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Discussion Starter · #1 ·
A friend of mine just lost her spouse. She is retired, close to 70, and knows just about nothing on investment since her loved one managed their whole portfolio himself. Their (her) assets are in the mid $1M, 40% in a taxable account, the rest split within RRSP and TFSA. She doesn't have any fixed pension beside OAS and CPP. Due to some bad past experiences, she doesn't want to deal with any financial advisors.

I told her that the solution might be just around the corner by putting everything in a one-ETF fund, like VCNS (of maybe VBAL, it's up to her.) She'll managed to get a small dividend, and may have to sell part of this asset whenever she needs to replenish her bank account. She loves to travel, and will probably continue to do so until her health stops her from doing it. She needs about $55-60K net per year.

Mind you, she will have to trigger some capital gains in the taxable account to switch it all to one ETF. And all her registered account assets are mostly in fixed income, that she has to renew every year, and she doesn't want to deal with any of that. She want to enjoy life totally! I think she can do it with the one-ETF solution. What do you think?

My question to this forum: Did I give her a sound and solid advice by suggesting her to put all her investments in one-ETF solution?

Thanks for any ideas and suggestions!
 

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This sounds like a difficult situation to me... I'd love to hear the thoughts from some of the older and more experienced investors here.

The problem is that she knows "just about nothing on investment", so I will presume that she doesn't know how much investment risk the couple was previously taking on, and probably doesn't know how much risk and volatility *she* can handle.

I personally think going with VCNS is reasonably good advice, but even with this, is she aware that the VCNS asset allocation has, historically dropped as much as 24% in the past and has had single years as bad as -15% ? On a 1M portfolio, she might one day look at a screen and see a loss of 100K to 250K. Will she freak out? Or does she understand that volatility is natural in any market portfolio and that this is completely expected?

I think that for many inexperienced investors, a drawdown in the ballpark of 24% (which even VCNS could give) can be quite jarring.
 

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Can we take it that when you refer to her "assets" you refer to her "investable" assets. If so, what else does her asset picture look like at present. Does she own a clear title $2 million home, for example. That might cause one to take a different view of how to handle the rest.
 

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This sort of thing has been discussed, sliced and diced, in a number of ways. What you have articulated is what happens way too often in real life. One spouse, by default or interest, or lack of interest on the other spouse's part, manages the portfolio exclusively, may not have had any discussion with their spouse, and/or may not have written an IPS (even in short form) to explain why the portfolio is constructed as is, and how and where to consolidate it as a successor. You have not disclosed her risk tolerance, so it is hard to speculate what her equity/fixed income allocation should be BUT given the absence of DB pension and given her age, I'd recommend a 60/40 equity/fixed income split.

As a one liner response, I'd say your advice is pretty much bang on. I'd have NO major difficulty having 100% of my portfolio in one Asset Allocation ETF....but despite someone like Vanguard likely being around for decades, I'd suggest it be split into 2-3 ETFs, just to hedge one's bets. Perhaps VBAL in non-reg and XBAL in registered accounts. If one wants to be a bit more conservative, then VGRO in non-reg and a bond ETF such as VAB in registered accounts... perhaps for a 50/50 allocation. That will provide a better 'sleep at night' factor.

If this individual does not want to manage even simple annual transactions in a DIY account, and she is reluctant to enlist the help of a trusted friend or relative to do transactions, she is a perfect candidate for a robo-advisor such as WealthSimple....simply because their 'advisors' are mainly computer algorithms and the 'humans' are mostly there to make things go smoothly, helping with paperwork, etc. There are no financial advisors who are on commission to line their pockets.

Added: I suggest 60/40 or 50/50 because at age 70, she potentially has 25 years left. Going too conservative on $1.5M could tap fairly heavily into invested capital, especially if needing $55-60k per year cash spend BEFORE income tax (no mention if the stated cash spend is BT or AT).

Added RL example: At the risk of boring long time members, and repeating myself, I will provide a real life example. My ex-spouse and I divorced 11 years ago at circa 59-60 years of age. My ex had not taken a 'working' interest in investing pre-divorce either though we had discussed our investments in our DIY discount brokerage accounts once a quarter or so, did an annual review of allocations and returns, using Quicken as the source to generate reports. Suffice to say, post-division of assets, she did not want to go 'solo' on her investments and kept asking me for advice, etc, etc. Short of her turning her portfolio over to an FA, we struck a middle ground and re-structured her portfolio into a half dozen ETFs and she learned how to do buy/sell transactions that way. I also developed a 2.5 page IPS* for her to use over the next 20 years in event I am no longer around for a 'sounding board'. Unless capital markets go completely off the rails, her portfolio is now on auto-pilot and only 1-2 times a year does she need to either sell something, or buy VBAL for her TFSA (her TFSA is solely VBAL).
* The IPS states simply how her portfolio is structured and why, and a suggestion to go to a robo-advisor if she tires of DIY investment management.
 

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But doesn't one need to somehow prepare her expectations so that she doesn't freak out when the eventual 20% to 40% drawdown occurs? From what I've seen with my older relatives, this is not something that amateur investors take in stride. For many people, even VBAL or XBAL's 60/40 is quite risky -- once the downturn comes and you see year after year of losses.

Her 1M portfolio could shrink to 600K. Will she then sell at the bottom and blame the OP for ruining her life?
 

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But doesn't one need to somehow prepare her expectations so that she doesn't freak out when the eventual 20% to 40% drawdown occurs? From what I've seen with my older relatives, this is not something that amateur investors take in stride. For many people, even VBAL or XBAL's 60/40 is quite risky -- once the downturn comes and you see year after year of losses.

Her 1M portfolio could shrink to 600K. Will she then sell at the bottom and blame the OP for ruining her life?
Is one of the reasons why I ask about risk tolerance. We don't know what the current asset allocation is either.

FWIW, I don't think much of VCNS because there is not enough juice in an 80% fixed income allocation to provide more than about a 2.5% return long term. Nor do we know yet if the $55-60k is BT or AT (40% MTR implies a pretty good income). The VPW table https://www.finiki.org/wiki/Variable_percentage_withdrawal#VPW_Table suggests about 4.8% (70% bonds) or about $72k that can be withdrawn on a $1.5M portfolio. That $72k plus CPP plus OAS has to cover all spend including income tax payments. While we are getting into data specifics here, my original response still stands... .yes, the entire portfolio could be put into a single AA ETF, or as I suggested, perhaps 2 to improve odds against a Black Swan event.
 

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Maybe have 70% ( her RRSP, TFSA first , investment last) in a bond ETF (ZAG, XBB etc). Lower growing assets in the RRSP will lower taxes when w drawn from the RRSP.

In her investment account, maybe 20% w XAW and 10% in XIU.
 

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Perhaps though it is getting more complicated with more than one ETF in an account. The senior may not know* anything about re-balancing or which ETF to tap into when she needs more cash. Hence why I suggested VGRO, but VEQT would also do it for a 100% global equity offering in non-reg.... if all of the RRSP and TFSA assets were in a bond ETF lik VAB/ZAG/XBB.

* or cause 'deer in the headlights' syndrome
 

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Perhaps though it is getting more complicated with more than one ETF in an account. The senior may not know* anything about re-balancing or which ETF to tap into when she needs more cash.
If I plug these numbers into VPW (Variable Percentage Withdrawal Worksheet), it seems quite doable given the supplied parameters while using a 60/40 asset allocation with VBAL.

But as James alluded to with his concern regarding losses in capital during bad years, you can see that the worst case condition would be a loss of $450,000 or about 30%. Some people might freak at that amount.

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ltr
 

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Depending on her age, you might want to leave things alone until she has to draw on the RRSP.

What are the current assets invested in?

The combination of RRIF and dividends might be enough for her. Then you only need a bridge solution.

Personally I am against wholesale change at this point. Let her stay the course for a year or so.
 

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Discussion Starter · #11 · (Edited)
The couple used to have a home but sold it 10 years ago. They are now renting in an Ottawa suburb. She doesn't even drive, so no car either!

EDIT: As for volatility risk, with all she got, she's not to worry! She also knows (I told her) that the markets will always rebound... "Just look at 2008-2009. It all came back!", I said. For her, as long as she has enough to cover her travels, and a potential future health care problem where she might have to go to a nursing home, she would be fine.
 

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I think the 70 year old widow wants to do something sooner rather than later. Why wait 2 years when she might do something permanently damaging in the mean time? Or maybe convert the RRSP to a RRIF now and start those withdrawals (nothing magic abuot age 72). It also seems she is 'renewing her fixed income assets in registered accounts every year'

@LTR. Not sure what you assumed on the 2 DB pensions, but the numbers don't seem to correlate to full CPP and OAS to me. A good chart though for discussion purposes.

The key to me is to find a few simple investments the widow can set and forget and other than required minimum RRIF withdrawal, supplement cash flow need by selling some of a single holding in non-reg each year. This lady likely does NOT want to have to do anything proactive....so whatever she has to do needs to be as few decisions and keystrokes as possible.

@Jackie.... Then maybe 60/40 (or 50/50) is right, and it is just a matter of juggling what is in each of the 3 accounts to provide some basis for that. Maybe VGRO in non-reg, VAB or XBB or ZAG in RRSP(RRIF) and VBAL in TFSA.....or similar.
 

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@LTR. Not sure what you assumed on the 2 DB pensions, but the numbers don't seem to correlate to full CPP and OAS to me. A good chart though for discussion purposes.
I think the OAS is correct as per this web site?

But it looks like I used the average recipient from the CPP site rather than maximum. Not that big a deal.

A few hundred dollars a month doesn't change the conclusion, as the 1.5M is the predominant money generator.

ltr
 

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EDIT: As for volatility risk, with all she got, she's not to worry! She also knows (I told her) that the markets will always rebound... "Just look at 2008-2009. It all came back!", I said. For her, as long as she has enough to cover her travels, and a potential future health care problem where she might have to go to a nursing home, she would be fine.
I just would be cautious about assuming that she won't worry or panic, just because you wouldn't worry in her situation, or that she "knows" this because you told her. Not everyone responds the same way to losses.

Past US bear markets in stocks have taken nearly 20 years to bounce back. The 2008 bear market was unusually short and I think many people incorrectly concluded that stocks only decline for short periods.

With a high stock allocation like 60/40, it's possible she could be in the red for several years, even potentially a decade. The bigger issue is psychological -- can someone really stick with the plan, or will they panic / capitulate and sell?
 

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Chances are the widow, who had no interest in the portfolio before, has not had to take the responsibility for, or the consequences of, volatility in the portfolio. IOW, it is different when you are behind the wheel which reinforces your concern.

That said, it seems to me based on what Jackie has said, that she is no dummy and would understand swings in a portfolio due to stock market volatility. Let's not underestimate knowledge before we know the facts. We also don't know how long this person has been a widow....but she may have seen the Dec 2018 malaise as an example of volatility.

Anecdote: My ex and I had a division of assets in Mar 08 that was completed within 3 months. We all know what happened immediately thereafter. That is solo flying into a hurricane.
 

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Jackie, I don't have any concern with your suggesting everything in VBAL (although I prefer to split things between VBAL and MAW104 to provide some diversity of 'product' and the passive etf vs active MF investing style that each represents).

The simplicity is very good to work towards so that you have it once in retirement. In her case it is a bit more complicated. The devil is in the details. Her willingness/ability to spend the time to get to a one fund solution at this relativey late stage is an important question - as Keith has cautioned.

Yours is just the investment suggestion. As AR notes, her investments need to be part of a larger financial plan that covers spending needs and wants (incl taxes), along with the income streams expected from her various sources (CPP/OAS/RRIF/non-reg). She should also have her estate plan up to date (will/poa/health directive, etc.).

For example, you mention that the RRSP is 'mostly' fixed income with annual renewals. If this is a 5 yr GIC ladder, she'll need to wait for maturity each year, instruct not to renew, possibly transfer the proceeds to a self-directed RRSP/RRIF acc, set aside the required minimum annual RRIF withdrawl starting in 2yrs when she is 72, then purchase VBAL with the remaining cash. Rinse and repeat each year until the FI renewals are finished.

For the unregistered account (sounds like about $560k, if his&her TFSA is ~$160k, RRSP ~$680k and total ~$1.4MM), as you note, she may have capital gains if she sells, so it may be prudent to stagger sales over several years so she doesn't bump her taxable ncome, temporarily jeopardize her OAS payment, etc. Since her initial annual RRIF minimum w/d is about $36k (5.3% of $680k), and her annual CPP/OAS perhaps $14k?, she'll need to be taking abut $5k to $10k from the unregistered account plus enough to pay her annual taxes. The remaining cash could then buy VBAL but it won't happen in one fell swoop.

As to the TFSA, is it her intention to not spend from it now? only later or if the need arises, etc.

Before any changes, it is important to understand what investments she now has, what income those will provide, if there will be a shortfall of income if she simply maintains the current investments, and how much work it would really be to maintain the status quo.

As to James' concern about having something like VBAL, seeing your account value drop in a market correction, panicking and selling it all... I think that is unlikely for most of us in retirement as long as we are able to have sufficient income to live on. We have experienced market volatility and survived, now simplicity of investments has a high value to us and our partner.

A RRIF by nature is a 'variable percentage withdrawl plan' and it doesn't seem like your friend will need to draw heavily from her non-reg account, so having sufficient income in a market correction should not be difficult for her. But if she has not experienced market volatility and might be distressed at a reduced account value then this could be an issue?
 

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The couple used to have a home but sold it 10 years ago. They are now renting in an Ottawa suburb. She doesn't even drive, so no car either!

EDIT: As for volatility risk, with all she got, she's not to worry! She also knows (I told her) that the markets will always rebound... "Just look at 2008-2009. It all came back!", I said. For her, as long as she has enough to cover her travels, and a potential future health care problem where she might have to go to a nursing home, she would be fine.
There is a reason there is a stock market. The big boys are making a fortune from the retail investor. The average player will always lose. like a poker game the money will flow to the strong player/players.

Games are played with the number of stocks in the indexes as well as changing the divisor i.e., the DJI was only 12 stocks 1896, In 1928 the dow divisor was 16.67 as of Sept first 2017 was .141533 using this divisor every 1 dollar change in a particular dow stock equals 6.885 1 divided by .14533 compared to 1 divided by 16.67 as in 1928.

It is all a game of smoke & mirrors to make it look like the average player is making money & always everyone should buy & never sell
 

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Looking back at JackieK's post, we don't know what this person currently is invested in. There is a mention of something like GICs in fixed income, but that's about it.

VBAL may in fact be more aggressive than her current investments. People's investments differ wildly... we should not assume anything.

Good points by OnlyMyOpinion
 

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I agree we don't know what the existing asset allocation is, and it would be good to know that to see if she needs to take more, or less, volatility to meet her objectives of $55-60k/year spending. Nor do we yet know if that $55-60k is BT or AT.

Once we know whether the spending need is BT or AT, we can back into asset allocation using the VPW table. If that results in too much volatility (equity), then the widow needs to adjust her spending accordingly. I am simply guessing at 60/40 or 50/50 until we know differently.

This does not need to be hard at a macro level once the basic data is known. There will be execution details though to implement and the widow may need some help, particularly if there is a lot of unrealized cap gains in non-reg.
 
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