[GreatLaker]

I wish to point out that you probably mean bond funds, and not bonds. A maturing bond ladder does not lose equity except in a default situation and they pay a damn sight more than a bond fund without anyone absorbing the already low interest income.

A bond ETF is just a bond ladder, with many rungs, and someone else manages it for the outrageous fee of 0.09%. Yes if you hold a bond until maturity it pays its face value. But if you need to sell it before maturity it can lose capital. A bond ETF will return your invested value if you hold it for the fund's duration, because that is the point where the interest payments will equal or exceed any capital loss.

A bond ladder is good for someone that wants guaranteed maturities on a fixed schedule, similar to a GIC ladder, except the GIC ladder should have a liquidity premium. A bond ETF is good for investors that want liquidity and flexibility to buy or sell smaller quantities as needed. That's why I hold both. Horses for courses.

 

[Gator13]

Our current planning has us starting retirement in less than 2 years from now with 5+ years of expense funds in HISA's & a GIC ladder. This also represents a portion of our fixed allocation. We will spend/gift/donate the interest generated.

 

[TomB16]

I hold individual bonds and they fell just the same as a bond fund.

Again, bonds are subject to the vicissitudes of the market, just like stocks, but 100% of capital is preserved if held to maturity like a GIC. The only difference is you have the option to sell, in the case of a bond, while you do not in a GIC.

I don't view bonds as a high frequency trading opportunity. I view bonds/GICs as insurance. A necessary evil.

 

[GreatLaker]

Lots of different perspectives here. What counts for retirees is they get a reasonable return that still lets them sleep at night, with an acceptable risk of portfolio depletion.

I don't hold much cash, relatively. Around yearend I withdraw enough cash to fund a year's spending, plus I hold about another 6 months spending in a HISA. So somewhere between 6 months and 18 months in HISA. I also have a savings fund (accountants might refer to it as a sinking fund) in a low-cost balanced fund to pay for large periodic expenses including new vehicles and home expenses like new shingles, driveway, HVAC etc. that can put a huge dent in a retiree's budget. I contribute a fixed amount annually to that, which should make it a sustainable fund.

I have a 5-year GIC ladder where each year's maturing rungs will provide for my non-discretionary expenses (beyond what I will get from CPP & OAS) in the event of a really bad market meltdown where I don't want to withdraw from equities or bonds. In normal times my annual withdrawal would come from equities. If equities are in a bear market, my withdrawal could come from bonds. If both of those are distressed then I spend from maturing GICs rather than reinvesting the proceeds.

I know OP dislikes the lack of liquidity of GICs, but for me they are not for discretionary spending, but part or a long-term approach to give me guaranteed annual availability of cash no matter what markets and the economy do.

I also get enough in dividends and interest to cover my non-discretionary expenditures, so a belt and suspenders approach. On the surface it seems like overkill, but I have studied market history enough to understand how bad things can really get, like the stagflationary 1970s and the lost decade of the 2000s. Some people say their 2-year cash wedge should be enough to get through a bear market. A dollar (USD) invested in the S&P500 at the start of 2000 did not return to its original value and stay there until some time in 2010, and a dollar (CAD) did not return to its original value and stay there until some time in 2013. That's a long time to stretch out a 2-year cash wedge. (Source)

 

[TomB16]

I have a 5-year GIC ladder where each year's maturing rungs...

May I presume that is 5x GICs maturing annually?

I ask because a few folks prefer 6 month maturity intervals.

 

[GreatLaker]

May I presume that is 5x GICs maturing annually?

I ask because a few folks prefer 6 month maturity intervals.

Correct. Actually I have two 5-rung ladders (one in RRSP and one in a LIRA), but both mature annually in early Dec. I just prefer annual maturities because I find it easier to track and manage them that way. I even go so far as to ensure that the two GICs that mature each year are from different financial institutions in case one becomes insolvent and has to go through CDIC. I think that's a low probability, and from what I have read the delay should not be very long, but again, belt and suspenders approach.

 

[james4beach]

On the surface it seems like overkill, but I have studied market history enough to understand how bad things can really get, like the stagflationary 1970s and the lost decade of the 2000s. Some people say their 2-year cash wedge should be enough to get through a bear market. A dollar (USD) invested in the S&P500 at the start of 2000 did not return to its original value and stay there until some time in 2010, and a dollar (CAD) did not return to its original value and stay there until some time in 2013. That's a long time to stretch out a 2-year cash wedge

A very good point. Stocks can really take a long time to regain value in a severe bear market. We haven't experienced that in a long time, but historically it has happened.

In recent years it's been easy to say "just put it all in stocks, with a couple years of cash on the side". But we've had very generous markets these last few years.

 

[Gallop]

+1 for thread of the year (for me)

I just can't lock away any money, it just doesn't register with my brain.

Same boat and exactly what I’m wrestling with. For me, spouse comfort with cash is more important than the math. Pre-retirement $20k was stated comfort zone, in reality she only relaxed after $50k was observable in her bank app. So approaching early retirement I have the same unease with large cash reserves and wedges but know that there’s a psychological minimum regardless. My best guess to date is that the more you have the more comfortable you’d be with thin margins. And “the more you have” probably means the larger your buffer, whatever that means to you. Worst case, in a bad sequence of returns stretch you sell some stocks/etfs. If that makes you shudder, go for cash. If you’re “well that sucks, but hey, live and learn” then I’d go cash thin. Personal finance is more personal than finance someone wiser than me once said….

 

[prisoner24601]

I don't hold much cash, relatively. Around yearend I withdraw enough cash to fund a year's spending, plus I hold about another 6 months spending in a HISA. So somewhere between 6 months and 18 months in HISA.

Similar approach here. I hold a large cash float in HISA equal to about 5 years expenses net of expected dividend and interest cash inflows. I will probably reduce the amount once I get past 65 and turn on CPP/OAS but for now I am in the danger zone with sequence risk so it seems sensible.

 

[Thal81]

I don't see any drawback to having a RIFF account. For those early in retirement only transfer the money you plan to withdraw that year from your RRSP into the RIFF. No fees doing this from what I've read.

I've been looking into RIFFs and found one benefit that would make me consider using them, and it's that withdrawals count as pensionable income, so you can claim the pension tax credit on the first $2000 withdrawn.

Funnily enough, all the online tables and calculators for minimum withdrawals start at 50 or 55, so I had to dig pretty deep in the government website to find out how it's calculated for a guy in his 40s...

 

[TomB16]

A bond ETF is just a bond ladder, with many rungs, and someone else manages it for the outrageous fee of 0.09%.

When I had a bond ladder, it returned 100% of my capital. In fact, preservation of capital was the reason I built the bond ladder.

XSB has lost 6.03% in the last year.

XSB has lost 6.86% in the last 5 years, for a CAGR of -1.8449244% (Note: hyphen is a negative sign indicating loss).

XSB yields 2.13% so with the capital loss, it lost roughly 4% in the last year while it roughly broke even in the last 5. Cash out performed XSB in the last year and was about the same over the last 5.

This is what we call a market investment.

How many threads are there on CMF that explain to people frustrated with bond ETF performance that it's OK for it to be down when you need it and that it will recover? If the primary purpose of holding fixed income is to preserve capital for SoR insurance, bond ETFs do not accomplish this.

 

[wayward__son]

Anyways, this new perspective make me wonder why I would keep much cash at all, beyond the next few months of expenses.

If I am reading correctly this means you would have to liquidate investments once every few months to fund retirement regardless of price? Everyone's different I guess but this would stress me to high heaven. Doesn't this carry a risk of severe impairment if we end up in a multiyear bear? I keep a few years in cash and that doesn't always feel like enough, but I run a bit of barbell with some fairly volatile stuff on the other end.

 

[londoncalling]

I've been looking into RIFFs and found one benefit that would make me consider using them, and it's that withdrawals count as pensionable income, so you can claim the pension tax credit on the first $2000 withdrawn.

Funnily enough, all the online tables and calculators for minimum withdrawals start at 50 or 55, so I had to dig pretty deep in the government website to find out how it's calculated for a guy in his 40s...

I know what you mean. I have been trying to figure out if I can semi-retire before 50 as well. Forecasting with that long a retirement requires either a larger nest egg and/or a greater safety margin in estimation. I got a few years to figure it out but without the tables it becomes that much harder. As that day gets closer, I will revisit my spreadsheets and run the numbers on a few online calculators before finding a fee based advisor and perhaps a tax specialist to go through the numbers. In all honesty, I never considered RRIF conversion before 55 at the earliest. Based on size of RRSP it may or may not be a good idea.

 

[TomB16]

If I am reading correctly this means you would have to liquidate investments once every few months to fund retirement regardless of price?

It would stress me as well but it is a viable strategy that usually outperforms other alternatives.

If I was doing it, I would sell down in small increments when the market is significantly down and sell in 6 month or 1 year increments when the market is stronger. I'd probably base it on the WBI, if I was an index investor.

 

[GreatLaker]

I've been looking into RIFFs and found one benefit that would make me consider using them, and it's that withdrawals count as pensionable income, so you can claim the pension tax credit on the first $2000 withdrawn.

Funnily enough, all the online tables and calculators for minimum withdrawals start at 50 or 55, so I had to dig pretty deep in the government website to find out how it's calculated for a guy in his 40s...

Isn't the rule for RRIF withdrawals 1 / (90-age)? For a 65 year old that's 1/25 or 4%. Then at age 71 you follow the table defined by CRA. RRIF account statements should show the mandatory minimum withdrawal for the year.

 

[cainvest]

I've been looking into RIFFs and found one benefit that would make me consider using them, and it's that withdrawals count as pensionable income, so you can claim the pension tax credit on the first $2000 withdrawn.

That credit is only if you're 65 and older right?

Funnily enough, all the online tables and calculators for minimum withdrawals start at 50 or 55, so I had to dig pretty deep in the government website to find out how it's calculated for a guy in his 40s...

Do minimum withdrawals matter if you are just moving small amounts through a RIFF account each year?

 

[Gator13]

Does anyone have data on the historical 5 year GIC rate?

 

[TomB16]

When I was 45, TD told me I couldn't get a RRIF until 55. Others have indicated there is no age limit for RRIFs.

Is that a TD thing or perhaps I just connected with people who didn't know what they were doing?

 

[TomB16]

Does anyone have data on the historical 5 year GIC rate?

What does that mean?

You want the 5 year history of one particular geometry from one GIC vendor or you want the history of the highest rate from any vendor/maturity?

 

[cainvest]

When I was 45, TD told me I couldn't get a RRIF until 55. Others have indicated there is no age limit for RRIFs.

Is that a TD thing or perhaps I just connected with people who didn't know what they were doing?

Likely just the person you talked to was misinformed.