CDN/US equities 50/50, I understand that I cannot run backtest? It's or US market or CDN?

The most important question for me... Can I consider GIC/HISA as Canadian Bonds? Or how I should treat it?
Currently we have allocation: 55% equities (both CDN and International), 10% FI (include CDN, US, int'l, prefs) and 35% HISA/GIC.


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## GreatLaker (Mar 23, 2014)

gibor365 said:


> Just curious, in case you retire at 50, and start getting CPP/OAS/DB in 15 years, couldn't you withdraw more at the beginning?


The author of the spreadsheet addresses that in this response: http://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=117200&p=544675&hilit=GIC#p544675



> In case of early retirement (or delayed CPP/OAS), one needs an income bridge between retirement and the start of payments. My opinion is that this income bridge should be similar to these pension payments; it must not be subject to the fluctuations of markets.
> 
> In order to build a non-risky income bridge, I suggest setting aside an amount equal to ($X x (N-1)) in a GIC ladder, where $X is the annual future pension (in current dollars) and N is the number of years to bridge. An additional $X is used for bridging the income during the first year of retirement. Then each subsequent year, one ladder slice ($X plus interest) is used to bridge that year's income.


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## gibor365 (Apr 1, 2011)

GreatLaker said:


> The author of the spreadsheet addresses that in this response: http://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=117200&p=544675&hilit=GIC#p544675


I think I'm stupid , I don't get it .
Assume I start at age 55, my% 4.2%, amount $1,500,000, I can withdraw $63,000.
However, at age 60 I start getting $3,000 CPP, at age 65 $5,000 OAS, and at age 57, $10,000 DB..
Thus, by how much I can increase those $63,000 starting 55?


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## Bruins63 (Jan 18, 2018)

GoldStone said:


> 4.3% is what you can withdraw at age 55. If you go down the same column, you can see that withdrawal rate increases as you age.
> 
> Note the key difference between fixed 4% method and VPW:
> 
> ...


Thanks to EVERONE! When using the 4 percent rule do I include the 3-5 year ladder as part of the overall capital or not?


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## GoldStone (Mar 6, 2011)

gibor365 said:


> Inflation adjusted, for 1M, I got in 13 years 26K , and in 43 years - 103K.


I think I understand why it happened.

Go to the Table tab. Look at the Backtesting Parameters in the upper left corner. The default returns are:

Stocks: 5%
Bonds: 1.8%

You see a rising income in the backtesting table because historical returns were better than the defaults (5%, 1.8%). VPW method gives you an automatic raise if actual returns exceed the default expectations.

Try changing Override parameter to Yes and enter these returns:

Stocks: 8%
Bonds: 2.5%

You will see a much smoother withdrawal amounts in the Backtesting tab, because the override returns are closer to the actual historical returns.




gibor365 said:


> Ok, and if my allocation for CDN/US equities 50/50, I understand that I cannot run backtest? It's or US market or CDN?


US dataset uses US returns for Domestic Stocks; International returns for International Stocks.

Canadian dataset uses Canadian returns for Domestic Stocks; 50% US returns / 50% International returns for International Stocks.

Pick Canadian dataset and you get fairly close to what you want. You will need to tweak the formula for International Stocks to get your exact desired allocation.


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## GoldStone (Mar 6, 2011)

gibor365 said:


> The most important question for me... Can I consider GIC/HISA as Canadian Bonds? Or how I should treat it?


Your choice of fixed income doesn't matter in the VPW tab. The spreadsheet assumes 1.8% real for bond returns. It doesn't care what you invest in: bond ETFs, individual bonds, GICs, HISA, your mattress, etc.

If 1.8% real doesn't seem right, you can override it in the Table tab under VPW Parameters. Enter what you think is a reasonable return for GICs/HISAs.

----

Backtesting tab is a different matter. It uses historical bond returns for backtesting. Not GIC/HISA returns. I suspect that historical bond returns are better than historical GIC/HISA returns. Does it really matter? I don't think so.

a. The difference is small.
b. Backtesting doesn't give you any guarantees.
c. Future returns are not known.

Set your expectations in the VPW parameters and go from there.


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## RBull (Jan 20, 2013)

Great summary Goldstone and quick study on VPW, which I have been using now for about a year in retirement. I think you're right on your analysis. 

Bruins63, are looking at ways to reduce your investing costs to make a significant difference on what will be available to fund your retirement?


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## Bruins63 (Jan 18, 2018)

RBull said:


> Great summary Goldstone and quick study on VPW, which I have been using now for about a year in retirement. I think you're right on your analysis.
> 
> Bruins63, are looking at ways to reduce your investing costs to make a significant difference on what will be available to fund your retirement?


Yes I am, right now running me a grand a month...crazy...IMO the fees work when in accumulation mode but not so much when in withdrawal mode...


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## GoldStone (Mar 6, 2011)

Bruins63 said:


> When using the 4 percent rule do I include the 3-5 year ladder as part of the overall capital or not?


Generally, yes.

I can think of one possible exception:
- the $$$ amount invested in the ladder is small
- your retirement income is barely enough to cover your expenses
- you don't have any emergency fund set aside

In that case, it might make sense to exclude the ladder. Look at it as your emergency fund that may disappear one day if you have a real emergency.




Bruins63 said:


> Yes I am, right now running me a grand a month...crazy...IMO the fees work when in accumulation mode but not so much when in withdrawal mode...


Honest feedback: you have some serious home work to do if you want to ditch your advisor. (no offense intended)


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## GoldStone (Mar 6, 2011)

GreatLaker said:


> To understand the VPW method, consider if you wanted to spend $100 equally over 5 years. In each year you spend $20, so after 5 years you would have spent it all. Now look at it another way. Instead of spending a fixed dollar amount, spend a variable percentage amount. In the first year spend 20% ($20). Then in the 2nd year you have $80 left so you spend 25% ($20). In the third year you have $60 left so you spend 33% ($20). In the 4th year you have $40 left so you spend 50% ($20). In the 5th year you have $20 left so you spend 100% ($20).
> 
> The difference between the 2 calculation methods is that the first method cannot handle varying returns. The second method can handle investment rates of return that vary each year, and still enable spending the portfolio down to $0 after a set number of years. That is basically how the VPW spreadsheet works.
> 
> ...


GreatLaker, this is a great summary. Thank you for taking the time to write it.


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## GreatLaker (Mar 23, 2014)

gibor365 said:


> I think I'm stupid , I don't get it .
> Assume I start at age 55, my% 4.2%, amount $1,500,000, I can withdraw $63,000.
> However, at age 60 I start getting $3,000 CPP, at age 65 $5,000 OAS, and at age 57, $10,000 DB..
> Thus, by how much I can increase those $63,000 starting 55?


Not the simplest concept...

Here is the $ you need to bridge the gap until your various pensions start:

From age 55-56 you need $10k+$3k+$5k/yr = 18k/yr x 2 years = $36k
From age 57-59 you need $3k+$5k = $8k/yr x 3 years = $24k
From age 60-64 you need $5k/yr x 5 years = $25k
So you need a GIC ladder of 36+24+25 = $85k to bridge until all your pensions start.

So now you put $1,500,000 - 85,000 = 1,415,000 into the starting value for the VPW spreadsheet. Your available spending each year is the amount calculated by the VPW spreadsheet, plus the bridge amount from the GIC ladder.

Note:

I did the above quickly so pls do the calcs for yourself
For simplicity I ignored rate of return on the GICs and inflation adjustments on CPP & OAS.
Hope that's clear.


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## Bruins63 (Jan 18, 2018)

GoldStone said:


> Generally, yes.
> 
> I can think of one possible exception:
> - the $$$ amount invested in the ladder is small
> ...


No offence taken Sir...just learning as they say...and trust me on this one, I’m not getting this kind of advise from my advisor, just projections based on a 3-4 percent return with no change in current portfolio...that’s why I am questioning the value of a grand a month for a buy and hold strategy


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## GreatLaker (Mar 23, 2014)

GoldStone said:


> I think I understand why it happened.
> 
> Go to the Table tab. Look at the Backtesting Parameters in the upper left corner. The default returns are:
> 
> ...


Wow I did not know where the growth parameters were and didn't realize I could adjust them for myself for the backtesting and VPW tabs..

Thanks a bunch!


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## like_to_retire (Oct 9, 2016)

Bruins63 said:


> Yes I am, right now running me a grand a month...crazy...IMO the fees work when in accumulation mode but not so much when in withdrawal mode...


Unfortunately, that assumption is not correct. Over time, even though ongoing fees appear small, they have a huge impact on your investment portfolio. Time is the key factor here. You've definitely waited to the eleventh hour to do something about it, stopping others from profiting at your expense, but it's never too late. 

For something so simple, to pay $1000 a month, leaves me speechless. There's little reason for an advisor. They are there to profit from your nest egg. If you're able to operate a chequing account, and pay your own bills, and live within a budget, surely you can handle your investments yourself. I never understand why people feel they require someone else to do this simple task for them?

ltr


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## RBull (Jan 20, 2013)

GreatLaker said:


> To understand the VPW method, consider if you wanted to spend $100 equally over 5 years. In each year you spend $20, so after 5 years you would have spent it all. Now look at it another way. Instead of spending a fixed dollar amount, spend a variable percentage amount. In the first year spend 20% ($20). Then in the 2nd year you have $80 left so you spend 25% ($20). In the third year you have $60 left so you spend 33% ($20). In the 4th year you have $40 left so you spend 50% ($20). In the 5th year you have $20 left so you spend 100% ($20).
> 
> The difference between the 2 calculation methods is that the first method cannot handle varying returns. The second method can handle investment rates of return that vary each year, and still enable spending the portfolio down to $0 after a set number of years. That is basically how the VPW spreadsheet works.
> 
> ...


Excellent summary. Hats off! I see it the exactly the same way but would have taken a lot of work to summarize as nicely. 



GreatLaker said:


> Not the simplest concept...
> 
> Here is the $ you need to bridge the gap until your various pensions start:
> 
> ...


Very well done. I need a little consideration in the pension scenario too.


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## Bruins63 (Jan 18, 2018)

like_to_retire said:


> Unfortunately, that assumption is not correct. Over time, even though ongoing fees appear small, they have a huge impact on your investment portfolio. Time is the key factor here. You've definitely waited to the eleventh hour to do something about it, stopping others from profiting at your expense, but it's never too late.
> 
> For something so simple, to pay $1000 a month, leaves me speechless. There's little reason for an advisor. They are there to profit from your nest egg. If you're able to operate a chequing account, and pay your own bills, and live within a budget, surely you can handle your investments yourself. I never understand why people feel they require someone else to do this simple task for them?
> 
> ltr


I can explain why...2.5 years ago I had to take the commuted value of a DB...I had ZERO experience in investing...fortunately my advisor has made me 8 percent annually on my commuted value BUT now I’m considering retirement and need to change things up


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## GreatLaker (Mar 23, 2014)

Bruins63 I was in a similar position to you 7 years ago. Wondering about the value of the advisor I was using (VP at CIBC Wood Gundy). Unhappy with the level of financial planning he and his team were doing. Concerned about fees and the impact on my long-term returns, but every time I discussed with him he always tried to ignore or deflect the discussion. Got him to lower fees incrementally, but not enough for me. Wondering how I could ever move my RRSP/LIRA/TFSA somewhere else.

I took about 3 months to study and learn everything I could about DIY investing. Resources like Canadian Money Forum, financialwisdomforum.org, finiki.org, canadiancouchpotato.com, books like The Four Pillars of Investing, Millionaire Teacher, If You Can by William Bernstein (free eBook). 

Then I took $50k of various funds that I already had outside the advisor portfolio (in Tangerine index funds) and bought ETFs from TD Direct investing (mainly because it was the bank I used). 2011 was a horrible year to invest, but I stuck with it. Once I built my confidence I made one final effort with the advisor to get to a fee level that was acceptable to me, couldn't get there, so moved my TFSA and non-registered account from advisor to TDDI. The advisor almost dared me to do it. A year later I moved my RRSP and LIRA across. No regrets.




> Could u please elaborate on a 3 fund index etf portfolio...I’m tempted to take the portfolio over myself as it’s costing me 1k/mth in fees...


As others mentioned, using index ETFs with a equity/fixed income balance according to your risk tolerance. The model ETF portfolios at canadiancouchpotato.com are a good starting point. Vanguard now has an even simpler single fund solution.




> Ok, next question...can I just walk into saaaaaay TDBank and get their recommendation for 3 ETF funds and a 5 year GIC Ladder and if I like it just buy the ETF’s and GIC’s and ditch the grand a month I’m paying?


Unlikely. Banks are in business to make money _from_ their clients, not _for_ their clients. Unsuspecting customers that walk into a bank branch are usually sold a mutual fund solution with ~2.5% MER, and maybe some complex, expensive market indexed GICs. You already know what unsuspecting customers that walk into a large broker get sold.  Discount brokers like TDDI or Questrade are not permitted to offer investing advice (but they will help you with how to set up an account and how to make trades).




> So I’d ask the question, if planning for sequence of returns is necessary, when is the right time to do it...2 years before retirement? 1 year? 3 years? My advisor seems to think the change in the portfolio should happen upon retirement, which IMO doesn’t allow for sequence of returns planning...


My personal belief is start a gradual move from accumulation allocation to spending allocation about 10 years prior to target retirement. Reason being markets can get screwed up for a decade. Consider someone that wanted to retire in 2000 and had a high equity portfolio. The market plummeted with the dot com crash in 2000, then again with the financial crisis in 2008. Such a person would really have been hurt by sequence of return risk. Contrast that to someone that retired in mid-2009, and benefited from a bull market from then to now.




> Ok, I re read this...here is an analogous situation to my situation...let’s say I have 1 million...at 4 percent, that’s $40k/yr...I need $60k per year in retirement...given your recommendation, that would put me in the 25/75 equity/bond allocation?


This is a really good paper to understand the oft misinterpreted "4% rule":
http://www.retailinvestor.org/pdf/Bengen1.pdf




> 2.5 years ago I had to take the commuted value of a DB...I had ZERO experience in investing...fortunately my advisor has made me 8 percent annually on my commuted value


The Canadian Couch Potato ETF portfolio with 75% equities made 8.8% annually over the last 3 years. The difference is probably approximately the advisory fees you are paying minus the MERs on the ETFs. Maybe a little less, since the advisor could be adding value before fees, but destroying value after fees.


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## Bruins63 (Jan 18, 2018)

GreatLaker said:


> Bruins63 I was in a similar position to you 7 years ago. Wondering about the value of the advisor I was using (VP at CIBC Wood Gundy). Unhappy with the level of financial planning he and his team were doing. Concerned about fees and the impact on my long-term returns, but every time I discussed with him he always tried to ignore or deflect the discussion. Got him to lower fees incrementally, but not enough for me. Wondering how I could ever move my RRSP/LIRA/TFSA somewhere else.
> 
> I took about 3 months to study and learn everything I could about DIY investing. Resources like Canadian Money Forum, financialwisdomforum.org, finiki.org, canadiancouchpotato.com, books like The Four Pillars of Investing, Millionaire Teacher, If You Can by William Bernstein (free eBook).
> 
> ...


Wow, great story!! Also GREAT analogy investing in 2000 vs investing in 2009!! That example really resonated with me! BTW my 8 percent annual returns are net of fees but definitely time to slow this train down and start to better understand this stuff! Your insights have been invaluable...thanks to everyone!


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## gibor365 (Apr 1, 2011)

GreatLaker said:


> Not the simplest concept...
> 
> Here is the $ you need to bridge the gap until your various pensions start:
> 
> ...


Sorry , but I got even more confused .
If I don't even consider CPP/OAS/DB, from 1.5M -> suggested withdrawal $66,000.
However, looking at numbers you got, from $1,415,000 -> suggested withdrawal $62,260 + $2,125 ( 2.5% of 85K GIC) = $64.385 . But logically if I have CPP/OAS/DB at later years, my starting withdrawal should be more, not less.
I don't get something here


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## james4beach (Nov 15, 2012)

like_to_retire said:


> For something so simple, to pay $1000 a month, leaves me speechless. There's little reason for an advisor. They are there to profit from your nest egg. If you're able to operate a chequing account, and pay your own bills, and live within a budget, surely you can handle your investments yourself. I never understand why people feel they require someone else to do this simple task for them?


Bruins63... you really can't go from your current situation to having NO advisor overnight, but as others have said it's in your best interest to study up, learn more, then eventually take over the task of managing the portfolio and investments yourself. Then you can drop this advisor and these high fees.

Most of these advisors (unless they're delusional) know that they are over-charging for the service and they would never pay these kinds of fees themselves to have their own investments managed.

At the moment though, in your meeting, I would definitely push the topics relating to imminent retirement. Is this 75/25 allocation a good idea? How much cash will you need to extract annually out of your portfolio in retirement years? Where do you stand today vs where you need to be? Is the risk of 75% equities too much when you might be starting retirement any moment now?

Continuing some topics to discuss with your advisor... wouldn't it be more prudent to back off to a 60/40 allocation, or perhaps even 50/50 where GICs make up a good amount of the fixed income.

Additionally, learn what funds the advisor has you invested in. What are the management fees of those, the MERs? Then ask, are these the lowest fee funds available for this purpose? For example TD offers a really nice "e-series" of index funds with very low fees. For example the Canadian Index Fund e-series has a 0.33% MER. There are lower fee options, but IMO if he has you in something with a higher MER than the e-series, he's being negligent.


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## GreatLaker (Mar 23, 2014)

gibor365 said:


> Sorry , but I got even more confused .
> If I don't even consider CPP/OAS/DB, from 1.5M -> suggested withdrawal $66,000.
> However, looking at numbers you got, from $1,415,000 -> suggested withdrawal $62,260 + $2,125 ( 2.5% of 85K GIC) = $64.385 . But logically if I have CPP/OAS/DB at later years, my starting withdrawal should be more, not less.
> I don't get something here


The GIC ladder is only meant to work as a bridge between retirement and when your pensions start and is all used up by age 65. Your total pensions at age 65 will be $18k/yr (ignoring any inflationary increases).

When you retire you have no pension income, so take $18k/yr from the GIC ladder at age 55 & 56. Then at age 57 the $10k/yr workplace DB pension kicks in, so you reduce the amount you take from the GIC ladder to $8k/yr for ages 57-59. Then at age 60 you will start $3k/yr CPP, so you reduce the amount you take from the GIC ladder to $5k/yr from age 60-64. Then at age 65 your OAS kicks in, the GIC ladder is all used up and you are receiving all 3 of your pensions, adding up to $18k.

Again for simplicity I have ignored inflation and rate of return on the GICs.


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## GoldStone (Mar 6, 2011)

Bruins63, 

Ask your advisor if any of the funds you own were sold on a DSC basis. DSC = deferred sales charges. DSC charges can be an expensive hit when moving away from advisor. Watch out for new DSC charges when making changes to your asset allocation. You don't want to restart the DSC clock.

I think it's unlikely that you are trapped by DSCs, because you are paying your advisor a fixed percentage of assets. Fixed percentage fee + DSCs would be an egregious double dipping. But it doesn't hurt to ask.


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## GreatLaker (Mar 23, 2014)

OP it seems like you are getting decision overload. Suggest you split the issue into multiple decisions:

Do you want to be a self directed investor and do you think you have the knowledge and temperament to do it.
If yes, how will you invest (indexing / couch potato most likely) and what will be in your portfolio
Do you have enough to retire / when can you retire

Item #3 is still an issue even if you decide to stay with the advisor


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## Bruins63 (Jan 18, 2018)

james4beach said:


> Bruins63... you really can't go from your current situation to having NO advisor overnight, but as others have said it's in your best interest to study up, learn more, then eventually take over the task of managing the portfolio and investments yourself. Then you can drop this advisor and these high fees.
> 
> Most of these advisors (unless they're delusional) know that they are over-charging for the service and they would never pay these kinds of fees themselves to have their own investments managed.
> 
> ...


Thank you...always appreciate your advice and mentoring...one thing I am aware of is exactly what my holdings are and exactly what fees I am paying for them...should be an interesting discussion...thanks again...


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## humble_pie (Jun 7, 2009)

bruins i haven't immersed myself in your thread but gather that some folks are suggesting mucho study before you launch on your own _sans_ advisor.

this forum has witnessed, even helped, lots of people recover from advisor addiction over the years. One idea is to do it gradually. The recovering investor opens a small discount broker account, purchases small quantity of an essential e-fund or a core ETF as jas4beach suggests, then starts to study. What will happen to his personal discount broker choice becomes an excellent teaching module.

this suggestion is the opposite of suggesting that you plunge into massive studies, create a master financial plan for the rest of your life, then grab the reins, all within a few months. IMHO it's more prudent to start by sticking a toe in the water first.

there's a caution though. Best not to alert the advisor that the above is going on. Some advisors can get royally ticked & it's impossible to predict whether that will happen or not. If ticked, advisor may sharply reduce the level of service.

i remember this happening to a very capable high-net-worth cmffer who together with her husband had passed 14 high-fee years with a big name advisor at a leading broker. The tantrum the advisor threw when she mentioned she & husband wished to slowly morph into DIY with ETFs was disgraceful. Their relationship deteriorated so fast that she had to move out much sooner than expected.

PS the story turned out very happily in the end. She had a good head on her shoulders. She was greatly helped here & at couch potato dot com.



.


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## Bruins63 (Jan 18, 2018)

humble_pie said:


> bruins i haven't immersed myself in your thread but gather that some folks are suggesting mucho study before you launch on your own _sans_ advisor.
> 
> this forum has witnessed, even helped, lots of people recover from advisor addiction over the years. One idea is to do it gradually. The recovering investor opens a small discount broker account, purchases small quantity of an essential e-fund or a core ETF as jas4beach suggests, then starts to study. What will happen to his personal discount broker choice becomes an excellent teaching module.
> 
> ...


Thanks for the advice...BTW my advisor has been very consultative and if I did slowly move, i believe my advisor would be supportive...My disconnect with my advisor simply arises from the fact the fees make sense when in accumulation mode (net 7-9 percent returns) but don’t make sense in withdrawal mode where 3 percent is required...overall I’ve had a great run with my advisor which has been mutually beneficial, but upon retirement, the business model needs to change...


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## gibor365 (Apr 1, 2011)

Just was playing with numbers on VPW backtest data and I see that sequence of returns has a HUGE effect. I took 1.5M and entered start year 1966. Starting withdrawal is 81K, however in 9 years, suggested withdrawal droped to 29,614 (it's 65%!) - ouch....and it took 22 years! until suggested withdrawal climbed back to around 81K. (even with 50/50 allocation , in 1975 amount drops 43%)
However, if I start 1975(again 81K starting amount), I woild never go below this amount and in 26 years suggested amount as high as 371K! Unbelievable!


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## james4beach (Nov 15, 2012)

It's true gibor, it is very significant. This is why it's a mistake to just focus on returns alone... drawing money out of retirement savings is BOTH about returns, and volatility/sequence of returns. You have to strike the right balance between those.

On the other hand you can't go 100% savings & GICs because then you just don't have any return.

For another example of a huge difference in outcomes due to sequence risk, see:
http://canadianmoneyforum.com/showthread.php/86673-Permanent-portfolio-and-asset-allocation?p=1809626&viewfull=1#post1809626

Although I was endorsing the permanent portfolio in that example, something like 50/50 gives nice outcomes too.


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## Nerd Investor (Nov 3, 2015)

I feel like I've posted this somewhere before, but this is one of the better introductions to sequence of return risk that I've seen. There is one the Savings phase and one for the Retirement phase. 

Savings: http://www.gestaltu.com/2013/08/sequence-of-returns-in-not-particular-order-savings.html/
Retirement: http://www.gestaltu.com/2013/11/path-dependency-financial-planning-retirement-edition.html/


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## gibor365 (Apr 1, 2011)

> Although I was endorsing the permanent portfolio in that example, something like 50/50 gives nice outcomes too


 That is also my opinion....AA Equities/(FI + cash) should be from 60/40 to 40/60 range



> On the other hand you can't go 100% savings & GICs because then you just don't have any return.
> Although I was endorsing the permanent portfolio in that example, something like 50/50 gives nice outcomes too.


 I'm not sure, as you can have HISA/GIC/individual bonds combination that yield about 2.5%, and inflation is about 1.5%. Thus, if you withdraw 1%, your principal stays the same. However, you need very big pool of cash to live on 1% .
On the other hand , you can also withdraw from principal, it will be interesting to see calcs, for example your FI average yield 2.5%, inflation is 1.5%, you have 1.5M and want to deplete all money in 50 years. What amount can you withdraw annually?


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## Koogie (Dec 15, 2014)

gibor365 said:


> On the other hand , you can also withdraw from principal, it will be interesting to see calcs, for example your FI average yield 2.5%, inflation is 1.5%, you have 1.5M and want to deplete all money in 50 years. What amount can you withdraw annually?


About 38K, if everything stayed constant.


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## cainvest (May 1, 2013)

gibor365 said:


> and want to deplete all money in 50 years.


50 years? Is this for early retirement or planning on a really, really long life?


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