A Simple Retirement Plan Using T-Bills/GICs

[twocentsworth]

Another of Milevsky's works which pointed out that with enough time and annual savings, equities were not needed to build a nest egg (that could then be "pensionized" with annuities).
Safe, too!

http://www.yorku.ca/milevsky/Papers/CIR1996A.pdf

[OhGreatGuru]

This paper was published in 1996, and was based on T-bill, GIC & TSE returns from 1950 to 1993. It might have a different conclusion if it used fixed income rates from the recent decade. From 1950-19993 the lowest 6-month T-bill rate was around 3%, and it peaked at over 20% at one point in 1981. T-Bill rates hit a low of 0.3% in 2009, and I don't think they went over 6% in the past decade.

[twocentsworth]

True enough, but stocks were slammed this decade as well -- especially if your time line for retirement was right after the BIG hits in the market. Can't remember the last time that T-bills or GICs were in negative territory.

My point is -- and Milevsky's paper mentions this also -- that if you start early enough (say with a 30 year time horizon) and pile up enough cash annually in even the safest investments, then equities are not a necessity.

[BRIAN5000]

My point is -- and Milevsky's paper mentions this also

Finnally someone who agrees with me.

[Flights of Fancy]

Try reading Zvi Bodie's Worry-Free Investing, as well. I think you can download a copy from his site for $5 USD.

[patriot1]

if you start early enough (say with a 30 year time horizon) and pile up enough cash annually in even the safest investments, then equities are not a necessity.

That's a truism. What matters is whether it's possible or cost-effective to save enough money to do it.

[BRIAN5000]

Try reading Zvi Bodie's Worry-Free Investing, as well. I think you can download a copy from his site for $5 USD.

He has a series on ten video's I will watch agian. Video number 8....stay in the labour force and work till your 70, blah !!

That's a truism. What matters is whether it's possible or cost-effective to save enough money to do it.

Using the Manulife calculater, linked elsewhere, retiring early (55ish) with a 4% inflation rate with a 60/40 or a 40/60 portfolio (no CPP or OAS) drawing ONLY $33,000 only gives 80-81% RSQ on a 2 million dollar portfolio.

3% inflation bumps it up to 88-90% the higher number on the heavier fixed income weighted portfolio in both cases.

[twocentsworth]

Zvi Bodie is my hero.
But I got his book at the library and it cost me nothing.

Savings rate? According to some, we need to ramp it up a wee bit:

http://www.theglobeandmail.com/report-o ... le1504390/

http://www.theglobeandmail.com/globe-in ... le1662505/

http://www.theglobeandmail.com/globe-in ... le1657272/

[twocentsworth]

if you start early enough (say with a 30 year time horizon) and pile up enough cash annually in even the safest investments, then equities are not a necessity.

That's a truism. What matters is whether it's possible or cost-effective to save enough money to do it.

Well, actually, I stretched the truth : If you consider a home as your equity holding, then the pile of fixed income that you've been diligently adding to each year can be topped up with a home sale or two at the right time. We plan on down-sizing into a smaller community at retirement and will add that healthy cash "bonus" to our stash.

And, in the RRSP, use Bodie's approach and go with Real Return Bonds (when they're up). To cover deflation, I offset the inflation-beating RRBs with long govt strip bonds going out 30 years (bought in the late 1990s when you could still nail down 6.5%).

Works for me.

[twocentsworth]

Are you on target?

Check it out:

http://www.theglobeandmail.com/pages/retirementplan/

http://www.theglobeandmail.com/globe-in ... le1292666/

But Trahair's advice on starting at 50...a big raspberry to that. Start your saving young and get the house paid off ASAP and then go to town piling up the cash in your RRSP too.

[bones1]

Using the Manulife calculater, linked elsewhere, retiring early (55ish) with a 4% inflation rate with a 60/40 or a 40/60 portfolio (no CPP or OAS) drawing ONLY $33,000 only gives 80-81% RSQ on a 2 million dollar portfolio.

3% inflation bumps it up to 88-90% the higher number on the heavier fixed income weighted portfolio in both cases.

$33k (I assume it's also inflation protected) is a pathetically small withdrawl on a $2M portfolio. What that calculator seems to be telling you is either:

(1) It's wrong, or
(2) Invest in real-return bonds and double your retirement income with zero risk.

Given Manulife's horrible stock performance, I'm betting that it's option (1). Their incompetence likely extends to their calculators too.

[BRIAN5000]

$33k (I assume it's also inflation protected) is a pathetically small withdrawl on a $2M portfolio. What that calculator seems to be telling you is either:

(1) It's wrong, or
(2) Invest in real-return bonds and double your retirement income with zero risk.

Yeah, I'm going with Gummy's spread sheet, withdraw 3% and spend 50% of the extra's. The kid may end up being "Richer than she thinks."

Now back to the Asset Allocation battle.

[twocentsworth]

Asset Allocation Battle? I thought I covered that already.

[twocentsworth]

Piling cash up at this point in time may not be a bad idea....

http://www.creditwritedowns.com/2010/11 ... 80%99.html

Watch the video and think long and hard about having a significant holding in stocks.

[twocentsworth]

Or, gulp, just pile it all up in a savings account!

http://www.moneysense.ca/2010/04/05/how ... ire-at-45/

[BRIAN5000]

Or, gulp, just pile it all up in a savings account!

http://www.moneysense.ca/2010/04/05/how ... ire-at-45/

They should of at least had 5 year GIC ladders and would have been earning a lot more.

Less then 1 % on 1.28 mil!!!

[twocentsworth]

With 1.8mil at their disposal, they could bury the stash in their backyard with no return and still survive.

$30-40,000/yr = at least 45 years of income (with CPP and OAS added as inflation protectors along the way).

Stocks? Don't need: http://network.nationalpost.com/NP/blog ... ities.aspx

(Observation/analysis by Milevsky again! )

[twocentsworth]

Now about that 5-year GIC ladder....

http://www.moneysense.ca/2010/10/21/fix ... and-sound/

"One of the biggest knocks against GICs is that they usually have terms of five years or less [CDIC doesn't insure anything longer]. "Anyone who hasn't invested in fixed-income securities longer than five years has been a loser over time," says [bond expert] Hank Cunningham. Since the late 1990s, 10-year Government of Canada bonds have yielded about 1% more than five-year GICs on average. "That's a lot of compounding left on the table."
Cunningham's preferred strategy for fixed-income investors is to build a 10-year bond ladder: you invest 10% of your money in a bond that matures in one year, another 10% in a two-year bond, and so on up to 10 years. Every year one of the bonds will mature, and you reinvest it in another 10-year bond. This strategy smooths out your returns and risks over the long term."

Of course, the risk of escalating interest rates is greater these days than a few years back. Maybe allocate 10 to 20% of that pile each year over a longer time frame?

[twocentsworth]

Another take on the safer-is-better, mainly-GIC route:

http://www.theglobeandmail.com/globe-in ... le1493987/

[BRIAN5000]

Looks like he's reccomending about a 35% equity 65% fixed income split. I've been thinking about this for a while. For me I think its more a question of greed and fear. Somewhere between a 30 to 40 % equity weighting (stocks) is what I think will end up at. Once you include real estate it moves to more of a 50/50 split. Should be enough to handle inflation, income needs an inheritance.

[twocentsworth]

I just noticed that the link in my original post no longer goes to Milevsky's 1996 paper: Risk Adjusted Retirement.

Here it is again:
http://www.spectrumfg.com/files/41899/R ... rement.pdf

Well, 35/65 or 50/50, ya still gotta have the bucks saved. And these days, it's becoming clearer that the middle-class is shrinking and there are now two growing segments of society: Them that have and them that don't. Outrageous executive compensation at the top and penny-pinching wages at the bottom.

Regardless of returns in retirement, I'm just damned glad our family income is such that we can sock away a significant amount each year and take early retirement. If we have to scrimp a bit later, far better than having to work until 75 or 80 at low-paying jobs.

[adrian2]

Stocks? Don't need: http://network.nationalpost.com/NP/blog ... ities.aspx

(Observation/analysis by Milevsky again! )

Now, wait a minute, you might cry: “What exactly was Robert holding all these years? You are cherry picking!” Well, I assumed Robert was holding typical funds linked to Canadian and U.S. Equity indices, on which he was paying (only) 100 basis points of expenses each year. If Robert was paying closer to 200 basis points in annual fees, his nest egg would be worth $202,000, which is $37,850 less than Sally. And, if you believe that the end of March/2009 isn’t a fair ending point, consider the end-of-December/2008 values: Sally has $234,500 while “Buy and Hold” Robert has $226,500.

Cherry picking is the correct term: I believe March 2009 isn't a fair end point and could be replaced with today's date, when the equity markets are about double that value. Changes the conclusions quite a bit, IMO.

As for looking in the rear view mirror, my view is that T-Bill real returns of the past 15 years are less likely to be repeated in the next decade and a half as opposed to equities. My first GIC I've bought in Canada, in the fall of 1994, was a 6%, posted rate, one year GIC, redeemable at any time with no penalty. I don't expect to see something like that available too soon.

[twocentsworth]

And, if you believe that the end of March/2009 isn’t a fair ending point, consider the end-of-December/2008 values: Sally has $234,500 while “Buy and Hold” Robert has $226,500.

Cherry picking is the correct term: I believe March 2009 isn't a fair end point and could be replaced with today's date, when the equity markets are about double that value. Changes the conclusions quite a bit, IMO.

As for looking in the rear view mirror, my view is that T-Bill real returns of the past 15 years are less likely to be repeated in the next decade and a half as opposed to equities.

Well, I suppose if you like looking in rear view mirrors, you could have a long glance back at the Great Depression era when a similar "Wow! See how the stock market has bounced back already!" sucker upturn occurred. And what followed that big bounce? A big, big drop. Maybe all you stock bulls haven't noticed but the governments on this side of the pond are propping up their economies with billions/trillions of dollars -- and those economies are still barely hanging on. A number of European countries are virtually bankrupt. If something unravels in Europe or elsewhere, would it not stand to reason that a worldwide financial contagion would erupt? For the moment, I prefer my cash or cash equivalents -- regardless of immediate or predicted future returns.


Milevsky again (from the article with link below): "Indeed, I believe that your equity allocation should depend much less on your so-called time horizon, hard-to-measure risk aversion or fickle confidence in the stock market, and much more on the composition and structure of your personal balance sheet. If your job is reasonably secure, your pension is protected and your income is predictable, then go ahead and take some stock market risk with the non-essential funds."

And if your job ain't secure, you don't have a protected pension and your income is unpredictable?
Read more: http://network.nationalpost.com/NP/blog ... z1EWCVaRmj

[adrian2]

What about my claim that "T-Bill real returns of the past 15 years are less likely to be repeated in the next decade and a half as opposed to equities"? After all, a retiring plan using T-Bills is the theme of this thread.

[twocentsworth]

Here's a question for you from someone on the verge of retirement: Which is less likely to lose a substantial amount of its capital over the next 15 years...a very, very large investment in T-Bills/GICs or a similarly large investment in equities? One is guaranteed. The other isn't. That's the point of the thread. If you have a job in a sector that is cyclical and unpredictabe (even if it does pay a lot), have no DB pension and are keen on retiring, then equities -- even if they MIGHT return more -- may not be the best choice.

I'm not picking on you, Adrian. The emphasis is on the UNKNOWN hooked up with equities, especially in markets that are regulated in a haphazard manner. The other unknown, of course, is how all that Fed QEI and QEII is going to affect inflation rates. Who's to say that rates won't suddenly rise quicker than expected? Did anyone in the 70s and 80s predict the record run of inflation we experienced then? And all I heard back then -- and still do -- is don't lock into long bonds because rates are going to rise.

There are many near-retired folks who have enough piled up that they don't need equities. Even though, yes, they MIGHT return more in the future. The inflation boogie man? Use RRBs in the RRSP to hedge that threat. In a hyperinflationary environment, RRBs would likely be even better than equities to hold.