The benefits of Variable Percentage Withdrawals (VPW)
As folks start entering retirement (or even start thinking about retirement), I suspect the following questions come to mind…
How much is enough to fund my retirement?
When should I start drawing down my portfolio?
How much should I even withdraw so I don’t outlive my money?
…and the list goes on.
Traditional retirement planning
With traditional retirement planning advice, some that I continue to follow myself, we are told to save early, save often and keep saving. Heck, I just wrote about that here in how to build a million dollar portfolio (or close to it).
While following that mantra is fine (and very good for the asset accumulation phase) you will eventually want to enjoy the fruits of your labour.
Or do you?
I mean, do you want to leave a legacy? If so, how will you know you can?
Conversely, how do you know you might potentially outlive your money?
With traditional retirement planning there is a huge bias to investing until someone magically tells you to “stop” when you reach some ripe old(er) age. I think this thinking is flawed and does a disservice to everyday savers and investors. Arguably, the whole point of retirement is to actually the enjoy the money and time you previously traded for years of labour.
Yet in trying to enjoy this precious time there are financial complexities involved. Some additional questions come to mind beyond the ones I listed above:
- When should I take my workplace pension? Is it worth it to take my pension if early-retirement penalties involved?
- When should I take Canada Pension Plan (CPP)?
- What about Old Age Security (OAS) – when should I take that and/or defer that instead of CPP?
- Should I consider a reverse mortgage at some point to fund my retirement? If so, when?
- What about the costs of long-term care should I need it?
Overlooked retirement income considerations abound.
I can’t tell you (or even guess) how long you will live. If I could, that would certainly make our collective decisions about retirement planning much easier (while far more morbid)!
I can tell you there is another meaningful way to consider how to draw down your portfolio so you don’t become the richest man or woman in the graveyard (if you don’t want to be).
Variable Percentage Withdrawals (VPW) 101
The essence of this approach is to compute an income payment required to deplete your portfolio at N years assuming asset allocation and portfolio returns during retirement. For example, N years could be age 99 or 100.
This method uses variable (and an increasing) percentage (hence the name) to determine withdrawals from a portfolio during retirement. Each year, the withdrawal is determined by multiplying that year’s percentage by the current portfolio balance at the time of withdrawal.
Consider VPW as return-adjusted withdrawals over time.
This is one of the best withdrawal approaches I’ve seen that allow you to essentially:
- increase your spending in “good years” and,
- decrease your spending in “bad years” therefore giving investors psychological ease.
Consider this VPW table from Bogleheads VPW (link below):
| Variable-Percentage Withdrawal Rates Based on Age and Asset Allocation | |||||||
| Age | 20% Stocks 80% Bonds |
30% Stocks 70% Bonds |
40% Stocks 60% Bonds |
50% Stocks 50% Bonds |
60% Stocks 40% Bonds |
70% Stocks 30% Bonds |
80% Stocks 20% Bonds |
| 40 | 3.2% | 3.4% | 3.6% | 3.9% | 4.1% | 4.4% | 4.7% |
| 41 | 3.2% | 3.4% | 3.7% | 3.9% | 4.2% | 4.4% | 4.7% |
| 42 | 3.2% | 3.4% | 3.7% | 3.9% | 4.2% | 4.4% | 4.7% |
| 43 | 3.2% | 3.5% | 3.7% | 3.9% | 4.2% | 4.5% | 4.7% |
| 44 | 3.3% | 3.5% | 3.7% | 4.0% | 4.2% | 4.5% | 4.7% |
| 45 | 3.3% | 3.5% | 3.7% | 4.0% | 4.2% | 4.5% | 4.8% |
| 46 | 3.3% | 3.5% | 3.8% | 4.0% | 4.3% | 4.5% | 4.8% |
| 47 | 3.3% | 3.6% | 3.8% | 4.0% | 4.3% | 4.5% | 4.8% |
| 48 | 3.4% | 3.6% | 3.8% | 4.1% | 4.3% | 4.6% | 4.8% |
| 49 | 3.4% | 3.6% | 3.9% | 4.1% | 4.3% | 4.6% | 4.8% |
| 50 | 3.4% | 3.7% | 3.9% | 4.1% | 4.4% | 4.6% | 4.9% |
| 51 | 3.5% | 3.7% | 3.9% | 4.2% | 4.4% | 4.6% | 4.9% |
| 52 | 3.5% | 3.7% | 4.0% | 4.2% | 4.4% | 4.7% | 4.9% |
| 53 | 3.5% | 3.8% | 4.0% | 4.2% | 4.5% | 4.7% | 5.0% |
| 54 | 3.6% | 3.8% | 4.0% | 4.3% | 4.5% | 4.7% | 5.0% |
| 55 | 3.6% | 3.9% | 4.1% | 4.3% | 4.5% | 4.8% | 5.0% |
| 56 | 3.7% | 3.9% | 4.1% | 4.3% | 4.6% | 4.8% | 5.1% |
| 57 | 3.7% | 3.9% | 4.2% | 4.4% | 4.6% | 4.9% | 5.1% |
| 58 | 3.8% | 4.0% | 4.2% | 4.4% | 4.7% | 4.9% | 5.1% |
| 59 | 3.8% | 4.0% | 4.3% | 4.5% | 4.7% | 4.9% | 5.2% |
| 60 | 3.9% | 4.1% | 4.3% | 4.5% | 4.8% | 5.0% | 5.2% |
| 61 | 3.9% | 4.2% | 4.4% | 4.6% | 4.8% | 5.0% | 5.3% |
| 62 | 4.0% | 4.2% | 4.4% | 4.6% | 4.9% | 5.1% | 5.3% |
| 63 | 4.1% | 4.3% | 4.5% | 4.7% | 4.9% | 5.2% | 5.4% |
| 64 | 4.1% | 4.3% | 4.6% | 4.8% | 5.0% | 5.2% | 5.4% |
| 65 | 4.2% | 4.4% | 4.6% | 4.8% | 5.1% | 5.3% | 5.5% |
| 66 | 4.3% | 4.5% | 4.7% | 4.9% | 5.1% | 5.4% | 5.6% |
| 67 | 4.4% | 4.6% | 4.8% | 5.0% | 5.2% | 5.4% | 5.6% |
| 68 | 4.5% | 4.7% | 4.9% | 5.1% | 5.3% | 5.5% | 5.7% |
| 69 | 4.6% | 4.8% | 5.0% | 5.2% | 5.4% | 5.6% | 5.8% |
| 70 | 4.7% | 4.9% | 5.1% | 5.3% | 5.5% | 5.7% | 5.9% |
| 71 | 4.8% | 5.0% | 5.2% | 5.4% | 5.6% | 5.8% | 6.0% |
| 72 | 4.9% | 5.1% | 5.3% | 5.5% | 5.7% | 5.9% | 6.1% |
| 73 | 5.0% | 5.2% | 5.4% | 5.6% | 5.8% | 6.0% | 6.2% |
| 74 | 5.1% | 5.3% | 5.5% | 5.7% | 5.9% | 6.1% | 6.3% |
| 75 | 5.3% | 5.5% | 5.7% | 5.9% | 6.1% | 6.3% | 6.5% |
| 76 | 5.5% | 5.6% | 5.8% | 6.0% | 6.2% | 6.4% | 6.6% |
| 77 | 5.6% | 5.8% | 6.0% | 6.2% | 6.4% | 6.6% | 6.8% |
| 78 | 5.8% | 6.0% | 6.2% | 6.4% | 6.6% | 6.8% | 7.0% |
| 79 | 6.0% | 6.2% | 6.4% | 6.6% | 6.8% | 7.0% | 7.2% |
| 80 | 6.3% | 6.4% | 6.6% | 6.8% | 7.0% | 7.2% | 7.4% |
| 81 | 6.5% | 6.7% | 6.9% | 7.1% | 7.2% | 7.4% | 7.6% |
| 82 | 6.8% | 7.0% | 7.2% | 7.3% | 7.5% | 7.7% | 7.9% |
| 83 | 7.1% | 7.3% | 7.5% | 7.6% | 7.8% | 8.0% | 8.2% |
| 84 | 7.5% | 7.6% | 7.8% | 8.0% | 8.2% | 8.4% | 8.5% |
| 85 | 7.9% | 8.0% | 8.2% | 8.4% | 8.6% | 8.8% | 8.9% |
| 86 | 8.3% | 8.5% | 8.7% | 8.9% | 9.0% | 9.2% | 9.4% |
| 87 | 8.9% | 9.0% | 9.2% | 9.4% | 9.6% | 9.7% | 9.9% |
| 88 | 9.5% | 9.7% | 9.8% | 10.0% | 10.2% | 10.3% | 10.5% |
| 89 | 10.3% | 10.4% | 10.6% | 10.7% | 10.9% | 11.1% | 11.2% |
| 90 | 11.1% | 11.3% | 11.5% | 11.6% | 11.8% | 11.9% | 12.1% |
| 91 | 12.2% | 12.4% | 12.5% | 12.7% | 12.9% | 13.0% | 13.2% |
| 92 | 13.6% | 13.8% | 13.9% | 14.1% | 14.2% | 14.4% | 14.5% |
| 93 | 15.4% | 15.5% | 15.7% | 15.8% | 16.0% | 16.1% | 16.3% |
| 94 | 17.7% | 17.9% | 18.0% | 18.1% | 18.3% | 18.4% | 18.6% |
| 95 | 21.0% | 21.1% | 21.3% | 21.4% | 21.5% | 21.7% | 21.8% |
| 96 | 25.9% | 26.1% | 26.2% | 26.3% | 26.4% | 26.6% | 26.7% |
| 97 | 34.2% | 34.3% | 34.4% | 34.5% | 34.6% | 34.7% | 34.8% |
| 98 | 50.6% | 50.7% | 50.8% | 50.9% | 50.9% | 51.0% | 51.1% |
| 99 | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
This approach differs from other popular withdrawal approaches:
The 4% withdrawal rule. Consider a healthy $1,000,000 investment portfolio; you can safely* withdraw $40,000 plus inflation each year for the next 30 years or so based on the Trinity Study (see wiki). The problem with this approach: a bad sequence of returns can sink your portfolio. Conversely, great returns can leave tons of money on the table for your estate.
Just spend the dividends rule. Consider the same $1,000,000 portfolio; you can likely generate anywhere between 3-5% in dividends (or distributions if you own funds) per year; you can therefore safely* spend $30,000-$50,000 each year for well, who knows how long, potentially indefinitely! The problem with this approach is obvious: you need a ton of money saved up to “live off dividends” and even if you get there, it’s probably more than you need. (Note: As flawed as some experts feel this approach may be I’m using this approach as more of a mindset. You can read more about that here.)
Constant-percentage withdrawal rule. Consider the same $1,000,000 portfolio; you can safely* withdraw 4% of your portfolio each year. Or make it 3%. Or make it 5%. Based on good or bad sequence of returns, your conservative withdrawal of 3% might leave a big portfolio at time of death. A more aggressive withdrawal of 5% depending upon your investing time horizon might force you to take a side-job to make ends meet.
*”safely” is a relative financial term. This is because any financial future is, for the most part, totally unknown by any financial guru!!!
Back to VPW, this methodology will also compute the percentage of retirement income payments based on your portfolio balance. Basically, this is a retirement income recipe you can follow over time.
Before I link to more information about VPW beyond one blogpost or simple table can cover, here is my summary of why I believe this approach works:
- It combines the best ideas associated with constant-dollar withdrawal and constant-percentage withdrawal strategies.
- It adapts your withdrawals to market/portfolio returns so effectively you don’t drawdown your portfolio too quickly.
- It uses a variable, and an increasing percentage to determine withdrawals so effectively you don’t hoard your money “until the end”.
- Essentially, this is one of the best approaches to use in retirement: increase spending in “good years” and decrease spending in “bad years”.
Beyond these points above, I also believe VPW works particularly well because you can then asses your spend rate against inflation. With inflation, it can be very problematic to start digging into retirement principal immediately at the start of retirement (given that inflation-adjusted spending needs could quadruple by the end of retirement assuming ~ 5% inflation rate). That’s scary.
This point was highlighted in a blogpost by Michael Kitces here Why most retirees will never draw down their retirement portfolio:
Takeaways
The more I read about how to manage our portfolio in semi-retirement or full-on retirement, I more I consider other options beyond simply trying to live off dividends or distributions.
The reality is, and I suspect most seniors are “there”, spending down retirement assets smoothly is no simple feat. When you consider taxation, inflation, longevity risk, portfolio risk, changing spending needs and much more – there is far from any one-size-fits-all. Leaving most assets near the end will trigger major estate planning work. That’s fine if that’s what you want!
For the majority of retirees, drawing down your funds too quickly is the biggest worry. Rightly so.
Over decades of investing theory and practices I think the Variable Percentage Withdrawal (VPW) approach might be as good as it gets. We’ll explore this approach more as we get older. I’ll write about it more on this site as well over time. For now, it’s save, invest and kill debt.
That traditional work towards retirement is certainly easier than asset decumulation!
Here are key resources from various sites including some FREE calculators and resources to dive deeper:
You can find more handy (and free) money and retirement calculators on this page here.
How to draw down your portfolio using Variable Percentage Withdrawal (VPW)
Canadian financial wiki, variable percentage withdrawal
Wade Pfau who is an expert on retirement withdrawal strategies (and more)
What’s your income plan for retirement? Do you have one? Are you already there and accomplishing your needs and wants?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
it is great to follow vpw but in reality it just doesn’t work. after 13 years of retirement we haven’t met our goals once! there is always something to throw a wrench into our plan/budget — new car, new countertops, new back splash, send grand babies to camp and those darn trips (bucket list items) etc. LOL. but in the end, a plan is much more important than no plan at all.
I think your last line says it all Gary….it’s the process of planning and re-planning that is important, not necessarily (or at all) that the plan is perfect 🙂
i love your posts mark but also like reading the comments, especially from “youngsters” like rbull and lloyd! (:
“youngsters”
I like that!
youngsters…..Awesome Gary. Many thanks and all the best to you!
LOL. Kids these days 🙂
“it’s the process of planning and re-planning”
I had “planned” to build the third phase of the GIC ladder this weekend *thinking* (I oughta stop doing that) that rates would have gone up with the May meeting. Now that plan is scuppered and I’ll have to sit on the cash in a daily HISA til the July meeting. I was trying to have a GIC mature every third month but now I’ll have a four month/two month gap. No big deal really but it goes to show that plans are destined to be changed when circumstances warrant it.
It’s a good place to be to have that kind of problem and flexibility to deal with it!
I read 80% chance of a July hike.
You got it Lloyd. All plans are destined to change but you’re a planner (it seems to me) and so the process of planning ($$ wise and likely in many other areas) has largely served you well through life.
You got that right Gary and Mark?
In the immortal words of Michael Cowpland of Corel and Mitel fame – “Since timing is never perfect it’s important to get the show on the road and make adjustments as you go”.
Neat idea. Seems like VPW gives you license to spend more as your time horizon shrinks, that makes total sense. It’s just going to be awkward when they create some “miracle cure” after I turn 98 and I’ve spent half my portfolio ; )
Ya, you don’t have to spend it all but VPW kinda pushes you there with their age to 99 or 100 model.
^nice!
Bank of Montreal (BMO) increases quarterly dividend $.03 (I don’t directly own this one).
https://www.ctvnews.ca/business/bank-of-montreal-reports-1-25b-q2-profit-raises-quarterly-dividend-1.3951280
@Lloyd: Was that the Feb increases? I don’t expect them (BMO & NA) to increase again till Aug.
Sorry Lloyd, I should have read your links. Nice surprises!
Nice. I love getting a raise!
Thanks for the info. I have 200 shares of BMO, that’s a $24 raise. Enough to pay a new toy. Nice.
National Bank (NA) increases quarterly dividend $.02
https://www.theglobeandmail.com/business/article-national-bank-second-quarter-profit-rises-from-year-ago-raises/?cmpid=rss
Wow, nice. Another raise 🙂
Don’t retire unless you have 2 million in assets (with at least 1 million in liquid investments) – then you have no worry about a draw down plan (because you won’t need one). If you can’t get to 2 million – then you may want a part-time job in retirement years.
I think it all depends on what you spend Mike, but for the most part, I’m with you since my bias and plan in fact has always been to have $1 M in invested assets before we retire. If we don’t have the $1 M invested AND no debt, we will not retire – we really cannot.
That ignores both whether a person has a work pension, govt benefit amounts (overall cash flow amount?) and what their desired lifestyle is. Both critical to determining when to retire.
Few will have 1M investable assets and another 1M in other??house???
Sorry May….the N and M keys are too close together and my tired eyes didn’t catch it on the proofread.
No worries. They are very close on the board, aren’t they? 🙂 I do typos all the time too.
@Nay
“Maybe VPM will suggest I can only safely withdraw….”
I could be reading it wrong but I don’t think there is any inherent safety in this plan. It seems it is designed to *spend* a set percentage just because.
Nothing can provide safety as far as a withdrawal plan as opposed to living well below your means – income only etc. VPW does the best by adjusting for returns. One still has to some flexibility in lifestyle because after a big equity market dump the change in withdrawal amount will be significant.
An alternative could be keeping a sizable amount out of your calculation in VPW.
ie if you have 1M keep 300K out of the calculations. Enter 700K as your assets to deplete over a 99 year lifetime and have the 300k as a buffer or let it also grow more over time to account for inflation. On the other hand if you’re happy doing whatever you are now that’s great.
I’ll have to do some research (I admit I have done next to none). I may be getting a mental block on the *goal* of hitting zero at a certain age. I would never do that so I can’t see a logical reason for wanting to do that. It may be my aviation background tripping me up here. I can see merit in your suggestion of holding back a set amount but then that technically isn’t really VPW if I’m reading it right.
It will still work the exact same way (VPW) but the suggested withdrawals will be less, based on the smaller “pile” you’re using. The same withdrawal percentages will apply, but you’d have a certain reserve forever or as long as you want.
I can see that about the “goal”. I doubt many of us that follow our investing and finances will let ourselves get too “tight” on depleting every last penny, especially since we don’t know our end date. Those with work pensions plus govt benefits will have additional stability.
You could download the spreadsheet and make a few simple entries and follow along, if only as a reference to see what you “could” withdraw. I starting using it about a year + ago but backdated mine to start of retirement 4+ years, entered ending year asset balance, my “withdrawals” (in my case I use my annual “spend” including taxes, subtract pension and ergo that = withdrawal #). Many take out a lump sum for the year over to a HISA and that’s simply their “withdrawal” and spend from there, replenishing it next year. Interestingly I was intuitively taking out less than suggested before I started using it.
Okay, I’ve looked at it a *bit* closer using the link Mark posted. Now I’m beginning to get it. This isn’t to spend ALL the money and end up with zero. It’s to spend all the excess money you won’t need.
“so that total non-portfolio income (including Old Age Security (OAS), Canada or Quebec Pension Plan (CPP or QPP), pension, and other lifelong income) is sufficient to live comfortably, independently of future portfolio withdrawals.”
If a person has a sufficient and non-depleting income stream already established as per the quote then yes, by all means, consider spending the rest.
You’re on to it now. That is if you’re saying excess money you won’t need is in investable assets. Because it will calculate to deplete this to the age you set.
It is also suggested for earlier retirees to set up a GIC ladder to offset the equivalent of OAS/GIC for stability, until it arrives.
Ya, I should have read before I typed. I still need to research more but I think I have a bit better understanding of the concept.
Good stuff Lloyd. When you’ve finished your “studies” let us all know what you think.
It actually suggested percentage according to current portfolio balance, predicted return based on asset allocation, and life expectation. Of course, things could go wrong and I agree with you, I should not use the word “safely”.
In the other hands, all the financial plan is based on some assumptions and at the end, nothing 100% safe. For me, at this moment, I feel if I put a big enough number of life expectation, and a low enough number for return expectation, I will be comfortable enough for the percentage number suggested by VPW calculation.
Again, nothing will not change in life except change itself. Still some time for me before retirement time. I have already changed my mind regarding to retirement plan a few times, might change another few times before I retire. LOL.
“I feel if I put a big enough number of life expectation, and a low enough number for return expectation, I will be comfortable enough for the percentage number suggested by VPW calculation”
I’m of the same mind and it’s what I’ve done. Lowered return, using age 99. (originally used 95) You might need to use 110!
My own VPW number with adjusted inputs at start of year (age 58) is 4.0%, VPW chart shows 4.7% for me. I expect we will withdraw ~3% this year and have been on a similar slightly higher track the past 4 yrs.
At 65+ “guaranteed” base income will also jump with OAS & CPP which is not reflected in current VPW suggestions. That’s peace of mind for us.
Plan to retire in 5 years. My current plan is to use VPW to test whether or not I will be ready to retire and also withdrawal plan into retirement.
@Llyod I think it really depends on life priority for individual person. Imagine maybe I can live on dividends/interest only but I would like to take an extra trip that costs $10K and it will require selling some shares. VPW can be used to determine whether or not selling $10K is safe or not. Maybe VPM will suggest I can only safely withdraw $6K , then I might change my travel plan.
I think I will be like RBull, use VPW in a conservative way as a guidance. If all my needs and wants already satisfied with dividends/interest then I will not touch the capital. So the end result most likely would be I die with an estate but maybe not very big.
First off I’ll admit I know little about this VPW plan. Having said that, I look at the two possible outcomes. We outlive our money, or we leave money on the table once we’re gone. IMO, this is no-brainer. Having a full tank of fuel when I reach my destination is not a concern in the least and I am not going to take action to try to arrive with an empty tank.
“Having a full tank of fuel when I reach my destination is not a concern in the least and I am not going to take action to try to arrive with an empty tank.”
Agreed. Even though my wife and I have no plans to leave a legacy, we do intend to have more than we need just in case.
I should have read your links *before* I opened my mouth (so to speak). Commenting on something I knew I knew very little about was dumb.
No apology needed please!!!
🙂 I was mentally kicking myself in the ass. Reminder to myself that I ain’t as smart as I think I is.
You’re rather smart 🙂
Well, you’re certainly not alone. Raises hand!
Great post Mark. There’s much written and a lot of focus on how to accumulate investment assets during savings years but not much on how to fund a retirement. The way I see it, the more people at the working to retired transitional phase understand various good options the better off they’ll be to pick something that works.
I’m in agreement VPW combines the best of cdw and cpw strategies, and support your list of reasons why this approach works (for those wanting to decummulate assets). I’m a fan and haven’t seen anything better.
As I detailed on your “case for keeping stocks” thread I am utlizing VPW to track our potential “suggested” retirement withdrawal. We however are staying below the suggested amounts and a little below our annual investment income generated. This of course raises the withdrawal amounts potentially available in future years. I can confirm it is difficult for some (me included) to break open some capital to spend, even though this is/was fully our intention. This may be a combination of conservative behaviour or a symptom of being earlier in retirement with maybe up to another 40 years of life (optimistic) to fund, which is what spreadsheet input I used (age 99). I also adjusted the inputs and chose to reduce the equity returns from historical 5% to 4%.
Right now we’re living comfortably and without financial worry. That along with VPW over time will be our guide and goal.
I need a number bigger than 99. My grandma died at 99 and all her siblings had long lives too. My mom can still take care of herself in 80s. So there is longevity genes in me and I need to prepare for it, be sure not bankrupted before my end.
As nobody can predict future, maybe no number is good enough? So it’s also possible I will buy an annuity in my 80s. The goal could be combining annuity, CPP and OAS can cover the basic needs.
Probably will make a lot of sense for you with a long expected life.
“As nobody can predict future, maybe no number is good enough? So it’s also possible I will buy an annuity in my 80s.”
Exactly my thinking as well. Annuities can fight longevity and cognitive risk when you simply don’t want to worry about running out.
And of course assuming that your retirement nest egg allows for it, delaying CPP and/or OAS beyond 65 provides yet another significant hedge against inflation with the longevity risk being removed from your accumulated nest egg and placed onto those 2 excellent pillars. Thus requiring a significantly smaller percentage of your remaining retirement nest egg to be dedicated to that annuity @ age 80.
Well put. Yes, the ability to delay inflation-fighting CPP and OAS benefits is huge if one can take advantage of it by doing so until age 70.
Thanks for your comment,
Mark
Well thanks 🙂
Interesting to read how some (including you…) well-to-do retirees are finding it a challenge to spend the capital. I wonder if I will?
I would think it’s absolutely tied to behaviour.
I figure if either my wife and I make it our mid-90s (I don’t think we will but you never know); the sale of our primary residence in our late-80s will likely go into an annuity and then that’s cash for life to rent somewhere or put both or one of us in a home. We hope the $1 M portfolio plus other assets will be enough money in our 50s when we start working part-time. For my wife, that’s about 5 years away. She is starting to get excited about the prospects of part-time work between age 50-55. Still lots of debt to kill in the meantime and investing to do but also some nice trips as well.
You gotta live too!
You’re welcome.
You will. It is certain the taps will open here sometime. I believe when we need car replacements ~3 yrs, and/or bigger house expenditures etc and/or as we approach OAS/CPP. Will also back off travel for a year or 2.
I agree with you on the timing/housing with an annuity. Deals with longevity and also lessens reliance on fiddling with investments at a more ripe age.
Nice to hear your wife is getting excited. Never a day goes by my wife doesn’t say how much enjoys not working anymore.
Gotta live is right. Sacrificing too much now isn’t needed nor is it fun.
I am 58 and just turned my LIRA and RRSP into RRIF’s. I have a 50/50 equity/bond mix in all my accounts using BMO and iShares high dividend ETF’s as well as Vanguard and BMO bond and preferred shares ETF’S. I collect $3K per month in monthly dividends which is enough for me to live comfortably. I find this approach the best for me as I no longer worry about market fluctuations and don’t have to sell any of my investments to fund my life. That and I can delay CPP to maximize the payments.
@Marko
Government mandated withdrawal percentages will eventually lead you to selling your investments. I doubt your portfolio will return 20% when you reach 95. At your age now, 58, your portfolio should be able to increase year to year. The government only wants 4% back by the time you are 65, increasing each year after that.
65 4.00%
66 4.17%
67 4.35%
68 4.55%
69 4.76%
70 5.00%
90 11.92%
91 13.06%
92 14.49%
93 16.34%
94 18.79%
95 and older 20.00%
RICARDO
@Ricardo:
Those are the withdrawal rates and amounts added to be taxed, but one does not have to spend the balance amount withdrawn. They can transfer them In Kind to a TFSA or Non-Reg account which will continue to generate income.
Haven’t done this yet, but it’s likely to happen with a few of our positions.
Just need to have the cash for tax over and above in kind transfer amount. Broker indicated if going to TFSA out of registered it has to pass thru unregistered first.
@RBull: Our rrif transfers to TFSA to Non-Reg first but with No fees or Cap Gain.
That’s the thing with VPW – it assumes you want to draw down your portfolio at some point. Some investors do wish to do that…others do not. I do believe regardless VPW is something investors should consider to at least increase their knowledge base. Cheers cannew!
Got it cannew. That was my understanding as well.
Thanks.
Some investors absolutely do that…but the idea of VPW is to largely spend your capital down “safely”. If we have the financial means we’ll consider withdrawing from RRSP, putting most into TFSA and then spending the rest in our 50s and 60s.
Good point Ricardo. Hopefully I won’t have to worry much about the withdrawal rates until I am 90 🙂 . I had a hard time coming to grips with the idea that I had to sell my ETF’s to fund my retirement. With the iShares XDIV and XDG ETF’s having such low MER’s and high dividends as well as the BMO ZPR, ZDI, and ZWC I have a diversified portfolio that pays me well each month.
Well done. BMO has very good low-cost but also income-oriented funds.
@Marko: It’s good that you have DB’s to rely on. We don’t and need to ensure our investment income grows. Looking at your etf’s distributions it’s not that great comparing 2016 & 2017
ZPR Min 13%
ZDI Up 1.15%
ZWC (comparing only 4 months), Up 1/2%
XDV Up 1.53%
XDG (comparing only 4 months), Min 18.3%
Yes, that maybe Cannew but I don’t care as I bought the high dividend funds for the monthly low/no tax income. I’m not looking for growth – just income. I sold off my non-dividend index equity ETF’S late last year and went into dividend funds. With $1.2M in ETF investments I’m not worried about our financia futurel with or without my wife’s reduced DB pension.
With that amount saved and invested, churning out income (your portfolio of 30% equity Canadian ETFs; 15% US equity and 15% in International equity); the rest in more fixed income, that portfolio is largely bulletproof. Even if you spend the capital, that should last another 30-40 years.
Very nice shape Marko. I can relate and like you have tilted towards a dividend (income) bias a few years back.
If we read it right you’re 60/40% equity/FI. I think above you mentioned 50/50%.
Right now we’re about ~ 17.5% int. / 17.5% US / 23% CDN as far as equities= ~58% . Accounting for geographic business overlap in all 3 of these I’d estimate it’s probably really more like: 18/20/20
Mark, I think you know where I stand on your statement and that approach.
Yup 🙂
yes @RBull – with my investments it’s 50/50 if I count my BMO ZPR pref as FI as opposed to equity whereas it’s 60/40 with the pref considered as equity – that’s what I am sticking with.
My wife’s investments are cleaner with all her accounts being 40% BMO ZAG aggregate bond ETF and 30% in each of iShares XDIV and iShares XDG.
I wanted/needed more income than she will so I bought the BMO covered call ZWC and ZWU and then had to balance out my US and International equity by buying ZDI instead of just XDG.
These days I suggest to anyone moving from mutual funds to just buy Vanguard VBAL and be done with it – 12,209 holdings and a .22% MER! That’s low cost and easy diversification! https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9578/assetCode=balanced/?overview
Interesting enough. I have a post coming up about that in a few weeks!
Thanks. It was just this below confusing me thinking total was 60% (15+15+30) w/o prefs. Doesn’t really matter anyhow. Whatever you’re comfortable with is the right answer.
“Yes Mark – I have 30% of my equity in Canadian ETF’s, 15% of it in US equity and 15% in International equity – none of hedged. I have Shares XDG for US/INT as well as BMO ZWC and ZWU as well as ZDI so it’s a well diversified portfolio that’s as tax efficient as possible for me. I plan to get to the mecca of no tax dividend income equalling $40K to $45K per year.”
Yes, I agree VBAL is a simple good choice for many people. Vanguard has a policy of always lowering costs too so won’t be suprised if that drops a fair bit in coming years.
No tax dividend income is about 30K here but it doesn’t matter even if I was there because I’m knocking down my registered accounts, so taxable income is well over that. To reach 40/45K “tax free” a person will need a pretty sizable unregistered acct., & no registered “withdrawals” I try and equal our incomes for tax efficiency but we’ll always be paying ~20% + tax, unless we want to cut lifestyle further until age 65, and when CPP/OAS arrive. Not gonna happen unless we have to and I see it going the other way.
Ya, to reach 40/45K “tax free” “…a person will need a pretty sizable unregistered acct., & no registered “withdrawals””. That won’t be us either since we have some pensions to look forward to.
I am optimistic we can at least draw down our RRSPs in our 50s and 60s, leaving our pensions, CPP and OAS to draw from in our 60s and 70s as fixed income. I am hopeful we can delay CPP and OAS until age 65 accordingly.
Hey Marko, I just had my 59th. 60/40% stocks, ETFs, bonds, GICs. I turned my LIRA into a LIF about a year ago, however a large chunk of our assets are in RRSPs that I’m also tapping but no plans to convert yet. Will probably do this over time in graduating amounts but now want flexibility to turn off the taps the simplest way if our overall circumstances change.
Do you see inflation being a factor on your needs and income only plans?
Do you consider Prefs FI or equity? I have one individual pref position that will be gone when the time is right. They’re hybrids but I see them as equities. I got my butt handed to me somewhat on mine and have decided never again. For me I’d rather own the common, have just as much safety and likelihood of rising dividends and capital appreciation. Or if considering them FI just buy bonds or GICs.
G/L
Good for you RBull. I don’t see inflation as a problem as my wife is also going to chip in $36K/year when she retires as a high school teacher in 2 years at the age of 53. She will have $300K in the same ETF’s as well so we are set up well to live in Ecuador or somewhere similar for several months of the year and in Northern Ontario the rest of the year. We live way below our means so money and inflation are not worries – good health and self-powered outdoor activities are our priorities.
I consider Prefs FI although when I bought $90K of the BMO Laddered Pref (ZPR) ETF and it dropped 27% in the beginning of 2016 I wasn’t so sure about considering that FI 🙁 . It sounds like you got hit the same way. Still, the BMO ZPR pays 3.88% so it brings me $307 a month of low or no tax dividend income. I’m actually considering selling all my bond ETF’s and buying high dividend equity funds – see http://business.financialpost.com/personal-finance/you-can-earn-50k-in-tax-free-dividends-but-theres-a-catch-you-cant-have-a-job
Good for you too Marko. Got it. My wife was a school teacher as well and took penalty, retired at 53. Pension in the same ballpark, but not indexed unless they fix the mess its in.
Sounds great on the lifestyle. We’re spending a fair bit traveling around the world for perhaps another 10 years or so and then maybe settle on one main winter spot that’s economical (if I can convince my wife). Otherwise we’re into the outdoors too and relatively basic lifestyle here on the Eastern Shore NS.
Yes, on the pref. I’m only off about 6K now but it is/was a lesson. I might do the same on dividend payers but not at this time early in retirement and markets where they are. I keep a sizable amount of cash. Only a small amount in a bond ETF, a number of individual corp bonds, and a growing amount in GICs. Also planning to delay CPP somewhere between 65-70 but we’ll see.
I think buying a basket of low-cost but dividend-oriented funds are a great plan in retirement. I noticed you mentioned you owned XDIV
https://www.blackrock.com/ca/individual/en/products/287823/
Almost 60% financials. Any other CDN ETFs you own to offset CDN bank stock risk?
Do you own any non-CDN ETFs for U.S. and international exposure? Thoughts on HDV or VYM or other?
Yes Mark – I have 30% of my equity in Canadian ETF’s, 15% of it in US equity and 15% in International equity – none of hedged. I have Shares XDG for US/INT as well as BMO ZWC and ZWU as well as ZDI so it’s a well diversified portfolio that’s as tax efficient as possible for me. I plan to get to the mecca of no tax dividend income equalling $40K to $45K per year.
Ha. That’s great! “I plan to get to the mecca of no tax dividend income equalling $40K to $45K per year.”
How does XDIV pay 4.75 % dividends, when very few CDN stocks pay that rate? Is that a sustainable rate of return?
Seems rather high to me but most of the top-10 are financials let alone almost 60% of the fund is CDN banks and lifecos and other financials. The yield on that sector is likely around 4% on average. Throw in a few pipelines and you’re probably very close to 4.7%.
I couldn’t find any return of capital yet on the fund, so it looks like all distributions.
https://www.blackrock.com/ca/individual/en/products/287823/#distributionsDialog
Break down of XDIV Fund
BMO dividend 3.83% weight in fund 9.03%
NTR dividend 3.15% weight in fund 8.99%
TRP dividend 5.13% weight in fund 8.94%
BNS divident 4.26 weight in fund 8.85%
RY dividend 3.83% weight in fund 8.85%
CM dividend 4.70% weight in fund 8.84%
SLF dividend 3.54% weight in fund 8.72%
PPL dividend 5.08% weight in fund 6.33 %
FTS dividend 4.13% weight in fund 4.87%
SJR.B dividend 4.54% weight in fund 3.3%
Top 10 holdings account for 76.72% of XDIV fund
3 holdings are at or above 4.7% yield, and account for 24.11% of holdings
POW dividend 5.03% weight in fund 2.98
GWO dividend 4.74% weight in fund 2.72
IPL dividend 6.88% weight in fund 2.6%
T dividend 4.61% weight in fund 2.5%
BCE dividend 5.59% weight in fund 2.31%
PWF dividend 5.36% weight in fund 2.25%
KEY dividend 4.61% weight in fund 2.08%
CIX dividend 5.67% weight in fund 1.91%
H dividend 4.71% weight in fund 1.78%
FCR dividend 4.07% weight in fund 1.0%
IGM dividend 5.83% weight in fund 0.90%
CAD cash 0.26%
Of the remaining 12 holdings, which account for 23.29% of XDIV fund
8 are at or above 4.7% yield, and account for 17.45% of holdings
So 41.56% of holdings are at or above the 4.7% yield.
Interesting math, not sure how that pencils out. But then again I’m not very smart.
Still puzzled
Good stuff. It seems to me about half of the funds are about 4.7% yield or more but the weighting might be low. I know from the site the yield is calculated by annualizing the distribution over the NAV of the fund. If the NAV of the fund is low, and the distribution has been rising, that makes the yield look higher than it is.
Great to read you came to a decision that’s working for you. Ha, on the correction that hasn’t come. I get it. Whenever it comes I’ll be ready and might increase equity weighting. In the meantime we’re fine.
CDN equities here all stocks -about 20; ETFs VTI, HDV, VXUS, IDV
To each their own. Indeed.
Have a good one!
I nice blend of income and growth RBull: CDN stocks + “VTI, HDV, VXUS, IDV”. You are set!
Well thank you. Time will tell!!
$3k per month in dividends from a 50/50 equity/bond split is a great income to have; a healthy portfolio to do so. Well done.
I think you’re VERY smart to delay CPP and OAS accordingly.
Isn’t that what a RRIF does?
True, yes, for the most part however VPW takes into account more than just the RRSP > RRIF. Converting an RRSP to an RRIF and then making minimal RRIF withdrawals is more a tax management issue. RRIF withdrawals can be reinvested into one’s TFSA and non-registered account. RRIF withdrawals don’t have to be spent. The idea of VPW is you spend the $ derived from your portfolio.
Mark, I have never seen anyone speak to taxable/non-taxable assets when heading into retirement based on some percentage of holdings. For example: $1mil in RSP, RIF and Lira and $.5mil in cash accounts. Is the plan to draw down 5% of all funds or just the taxable?
I haven’t figured out my optimal draw down approach yet Paul but I am considering the following order: RRSPs then taxable then TFSAs. Doing so will allow me to draw down tax liabilities that are my RRSPs and move any money not yet spent into tax-efficient (taxable) and TFSAs (tax free) before pensions or government benefits kick in.
For the VPW – this assumes across all accounts in total (not just registered vs. other) with the goal to go to “zero” around age 100 or whatever end date you specify.
Saying that, would you attempt to replicate a portfolio between RSP, RIF, Lira, TFSA, spousal TFSA and a joint Cash account or do you focus on specific holdings for each individual account?
Great question.
I know for my portfolio, I’ve got a mixed bags of assets across various accounts and I’m working on simplifying that over time with a few low-cost ETFs.
For us, my wife and I have similar holding across all major accounts:
-Taxable = all CDN stocks
– TFSAs = mostly CDN stocks + now XAW as of 2021
https://www.myownadvisor.ca/january-2021-dividend-income-update/
-RRSPs = some CDN stocks + U.S. stocks but really adding more U.S. ETFs over time
-My LIRA = U.S. stocks + ETFs and very minimal CDN ETFs.
To keeps things more simple than I have, you could absolutely replicate the same funds across various accounts – but asset location is a bit of an art.
Here is some related reading on that!
https://www.myownadvisor.ca/should-i-invest-in-taxable-accounts/
Cheers,
Mark