So how would you manage a $1 million portfolio?
I got this question in my inbox lately.
How would you manage one million dollars?
The questions and assumptions from the reader went on to say this: let’s assume you are 65, have no company pension, no kids (to make it simple), no debts (no mortgage), and your government CPP (Canada Pension Plan) and OAS (Old Age Security) cover your monthly expenses. You want to use the $1 million to increase your standard of living. Let’s assume you will live to age 88. You don’t have too many needs but you want to have some fun.
- Hire an advisor?
- Do it yourself?
- Keep some money in a passively managed fund or funds?
- Purchase an annuity?
- Buy and hold stocks?
That’s a number of questions to answer. It is a difficult exercise to suggest to anyone, how to manage their money, without knowing a number of factors related to their saving, investing and lifestyle goals. I can’t answer these questions for the reader who sent them to me but I can have some fun with these questions and provide a few answers from my perspective; what my wife and I might do.
First off…if both CPP and OAS payments covered my basic monthly expenses in retirement as the reader mentioned, and I had $1 million accessible to me, I would be laughing all the way to the bank – literally. Based on the loose assumptions above I believe that is easily plenty of money to “have some fun” with as the reader put it. Your mileage may vary. Assuming you have some form of home to rely on (and sell) in your aged years, to pay for elderly care, I believe you could easily spend $40k per year (from this fictional million dollar portfolio) starting at age 65 and never worry about running out of money. Sure, inflation will eat at some of your purchasing power over time but I doubt this will a huge issue for such a wealthy senior.
How would I invest? Would I hire an advisor?
You know that’s an interesting question. How I invest today (via this primary method) could be different from how I invest at age 65, or older. I’m in my asset accumulation years now. So, my focus is on total return today but also building a modest passive income machine whereby I don’t have to rely on capital withdrawals very often to fund expenses. This approach will allow us to “live off dividends” to some extent. I suspect my focus at age 65 will be some capital preservation but also, if I save properly now, it will also include lots of spending as well if not beforehand.
Regarding an advisor, I would be inclined to hire a fee-only financial advisor or use a robo-advisor in the future to help me manage my portfolio. If I maintained some passion (and competence) with investing I will consider remaining a DIY investor as a retiree.
Would I keep the money in some passively managed funds?
Yes. My bias is and will be to own stocks indirectly via passively managed Exchange Traded Funds for the foreseeable future to get exposure to U.S. and international equity markets.
I don’t have any bonds in my portfolio now and I don’t intend to own any for the next 10-20 years largely because of this reason.
Would I purchase an annuity?
No. I really don’t see this in our plans since I believe there are other options to manage your assets in retirement. I think the decision to own annuities really comes down to determining how much fixed-income you absolutely need and for how long.
Would I buy and hold stocks?
100%. I’ve been convinced for many years now, companies that have paid dividends for decades or generations will likely keep paying them. You also get some capital appreciation from stocks, which is higher than bonds, which is higher than cash over time. Capital gains are an efficient form of taxation – so selling stocks over time can be a tax strategy.
Although there are some companies in our portfolio that have reduced their dividends this year (examples: HSE, COS) this number is dwarfed by the number of companies we own that have raised their dividends or maintained their dividends over the last seven months. My plan is to buy and hold about 30-40 large-cap dividend paying stocks that will provide cash flow for basic living expenses and index invest everything else. On this path, we’re already 42% towards reaching one of our major early retirement goals.
How would I invest a million dollars?
Probably not much different than the path I’m on trying to grow a million dollar portfolio. This means I would hold a number of Canadian blue-chip stocks that have a long history of paying dividends. I would index invest part of my portfolio (primarily with ETFs that hold U.S and international equities) to get diversification from thousands of companies from around the world. I would bias my portfolio towards equities and limit bond exposure. I would consider hiring a fee-only advisor or use a robo-advisor to help me with my portfolio if I didn’t have the same passion (nor competence) I do today.
Managing a cool million would be a nice problem to have. What would you do?
By registered accounts that meant RRSP’s and LIRA/RIF not TFSA 🙂
OK, I see, but a TFSA is registered account per se.
I like Ricardo and Mark’s thinking on this. My RRSP is being turned into a RRIF on January 1, 2018. I will only be taking the current dividend drip which amounts to about $800 per month. I’ll increase that as required as I get older and reinvest the money I don’t need into my TFSA.
I read an article recently about Cascades Financial Solutions, https://cascadesfs.com/ , and had them run a retirement income report for my wife and I. The report suggested that drawing down our registered accounts first was the most tax advantageous way to fund our retirement. Best of all our after tax income will be $98,600. That will more that fund our modest lifestyle, the travel and backpacking trips we have planned.
You might consider a story on Cascades new software and reporting Mark. I also noted TD has added a projected retirement income tab to their Direct Investing site although it is lacking functionality. I bet there will be many apps and web based tools for retirement income planning to follow.
Thanks for sharing Marko. I’ve heard of Cascades via a G&M article. Seems interesting. There are some free tools out there but nothing that fully compares non-reg. to RRSP/RRIF draw downs as far as I know. I’m really not convinced tapping the TFSA is smart early in retirement so I would need to be convinced this is a good move – otherwise it will be last on my list to deplete!
I know of some of your details Marko – I would think $98,600….will more than fund any modest travel and backpacking lifestyle. Very well done. You’re living it up now!
“essentially “live off dividends” in poor markets”
Once you are on to the RRIF bandwagon you get the mandated increasing percentage withdrawal every year. So eventually you will deplete that RRIF. The government wants their taxes back. After all the RRSP is a tax deferral regime.
Now if you are having to withdraw say 5% but are making 6% then you can re-invest to increase that dividend payout without touching the principal at least until the mandated withdrawal percentage catches up to you – which it will.
Now in this case, a bear market could actually work in your favour as long as dividend payout continue at the same level.
So if you have the $1M portfolio paying 6% and you are mandated to withdraw 5% then you have $10K to re-invest. Again presuming you do not need the full $60K for living.
Now if a bear market hits and, for simplicities sake, the market declines 50% (heaven forbid but just for simplicity) then you would only be obligated to withdraw $25K ($500K X 5%). If you can easily live on that along with your DB income (CPP/QPP, OAS, etc) then you would have $35K to re-invest. A bear market in this kind of scenario would be a God send as you could really increase that principal within the RRIF as long as the dividend payouts remain steady.
For sure, if you have to withdraw the $50K but do not need the complete amount then you can re-invest that as well in to your TFSA or a non-registered account if you have already topped up the TFSA.
All kinds of ways to get rid of extra cash.
That’s my thinking as well Ricardo. If I can generate a few income streams/sources then we’re not reliant on just big RRSP withdrawals to live from. Therefore minimum RRIF withdrawal cover some expenses and the extra can be moved into more tax-efficient / tax-free savings (i.e., TFSA) over time when there is a delta between the minimum RRIF withdrawal rate (say 5% that starts at age 70 and increases in % from there over time) and what the portfolio return is (say 6% or so annualized).
I think having a cash wedge in retirement would be very smart as well. I see lots of retirees on this site have one. i.e., cash as 10% or 15% or more as part of their portfolio with a combination of high interest savings or laddered GICs. In lieu of holding any bonds I might consider than – holding some laddered GICs at time of retirement. I dunno…not there yet so in my asset accumulation years so I’m focused on equities!
“Agreed but this is why I like dividend paying stocks. I get paid to ride that out. How about you?”
I like the dividend payers as well. I am not too worried about stocks in the RRSP/TFSA.
At present the RRSP is paying more in divs than if I were to convert to an RRIF and have to take out the mandated percentage (which is more than 4%) so I could ride out any dip if it were not too excessive and not too long and the companies did not cut the divs.
As to the construct, I never analysed percentages by sector, just bought what I fancied. I am probably considered to be way overweight in BCE, IPL and probably over weight in several others as well. I don’t really think about is as BCE pays me in excess of $18K per year and IPL is presently paying me 25% on my initial COP.
The non-registered investments are obviously more sensitive to stock market fluctuations as I am presently selling them off to cover any spending imbalance from the government payments. If the bull market can hold up for another year I would be quite happy.
Aside from that I am running a HELOC for an investment account. At present prime rates it pays off the HELOC interest as well as several hundred on the principal every month. This account has been up to aprox $5K in the hole or up to $2K in the black. But like I said it is at present paying for itself as well as paying down the principal. So hopefully It will eventually be a source of extra income (divs) for me in a few years.
I hope to get to the same place…eventually re: the RRSP pays more in divis than RRIF withdrawals would.
Therefore you have the ability to essentially “live off dividends” in poor markets. My July 2018 dividend income update will highlight that thesis.
Sounds like you’ve done very well Ricardo – nice work!
I’m 67 and running my $1m portfolio on my own. Retired for 1 year
Just my toy car that I bought in 2016 to pay off by middle of next year.
Living on QPP (CPP), OAS & very small company pension plus whittling down my non-registered investments (gotta pay the car)
Will probably start in on the RRSP wagon at the end of 2019 or early 2020.
Prior to retiring I made up a projected budget and then boosted it (inflation planning), It was hard to project forward on several lines as my employment required some travel with a company car. So food expenses, gas expenditures and car maintenance once I retired were unknown guesstimates at the time I made the budget, This will be my first year for a full 1yr expenditure budget. I track all expenses per line except where I pay cash and that falls under cash withdrawals from the bank. So all monies spent are accounted for.
Several items have affected it such as paying the car insurance for two years and some extra vacation spending (5wks instead of two) but overall I am within the budget and I expect expenses to decrease towards the last quarter of the year.
Budgeted approx. $60K gross to cover all expenditures
Looking forward the only hiccups I can see would be major expenses like house or car problems (buy a new car0
Aside from that the other problem is that I am hoping to live to two hundred.
Bank advisor said I may end up with more money by the time I croak but I think he was being unrealistic.
Approx $60K dividends both registered and un-registered
Presently letting some cash accumulate. I don’t like the market – very sideways with a tendency to go down in my opinion.
Congrats on the first full year of retirement 🙂 Well done.
I will be interested to hear how things progress for you over time…since this is our goal as well beyond any small workplace pension, CPP and OAS.
$60k in retirement is a healthy budget. We’ll need to factor in buying a newer car every 10 years in retirement but we’ll only have 1 car going-forward so that shouldn’t be an issue. If money is tight for us we can always get a low-cost car vs. a nice one, paying ~$10k.
re: “I don’t like the market – very sideways with a tendency to go down in my opinion.” Agreed but this is why I like dividend paying stocks. I get paid to ride that out. How about you? How is the portfolio of 98% stocks constructed?
The reader stated that basic living expenses were covered by CPP and OAS and he wanted to have some fun. Therefore I’d invest and spend/donate to charity the money as follows, the same way whether is was $100,000, $1 million or $10 million. Invest the whole lot as a lump sum asap in a globally diversified portfolio of ETFs, 100% stocks, 1/3 Canadian, 1/3 US, 1/3 international. No individual stocks at all. Using a variable percentage withdrawal spreadsheet, I’d enter age 100 as the end point (just to be sure), and withdraw the stated percentage each year (from memory age 65 is 5.1%). Although spending would fluctuate with the markets, that strategy would likely maximize spending and guarantee I wouldn’t run out of money until age 100. No need to hire a financial advisor or accountant or anyone else, except perhaps a good cook, butler and travel agent.
“No need to hire a financial advisor or accountant or anyone else, except perhaps a good cook, butler and travel agent.”
That’s living it up 🙂 Thanks for your comment.
We all should also fully realize that 98-99% of us will never attain a $1 million portfolio so this is kind of like playing the “If I won the lottery…” game.
Then again, the allocation ratios could just as easily be applied to a $500,000 portfolio.
I agree, the $500k value is more attainable for most.
A 30-year old saving $300 per month, every month, for 30 years, earning 6% should be able to end up with a nest egg of about $300,000 inside their RRSP at age 60. A couple would do well to have $600k between them without including pensions or home equity or government benefits for retirement.
Most people don’t have the financial discipline to save for 30 years though and also, life gets in the way!
It would be more difficult now to amass a million dollar portfolio but back when a simple GIC was paying 10-14% it was doable. Having said that, we didn’t have TFSAs back then and RRSP limits were pretty pathetic if one was a member of a DB plan. In 1990 my limit was $561.44. So while the returns certainly aren’t what they used to be, we didn’t have the opportunities we have now either.
Bonds yields are pathetic for sure and they are going to remain low for a very, very long time. I still think it’s possible for my generation to save $1 M but we’re going to have to do it with a high savings rate, not a high rate of return.
When one is 20, 30 and even 40 $1 Mil may seem like an unattainable goal, but for many their key earning years will be 45 to 60. So if one sets saving goals and everyone agrees the earlier the better, then increases the amount saved as earnings grow, then the $1 Mil goal is much more attainable, especially if one maximizes the TFSA. For those which began saving and investing early and during their 50 to 60’s contributing $40k $50k per year and having an investment plan which might generate 8% to 12% per year, yes, you’ll reach your goal.
“For those…during their 50 to 60’s contributing $40k $50k per year…”
Yup, those who have the income which allows $50k in saving per year will have a higher probability of getting to a million than someone whose total income is $50k per year.
I am presently in that position, and hold 14 Canadian dividend stocks in my non registered fund, reits & restaurant dividend stocks in my TFSA, and Vanguard VTI in my RRSP. I don’t hold emerging market or European stocks or ETF’s because the large global companies I want that are in those regions are already in VTI, and I don’t have to concern myself with currency risks or tax issues. I hold in addition $20K per year laddered for 5 years in a GIC as emergency/ play money so if I need it, I use it, if not roll it over. I keep everything as KISS as possible.
You and I sound similar. Your approach is well balanced but it’s also a path I’m on so I might be biased. I personally like the combination of individually owned CDN stocks and REITs and then a couple of U.S.-listed ETFs for international exposure. Continued success Brian.
Thanks. If you do want more international exposure, you simply divide your rrsp between VTI & VXUS and you now own the world, tax efficiently.
That’s what I’m working on, more VTI and VXUS over time with RRSP contributions. DRIPping Canadian stocks (TFSA and non-reg) everywhere else.
any chance Brian that you could list your investments? thanks in advance if you choose to!
Check out this page 🙂
Sorry I didn’t see this question. Canadian stocks at present are BCE, T, RY, TD, BNS, BMO, TRP, PPL, ENB, CU, FTS, AGN.ct, POW, CNR, ZRE & ZLC
I like your plan. I recall Warren Buffet having the same comment about not needing equities outside the US. I have 15% of my equities outside North America but will have to rethink that as I am incurring foreign withholding taxes of about $800.
I don’t have that much outside US, i.e., in VXUS or something similar but I am working on it and I do hold multinational companies like KO, GE, that derive a great deal of their revenue via foreign markets/beyond the US. I’m getting international diversification that way.
Same with some CDN banks like RY, BNS, and TD to name a few examples. SLF is moving into Asia more.
I don’t have any withholding taxes now since I prefer to keep U.S. listed ETFs only in my RRSP.
any chance Brian that you could list your investments? thanks in advance if you choose to!
My wife and I actually have just over $1M invested in ETF’s from Vanguard and BMO (MoneySense and CCP recommended ones) using the DYI method through TD Direct Investing. At almost 57 (my wife’s 49) I had been in TD and RBC mutual funds, DFA Funds and finally with TD in a Strategically Managed Portfolio. All those programs carried MER’s of 1.5% or so. I realized I couldn’t afford to retire early and pay $1000+ per month in fees to a financial adviser/FI. The DYI method with ETF’s is easy to administer and they carry nominal MER’s of .06 to .50% (ZPR :() .
If I were to use another method I would go with Nest Wealth (good ETF’s and low fees) or pay more for good advice from PWL Capital’s Justin Bender/Dan Bortolotti. That or pay a fee only adviser for direction.
Great work Marko. I recall you’ve saved and done very well – to a point many Canadians would envy but also aspire to!
I think the ETF route coupled with fee-only or robo-advisors are a good path for many Canadians that need some guidance but also want to keep their hands off the investment steering wheel.
The spending pattern should not be considered constant. Rarely is health constant between 65 and 88 or older age. I would assume that more money will be spent earlier so I would probably avoid an all stock portfolio unless the dividends provide the necessary lift.
Early on, more money might be spend. The bucket list needs attention while you are healthy.
Agreed. I suspect someone who is in their 80s wouldn’t spend as much as someone is their 60s, certainly travel and hobbies would decline, but everyone is different.
Live life while you are healthy indeed!
I can foresee many of your commenters and other bloggers easily ending up with $1 Mil portfolio and probably much more. Many of you are saving a good percentage, watching your expenditures and began investing at an early, or earlier age than I. Most have already decided on the investment strategy they want to follow, have a projected goal and monitor your progress.
With regards to the post:
1. One should not require an Advisor unless they are incapable of handling their own affairs
2. One should invest Over Time, not invest a lump sum unless your lucky enough that’s its 2009
3. My personal preference is to invest in a select group of Dividend Growth stocks that will generate a growing income from ones investment, no etf’s or funds.
4. Reinvest all dividends, except those one wishes to draw down to use as income.
5. For the dividends to be drawn down have the shares with the Transfer Agent (to eliminate all fees).
6. As one would unlikely be investing additional funds, use ShareOwners as they offer Full Dividend reinvestment.
7. Maintain a percentage in cash or savings depending upon ones situation and needs
8. Maximize one TFSA
Our portfolio is over $1Mil and this is exactly how we manage our investments.
A competewnt advisor can give you very good tax advice that can save you thousands. Unless you are an accountant, you are unlikely to know the most tax advantaged way to take advantage of your savings.
It’s important to know what you don’t know.
Also, research shows it’s almost always better to invest as a lump sum.
Great points Matt.
For the most part, I know where general tax advantages come in. Capital gains are an excellent form of taxation, as are dividends. Ultimately to have a tax issue in retirement, with your health, is an excellent problem to have. It means you saved enough.
An advisor is not a tax expert. That’s usually the accountant so I would start with an accountant before an advisor if that was a priority. The advisor won’t do your taxes either so you will end up needing an accountant at some point.
I am a 100% self directed investor. When you get assets of certain size, the tax implications can be high, especially when considering intergenerational wealth transfer. When I spoke of an ‘advisor’ I wasn’t speaking of a traditional investment advisor who shoehorns you into a few mutual funds that they get commission to sell to you on.
I was speaking of a wealth or estate advisor who, if they don’t know anything about tax implications would be completely useless.
Well, one of our financial goals is to have a million dollar portfolio – excluding home, pensions and other smaller assets like cars.
That’s the plan.
We’ll need to keep our savings rate very high until age 50 to have a chance at this but if we can, we’ll be rewarded I think.
Regarding your points – this is how we are aligned:
-We do invest regularly, although lump sum investing tends to work best (studies have shown)
-We do reinvest all dividends. We will stop doing that around age 55 or so for income.
-We are working on a higher % of cash/savings as we get older. I think a “cash wedge” is smart as you enter retirement.
-We have and intend to maximize our TFSAs for as long as we live.
Thanks for the comment, glad it’s working for you now.
I agree almost 100% with cannew. It would be pretty much business as usual with my dividend growth stock investing strategies. I would, however, put a portion of the money into a mix of two Mawer Funds, 25% Mawer Balanced Fund & 75% Mawer Canadian Bond Fund. This mix has averaged 6% annually since inception in 1991 and has never been under water in any time frame along the way. I would seriously consider employing an accountant for tax advice but would never go back to a financial advisor…been there done that!
Are you tempted to use Mawer as you get older Bernie? They seem to have great funds and seem to be a very well managed company.
I plan to go the DGI route for as long as I’m able. I’ve suggested my wife go with Mawer funds when either I pass on or can’t function any longer. I’m 65 and healthy right now.
Getting this error.
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Very odd. Trying to look into it now. But you can comment now?
I could have fun with a million bucks over 23 years just by spending the principal. That’s over 43K per year.
$1 million in the bank with everything else paid for (home, food, cars, etc.) is pretty great life with no cash flow issues.
Still trying to post?
Seems to have worked?
“You want to use the $1 million to increase your standard of living.”
Depending on the degree of the increase, you’ll probably run out of money.
I would agree depending on the burn rate.