[mesaana14]

Here's a bit of info:

I'm 40, single, no kids. I work for the federal government. I started late, and I am not certain I will remain there until retirement (I currently hate my job, but that's another story). However I do have a DB pension plan which - if I were to quit tomorrow, for example - would pay me 1575$ per month (indexed) for life (except for the adjustment at 65 when CPP kicks in) starting at 60 years old.

I'm in the process of "re-organizing" my finances. I have a bit of money in a bunch of places, including some high MERs mutual funds and I'm gradually moving it out of there (I've been educating myself over the last few months).

I'm trying to figure out what asset allocation I should use in the future. It seems I'm a bit in an "information overload" situation right now and guidance would be appreciated.

Do I need fixed income (bonds) or is that covered by my pension?
What about REIT/REIT ETF?

Should I get "regular" Cdn equities (most likely ETF) or should I go for something that pays dividends (either in an ETF or directly, although I probably don't have enough to get a diversified portfolio).

Also, as long as I keep this job, my RRSP contribution room is very small. So I can look at putting about 3000$ a year max in my RRSP, the rest is TFSA and non-registered.

Thanks for any guidance you can provide.

 

[Sampson]

I think it would be most prudent to first develop a plan, i.e. retire by X age, and live off $Y per month. By establishing your goals, and required benchmarks to achieve those goals, you'll best be able to determine how to allocate your savings/investments to achieve those goals.

MDJ had a post a while back projecting what his expected costs are during retirement. If you figure how much you'll need, then you can establish a savings rate that doesn't detract from current standard of life, and base you asset allocation on the growth rates you'll need to achieve that.

A little obtuse, but hope it helps.

 

[mesaana14]

Thank you Sampson.

Good point. Because I am unsure about my job situation long term (as in I might just decide to reorient my career because I'm unhappy, not because I might lose my job), I am currently planning to retire at 60. I meant to put that in my post, I blame this stupid cold for my brainlessness...

More info: I rent. By choice. I used to own a house. I hated it. I have no interest in "house stuff": maintenance, gardening, decorating... When something breaks, I call the rental company, and they come and fix it. Problem solved. And I think house prices are ridiculous. A very ordinary bungalow just went on sale one block away from where I live and they are asking 525,000$. It's nuts. Plus, I like to be mobile.

But to get back closer to your point, I'm not clear on how to correlate the "ideal" asset allocation with the amount I think I will need to live. Does that make sense? Even if I say I need 45,000$/yr, how do I then know how much Cdn equity, US, Intl, etc, plus my questions above?

Thanks again!

 

[Sampson]

Lets make some assumptions.

1. No other income aside from your pension (overly simplistic) - you'll need $26.1k per year to make your desired $45k/year.
2. You live to 85 yrs, you'll need $652k from other sources to be withdrawn. To get to the amount - subtract your current savings (say $200k for this example) and you'll need to grow your investments by $452k.

If you've got 20 years to do that, say you can save $10000/yr = $200k, with $242k required to come from portfolio growth. To achieve this, you'll need around 3.5-4% real return growth (inflation adjusted).

Based on that desired rate of return (3.5-4%) you can use this to determine your 'ideal' asset allocation. For example, based on many rolling 20yr periods, the S&P 500 can return about 11% (before inflation), so you know you WON'T need 100% in equities.

Basically, you'll want to set expected rates of returns for each asset class, then make model portfolios with different % of each class and see if you can produce the required return. Bonds typically yield close to or less than inflation, equities roughly 11%, real estate about 2-3% above inflation etc.

Note this is a rough and dirty example, keep reading, figure out how much you think you'll need, get your assumptions of growth rates and inflation as accurate as possible, then you should be able to get at how much risk you'll need to take.

My view of asset allocation is that there are multiple tiers - in order of importance (my opinion )

1. Asset type (cash, bonds/fixed income, equities, real estate).
2. Subtypes (within bonds: government vs. corporate, equities: Large, mid, small capitalization, real estate: residential, retail, corporate).
3. Country (although economies all seem very closely correlated these days)
4. Sectors (bonds: muni's vs. federal/provincials, grades of the coupons, equities: 10 sectors (tech, energy, financials etc.).
5. Individual assets/holdings within each sector.

 

[Sampson]

Sorry for the long post, but the last little bit about asset classes should make you think about how to break down based on the broad categories (cash, bonds, equities, real estate).

I wouldn't worry about the rest too much, try to cover them with some low fee, broad/diversified ETFs, and you'll be fine.

 

[OhGreatGuru]

Here's a bit of info:

I'm 40, single, no kids. I work for the federal government. I started late, and I am not certain I will remain there until retirement (I currently hate my job, but that's another story). However I do have a DB pension plan which - if I were to quit tomorrow, for example - would pay me 1575$ per month (indexed) for life (except for the adjustment at 65 when CPP kicks in) starting at 60 years old.


I'm trying to figure out what asset allocation I should use in the future. It seems I'm a bit in an "information overload" situation right now and guidance would be appreciated.

Do I need fixed income (bonds) or is that covered by my pension?

Rather a lot for questions in one one post. You need to do some reading on investing, and asset allocations. Then make an asset allocation approporiate to your age, goals, risk tolerance and retirement objectives.

There are a number of simple Q&A guides to determining a recommended asset allocation on-line, but most of them don't take into account having a defined benefit pension. There are various formulas for estimating the equivalent capital value of a pension. For a federal government pension I would use 180 x monthly pension = equivalent asset value. (That's from an article by James Yih. Somewhere in my files I have an abstruse paper on calculating pension values depending on whether it is indexed, or has survivor benefits, and whether it it coordinated with CPP or not. But I can't find it for some reason. My recollection is that James Yih's rule of thumb agreed pretty closely with the factor the more technical paper proposed for a federal government pension.)

So your $1575/mo pension is equivalent to about $283,500 in income funds in your overall portfolio. If you take the Public Service pre-retirement course (and I recommend you do before you quit - it's a really good 3-day course) you will be advised to think of your pension as an income part of your portfolio.

With that amount of "income" asset allocation already, you can see that your other investments should hold mostly equity.

 

[mesaana14]

Sampson: Thank you for the calculation example. And don't worry about the long post, I really appreciate you taking the time.

OhGreatGuru:

Rather a lot for questions in one one post. You need to do some reading on investing, and asset allocations. Then make an asset allocation approporiate to your age, goals, risk tolerance and retirement objectives.

Actually, my original question, when I started typing, was about the DB pension, but I guess I got a bit carried away. As for the reading... that's my problem. I've been reading, but apparently I'm having a bit of trouble right now because a) not all sources agree; b) they do not include DB pensions in their calculations; and c) I'm at that stage where I don't have enough knowledge/experience to judge clearly the value of the different approaches.

That's from an article by James Yih.

I found this, but it's probably not the one you are talking about (still useful, though).
http://www.wealthwebgurus.com/article/421/how-much-do-you-think-your-pension-is.aspx

So your $1575/mo pension is equivalent to about $283,500 in income funds in your overall portfolio. If you take the Public Service pre-retirement course (and I recommend you do before you quit - it's a really good 3-day course) you will be advised to think of your pension as an income part of your portfolio.

With that amount of "income" asset allocation already, you can see that your other investments should hold mostly equity.

Very useful advice, thank you!

 

[Sampson]

You'll want to try and find some books specifically dealing with asset allocation since it is a very academic topic.

Some generalizations people will use from time to time are:

(i) Fixed income allocation = Age (so more stability, but less growth potential as you get closer to retirement)
or
(ii) Equities allocation = 120-Age

Start from there. With the equity allocations, you could keep it simple for now and have equal weightings in Canada, US, and EAFE (Europe, Australasia, and Far East).

So a very simple but sound portfolio for you at this juncture might be:

Bonds/Cash = 40%
Canadian Equities = 20%
US Equities = 20%
EAFE Equities = 20%

You could reduce bonds/cash and replace with real estate or more equities if you want to be a little more aggressive - but this will depend on your existing savings, future savings rate, and whether you need to take on extra risk to achieve your goals.

Good luck!

 

[Jon Chevreau]

The Discomfort of Diversification

Diversification of asset classes, geographies, market cap, investment style etc. SHOULD be discomforting, according to Tacita Capital's Michael Nairne. My blog looks at this today and there's a link to Michael's full essay there at his web site. It's a useful phrase I think.

http://network.nationalpost.com/np/blogs/wealthyboomer/default.aspx

 

[leslie]

You say you started late, but would get $1500/mo pension if quit today. Boy, that is SOOOOO generous. Might that $$ reflect what your pension 'would be if you continue to work at your current rate until retirement'?

I have been a successful investor for thirty years. And never did I 'asset allocate' or 'rebalance', or 'draw up a financial plan' or 'budget', or any of the other bookkeeping stuff the financial planners say is necessary.

I earned equity returns with a lot less risk by rotating through asset classes depending on the economics of the times. Yes, this means you cannot buy a bunch of stuff and walk away and forget it..... but I don't believe in buy-and-hold either, even when you index and asset-allocate and re-balance.

Read the argument against asset allocation.

 

[mesaana14]

Bonds/Cash = 40%
Canadian Equities = 20%
US Equities = 20%
EAFE Equities = 20%

You could reduce bonds/cash and replace with real estate or more equities if you want to be a little more aggressive - but this will depend on your existing savings, future savings rate, and whether you need to take on extra risk to achieve your goals.

This is what brought about a part of my question, really... Do I need that much in Bonds, if I have that DB pension? I'm tending towards keeping less than that. Thanks so much Sampson.

Jon Chevreau: Thank you, interesting read.

You say you started late, but would get $1500/mo pension if quit today. Boy, that is SOOOOO generous. Might that $$ reflect what your pension 'would be if you continue to work at your current rate until retirement'?

leslie: I started late compared to many of my colleagues who will retire at 55 with a full pension. But I have been there for a few years, and I transferred a few more years from a previous employer. I'm sure of my numbers (they are available online through the pension plan, and you can also simulate different dates, and different salaries).

Your statements and the link you provided are giving me more to think about. Thank you, I appreciate it.

 

[Jon202]

Neither, selection nor asset allocation, is more important. I've found articles that state both are correct. It's a gamble either way.


"With our more representative benchmark portfolio, and a modified security selection methodology, our results do not support a clear hierarchy of investment choice. Security selection and asset allocation decisions are, on average, equally important [...] Our results thus indicate that we cannot unequivocally declare that one particular activity is structurally more or less—important than the other."
Assoé, Kodjovi, Jean-François L'Her, and Jean-François Plante. "The Relative Importance of Asset Allocation and Security Selection." Journal of Portfolio Management 33.1 (2006): 46-55.

"Portfolios comprising an optimal mix of stock and bond indexes provide much less expected utility than a portfolio comprising an optimal mix of specific stocks and specific bonds. Thus, security selection is found to be far more important than asset allocation."
Hlawitschka, Walter, and Michael Tucker. "Wealth Management: The Relative Importance of Asset Allocation and Security Selection." Journal of Asset Management 7.1 (2006): 49-59.

"Contrary to the widely held view, it turns out that choosing stocks within the equity component of a portfolio is substantially more important than choosing a portfolio's exposure among stocks, bonds and cash. Further evidence is provided of the dominant importance of security selection by applying option pricing theory to value asset allocation skill and security selection skill."
Kritzman, Mark, and Sebastien Page. "Asset Allocation Versus Security Selection: Evidence from Global Markets." Journal of Asset Management 3.3 (2002): 202.

"Defining asset classes and managing asset class exposure is useful and practical. Distinguishing the contributions to portfolio performance coming from long-term asset allocation strategies, from attempts to exploit short-term asset class pricing anomalies, and from the trading of mispriced securities and costs associated with investing is important. Unfortunately, today we think we know more about this than we really do. "
Jahnke, William. "The Importance of Asset Allocation." Journal of Investing 9.1 (2000): 61.

 

[leslie]

Well I think your selection of quotes is hilarious, but the OP must be ready to throw up his hands in despair.

I think the take away can only be ..... when receiving any advice consider first whether you can analyse the problem for yourself and determine what is correct. Then, if you REALLY have to simply 'accept' what someone else says, consider the ulterior motives of the advisor.

Since financial advisors offer mainly book-keeping type, procedural advice that allows them to be 'not responsible' when portfolios do poorly, they will say, of course, that these mechanics are REALLY important.

 

[Maltese]

Here's the link for Jim Yih's article How Much Do You Think Your Pension is Worth?
http://www.wealthwebgurus.com/article/421/how-much-do-you-think-your-pension-is.aspx

 

[mesaana14]

Here's the link for Jim Yih's article How Much Do You Think Your Pension is Worth?
http://www.wealthwebgurus.com/article/421/how-much-do-you-think-your-pension-is.aspx

I'm finding this thread rather confusing since the original poster seems reluctant to provide much detail. I think it's hard to provide much advise since his age hasn't been revealed. Asset allocation at 35 is going to be different than at 55.

Now, I'm confused... I started my original post with this:

Here's a bit of info:

I'm 40, single, no kids.

I'm not reluctant, what more info do you want? (By the way, I'm female, if that is relevant.)

 

[Maltese]

Now, I'm confused... I started my original post with this:



I'm not reluctant, what more info do you want? (By the way, I'm female, if that is relevant.)

Oops sorry, I should have gone back to the very 1st post. I feel silly so I'm going to edit my post. Thanks for correcting me.

 

[mesaana14]

Maltese: No worries. I have plenty of silly moments