# Yearly Income From Investment



## Squith (Jan 6, 2016)

Hello. I'm a first-time poster looking for some advice/feedback. I've been lurking around this and other forums for several months and I appreciate all of the useful information that I've obtained.

A little bit about me. I'm in my early 50's and employed in a profession that will provide me with a great pension when I retire. My expectation is that between my pension, RRSP, CPP, and OAC - I should be in good shape financially.

A year ago, I came into a fairly large sum of money. This was unexpected, so, with no real plan in place, I put the money into a 1 year GIC. Now I need to move forward. My goals would be to:
1) Pass on some of this windfall to my own sons some time down the line - so preservation of my original capital is important to me. 
2) Invest this money in such a way that I could provide myself with some extra yearly income, while at the same time having my portfolio continue to grow.

The strategy I was considering was;

1) Invest the money into some low fee funds ie. Mawer, TD e-funds, perhaps ETF'S. 
2) In years where the portfolio grew I would take 50% of the growth as income. In the tough years with no growth, I wouldn't touch it.

Ex. Lets say a person has a $300,000 portfolio on Feb. 1st, 2016. On Feb. 1st, 2017, there has been 4% growth so now the portfolio has a value of $312,000. He sells off $6000 worth of shares and uses it as income. The remaining $306,000 keeps moving forward.

I would be interested in people's thoughts/opinions in regards to this strategy.

Thanks.


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## Woz (Sep 5, 2013)

I don’t see any major issue with your plan. Over a long period I think it will meet your objectives of preserving principal and providing a bit of extra income.

That being said, after the withdrawals I don’t expect you’ll see much portfolio growth, so depending what you meant by “having my portfolio continue to grow” it may not meet your objective.

This is due to the increased effects of volatility on your strategy; higher highs where you make large withdrawals and lower lows where you take the full impact.

The higher the volatility of your portfolio, the less your portfolio will grow (more so than someone who’s not making performance based withdrawals). For a portfolio with a 4% average return and an 8% standard deviation your portfolio would only grow at an average of ~1.3% after your withdrawals. If you had the same 4% average return but with a 20% standard deviation your portfolio would grow at ~-0.3% (that’s before the normal effects of volatility on average vs annualized returns so your annualized return would be a bit lower).

One alternative to consider, which would remove most of the volatility impact, would be to set a ceiling on your yearly withdrawals (i.e. 50% of the growth to a maximum of 6% of the principal value per year). Another option would be to pick a portfolio with very low volatility so this wouldn’t be an issue, but you’d sacrifice some of your expected return.


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## OnlyMyOpinion (Sep 1, 2013)

Squith,
i) You suggest stripping out half the growth as income each year. Are you referring to a simple 'half the increase in account value at the end of the year'? Because depending on your investments, your account will generate dividend income regardless of whether the underlying investments go up or down in value. You could draw only that dividend amount each year and not touch (not sell) any of the underlying investments. It will be a more predictable amount than the overall account value. Over time the underlying investments should still increase in value. You would be able to get a 4% dividend yield these days quite easily.

ii) You don't mention your TSFA. Is it max'd out now? If not, it would be a good place to keep some of that sum of money.

iii) Also, are your kids 18+? If so, they could be max'd out and then gifted TSFA contributions each year so that future income is their's for tax purposes, not yours. This could also apply if they have unused RRSP room.

We have a similar plan with a 'sum' we have in a trading acc portfolio that is a mix of fund, stocks and fixed income. Eventually (age 71?) we will crystalize its growth (gains/losses) and the proceeds will go to the kids. We'll then use RRIF income for the balance of our lives.
Until age 71, we'll use income from the trading acc to cover our retirement costs (along with modest CPP from age 60, and modest RRIF from age 65 (just for the pension credit). We spend only the dividend-equivalent income generated, but in practice we use a cash wedge of maturing strip bonds and let the actual dividends DRIP back into the equity side of the portfolio to fund future capital growth.


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## Eclectic12 (Oct 20, 2010)

If the pension is "great" ... what is going to happen with the OAS clawback?
Most of the funds being mentioned, when held in a taxable account - look like they will be producing taxable income. This would be on top of whatever else has been started like the Pension and CPP.

http://retirehappy.ca/minimizing-old-age-security-clawback/


There's no mention of a TFSA so maybe the money could be tax sheltered there to reduce/eliminate the chance of an OAS clawback. Another advantage is that where the investment chosen is an ETF, holding it in a TFSA (or RRSP) means that the yearly or more often bookkeeping like the taxable income being paid, won't be needed.

Here are some links or you can check out a book from the library to get a feel for the bookkeeping/tax reporting to prepare for in a taxable account.
http://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm
http://www.theglobeandmail.com/glob...n-with-phantom-distributions/article18409698/
http://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/


The good news is that while it looks daunting when one first learns about it ... where one takes the time to learn it at one's own pace, it boils down to being disciplined to plan for it then do it. The math as well as the time required is not as bad as it first seems.


As for #1 ... you may want to spend some time planning for this. 
Without a plan, the windfall could be lumped into your estate where it might taxed at a much higher level than if gifts are given at a lower income level or a plan has been made.


Cheers


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## OnlyMyOpinion (Sep 1, 2013)

Eclectic12 said:


> If the pension is "great" ... what is going to happen with the OAS clawback?...


I think you point out the need to shelter whatever the OP can including the TSFA's and RRSP's of the children if possible since the intent is a legacy anyway. But there is only so much one can do. After that we can only repeat "its a good problem to have" over and over. :frown:
As to "what is going to happen with the OAS clawback?", we can hope it will go to some poor soul in need through no fault of their own. But since OAS comes from general revenues, it is just as likely the feds will piss it away somewhere else.
(I know that's not what you meant, but I couldn't resist)


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## Squith (Jan 6, 2016)

Thank-you very much to everyone for some real eye opening advice. Each of you brought up some issues that I hadn't considered. Over the last while I've really enjoyed researching the investment world and considering different strategies for this money. My research thus far has led to what might be the most important discovery of all - I DON'T KNOW MUCH ABOUT THIS STUFF AND BETTER GET MY S%%^ TOGETHER!! 

Because of my pension plan, I've always been fairly limited in terms of what I could contribute to my RRSP each year. I was always more interested in the income tax savings. So, I'd rush into the bank just before the RRSP deadline and purchase a GIC or whatever mutual fund the adviser would recommend. I was probably told about the concept of an MER, but, it must have went in one ear and out the other. Anyway, I was horrified when I recently learned about the fees associated with mutual funds - I have several high fee funds sitting in my current RRSP "portfolio".

So, at the ripe old age of 53, I have vowed to smarten up and take control. Instead of having my $$ spread out everywhere, I've opened up an on-line brokerage account and I'm going to get everything under one umbrella. Now, I need to develop a plan. I'm learning a lot about fees, passive income, couch potato portfolios, ETF'S, index funds, dividend investing etc. I've just been taking it slow and trying to absorb as much as I can. 

I read one interesting article recently which suggested, if I understood it all correctly, that selling off a $1000 worth of holdings in a stock/fund was essentially akin to taking a $1000 in dividends as cash. I think that was the gist of what the article was suggesting.

Anyway, thanks again for the advice/information.


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## RBull (Jan 20, 2013)

Sounds like you're on the right track. Some good advice from other posters. I'm thinking along the lines of what OnlyMyOpinion posted.

Given what you've said about your financial investing I would also suggest you also check carefully on your pension and applicable benefits, if you haven't already. That way you'll be sure of what to expect when you retire. 

Understanding your exact financial payout and the impact of different retirement dates, bridging (if applicable) and affect of CPP, benefits, survivorship options / benefits etc is crucial. I've heard numerous people at retirement time speak of surprises re pensions. I think its OA*S *you're speaking of.


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## Eclectic12 (Oct 20, 2010)

Squith said:


> ... My research thus far has led to what might be the most important discovery of all - I DON'T KNOW MUCH ABOUT THIS STUFF AND BETTER GET MY S%%^ TOGETHER!!


This is a good idea ... though if it keep you up at night, remember that it seems to be a good, first world problem to have.

Then too, learn at your pace and you will get there ... some are intimidated by how much there is to learn and give up.




Squith said:


> ... Because of my pension plan, I've always been fairly limited in terms of what I could contribute to my RRSP each year.


This is a sign that the OAS clawback may apply and likely means it is is defined benefit (DB) pension.




Squith said:


> ... I read one interesting article recently which suggested, if I understood it all correctly, that selling off a $1000 worth of holdings in a stock/fund was essentially akin to taking a $1000 in dividends as cash.


YMMV ... dividends do not deplete the asset whereas selling shares does to get the $1K does. 

In theory, there's no difference because the stock will start the day after the dividends have been paid down $1K but if it is a growing business, it may go up. 

If one is forced to sell for the $1K when the market in general is down (ex. mar 2009), the dividends might come out ahead by a long shot. Compare what selling BNS in Mar 2009 at $30 a share versus dividends being paid without a cut ... 2008 has $50 a share, early 2009 has $30 a share then Dec 2009 has $49 a share.

The other part where I'm not so confident in the theory is that it assumes there is another choice ... I'm not aware of any major Canadian bank that does not pay dividends. The idea that "another stock that doesn't pay dividends will preform similarly as the total return of the dividend payer" does not seem sound to me when there are no comparable non-dividend paying stocks.

In any case, the higher priority should be whether it is a good investment, not whether it pays dividends or not.


Cheers


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## OnlyMyOpinion (Sep 1, 2013)

This is the much-debated 'sell off some holdings for income' from a growth-biased portfolio once you reach the withdrawl stage, versus 'collect dividend income' from a dividend-biased portfolio. 
In practice most of us end up utilizing a combination of dividends and sale of holdings to fund our withdrawls. 
There are reams of discussion and analysis on withdrawl strategies - withdrawing as much as I need but not running out, and/or retaining as much residual value as possible. You certainly won't run out of reading material when that becomes a topic of interest.


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## Squith (Jan 6, 2016)

Thanks for the information and taking the time to reply.........................lots of things to consider as I work on a strategy ...............


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## Eclectic12 (Oct 20, 2010)

To add to the considerations for sell or dividends for income ... where the funds are may also add wrinkles.

In an RRSP, selling or dividends - without a withdrawal, there is not tax implication. Once the withdrawal happens, selling or dividends - the $$ amount is reported as income.

If it is a taxable account, depending on one's tax bracket and province/territory - the taxes will be either the lowest or second lowest that an individual can pay. For example, using the 2015 Ontario tax rates at link provided below, below a bit over $90K, eligible dividends are cheaper than CG while above that mark, CG is cheaper than eligible dividends.

http://www.taxtips.ca/taxrates/on.htm



Then too, once the OAS clawback comes into play, in a taxable account - $1 of CG is reported as $0.50 of income versus $1 of dividends received is reported as something like $1.38 of income.



Cheers


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