Yesterday, I went over the income projection of Dave’s $1 million portfolio that “should” last him for the rest of his life.  Today, I want to go over a few portfolio options to generate that income.

The Portfolio

As I am no where close to being a retirement expert, my investment knowledge for the years during retirement is limited.  However, here is my opinion on the matter.

If it was me with $1 million in cash, with a very low withdrawal rate, I would have a lower equity allocation than the suggested 50/50 split for greater capital protection.  Perhaps it’s my fairly conservative nature, but capital preservation is a high priority when the portfolio is your sole source of income.

But say I did go for the suggested 50/50 equity/bond split, what would I invest in?

The Equities

As the purpose of the portfolio is a combination of capital protection and income generation, I would invest the equity portion in high quality dividend paying blue chip equities, high quality preferred shares and perhaps some exposure to international indices/dividends for diversification.

As it seems that Dave doesn’t have a lot of investing experience, it may be best to stick to ETF’s as it reduces the complexity of choosing individual stocks.  Here are some examples of quality income producing ETF’s:

  • Claymore Canadian Dividend and Income Achievers ETF (CDZ) – This ETF follows the Canadian dividend achievers list which includes stocks which have a strong track record of increasing their dividends over the years.  The downside of this ETF is that the MER if fairly high (0.60%) but can be avoided if mimic their holdings via individual stock purchases.
  • Vanguard Dividend Appreciation ETF (VIG) – This ETF has a MER of 0.28% and covers U.S stocks that have a track record of increasing dividends over time.  Note that the higher the foreign dividend income, the higher the income tax.
  • Claymore S&P/TSX Canadian Preferred Share ETF (CPD) – This is the only ETF that I could find covers the Canadian preferred share market.  It’s has a MER of 0.45% with most of it’s holdings coming from the financial sector (85%).  Preferred shares pay dividends (low taxation) on a quarterly basis, offer the value of higher priority (and yield) over the common share dividend.  However, the downside is that they generally thinly traded and capital appreciation is not as great as the common share.

The Fixed Income

Having a higher fixed income allocation in your portfolio will reduce the volatility while generating a steady income stream but will limit the potential gains.  With all the various fixed income instruments out there, what would I pick?

Personally, I would create a bond ladder with government bonds that mature at the various years/rungs.  This will give you interest rate diversification providing you hold all the bonds until maturity.

But if I wanted to keep it really simple, I would pick ETF’s that cover a combination of real return bonds, short term bonds and corporate bonds with relatively short duration to reduce interest rate risk. Long term bonds, on the other hand, have longer durations along with a higher correlation with equities.

iShare’s offer various bond ETF’s at a relatively low cost.

  • iShares Canadian Short Bond Index Fund (XSB) – This covers the short term bond index with a fairly low MER of 0.25%.  All bonds within this index have maturities of between 1-5 years.
  • iShares Canadian Real Return Bond Index Fund (XRB) – Real return bonds are government bonds that adjust to inflation on a regular basis.
  • iShares Corporate Bond Index Fund (XCB) – This ETF will cover the Canadian corporate bond market with maturities of at least 1 year with a relatively low duration.  Corporate bonds generally have higher yields.  XCB pays semi annually with a MER of 0.40%.

Final Thoughts

So there you have it, if I was approaching retirement with $1 million in cash, my priorities would change from capital growth to capital protection and income generation.  Based on my mock portfolio above and  today’s prices, it would generate a 4.5% yield which is more than enough to meet Dave’s expenses without even touching the capital.

But what if Dave wants to buy a new car or other big item in the future?  I would suggest to save for it like anything else.  Perhaps even withdraw the difference between what the portfolio will allow and regular expenses, then deposit it into a TFSA mad money account.  What’s retirement without a bit of fun?

So what are your thoughts?  What kind of retirement portfolio would you come up with if you had $1 million in cash?

As I mentioned above, I am not a financial advisor. The above is not meant as recommendations but merely for informational purposes only.

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I would also invest the equity portion in quality blue chip dividend growth stocks from as many industries as possible. I wouldn’t invest in dividend ETFs however, because the annual costs of the fund eat your income every single year.
As for the fixed income portion I suppose you could either invest in government bonds with varied maturities or purchase certificates of deposit and ladder them up if they generate a higher yield ( but stay within the insured limits).
You could also allocate up to 40%-50% of the fixed income allocation to TIPs, to protect you in an stagflationary environment.

Perhaps my mindset will change when I actually get close to retirement, but even after this market meltdown I think of holding a high proportion of equities (solid, blue chip companies) that pay dividends is the way to go.

Why? Because I expect to live for another 30 years at least which to me, is a long time horizon.

Now, if the interest rates were not so low, then I would put more into the bonds but right now I would put it all into equities.

I’m not as conservative as others are but again looking at right now I wouldn’t be putting anything into bonds. In a few years, sure, but not right now.

I’d rather be more diversified – broad based equity ETFs in different countries ie Can, US, Europe, Asia.

How about just getting an annuity? No risks at all and he does not want to leave anything for his heirs anyways.

I would lean more towards Corporate Bonds and High Yield (junk) bonds in this case.

He has 30 years + to live on his income, why use gov’t bonds and GICs paying out very little interest. He has the cash and the time to outlast any minor issues he may come across in the corporate bond markets.

He can easily get 6 – 7% right now on Blue Chip Corps, so why settle for 3-4% on government bonds or the unknown in the equity markets?

Corporate bonds are becoming more and more attractive in this time. All of these large companies are having to re-finance their loans, and in these tough times, they are having to re-finance at higher and higher rates.

It’s almost the best possible time to get into this asset class.


What happens to an annuite if the insurance company that sold it to you goes bust?


High Yield bonds are nice to own, in bull markets. During bear markets when all that junk starts defaulting your interest income could get slaughtered like a pig.
As for dividends, they are not guaranteed. Companies could cut them. Government bonds are less likely to cut their interest payments.

I would likely go for an allocation of 40-60 (equities) : 60-40 (bonds).

Within the equity portion, I would still maintain a moderate to high risk profile (5:3:2 – Lrg, Mid, Small Cap), and want country diversification (1:1:1:1) – (Canada, US, EAFE, Emerging markets). Lrg and Mid caps would focus on dividend achievers.

The anchor of the portfolio would be the bond/GIC ladder. As someone in yesterday’s post mentioned, in ‘bad years’, you cut down on spending, but the fixed income portion could still provide upwards of 60-70% of the fixed annual costs. In good years, bank the gains from the equity portion and place directly into the fixed income portion.

Its tough though, to know what sort of risk tolerance I’ll have, retirement seems so far away ;-)

Dividend Growth Investor,

If the compnay goes bust the annuity would be protected by Assuris.

A life insurance company authorized to sell insurance policies in Canada is required, by the federal, provincial and territorial regulators, to become a member of Assuris.

FT- I really like your ETF/ low MER approach.

I would have taken 25% ($250,000) and put that into a GMWB / annuity style product. I have been very impressed with a few wholesalers for these products, who have been very vocal about not wanting more than 25-40% of anyone’s assets.

Assuris protects everything- nothing to fear on that end, but you still want to work with the more credible firms.

Tucker Wright

I’m 56, married and draw an income from a portfolio which at time of switch to a DIY account had $1,164,000. I bought 30% (12 in total) “perpetual discount” preferreds from CDN banks and insurers. 35% went into 11 bluest of the blue chip dividend stocks … plus RioCan REIT and Encana. Bought 50 grand of XCB Cdn Corporate Bond Index.

From this I have an income of $47,000 and still have 35% cash, waiting for the next leg down to buy more. And this is virtually tax free in BC thanks to the federal and provincial dividend tax credit.

I learned a lot from Tom Connolly who has only been buying Canadian Dividend paying stocks (when cheap) for the past 40 or so years. Read “The Investment Zoo” as well. You’ll never buy a mutual fund again.


Just out of curiosity, what are your “bluest” of blue chips you speak of?
Canadian banks, insurance and energy companies?

How much do you have to invest to make your $47 K/year income?
>$500,000 I assume?

I’m some 30 years away from retirement, but this doesn’t mean I don’t want to learn how to “get there” much, much earlier.

BTW – I enjoy these case-study posts FT, excellent way to get people thinking and sharing information.

About 770,000.

Banks: BNS, TD, RY, BMO
One Insurance Company: Power Financial
Utilities: Atco, Canadian Utilities, Fortis, Emera
Pipelines: Enbridge and Trans Canada Corp

RioCan – bought this well managed REIT as the one distribution (don’t read dividend here as it is taxed differently) oriented entity and Encana (only energy company) as the only “growth” investment.

You can dispute how “blue” they are … but I bought most of them when they were cheap. BMO at 26 bucks for example at almost a 11% dividend. That’s key – buy when they are cheap (P/E under 10 if you are patient). Same with the preferreds … I bought after the 30-40% decline which brought value not seen since 1993 – 94. Hence the nearly tax free income of $47,000 with lots of cash for more buying …

I don’t own income trusts or mutual funds. Stick to tax efficient dividend paying stocks with a history of raising their dividends. Many of the above raised theirs in the spring. The banks were fabulous income generators until the credit crunch last year. In BC the Dividend Tax credits offshoots your other income too (interest, capital gains tax). It’s incredible and legal. Every province is different.

Banks are the soundest in the world according to Davos “World Economic Forum”. The UK and US rank 40th and 44th I think. Anyway, Cdn Banks were in worse shape in the eighties with the Latin American debt explosion. During 1984 to 1994 they had to liquidate 40 billion worth of debt (includes Olympia and York default) and no dividend cut except National Bank. We were also a country with an ever increasing government debt with high interest payments which strangled us… one third of the federal budget was just interest on that debt! Canada is today well positioned to save our financial sector if the case was necessary but compared to other countries we are not in the same pickle … and with every resource the world (read China and India) wants. The future looks fantastic when we get over the multi year deleveraging which will keep the stock market in a up and down “range bound market” for … god knows how long. Last time 1966 to 1982. Study the period … and learn. Stock market went nowhere … but select dividend paying companies just kept pumping the income out.

Another excellent book is Katsenelson ” Active value investing in range bound markets”

Barry, do you subscribe to Tom’s newsletter? You sound a bit like him! I try to glean everything I can from his website.

Hi Barry, you invested all in Canada, is that a risk? What about diversification?

13. No, but fortunately there are two libraries in Canada which carry his newsletter, one of which is the West Vancouver Memorial Library, where I copy mine, and the other is the North York Library in Toronto. If ever you are near any of these two go inside and copy all the reports. You’ll be glad you did 10 years down the road.

I sound like him? Wow – now that was a compliment. I can tell you I spent over 20 years investing until one day I was walking along the southern coast of Turkey and suddenly he made sense to me. Imagine that.

I think Tom is brilliant, and just love the fact he figured it out himself and shares the information with others. It’s so refreshingly “unprofessional” I just love his “down to earth” commentary “. Example: “sorry no more subscriptions … me and Louise put the whole report together on our kitchen table”. No mutual funds, no bonds, no outside of Canada investments. Just income machines like the CDN banks and the others he follows on a list. For example. If you had 500 grand only in CIBC in 1996 you would have earned a $16,000 dollar income. Today if you never touched the principal that same capital figure morphed to 900 grand by Dec, 2008 and a $55,000 income because of all the dividend hikes!! Sure a year back the base figure was 1.6 million but look at that income … and it’s tax efficient. You have to be very very patient and be able to tune out media noise, the “all the rage” investment flavors of the month and cyclicals. It’s tough and at times gut wrenching but in the long run …

14. Diversification didn’t help anyone last year. Tell me the risks of investing in Canada as opposed to China and the US? You want to invest in China, go ahead but their markets are not very transparent. But you might do better than me. The US … not interested. Think about it. Which country is in better shape: south of the border or here? Canada’s government debt load is 29% of GDP and the US?? Remember when Dick Cheney said “deficits don’t matter” … I thought smoking pot was illegal down there. And just look at the growing tax efficient income from Canadian companies which raise their dividends on a regular basis like Fortis – 36 consecutive years! Everything I bought I understand … and that’s important … to me.

You have to honestly understand who you are and what kind investment you can tolerate. Sit in a room quietly and figure that out. Watch BNN and monitor your emotions. Stick to it and learn. I have a friend who is a confirmed trader and he couldn’t stand what I do, although he sees merit in it. And he is successful most of the time. I don’t think he would be successful at what I do.

I believe we are in a secular bear or range bound market which will see swings yo yoing for years until personal, public, and corporate debt is paid down. Companies with lots of cash flow, manageable good debt, intelligent management and profitable operating budgets will thrive in this market. As the baby boomers age they will be looking for income generating investments if they continue to invest in stocks. Which ones do you think they would choose?


Are you sure they are available at the Toronto library. Took a quick look via the online catalog and did not seem to find anything under his name. Perhaps I was looking in the wrong spot?


Thanks for the insight on your “chips”. This is the year I’m starting to work my way out-of index and equity mutual funds, into DRIPs of CDN companies.

I got ENB now, got a couple thousand in that, and trying to put a few thousand more during 2009.

Later this year, I’m going to try and buy BMO, a put a few thousand into that.

I figure that’s a good starting point. Like you, I want to amass a few hundred thousand in CDN divident payers over the next 20 years, and then retire with a steady stream of dividend income.

Hopefully I’m following the same path you did, since your $47 K/year seems pretty nice and comfortable. Congratulations and well done.

Thanks for your insight Barry!

I wish you well. You’ll make plenty of “mistakes” along the way. I certainly did/still do. The key is patience and learning to understand what you can tolerate as you will experience a “sure thing” turning sour … momentarily. Again, we are going through an ongoing disruptive multi year correction of bad habits accumulated over the past 20 some odd years. This will reflect in the stock market. There will also be times when certain stocks or sectors will become sexy and skyrocket while yours will dawdle. As long as those dividends keep coming this won’t matter very much as eventually – if the stock represents true long term value in price – it will rise. The tortoise wins the race.

You will also hear a lot of talking heads, elite members of the chattering class on TV, spout all kinds of well honed arguments as to why oil will reach 1000 dollars a barrel, or else the Dow is headed to 36000 or 1000, or else Gold is going to $2000, or inflation is going to make the seventies like a tea party, or we’re headed to a Depression. It ultimately ends as white noise because nobody knows, only believes. What you have to figure out is how to find the best way to avert a loss of income in case any of the above may be true.

My answer is a belief in the portfolio I outlined in the above previous post(s). If that’s suitable for you, great. Before you change your mind I will strongly encourage you to study, not just read, everything Tom Connolly writes on his website as a primer. Imagine, this is a man who says, “if you can’t afford to buy this book go into a bookstore and read pages 96 -97 and 214. ”
When I read that I thought this guy isn’t trying to con you. He’s the real deal.
Study the books he suggests. His favorite is “The Investment Zoo” written by Stephen A. Jarislowsky whose life has been extraordinary. I’m sure it’s in your local library. I borrowed a copy and scanned it.

I failed to mention two other stocks I own … Metro and CNR.

Barry, I like your portfolio… those are the some of the dividend paying stocks that I’m looking at for a Smith Manoeuvre.

What if you are not nearing retirement and you finally hit that $1 million dollar mark? Do you change your investment focus, or stick with it? Do you become more conservative to now preserve the $1 million? I am not so sure why it should matter whether you are approaching retirement. It seems like at some point you have to say, I’m comfortable with the level of assets that I have and now my focus should be on conserving what I’ve made and give up a little of the crazy high returns for the decreased risk. Thoughts?


First, I would look at the ‘mark’ to be your own personal number, whether that is $1M, $800k, $1.5M whatever. The mark, for me, would be less important than the cash flow it could generate. Once it has sufficient buffer to be able to provide me with cash flow necessary to retire, then I’ve done it. Whether I choose to retire or not at that time then becomes a choice I could literally make every day.

Depending on how old I feel and what I want to do, I could decide to keep working. That would give me even more flexibility to stay the course and perhaps I would make new investments in a more conservative way to mitigate risk of a downturn. If on the other hand I decide I want to stop working, then I would be wise to fortify my position by moving some investments from equities to less risky investments. Hopefully I was prescient enough to do this gradually before that day. I probably would delay this transition if my equities are in a trough and wait until they returned to more normal values.

But one thing I try to keep in mind – if I retire at 55 for example, I still have to think of a 30+ year time horizon for my investments. That is a long term view by most anyone’s standards.

Hi Again Barry,

Are you speaking about the Connolly Report?
Is there a direct link you can provide to this report?

Also, I will probably buy the Investment Zoo for summer patio reading.
I’ve heard about it, but based on your post in this blog, you have convinced me to buy it.

Cheers Barry,

It’s not the report but Tom Connolly’s Blog.

I enjoyed “The Investment Zoo”

Thanks again Barry.



Would he like to have less risk, pay less taxes and have more money?

Part of this answer would be to read my story on insured annuities.


Great question! Assuming the 60 is going to be around awhile,buying an annuity at age 65 (five years from now) is the better idea. Lets assume rates remain low, the…. taxes…. one pays more than offsets the the low interest rates. In fact a 6% GIC rate is needed to beat it (for most situations).


The distribution is not as simple as say a 4% distribtion. Taxes are much lower and the payout is guaranteed (annuity). Remember 2008? The balanced portifolio lost about 20%. If you were in your 60’s there maybe a chance you’d never recover since you are pulling out money every month.

As an aside, getting an annuity at age 60 (male) for $100,000 would pay $6,600 per year and only $1824 would be taxable. For life, guaranteed.

FT, take a another look at my example below… for the annuity story below.

Back to Back Annuity (insured annuity)
This example compares GIC vs a life annuity with a matching life insurance policy.


?Current GIC rate 3.25% (five year rate lock-in)
?65 year old male purchases $100,000 non-reg annuity and $100,000 life insurance policy
?Tax bracket 31.41% ($40,970 up to $65,345) Ontario

Insured annuity GIC
Gross income $8,165.28 $3,250
Taxes payable $742.90 $1,012.37
Life insurance $3,240 $0
Total net $4,182.38 $2,237.63

After taxes are considered, a GIC of over 6% is needed to equal the annuity. At higher tax brackets, a GIC paying over 8% is needed! Also, under the annuity strategy, he pays less tax as he is showing less taxable income and is less susceptible to OAS claw backs and age amount (age 65) claw back.

You will note waiting five years later the payout increases and the taxes payable drops!

Hey FT,

The annuity is return of income (that’s why taxes are low) also life expectancy. Since the insurance company know X amount of males will die and X amount will live the payout is also based on this. Also working in favour here is our high taxes. If taxes were low and goodies like OAS and age amount were not taken away from us then the annuities may not look as good.

When you get the book I promised there will be another great idea… I show you that you can lower taxes and have more more in retirement with less risk…assuming non-registered money.