# When one has collected enough savings,does one reduce risk



## 1980z28 (Mar 4, 2010)

When we start to invest our goal is to reach financial independence to get us to the end,let`s say 100 years old

As this goal is reached,does one reduce risk and back away from equities


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## Dilbert (Nov 20, 2016)

My strategy is to begin to create a cash wedge now that I have sufficient investments in equities.


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## zylon (Oct 27, 2010)

> As this goal is reached, does one reduce risk and back away from equities


I believe this decision is based on personality.
Some people will not risk anything, based on their definition of 'risk', and are happy with GICs, world travel, and golf.

I'm of the variety that sets aside that portion which if lost, will not affect my lifestyle. Those funds are used for all sorts of outlandish gambles which have low probability of showing a return.









https://darkzero.co.uk/game-reviews/wallace-and-gromits-grand-adventures-pc-xbox-live/


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## 319905 (Mar 7, 2016)

1980z28 said:


> When we start to invest our goal is to reach financial independence to get us to the end,let`s say 100 years old
> 
> As this goal is reached,does one reduce risk and back away from equities


I've no opinion ... financially independent, sold all equities and quit the game a few years back mainly to sleep better at night ... but the term cash wedge got me googling. Came up with MOAs link ... https://www.myownadvisor.ca/cash-wedge-opening-investment-taps/ ... which just might contain the answer you seek :encouragement:


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## like_to_retire (Oct 9, 2016)

rikk2 said:


> ... but the term cash wedge got me googling.... https://www.myownadvisor.ca/cash-wedge-opening-investment-taps/ ... which just might contain the answer you seek :encouragement:


Yeah, I admit I had no idea what that meant when I read it.

But after reading the link, I see it basically, as the same advantage that a dividend portfolio offers as opposed to a growth portfolio (where you sell equities to provide income). With a dividend portfolio you don't get too concerned about share price as long as the equity continues to supply dividend income. As such there's no sequence of returns problem. I know people love to school others how there's no difference between growth and a dividend portfolios, but I don't happen to agree.



> I've no opinion ... financially independent, sold all equities and quit the game a few years back mainly to sleep better at night


I'm certainly in the camp that believes you should have less, rather than more equities if you are financially independent, but zero equities sounds extreme and just no fun at all. Don't you keep perhaps 20% or whatever?

ltr


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## Userkare (Nov 17, 2014)

In my late 60's, I'm happy with what I've accumulated, and see no reason to take any risks at all. I no longer have any investments beyond simple GICs. I've got our combined income spread-sheeted out with a total after-tax net around $55K/yr, dropping to $45K after age 90. GIC rates may go up or down, but I'm not really counting on the interest to survive. In addition to the yearly income, are savings that I can draw on for any unforeseen situations.


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## Mechanic (Oct 29, 2013)

Good information here, thank you. I too had no idea what a cash wedge was but, after reading the link I have a better understanding. Turns out I have a few cash wedges in place. That way I can keep my investment portfolio invested and growing with all the dividends staying within it. I have added to my investments in the 5 or so years since retiring early but haven't had to sell any to produce actual spending money as I just draw from the cash wedges as needed.


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## 319905 (Mar 7, 2016)

like_to_retire said:


> I'm certainly in the camp that believes you should have less, rather than more equities if you are financially independent, but zero equities sounds extreme and just no fun at all. Don't you keep perhaps 20% or whatever?
> 
> ltr


By my simple math, no fun low risk low effort equities don't put me ... others sure, me no ... that much farther ahead than really low risk no effort GICs, HISAs. And the higher risk fun equities take the time and effort I'm not willing/not interested in putting in these days ... still mulling over that SLK 350 though ... hmmm.


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## kcowan (Jul 1, 2010)

I am doing my heirs a favour by maintaining my prior equity share and letting it drive the AA. They both prefer that I keep my equity exposure. My withdrawal rate is under 2% but I am trying to correct that. Been retired 15 years.


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## like_to_retire (Oct 9, 2016)

kcowan said:


> My withdrawal rate is under 2% but I am trying to correct that. Been retired 15 years.


I assume you mean you are trying to correct your withdrawal rate higher and presumably enjoy that money. It's certainly one of my goals that I haven't been able to accomplish after near 12 years of retirement. It's a hard nut to crack after a lifetime of being frugal.

My withdrawal rate is 0%, as my pension and CPP cover all my needs, so the portfolio is more an amusement than anything else. I keep around 40% equities. I did force myself once to take money out to pay cash for a car, but that's it. I was quite proud of myself.

Like you say, I'm trying to correct that.

ltr


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## OptsyEagle (Nov 29, 2009)

I think there comes a time in life where the benefit of having more money does not add much improvement in your life, whereas less money would create a significant problem. 

When I was under 20, had no money and wanted to invest in stocks, I could take on all the risk I wanted. Not only did I have many years to fix my mistakes, but since I virtually had no money when I started, I technically had nothing to lose. Things are considerably different now.

So ask yourself. Pick any percentage number. Lets says 25%. If you had 25% more money, what would you do differently in your life? What affect would that have on your future and your feeling of financial security? Now ask it again, but lets create a loss. If you had 25% less money, how would that affect your life?

Keep doing this with larger percentages and you might be able to uncover your true risk tolerance and hopefully figure out what amount of money you should have in equities and what amount of money you should have in guaranteed investments. Call that part a wedge, a buffer, dry powder, whatever you want, but it is the money that will allow you to invest the equity part of your portfolio, without the emotional mistakes that investors make during bear markets, when they have invested more money in equities then they should have.


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## ian (Jun 18, 2016)

We maintain our percentage equity position. We are secure but we want a hedge against inflation, currency fluctuations, plus we want to pass along some equity to our children.


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## milhouse (Nov 16, 2016)

I'm kind of all over the place with a hybrid dividend growth and index approach. Once I hit my dividend target, I don't see myself adding or reducing that component. On the index side, I can see myself reducing the equity portion but unlikely beyond a 50/50 split. Would like to build up a cash component/GIC ladder too. 

Along the lines of what ian says, I want to make sure we have enough growth to provide coverage against inflation and currency risks (which may impact our travel goals).


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## hboy54 (Sep 16, 2016)

Hi:

I don't intend to run things any differently in the foreseeable future, except that the leverage is coming down both in absolute dollars and as a percentage of the portfolio. Net dividends plus my wife's pension will provide more after tax than her job did, so crashes won't much matter. The better returns of stocks will then benefit somebody somewhere.

Hboy54


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## james4beach (Nov 15, 2012)

1980z28 said:


> When we start to invest our goal is to reach financial independence to get us to the end,let`s say 100 years old
> 
> As this goal is reached,does one reduce risk and back away from equities


This is an interesting thread, and different opinions certainly. I would say yes, once the goal is reached, I think it makes sense to reduce risk.

For example let's say you really have enough for all your retirement needs, and switch to 80% fixed income and just 20% stocks. PortfolioVisualizer.com shows this achieved a 4% real return since 1972. This seems like a fine allocation to me... the money keeps growing faster than inflation erodes it, plus you have no fear of market crashes or prolonged bear markets.



ian said:


> We maintain our percentage equity position. We are secure but we want a hedge against inflation, currency fluctuations, plus we want to pass along some equity to our children.


But if it only takes 20% equities to beat inflation, what's gained by going higher?


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## olivaw (Nov 21, 2010)

^Fixed income returns have been anemic for the past decade. You aren’t going to achieve a 4% real return on a 2.5% five year GIC. i’m at 50-50 and the FI portion is barely keeping up with inflation.


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## kcowan (Jul 1, 2010)

james4beach said:


> But if it only takes 20% equities to beat inflation, what's gained by going higher?


Building a legacy for the heirs and contributing to charities (like Gates and Buffett).


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## kcowan (Jul 1, 2010)

like_to_retire said:


> My withdrawal rate is 0%, as my pension and CPP cover all my needs, so the portfolio is more an amusement than anything else. I keep around 40% equities. I did force myself once to take money out to pay cash for a car, but that's it. I was quite proud of myself.
> 
> Like you say, I'm trying to correct that. ...ltr


It is the habits of a lifetime that drive our behaviour. Sure I can afford a new car, but I know that buying one 2-3 years old is the best deal. OTOH our cars are 9, 12 and 24. But they serve the purpose because we take transit and taxis for our convenience. I suppose that is one of our attempts to spend more.


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## off.by.10 (Mar 16, 2014)

On the other hand, if you keep the same allocation, you end up with extra money. Having more than you actually need is a also form of risk reduction.


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## ian (Jun 18, 2016)

We have been secure for quite some time. It does not stop us from sitting at 65 percent equities from time time to time. Over the the past five years this strategy has made a significant difference to our net worth. Not particularly to our standard of living. Habits of a lifetime as kcowan says. We have increased our charitable giving, we have taken steps to provide the required funds for our grandchildren's education-RESP and otherwise. 

My goal over the next fifteen years is to build an asset base that will provide an retirement income for each of my children should they need it. Our vehicles are both 11 years old. No plan to replace them. We are spending more on travel. We downsized our home in terms of space and cost purely because of a lifestyle decision.

The only reason our investment ratios will change will be our perception of the market and/or advice from our financial adviser. Our net worth has nothing to do with that decision.


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## hboy54 (Sep 16, 2016)

off.by.10 said:


> On the other hand, if you keep the same allocation, you end up with extra money. Having more than you actually need is a also form of risk reduction.


This!


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## birdman (Feb 12, 2013)

I presently am invested 25% in the market (100% in Cdn blue chip divies)with the balance in GIC's and a bit of other stuff. Pensions, interest, RIF withdrawals provide us with ample income and the funds in the market just accumulate. No changes planned and it seems to work.


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## AltaRed (Jun 8, 2009)

off.by.10 said:


> On the other hand, if you keep the same allocation, you end up with extra money. Having more than you actually need is a also form of risk reduction.


+1 More than 11 years into retirement, our lifestyle is funded primarily, in decreasing order of significance, by: 1) investment income (primarily dividends and some interest) ~ 2/3rds, 2) DB and CPP pension income ~ 1/3rd, and 3) some (circa 2%) draw on capital for one off expenditures like roof replacement, new vehicles, expensive travel adventures, and charitable giving 

My asset allocation to equities has been increasing each year of retirement because: a) our needs are already met and I can thus take market risk, b) padding the portfolio to more than we need is risk reduction in itself, and c) it is more fun than just clipping coupons. It currently stands close to 85% and that is about as high as I feel comfortable with. I will shed some equity once a year or so, if markets do not do it for me, to stay within those parameters.

I also maintain a HISA cash reserve approaching 6 digits as a buffer to avoid capital draw down for perhaps 5 years of 'bear' equity markets to supplement needs. I will have to top that back up first thing in the New Year as we are making significant payments in the next 2 weeks for 2018 travel adventures. I will do that in January while equity markets are still strong and to avoid cap gains for the 2017 tax year. I already have my equities prioritized for what goes on the block.


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## kcowan (Jul 1, 2010)

AltaRed said:


> It currently stands close to 85% and that is about as high as I feel comfortable with. I will shed some equity once a year or so, if markets do not do it for me, to stay within those parameters.


You are a better man than me, Charlie Brown! And yee shall be gathering the significant rewards from that allocation.

I do agree that we should all make hay while the sun shines. If one has sat out the bull market, then they have forgone the substantial buffer that you have already accumulated going forward.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> My asset allocation to equities has been increasing each year of retirement because: a) our needs are already met and I can thus take market risk, b) padding the portfolio to more than we need is risk reduction in itself, and c) it is more fun than just clipping coupons. It currently stands close to 85% and that is about as high as I feel comfortable with. I will shed some equity once a year or so, if markets do not do it for me, to stay within those parameters.


Wow Alta, 85% equities, you've got nerves of steel. Kudos to you. I'm at 40% and I think it will stay there until I'm gone. With that, even a crushing 40% drop in the market and I would only be down 16% overall. I could just stomach that. But that would be my limit.

ltr


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## OptsyEagle (Nov 29, 2009)

off.by.10 said:


> On the other hand, if you keep the same allocation, you end up with extra money. Having more than you actually need is a also form of risk reduction.


That's a great strategy except for one flaw. You need to risk having enough in order to get to the point where you have more then enough. Having the right amount usually happens first.


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## AltaRed (Jun 8, 2009)

like_to_retire said:


> Wow Alta, 85% equities, you've got nerves of steel. Kudos to you. I'm at 40% and I think it will stay there until I'm gone. With that, even a crushing 40% drop in the market and I would only be down 16% overall. I could just stomach that. But that would be my limit.
> 
> ltr


If I was caught in a 40% equity decline, I would definitely be having some 'bad hair' weeks and months from a 'net worth' perspective, but I am convinced that our central bankers won't let the equity markets stay in the deep crevices of a gutter very long. Perhaps a few years. 

Bottom line is, because of investment income, I could weather the storm with only marginal impact to my lifestyle, and mostly on the fringes of discretionary luxuries. And since I plan on being around another 15-20 years, it seems worth my while to 'play the game'. I'd have no reason to spend countless hours on forums like this if I was bored to tears with almost entirely fixed income.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> If I was caught in a 40% equity decline, I would definitely be having some 'bad hair' weeks and months from a 'net worth' perspective, but I am convinced that our central bankers won't let the equity markets stay in the deep crevices of a gutter very long. Perhaps a few years.


Yep, completely agree, I just don't have the guts for it. I know if I raised equities I would be fine eventually, and it wouldn't affect my lifestyle during the drop. 



> I'd have no reason to spend countless hours on forums like this if I was bored to tears with almost entirely fixed income.


Hilarious.



> I also maintain a HISA cash reserve approaching 6 digits as a buffer to avoid capital draw down for perhaps 5 years of 'bear' equity markets to supplement needs.


Yeah, this is the key. Don't have a lot of equities if you can't back it up with a lot of cash to make it through the trough. I keep a couple years cash around for sure, and I know it only makes HISA rates, but it makes me comfortable, so what the heck. I'm sure there's someone that might start making calculations on the return of a large HISA buffer against the extra dollars earned through a high allocation to equities. They might argue that you could lower the equity allocation and also lower the need for the high HISA allocation as a result. I suppose this would be ammunition why HISA hopping is worth the effort.

ltr


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## james4beach (Nov 15, 2012)

For those of you with > 50% stock allocations, what are you going to do if we get a prolonged bear market, not only a huge plunge, but maybe 20-30 years to recover. Example, Italy's market index:

http://stockcharts.com/h-sc/ui?s=$INE&p=D&st=1998-01-01&en=(today)&id=p61591324711

That example shows still about 50% equity loss even with 18 years elapsed. Are you really going to be ok with that? Some of you guys invest like you're 20 years old!


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## james4beach (Nov 15, 2012)

Regarding that Italy example, that price shows the index but not total return with dividends. Their market div yield averages around 2.5% so to adjust for that, if we start from the peak price in 1998, the total return over 18 years is down about -20% to -30% even after dividends.

I think this shows that you can't always just wait out a bear market. It can last longer than just a few months, in this case it's 18 years and counting. And that's despite the European Central Bank flooding the whole zone with free money.


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## Thal81 (Sep 5, 2017)

Good point. Somehow I like to think that this won't happen in North America. I hope those italians got good global diversification in their portfolios.


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## scorpion_ca (Nov 3, 2014)

james4beach said:


> For those of you with > 50% stock allocations, what are you going to do if we get a prolonged bear market, not only a huge plunge, but maybe 20-30 years to recover. Example, Italy's market index:
> 
> http://stockcharts.com/h-sc/ui?s=$INE&p=D&st=1998-01-01&en=(today)&id=p61591324711
> 
> That example shows still about 50% equity loss even with 18 years elapsed. Are you really going to be ok with that? Some of you guys invest like you're 20 years old!


I think that's why we need to follow proper asset allocation.


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## GreatLaker (Mar 23, 2014)

As young naïve investor I had 100% equities, some of it on borrowed money. I gradually increased fixed income allocation to 40%, especially in the final 10 years before retirement. At this time I am comfortable with 60/40 (equities/fixed income), and anticipate that I will hold that for the duration. Equities are split equally among Can/US/Global. Fixed income is split roughly equally between 5 year GIC ladder and an aggregate Canadian bond ETF.

One reason is a 60/40 portfolio just seems to be the default standard asset allocation historically for an investor with a moderate risk tolerance. Another reason is 40% fixed income, at roughly a 4% WR gives the ability to withstand 10 years of bad equity returns. The GICs especially give guaranteed income to cover 5 years spending no matter what the market does, and 5 year ladder returns enough to cover inflation. A third reason is Bill Bengen's study Determining Withdrawal Rates Using Historical Data which said 4% WR is sustainable through a 30 year retirement as long as the portfolio has between 50 and 75% equity, as long as future returns are no worse than historical returns during the study period. Equity % below 50% could not keep up with inflation, and greater than 75% was too volatile to withstand the worst bear markets of the Great Depression, the mid-late 1930s and the stagflationary 1970s. (Note that I don't plan on following a rigid 4% WR, rather I will use a variable percentage withdrawal method.)

Having a very high fixed income percent concerns me, because I might think I have "won the game" then get hit by a barrage of high inflation like the 1970s where fixed income was decimated. Readers may opine that inflation is dead. Inflation was low in the 1950s and people thought it would stay low for ever; inflation was stubbornly high in the 1970s and it was thought that it would stay high forever, then Paul Volcker managed to wrestle away inflation when he was Chair of The Fed, and now the expectation is that inflation will stay low forever. I don't know what inflation will do, but I do think it would not be wise to enter a retirement that could last 30 years or more without having a portfolio designed to withstand it.

And in case my asset allocation results in more wealth than I can comfortably spend, I like Ronald Read's story.
https://www.cnbc.com/2016/08/29/janitor-secretly-amassed-an-8-million-fortune.html


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## GreatLaker (Mar 23, 2014)

Thal81 said:


> I hope those italians got good global diversification in their portfolios.


+1. You hear the same thing about the Japanese market, but how would investors in Italy or Japan have fared if they held a good balance of domestic and global equities plus fixed income? Probably a lot better.


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## AltaRed (Jun 8, 2009)

james4beach said:


> For those of you with > 50% stock allocations, what are you going to do if we get a prolonged bear market, not only a huge plunge, but maybe 20-30 years to recover. Example, Italy's market index:
> 
> http://stockcharts.com/h-sc/ui?s=$INE&p=D&st=1998-01-01&en=(today)&id=p61591324711
> 
> That example shows still about 50% equity loss even with 18 years elapsed. Are you really going to be ok with that? Some of you guys invest like you're 20 years old!


As others have mentioned, global asset allocation is critical to success. 

I have significant global allocation to avoid specific country risk AND I don't need to have capital appreciation to meet my plan (my heirs might not get much but that is not my problem). You use Italy as an example, but seriously, look at how the Italians, as a holistic society, never took Econ 101, nor had a strong work ethic. The Greeks, as a society, are pretty much similar. And the Japanese? They are so insular culturally, they will disappear as a race without immigration and acceptance of others. These are just some examples of knowing where NOT to invest given cultural behaviours. 

It is important to invest globally. IMO, those who stick 100% to Canada, whether stocks or bonds, risk double jeopardy. Their living standards could collapse along with their portfolios in event of a country specific collapse. I'd sure want some greenbacks and Euros to offset that calamity, or at least limit my Cdn domiciled investments to those companies with significant ex-Canada operations. I feel I am taking less risk than those that stick to Cdn domiciled investments.


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## milhouse (Nov 16, 2016)

Heavy fixed income has done well since the 80's because of a general trend down in interest rates. Asset allocation likely gets more difficult the next 10-20 years with a general trend of rising rates.

I wouldn't necessarily say one shouldn't look to Italy or Japan as examples where one can face prolonged bear markets / recovery periods. However, along the lines of what Altared said, I think one has to take things into context in terms of their situations. Not saying we're completely immune to a meltdown/lost decade in North America though.


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## 1980z28 (Mar 4, 2010)

As of today I am 100% equities

Nice to see that some still hold equities

Before retirement i picked up new house,vehicle,atv,tractor backhoe,dump trailer,stereo and other stuff all paid no debt which is important to me

I tracked my spending for the last 7 months,it is very low less than 1200 per month for living expense ,,in 2018 will be increased because of building a greenhouse and some other projects i have going,property total is 126 acres,,,house sits on 26 acres,,,there is hiking,fishing,wood cutting,crop growing so always outside each day,lots of exercise 

Will be selling firewood and surplus crops as needed

I have less that 50k in dividends per year and enough cash in savings for the next 8 years,i am not going to reinvest the cash from the dividends,also will start in 2018 to move RRSP withdraws to non reg account ,,so far my plan has work out for me better than expected,,,it has not snowed yet weather has been great for my life style

One setback was the passing of my 14 year old GSD in june ,i got a new friend she is now 6 months old GSD hard to keep up with her


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## off.by.10 (Mar 16, 2014)

1980z28 said:


> I tracked my spending for the last 7 months,it is very low less than 1200 per month for living expense ,,in 2018 will be increased because of building a greenhouse and some other projects i have going,property total is 126 acres,,,house sits on 26 acres,,,there is hiking,fishing,wood cutting,crop growing so always outside each day,lots of exercise


Every time I read one of your posts, I figure you did not really retire as most people see it but rather got yourself several types of work you enjoy more. Best way to "retire" early IMO and definitely something I'll aim for if I can gather a large enough nest egg early enough.


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## 1980z28 (Mar 4, 2010)

I think what help me was being homeless at 18 in 1978,moving to Ontario to work as a mechanic for 38 years and did not spend any money,just saved it all,,,i done without lots,only spent what i needed to live,,,,always did not want to be homeless again so i did keep all the money i earned ,,my hobbies are 2 channel stereo vinyl,photography,outside and cars


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## Italicum (Feb 10, 2017)

Thal81 said:


> Good point. Somehow I like to think that this won't happen in North America. I hope those italians got good global diversification in their portfolios.


I sit at ~55% equities, 35% real estate (not REITs); 10% GICs (1-5 years as an evolving cash wedge). I see my 35% as akin to the 'fixed' (income not capital) allocation. Not retired yet but divvies + rents generate more than i need as it is. Working on creating enough retirement income for my children and plan no substantial change to the above asset allocation.

Oh, and yes, i am Italian though living in Canada 

Added:
Should also mention that when retirement arrives i plan to have any one of three 'pillars'
- Real estate (with no time limit but my own demise)
- divvies (same)
- GICs (for 5 years)

Plus Cpp and OAS (minus claw back) provide enough for my needs.


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## Italicum (Feb 10, 2017)

Since i am rather familiar with things italian, i will also mention that the dismal performance of the stock market there is affecting a tiny segment of retail investors. That's because italians are very risk averse and run for the hills when you mention the borsa di Milano (Milan stock market which, btw, has a lower market cap than Toronto's while the country's GDP is still larger than Canada's). As mentioned above there is also a very low financial literacy in the country. What they believe and place their savings in are "i mattoni", literally bricks (physical RE, though it has been performing dismally in the last several years) and fixed income assets.


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## lonewolf :) (Sep 13, 2016)

The moral play is to increase the odds to that of which promotes the most long term happiness. Always reduce the risk of that which destroys the most long term happiness


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## canew90 (Jul 13, 2016)

We are in our mid 70's and reached our goal several years ago, as our Dividend Income exceeded our annual expenses. What we have done is reduce the number of holding to what we consider our Core stocks. We sold the others as the market rose. We are still 100% Cdn equities and have no plans to change our allocation. If anything we feel more comfortable with less stocks and feel they will continue to increase our income and remain solid holdings.


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