Case Study: 60 Years Old, Lots of Cash, No Portfolio – The Portfolio

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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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Brian Poncelet
10 years ago

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.

Brian Poncelet
10 years ago

FT,

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.

Example:

?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!

Brian Poncelet
10 years ago

FT,

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).

Brian Poncelet, CFP
10 years ago

FT,

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.

https://milliondollarjourney.com/how-annuities-work.htm

Mark
12 years ago

Thanks again Barry.

Cheers!

Barry
12 years ago

It’s not the report but Tom Connolly’s Blog.
http://www.dividendgrowth.ca/dividendgrowth/

I enjoyed “The Investment Zoo”

Mark
12 years ago

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,
Mark