[411guy]

I am within 3 - 5 years of retirement and do not have defined benefit pension. I will be relying mainly on my RRSP, CPP and OAS for the next estimated 25-30 year period. I figure I should be comfortable with the amount I've saved.

As such, I am now in 60 equity - 40 fixed income/cash allocation. Furthermore, to minimize fees and to have diversification within the different instruments, I have bought ETFs.

I am sticking mainly to the TSX Composite, Dividend, and REIT ETFs as well as to the short term bond ETFs. I am comfortable with this approach and had been planning on a yearly re-balancing and small tweaking (like buying some BRIC ETFs, gold bullion trust, etc. - no majour departure) in the future.

Until an investment adviser mentioned that I could be taking on unnecessary risk in such passive investing with the current volatility in the markets. I could be missing out on sectoral buy and sell opportunities as market trends and cycles change.

I am now conflicted. What do you all think? Is your investment philosophy these days leaning towards buy and hold or watchful and active trading? Appreciate your input.

 

[FrugalTrader]

Does your current bond/equity allocation + oas/cpp provide enough passive income in distributions for your retirement lifetsyle? If so, why would you veer from the plan?

 

[411guy]

Does your current bond/equity allocation + oas/cpp provide enough passive income in distributions for your retirement lifetsyle? If so, why would you veer from the plan?

Not quite. I am still counting on capital growth and some drawdown of investments over time. No kids, so all I worry about is outliving my savings.

Using monte carlo simulation type retirement calculators like T. Rowe Price and Firecalc, I should be fine.....but I still worry.

 

[leslie]

Only opinion, but I would disagree with a few things.

I would not rely on principal draw down to fund expected living costs. I would consider that principal untouchable for the inevitably very costly last 5 years of long-term care.

I would consider you have longer to live than just 25-30 years. Because I retired early, I have to work on the assumptions that I need the income for perpetuity. But I would think you should consider death at 100 to be expected, unless you buy longevity insurance (Annuity) or unless the amounts you receive from CPP will be sufficient. You have to assume the WORST outcome, not the most likely.

A longer life has another consequence - inflation. To maintain the same value of draws, you have to reinvest some (= inflation) of each year's income back into the portfolio to increase its nominal value and nominal distributions.

Conclusion: if you don't change your portfolio I would cut back the amount you consider spendable.

If you go looking for conflicting opinions on your portfolio, you will find them. Did you really think the advisor would tell you to 'carry on'?

 

[411guy]

If you go looking for conflicting opinions on your portfolio, you will find them. Did you really think the advisor would tell you to 'carry on'?

Very true. That is why I am asking opinions from posters here. You have put forth good food for thought. Thanks.

 

[OhGreatGuru]

Until an investment adviser mentioned that I could be taking on unnecessary risk in such passive investing with the current volatility in the markets. I could be missing out on sectoral buy and sell opportunities as market trends and cycles change.

I am now conflicted. What do you all think? Is your investment philosophy these days leaning towards buy and hold or watchful and active trading? Appreciate your input.

I would not describe passive investing as "taking on unnecessary risk". To me, trying to guess which sectors will be gainers and which will be losers is more risky than staying diversified. Your advisor is trying to convince you that you are "missing opportunites", and there is some truth to that. But chasing those opportunities requires a good knowledge of markets, the time and interest to follow them closely, and higher risk tolerance IMHO. Sector funds are much more volatile than broad-based market indexes, so trying to argue that you should move into sector funds because of the "current volatility in the markets" makes no sense at all.

An investment advisor has a self-interest in encouraging "active trading", because he figures you are either going to come to him for paid advice on what to buy and sell, or at least give his company more service fees for trading, or by buying sector funds that have higher MERs. I would take the advice with a large grain of salt.

The past year has been pretty scary for all investors, but if you are still 3-5 years away from retirement, your portfolio should at least recover if not gain.

Do some studying on what your cash-flow needs will be, and tweak your portfolio towards a mix of income and conservative equity if needed. But I would think it too early to start reducing your equity - wait until the market recovers.

I would not rely on principal draw down to fund expected living costs. I would consider that principal untouchable for the inevitably very costly last 5 years of long-term care.

Whether or not you should be worried about drawing down capital depends on your total capital and estimated income needs. Because long-term care is subsidized in Canada, people of average incomes are often surprised to find it is not the financial hardship they expect. It's Seniors' residences that are getting very expensive in comparison.

 

[411guy]

....tweak your portfolio towards a mix of income and conservative equity if needed. But I would think it too early to start reducing your equity - wait until the market recovers.

That's where my head is at right now.

....Because long-term care is subsidized in Canada, people of average incomes are often surprised to find it is not the financial hardship they expect. It's Seniors' residences that are getting very expensive in comparison.

Thankfully I own my home free and clear. Without any heir specifically to leave it to, I am using it as back up for extraordinary expenses in latter years.

Thanks for your input. It sounds like our philosophies are similar.

 

[411guy]

Conclusion: if you don't change your portfolio I would cut back the amount you consider spendable.

Question for leslie re the above statement: in your opinion, without adding to the total retirement savings amount I currently have, what would you consider as "change your portfolio": ex. more allocation to equity? More active/ opportunistic investing?

Thanks in advance.

 

[leslie]

Owning your home mortgage free takes care of excess medical costs at the end of life. Assuming your CPP and OAS will cover most of your ongoing costs at today's CPI you have little longevity risk exposure either.

So that leaves only the degrading effects of inflation. Assuming CPP/OAS is not indexed to inflation (I don't know), you need to consider the investment part of your situation as the generator of all the growth in the cost of living. By definition, bonds cannot do that unless they are real-return bonds. I would put more into growth vehicles (capital gains from whatever source).

If the pensions ARE indexed, then inflation is not a worry either. The income from the investments would only buy the 'extra' lifestyle above what the pensions can buy. Assuming these are nice-to-have but not necessities, you should also take on the added risk that comes with higher returns. Your downside is protected, and you have a chance of more spending money.

When stated as a percentage of the total investment portfolio, it might seem a large %, but as a percent of the portfolio, plus house, plus PV of pensions, it would really be much less. How much % I cannot say without knowing what % of your costs will be covered by the other sources. Or whether you could completely live off the other sources in short periods of down-markets.

 

[411guy]

If the pensions ARE indexed, then inflation is not a worry either. The income from the investments would only buy the 'extra' lifestyle above what the pensions can buy. Assuming these are nice-to-have but not necessities, you should also take on the added risk that comes with higher returns. Your downside is protected, and you have a chance of more spending money.

Thanks. I guess taking on added risk that comes with higher returns is reasonable for me at this stage in my life. That is why I still have 60% equity in my portfolio. I plan to reduce this over time.

Interesting article I read today: What's the Minimum I Need to Retire?

http://finance.yahoo.com/focus-retirement/article/107530/whats-the-minimum-i-need-to-retire?mod=fidelity-readytoretire

 

[leslie]

As that article points out, no article can take account of all the different people's situations.

What none of the generalized advise takes account of is the ownership of a house (not leasehold) to covers the biggest monthly cost (rent) and provides the capital for medical expenses or legacies at the end of life.

And what none of asset allocation rules take account of is the amount of income coming from the house (rent) and government programs. I personally will get little from CPP because I retired early, but most people with a house and decent CPP have very little to worry about.

The advice also ignores the reality for 95% of situations where the (e.g.) 4% withdrawal rate not only is sufficient to maintain enough capital but leaves you after 30 yrs with capital that is SEVEN TIMES BIGGER THAN WHAT YOU STARTED WITH. Look the Table 5 of this paper. That is a 6.7% growth rate AFTER draws.

Table 3 gives the probabilities of running out of $. You can see the advice is geared toward a great deal of certainty. And even those calculations have been revised by recent work that put together the investment returns possibilities with the probabilities of death along the way. Those results showed the risk of running out before death to be even lower.

 

[411guy]

As that article points out, no article can take account of all the different people's situations.

..... but most people with a house and decent CPP have very little to worry about.

Thanks. What I do for my estimations is to run numbers via monte carlo simulation type calculators like: T. Rowe Price Retirement Income Calculator http://individual.troweprice.com/public/Retail/Planning-&-Research/Tools-&-Resources/Retirement-Planning
and FIRECalc http://www.firecalc.com/index.php

Though these are US-centric, they at least give me a ball park snapshot of the probability that I will not outlive my savings. What do you think of such calculators and do you use them?

 

[canadianbanks]

The stock markets are too volatile and will remain this way for a long time in my opinion. This makes buy & hold strategy very dangerous at least for me.

 

[Rickson9]

The stock markets are too volatile and will remain this way for a long time in my opinion. This makes buy & hold strategy very dangerous at least for me.

Buy and hold is perfectly designed for volatile markets. Without volatile markets there would be absolutely no way I could find good prices to buy stock and absolutely no way my wife and I would have been able to become millionaires 10 years after graduating university.

The reason why individuals don't "buy and hold" isn't because it doesn't work, it's because they don't believe it can work so they don't bother practicing it. Individuals would rather invest in a "safe" bull market (where I prefer safe bear markets where the risk has been burned out of the price) or use a cookie cutter, risk-adjusted, asset allocated, diversified strategy to nowhere.