# 3 Year GIC ladder or Short Term Bond ETF or Current Mix?



## milhouse (Nov 16, 2016)

My RRSP currently has a 75:25 asset mix with US/EAFE/EM index ETF's and a Canadian aggregate bond ETF. (I'm considering adjusting it to 70:30 and possibly consolidating the equity portion to a global ex-Canada index ETF.) I'm looking to _loosely_ apply a VPW strategy to withdraw from my RRSP early in retirement (with the first withdrawals estimated to be 3 years away in Q4 2023). 
Obviously a VPW strategy may cause the actual withdrawal amount to vary from year to year. However, if it's somewhat stable, the amount should be about $20k/year, give or take, in the early years. 

Any thoughts on whether I should start building a 3 year $20k/year GIC ladder now (and over the next 2 years) via the fixed income part? 
Or should I instead allocate $60k of the fixed income to a short term bond ETF which has the flexibility to support the variability of a VPW strategy? 
Or should I do nothing (apart from what I mentioned above initially) and just withdraw while maintaining the asset allocation ratio? Eg. Am I going to gain much allocating a portion of the aggregate bond ETF to a short term bond ETF?


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## AltaRed (Jun 8, 2009)

The merits of an aggregate bond ETF (about 7-8 years duration) vs a short term bond ETF (about 3-4 years duration) would be higher returns on a rolling average basis at the risk of higher price volatility as the bond yield curve moves around. The risk would be having to sell MT bond units at low(er) prices than you might like in any given year. That said, remember that asset allocations are not precise, e.g. a 70/30 can be anywhere from 72/28 to 68/32 in variability due to movements in both the bond and stock markets. In any given year of withdrawal (RRSP or RRIF), you can arbitrarily decide from which ETF you draw from, e.g. VAB for bond or XAW (or VXC) for equity given which side is up/down that given year, or which of the two is the cause for being outside your preferred asset allocation (in effect, doing some auto re-balancing by picking the outsized one). IOW, I don't see any need to change your bond ETF strategy specifically unless you want to go to a ST bond ETF (pluses and minuses).

If I was doing it, I would go XAW for equity and VSC or XSB for a ST bond ETF for fixed income.

I don't see any value in 3 year GIC ladders. You want to maximize your GIC return and that is done with 5 year GIC ladders. If you were to start one now, you can do it 2 ways. Start with one 5 year GIC now and then buy another 5 year GIC next year...rinse and repeat until you have all 5 years going. OR start with one GIC each of 5, 4, 3, 2, 1 years and next year renew the maturing 1 year GIC into a 5 year, and so on. The dilemma with GIC ladders is you will have to determine how much you wish to withdraw that particular year from a maturing GIC before re-investing the residual into a new 5 year GIC. That is not always easy to do when trying to maintain a 70/30 asset allocation fo example. Thus the simplicity of a bond ETF.

Added: Another consideration is how easy you want portfolio management to be in the event you can no longer do it. Could/would your spouse be able to take over? This latter question rarely is given consideration when one is in their 50s and 60s but when one gets into their 70s and they realize they are not immortal and the odds are increasingly against them, simplicity becomes a considerably more significant consideration.


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## milhouse (Nov 16, 2016)

Thanks for the insightful response, AR.
Definitely looking at simplifying things over time and willing to sacrifice a few points of return for that.


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## james4beach (Nov 15, 2012)

AltaRed said:


> I don't see any value in 3 year GIC ladders.


I agree that it's better to use bond ETFs, not GICs, for this purpose. They are simpler to manage and more appropriate for arbitrary withdrawals.

Myself, I hold GICs non-reg mainly because I prefer the tax treatment and reporting. Inside my RRSP, I just use XBB.



milhouse said:


> My RRSP currently has a 75:25 asset mix with US/EAFE/EM index ETF's and a Canadian aggregate bond ETF.
> . . .
> Or should I instead allocate $60k of the fixed income to a short term bond ETF which has the flexibility to support the variability of a VPW strategy?


I have done various back-tests, going back many decades, on withdrawal strategies where money is removed from the portfolio by selling the stock or bond portions.

I used XBB and equivalent aggregate bond funds in my simulations, and they worked out fine. As AltaRed says, you would choose which ETF to withdraw from based on your asset allocation targets, effectively selling whatever is high. It's a beautiful strategy and you rebalance/withdraw in one step... at times you'll sell stocks, other times bonds.

In my simulations I found no problem with the aggregate bond ETF and did not see any obvious advantage of using short term bonds instead. The only caveat I would add is that this depends on your overall time horizon. In my case, even though I'm starting withdrawals, I still expect most of this capital to remain invested for 20+ years. For that time horizon I think aggregate bonds (like XBB or VAB) are best. However, for a much shorter time horizon, where someone expects to deplete much of the capital in less than 10 years, I think a short term bond fund could make more sense.

But because you mention this would happen early in retirement, I presume this is still very long term capital. My approach would be
70% XAW
30% VAB or your current aggregate bond ETF

Very simple... just two ETFs and you would sell whatever is higher than its target allocation weight at withdrawal time.


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## james4beach (Nov 15, 2012)

Additional thought on the question of regular bonds (VAB) vs short term bonds (XSB) in this asset allocation.

Personal comfort with volatility should factor into this. VAB will be more volatile due to its greater interest rate sensitivity. In a situation where interest rates march steadily higher, VAB would drop more than XSB and stay depressed for longer. Ultimately it would also perform better going forward, by the way. More risk, more reward.

But the potential decline are a concern for *psychological* reasons. VAB might have a "drawdown" of roughly 15% and XSB would be less, perhaps 5% drop. Here I'm talking about performance due to changing interest rates, not bond market turmoil or catastrophes.

The reason I mention the bond ETF volatility is that some people seem to have unrealistic expectations of how safe and stable bonds are. Bond ETFs have held their value extremely well in the last few years and it's probably made people expect pretty smooth returns in bonds. If VAB tanks 15%, some people are going to freak out.

If we do see bonds drop sharply, I am positive that many people will be screaming that it's the end of the bond market, interest rates are going up horrendously, inflation is going to destroy you, etc. That could then scare you to give up on your bonds (capitulate), similar to being scared out of stocks in a crash.

Here's a chart back to 1972 showing the volatility you could get in VAB. Click the Drawdowns tab and you'll see how bad it can get at times. You can also click 'Inflation adjusted' to see the chart adjusted for inflation, which is also pretty scary looking. Remember, it might happen again.

If you are comfortable with volatility of that nature, then VAB is great. But if you worry about that volatility, XSB is better just for the peace of mind.


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## milhouse (Nov 16, 2016)

Thanks for the additional insightful commentary j4b. 
Just to provide additonal background around how I'm currently planning things:
Yes, looking to have the RRSP run for at least 20 years but likely spending it downwards towards age 70 (in 20 years) as CPP and potentially (due to clawback concerns) OAS streams come online. 
I'm leaning towards the two ETF solution to start and potentially even one (all in one) later. 
I'm not as concerned with the psychology of volatility but ideally structuring for a more stable stream with reasonable effort.


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## GreatLaker (Mar 23, 2014)

I retired a couple of years ago and have no pension so live on my investment income and a bit of capital. I'll start taking OAS in 2 years at 65 and CPP at 70.

I have a 60:40 portfolio and the 40% fixed income is spread across an aggregate bond fund (VAB) and a 5-year GIC ladder. The GIC ladder gives me guaranteed funding availability every year, regardless of what the economy or markets do. Each rung of the 5 year ladder is enough for a bare bones budget if the equity and bond markets really tank. VAB gives me income and more stable capital with possibility of capital gains when interest rates drop. Equities give me investment growth and growing dividend income. 

Worst case I could go 5 years without accessing equities or bonds and >10 years without tapping equities. Sometimes that seems conservative but then I remember the 2000 tech crash followed by the 2008 financial crisis when a dollar (CAD) invested in the S&P500 at the beginning of 2000 did not get back to its original value until some time in 2013 (link). The 70s and the great depression were also bad, so I don't think a retirement plan that can handle a decade of bad returns is unreasonable.

This MoneySense article by Dan Bortolotti explains how to take your retirement income from a portfolio:
A better way to generate retirement income


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## AltaRed (Jun 8, 2009)

Excellent post and link. I think you have a phenomenal plan. One can quibble about whether the bare bones bridge should be 5 or 10 years, but the important part is to have a multi-year bridge (I call it a cash reserve where I consider HISAs and 5 year GIC ladders cash reserve because both are guaranteed).

Added: I have a minimum 3 year cash reserve at current spending rates (that includes renos, auto purchases and such), can make it 5 years cutting back on large capital purchases, and could go 10 years if I had to really hunker down. I sleep well at night despite the debacles of the past 20 years.


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## james4beach (Nov 15, 2012)

Maybe I should also add, although I did talk about selling off the ETFs to generate income I need, I also have a large cash buffer which comes into the mix.


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## milhouse (Nov 16, 2016)

Thanks for sharing your strategy GL. (Back after a few days away from really at the boards.)
I think I previously read that article by Dan Bortolotti on MS and it likely subconsciously formed part of my thinking around the GIC ladder, albeit with a 3 year ladder instead of a 5 year ladder. I'm trying to wrap my head around balancing low fixed income returns, consistency and stability of my withdrawals, how much I want to withdraw every year, how much flexibility I want, and what kind of equity to fixed income split makes sense. My situation is not exactly the same too as my question is specific for my RRSP (since I have a different plan for my non-registered stream) though, I really should be framing things holistically. For example, at a 25-30% fixed income split of my RRSP and wanting to withdraw $20k/yr, a 5 year GIC ladder would take up most of that 25-30% fixed income allocation (hence why I was initially thinking instead, a 3 year ladder, but didn't consider the 3yr to 5yr rate trade-off) with very little room for bond allocation. 

Speaking of a cash buffer, in our current working years, we equally contribute to a shared chunk of cash into a shared chequing account that we consider "working cashflow" which we keep above a minimum and that kind of builds up during the year since we don't spend/allocate all of it. At the end of the year what's considered surplus gets split between us and it basically goes toward our TFSA contribution. I suspect we'll maintain some version of that into retirement but likely plan to grow it to support potential spending shocks (new roof, new car, etc) rather than as a means to address poor multi-year returns. 

Anyways, no decisions made yet. Just handy to talk through different strategies to determine what might work best for me and what I'm comfortable with.


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