Investing in Retirement

Investing in retirement is a hard one. 

Investing in retirement is different, because everyone's life situation and financial situation is different. One size definitely does not fit all.

The focus in retirement is on turning your investments into an useable income stream, to live on, travel, or to supplement your work pension, CPP, and OAS. At the same time, you want to make those investments last long enough so that you never completely run out of money. You may also want to have enough left over to leave a legacy to your children, or perhaps your favorite charities. 

Investing in retirement requires taking a step back, and perhaps making some portfolio adjustments in order to reduce or mitigate risk. If you have additional, reliable sources of income coming in (for example, a nice defined benefits work pension), your investment strategy in retirement could look totally different than someone who's relying primarily on their savings and investments.

What products should I hold in my retirement portfolio?

Essentially, the type of products used will likely be the same you used before you retired. In other words, for most DIY investors, that would mean good ol' low-cost exchange traded funds (ETFs). The all-in-one, asset allocation ETFs remain a terrific choice, and you can hold one that meets your chosen retirement risk profile. Generally, people get a little more conservative in retirement, as wealth preservation becomes one of the goals, rather than shooting for the moon in terms of (potentially) maximizing growth. If you've always had a growth portfolio in your accumulation years, you might take a step back and convert it to a balanced portfolio. Or, if you had already moved to a balanced portfolio while approaching retirement, you might decide it's time to move to a conservative one. It's all up to you and what you're comfortable with. In the DIY retirement investing world, you're the Boss!

If you're not already familiar with the all-in-one, asset-allocation portfolios, you need to check out what I think is the best summary around, in a post by Dale Roberts on his Cut the Crap Investing blog. Click here for his Ultimate Asset Allocation ETF Portfolio Page. Trust me, you'll be glad you did.

If you're using an asset-allocation ETF as a core part of your portfolio, in retirement you'll probably want to consider adding other ETFs to easily generate a monthly, quarterly, or annual income stream from your investments. These could include dividend ETFs, or a monthly income ETF like BMO's ZMI that is specifically designed to generate regular, fixed income.

To create income from your asset-allocation ETF and draw down from the total return it generates, you'll have to sell units. Which isn't hard, but it's a bit of a pain to do on a regular basis, and there can be transactional (selling) costs. Which is why the dividend or monthly income ETFs fit the bill so nicely. They pay you a reliable income stream, generally on a monthly basis, with no additional work or cost on your part. How awesome is that?!

To get the idea, here's a great example of an income portfolio that Dale Roberts created. It generates income from a mix of dividends, real estate investment trusts (REITs), bonds and preferred shares. So effective, and so easy...nice!

Fixed Distribution ETFs for Retirement - another option

A few years ago, in September 2020, Vanguard came out with a unique ETF called VRIF. It was designed as a balanced fund with a fixed 4% annual distribution rate, paid monthly. It was designed for use in a retirement portfolio, specifically for an RRIF, where one needs to withdraw a certain percentage of funds (a designated 'minimum amount') each month.

VRIF has struggled for a while to find its mojo. It started out as a 50/50 balanced fund of equity to bonds, which to me is about right for retirement. But along the way, Vanguard changed it to its present weighting of about 30% equity to 70% bonds. To me, that's a bit too conservative, and a way too heavy lean to bonds, but for others, it might be the right mix they're looking for. 

Source: BMO

Now, however, BMO has come out with a couple fixed distribution ETFs that I like a lot more. ZBAL.T and ZGRO.T. They are exactly the same composition as BMO's balanced and growth asset allocation ETFs, ZBAL and ZGRO, but with a 6% distribution. Like VRIF, these ETFs are aimed at retirees and anyone else who needs a predictable stream of monthly income. 

Source: BMO

As a DIY investor, you can play with your allocations to VRIF, ZBAL.T, ZGRO.T, and/or the other income ETF options mentioned earlier in this post, in order to get the mix you want with regards to risk, volatility, equity/bond allocation, and distribution. 

I personally love that all these great, low cost options are available! I think even more will soon be offered by other issuers, as more Canadians move into the retirement zone with a need to easily generate monthly income.

How much can you withdraw safely from your investments? 

Okay, now that you know what investments you'll be holding in your retirement portfolio, you'll want to consider 'how much' you need or want to safely withdraw from your investments.

The 4% Rule (which is not actually a rule) can and does work for many. It's not perfect, but it can be used to estimate a reasonable and safe retirement income from your investments. 

Remember though that sequence of returns risk can really hammer a portfolio at the outset of retirement. In order to mitigate this risk, you should likely take a look at the actual value of your portfolio each year (because it inevitably varies with the market), and possibly make adjustments to your annual withdrawal based on that. The best method I know of is to do a simple recalculation each year using the VRW (Variable Rate Withdrawal) model, which will give you a suggested, safe amount you can withdraw in that particular year. Then you take out what you need, which will be either the suggested amount or a lesser amount based on your budget (living needs, recreation, travel etc.). By adapting your withdrawals each year for the impact market returns have on your portfolio using VRW, you will eventually draw down most of your investments, but never completely deplete them. Beauty!

Order of withdrawals - tax considerations

Now we're at the final step. Which accounts should you be drawing from first in retirement? Traditionally, advisors have usually recommended you draw from least taxable to most taxable accounts. That would mean starting with your TFSAs, then your non-registered investments (which may have preferential tax treatment as capital gains and dividends), and finally your RRSP/RRIF, from which withdrawals are fully subject to tax at your marginal rate. The idea of course is to defer tax until 'later'...at all costs.

That being said, there are often reasons where an RRSP drawdown strategy may be worth some consideration. If you retire early, say somewhere between 50 and 60, it might actually be advantageous to draw from your RRSP first. This is because you won't be receiving your CPP and OAS yet, and if your RRSP income is your only income, you'll be in a lower marginal tax bracket. Depending on how much you withdraw each year, you might not even be taxable at all. And by using your RRSP first, and drawing down that income in your early retirement years, you might be able to defer your CPP and OAS to ultimately get a larger amount. Additionally, by using up some or all of your RRSP funds, you might be able to keep your income low enough to mitigate or completely avoid the dreaded OAS clawback.

There's a lot to consider, and sometimes some complex numbers to crunch, depending on your situation, your various sources of income, and your lifestyle. If it's too much and it's making your head spin, you can always consult with a fee-only planner. 

That's it!

Simple eh?! Not really? Yeah, there's a lot to digest and consider. But once you've got everything figured out and set the way you want it, it's easy sailing after that. Or maybe cruising....

Cheers!

Armchair