Friday Reader Case: How Should I Position My Portfolio For Retirement?

Wanderer
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Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
Wanderer
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Hey hey hey! It’s Friday, so it’s time for a reader’s case!

Hi FC!

I’ve been studying FIRE seriously since 2014, and I was hoping to pull the plug next year, or at least seriously decrease my day job, so I can work on my side hustle and enjoy time with our kids. Most people our age are in the accumulation stage and think I’m nuts. My husband is willing to work for another year or so, but is increasingly interested in FIRE also.

My gross income $182,995.66 + side hustle (haven’t calculated this past year, but usually <$10K)
Husband $116,000.00

Annual family spending $60,000. Does not include spending for my job & side hustle, which is about $78K (a good chunk of the latter is taxes, but also accountant, professional dues, etc.).

No debt. House & 2 cars paid in full, although house will need repairs.

2 kids.

Investments: ~$2M

I’m trying to move us to a 60/40 stock/bond split in anticipation of FIRE. Right now, we’re at about 67/33. I’m happy to send you the whole spreadsheet through Sync, should you be comfortable with that. This includes $160k for our kids’ education.

Husband has a defined contribution pension, I think it’s called, for which he’s not eligible until age 55. If he cashed it out instead, it’s worth another $155K. I have no pension.

We are Canadian, so I’m not too worried about health care. We have room to reduce expenses, although we anticipate that any graduate school for our kids would make that difficult.

 

I’m trying to do Justin Bender’s suggestion of splitting between GIC’s and bond funds: https://www.pwlcapital.com/en/Advisor/Toronto/Toronto-Team/Blog/Justin-Bender/December-2017/The-Most-Boring-Battle-Ever-Bond-ETFs-or-GICs

1. Does this split look reasonable? I know we’re overweighted in the U.S., but I love the returns compared to Canadian and even international.
 
2. Simplifying our accounts. We have a ton of accounts. I’d like to move from MD Management to Questrade, but Questrade won’t cover more than one account per household, and I saw one MDM fee schedule that was $315 per account, and we have at least 9 MDM accounts. Questrade said the best it could do was offer us some free trades per account. I know you two are the optimizers, so please help!
 
3. Worried about actual retirement. According to you and FIREcalc, we’re good to retire. But Moneygeek, for example, has a retirement calculator for members only (https://www.moneygeek.ca/members/retirement-planner/#) that suggests I need to work through 2019 to get over a 95% success rate.
 
And the questions you might not be able to answer…
4. Bond options for corporate/US accounts?

But I hate how all my bond funds are in the red, and GIC’s will only keep up with inflation if I lock them up for 4-5 years.
I’m struggling to find decent GIC’s either in USD or for a corporate account.
I did buy some preferred shares and already have REIT’s.
 
5. Some people max out their RESP and forgo the Canadian grant. Others say you can invest outside the RESP and transfer it in and still get the grant. We’ve been doing the latter. Not sure which is best.
 
~~AboutToFIRE

 
So, to be honest, when I initially read this email I was like “I’m not doing this one! They’re too far ahead! My analysis will just be: You’re Done. Go away.”

But then I took a look at their rather detailed portfolio and I thought, hey this could be interesting to dissect. So here we go.

First of all, You’re Done. You can retire tomorrow if you want. With a 2M portfolio and $60k spending, you’re sitting on a 3% Withdrawal rate which has a 100% success rate. So pack up your things and ride off into the sunset.

But AboutToFIRE has graciously provided us with her investment allocation, so let’s take a look at that and see what we can see here? After that, we’ll answer her questions.

Now before we start, let me again emphasize that anything I say is NOT investment advice. I am not a certified financial advisor, and anything I say should be vetted with a fee-only financial advisor before implementation.

The Portfolio

OK so let’s take a look at this allocation. Looks like AboutToFIRE has been 67%/33% while working, and now wants to move back to 60%/40%. Smart. That’s the allocation we used when we retired, and as we’ve been been writing about the past few weeks, it creates a nice Yield Shield that you can use to power your early retirement.

So before we begin, let’s bring that table back again, shall we?

OK so what do we notice here?

Cash Should Not Be Part Of Your Asset Allocation

I don’t know why people do this. Not the part about keeping some money in cash, that’s fine. But nailing it to a percentage of your portfolio.

Cash should have one job and one job only: To finance your short-term day-to-day expenses like food and booze. Cash should not be a line item in your investment portfolio, because cash dose nothing but sit there.

Keep a cash cushion, as I’ve written about here, separate from your investments. And keep enough of it to finance 3-5 years of living expenses (after accounting for income from the Yield Shield). After that, your target allocation for cash in your investment portfolio should be 0%. Cash isn’t an investment.

You’re More American Than You Think

You’re surprisingly pro-American for a Canadian, and I get it. The S&P 500 romped ahead 21% in 2017! Personally, I’ve maintained a neutral weighting on (20% Canadian, 20% American, 20% International), but if you want to tilt towards the US a bit more, fine. Your target of 32% isn’t too nutso.

However, your International allocation is using a Global Ex-Canada fund. Remember, a Global Ex-Canada fund actually includes the US as part of it. I looked up a typical global Ex-Canada fund like VXC, and 54% of its holdings are American! So while you think you’re 32% allocated to the US, you’re actually closer to 32% + (54% x 10%) = 37.4%.

I don’t think that was intentional. You may want to consider consolidating that holding into an EAFE fund like XEF.

But Otherwise…

Good job! No seriously, you’ve done a great job creating a balanced, diversified portfolio that has gotten you and your family onto the cusp of early retirement. You’ve obviously done a ton of research, are familiar with the FIRE blogs, and need very little help other than a thumbs up for someone who’s done it before.

So officially: Thumbs Up!

Now Onto The Questions!

OK then, AboutToFIRE had a few other questions for us, so here are our answers:

Q1: Does This Split Look Reasonable?

After a few minor tweaks, yes.

Q2: Should We Simplify Our Accounts?

I don’t know. I don’t know what MDM charges to manage your accounts, but here’s what you do to decide. Figure out how much you save per year with a low-cost brokerage like Questrade vs. MDM. If that’s more than the transfer fee, just pay the transfer fee and move it on over. If not, stay put. Easy peasy.

Q3: Worried About Actual Retirement

Shyaddup.

Let me put it this way: Our retirement numbers aren’t as good as yours. If we could switch places with you, we would.

You’re good to go. FIRE away.

Q4: Bonds vs GICs

To our American readers, GICs are like CDs. In that they both suck.

Don’t buy GICs. I’ve been interested in money stuff since I graduated in 2006, and at no point in time have GICs ever made sense. Lock my money up for 5 years for 2%? I can make more in an online savings account!

GICs can go F#%@ themselves.

Q5: RESPs

“Some people max out their RESP and forgo the Canadian grant.” These people are what we call “Idiots.”

For our American readers, RESPs are tax-free savings accounts we use to save for kids’ education. Kinda like your 527’s. Only, you know, better.

RESPs take in after-tax money and shelter any gains from further tax. Only for every dollar contributed, the government will match 20% of it, up to a maximum of $500 a year. So you can contribute $2500 a year, and have the government give you a guaranteed 20% return on your investment.

You also have a lifetime limit of $50,000 that you can put into an RESP account. So if you dump a full $50k into the RESP in one year, you only get government matching of $500, then you can’t contribute anymore, meaning you will have permanently lost out on free money you could have gotten.

So absolutely do not listen to that idiot friend of yours who just want to dump money into the RESPs. Invest outside, and gradually transfer $2,500 into the account each year.

Over To You

And now, over to you. What do you think? What should AboutToFIRE do with her portfolio? Let’s hear it in the comments!

For the new readers joining us, this post is part of a re-occurring series called “Friday Reader Cases” where, every other Friday, we analyze the financial situations of readers who write-in and encourage feedback from the Millennial Revolution community in the comments . You can read the rest of the series here.



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42 thoughts on “Friday Reader Case: How Should I Position My Portfolio For Retirement?”

  1. Wow! Nice job guys. This is where we all want to be. I wish I could put a gif in the comments so I could give you a standing ovation.

    The only hesitation I would have is sequence of returns risk. We look like we are right at the top of a global expansion at the moment. Personally, I’d scale back work, and then quit fully at the nadir of the next recession. This is just a little bit of insurance for you.

    I would also check out Wanderer’s advice about 3-5 years in cash. That puts your cash needs at more like 15%. Another insurance policy against sequence of returns risk.

    But yeah, hats off to you.

    1. Yeah, just the general process of winding down their careers will probably build this cash cushion up for them. I’m not too worried about sequence of return risks with a 3% withdrawal rate.

  2. Everything seems good to fire away. My situation is somewhat similar.
    -MDM is kinda a ripoff if you have to belong to the CMA, or pay any fees.
    Last time I checked questrade levied a $500 fee for corporate accounts; I figured it was simplist, and cheapest to just go with one of the big banks (the same one that my accounts were with). Yes the trade fees are a bit higher (but tax deductable).It forces you to only do a few trades a year . It is a pain switching brokerages for corp accounts though
    – For bonds in a corp account you might want to look into the horizon swap etfs (HBB/HTB)
    congrats

    1. Good points, Oscar, except HBB’s value doesn’t impress.

      Does anyone else have good corporate bond suggestions? Justin Bender uses ZDB & GIC’s. In general, business accounts get worse interest rates.

      AboutToFIRE also asked about USD bond options, but BND’s been lackluster too.

      Seems like we have to take higher risks with preferred shares or corporate bonds, or we eat crappy returns. More tiny violins!

  3. Hey Wanderer,

    Love the website, long time reader, never time caller. There’s a request in this case study to obscure their ages, but the ages have been kept in.

  4. 2 million in assets is doing really well. They probably could FIRE today and be fine… but there’s always the possibility of a giant correction.

    Could they live off only $1 million for a few years? That could be a “worse case scenario”.

    In regards to the portfolio complexity — Unless there’s too much complexity, I don’t see any need to simplify the portfolio here. A few extra accounts isn’t going to hurt much.

  5. Pretty stellar numbers, I applaud you both. I think you can start thinking about the next stage for your family and how you’d like to spend your time going forward.

    I also echo Wanderer’s recommendation to pull a bit more out of US stocks. After such a good run and appreciation you want to make sure you’re balanced.

    1. Too be honest, after last year’s run I was also tempted to increase my US weighting, but I had to fight my own instincts to keep it balanced. It’s TOUGH not wanting to chase your winners, even for me!

  6. This is great, way to go! Definitely seems like you could both retire today if you wanted. Reading this does make me want to go back now and read case studies of people who FIREd with much lower incomes though…

  7. I have a couple of thoughts to add for consideration:

    1. I agree that cash should be kept separate and out of the “portfolio” per se. However, if you really want to buy GICs, then I think you should go get a high interest savings account with an online bank instead. They also pay around 2% and you can access your money almost immediately.

    2. I also agree about not maxing out your RESP. But there is one case where it could make sense. For each child, there is a lifetime max grant is about $7200. So that means that any contributions beyond $36k are grant-free anyway (0.2 x 36k = 7.2). So if you wanted to max out, do it with the $14k difference between $36k and $50k, then gradually transfer $2500 each year thereafter. Your $14k will grow tax free for years, and you will still get your free $500 each year as you go along.

    1. Oh, yeah, that totally makes sense. Good catch.

      And as for GICs, at no point in my investing lifetime have GICs ever made sense when I get just HISA-hop for the same interest rate.

      1. Actually, that’s not quite true. A 5 year GIC pays 3.25% at Oaken Financial and a 5 year GIC ladder comes in at 3.09%. GIC’s are a perfectly good alternative for those who don’t like the short term losses of bond funds when interest rates rise. Over the long term bonds and GICs give a portfolio very similar returns and volatility, so essentially serve the same purpose.

  8. Well done! I would prefer higher global share percentage but you are in great position 15-20 Years in front of me!

  9. Hang on, wouldn’t it make sense to buy GIC’s in something like an RRSP, where you’re already locked in until you convert it to a RRIF or slowly withdraw it like what you’re doing?

    But yeah, good job, About To FIRE!

    1. An RRSP isn’t really locked in, you can withdraw it anytime. Besides, like Chris Urbaniak said, you can just get the same interest rate in a HISA. Why bother?

  10. Sounds good … if you don’t like bonds …then the reits and preferred shares that wanderer mentions are worth a shot…we have around 2.5 + plus mill … in our overseas context with no hope of later government pensions because of our long term non resident no tax status… so their hesitation.. . I understand … so cutting down to half time or 1 income might be fine … I teach overseas and staycation or travel 3 months per year CPO

  11. I never have any career luck (not even averagely good) throughout my life. Most of what I have now are just the result capital gains, not income. What kind of a job would pay over $15,000 a month, or $182,995.66 a year?

    1. Doctor, most likely. Especially since they’re considered small business owners and have to save for their own retirement, etc…

  12. ““Some people max out their RESP and forgo the Canadian grant.” These people are what we call “Idiots.””

    These people probably don’t care too much what you call them if they can end up ahead in the end. Although it’s usually not a good idea to put in the full $50k up front, contributing more than $16.5k can absolutely make sense in many cases. This is because the benefit of tax-free compounding can outweigh the loss from forgoing the grant. The optimal amount to contribute up front will depend on your marginal tax rate and rate of return, but here is a more detailed analysis:

    https://www.michaeljamesonmoney.com/2012/10/is-lump-sum-or-annual-contributions.html

      1. As I mentioned, the benefit of tax-free compounding can outweigh the loss from forgoing the grant.

        Say you’ll realize 5% of investment income per year and your after tax rate of return is 2.5%. For the grant money corresponding to the 14th year (the last year when the full $500 grant is received), you have a choice between a) transferring $2,500 from a non-registered account into the RESP immediately and foregoing the eventual grant, or b) leaving $2,500 in your non-registered for 14 years and then transferring $2,500 into your RESP and receiving the grant.

        In a) you will end up with $2,500 * 1.05^14 = $4,950 in your RESP after 14 years (no grant is received). In b) you will end up with $2,500 * 1.025^14 + $500 = $4,032 ($3,000 in your RESP and $1,032 in your non-registered account). Not only do you have more cash in a) (in spite of forgoing the grant), but the entire amount is sheltered in your RESP for 4-5 more years so you get even more tax-free compounding.

        You can do a similar analysis for year 13, 12, and so on to determine the optimal up front RESP contribution amount.

  13. I beg to differ with the comments regarding holding cash. Cash only does nothing if it’s under a mattress. Stockpiling cash (2.5% with Tangerine) waiting for a buying opportunity isn’t a bad strategy. There are 3 basic asset allocations – stocks, bonds and cash.

    1. Yes, I tend to hold cash in a T-bill, or interest bearing certificate, and cash in when required, such as our RESP. You also want cash to buy in when a market tanks.

      1. When will I know “when a market tanks”, recently I’ve seen dips of $25k over several days, is that tanking?

        What I really would like to know is what is the trigger point where we start drawing from the Cash Cushion? Like a parachute, I don’t want to open it too early (in the plane) or too late (6ft from impact). Thanks in advance.

    2. Don’t fib, 2.5% for six months… then 1.1 %

      “Special offer: Become a new Client and you could earn 2.50%† interest on your first Tangerine Savings Account for 6 months‡. ”

      Remember, Anything less than 2 % is negative as inflation eats it up…

  14. Wanderer,

    Very curious about your blanket dislike of GIC’s. My HISA can give me 2.3%. A 5 year ladder will top out at 3.2%.

    I’m looking to preserve capital and roughly keep pace with inflation in the first few years of retirement (SORR). I’d been looking at two years in the HISA and years 3-5 in GIC’s.

    Bond funds don’t preserve capital and the HISA gives up significant yield differential. Would love to know your thoughts on this combo and how I could do better. Is it just the locked-in nature you don’t care for?

    Love the site. Thanks for doing these!

    1. That combo looks fine to me. I wouldn’t put money you need within the next 5 years in equities. As recently as 2000-2006 it took 6 years for the market to recover.

  15. Your post on the Cash Cushion got me thinking about an implementation that could provide a higher rate of interest than cash in a savings account, while at the same time, avoiding locking any cash away for five years. Here’s what I’m thinking of doing (I’ll call it the “Just In Time Money Train”): It’s 24 x two-year auto-renew GICs, with each one of them renewing on a different month over a two-year period. The value of each GIC will be sufficient for one month’s spending, and the value will grow because the interest earned will be added to the GICs’ value. When the mother of all market crashes occurs, we’ll just start cashing the GICs instead of drawing down our investments.

    There are other GIC permutations that could be deployed to provide a longer period Cash Cushion e.g. 36 x three-year GICs (three-year Cash Cushion), or two sets of 24 x two-year GICs (four-year Cash Cushion). The idea is to set it up and just let it run forever. As for the problem of needing the cash in an emergency, we’ll also have a separate small cash emergency fund, however, during our working lives we’ve always had to wait for payday to address many emergencies, now we’ll wait for the monthly Just In Time Money Train to arrive.

    I’d be interested to know if anyone sees any problems with this plan.

  16. Congrats! With a withdrawal rate of 3%, recommended for early retirees, you’re there. Done. A couple of thoughts, though. I’m not a fan of focusing on yield at any time, including retirement. Doing that creates a less diversified portfolio, which will have a wider dispersion of returns, which on average will be less than a more diversified portfolio using a total return approach. Withdrawing from a total return portfolio is described here.

    http://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/

    Now, the good news is at retirement you don’t need to change anything as you are already using a total return approach. I’d tweek it a bit, as Wanderer has suggested, equal weighting Canada/US/international. Valuations are high in the US market, so I wouldn’t be overweight there. It’s a good idea to have 2-5 years of cash (mostly in the form of GICs) in retirement, but that should definitely be counted as part of your fixed income allocation, because it is. I didn’t know MD Management charged so much for each account. That’s insane. I’d move everything to one of the big banks that don’t charge any account fees, just trading commissions. Bond options for corporate or personal taxable accounts: I’d go with the discount bond fund ZDB or the swap based ETF, HBB, or GICs. But keep enough bonds for rebalancing as described in Justin Bender’s article you referenced. That’s exactly the ratio of bonds to GICs I use. Remember that the bond values you see in your account are just the price, not the total return, which is what matters. As interest rates rise, you will see some red, but maturing bonds are reinvested at the new higher interest rates, so over the duration of the bond fund, you will not lose money. I wouldn’t bother with US bond funds. They just add unnecessary complexity. Reits and preferred shares are stocks and will be have like stocks, so are definitely not bond substitutes from a risk management perspective. Good luck with your retirement!!

  17. Dear Wanderer,
    Were you referring to the US 529 (not 527) education savings plans in your answer to question #5 ?

  18. Have a look at this: http://www.in2013dollars.com/2008-dollars-in-2018?amount=100

    Based on this, if you retired in 2008 with a million dollar portfolio that was able to support you, by 2018, you would have had to grow that portfolio to be at least 1,115,065.00.

    The folks who run this website seem to be able to do that (I believe they have posted somewhere that their portfolio is currently 1,250,000?)

    So they are a little ahead.

    That is the largest problem I see with relying on a portfolio for early retirement. You need to ensure that not only is the portfolio able to support you without being reduced in capital (ie, you have to keep the million in place, and be able to draw out capital gains and distributions, without disturbing the principal), but it also has to increase in value each year, at least by the rate of inflation.

    Otherwise, in 20 years’ time, you will be trying to support yourself on roughly 1/2 of the amount you started with, even if the principal amount does not change.

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