A Simple Retirement Plan Using T-Bills/GICs

[iluvnascar]

Just wondering re:

"..... RRBs would likely be even better than equities to hold"


Is there a simple and easy way to buy RRB's online (like at TD Waterhouse or comparable online firms)? And if one bought $1,000 of RRB's today, what is the yield?

[twocentsworth]

Howdy Nas!

I buy them in large batches when the price is right. The first bunch I got years ago were yielding inflation + 3.6% (them were the good ol' days). The last batch I picked up at 2.3%. I won't dig in again until I see something exceeding 2%+ -- and that might not happen for years.

Current rates? I use Bylo's site http://www.bylo.org/ (doesn't everyone!): look under Other Stuff, Real Return Bonds for Canadian Dummies. Click on that and then look under RRB Historic Yields for Recent Bond Yields. If you go down to the bottom, you'll see how the rates have been running. http://www.bankofcanada.ca/en/rates/bonds.html Right now, you're looking at about inflation rate + 1.46%. Note to Bylo: Two BIG thumbs up for that info! If you'd like to look back at prior years to see how the yield has varied, click on Previous Data and plug in a date range.

I check the rate every once in a while and if it looks like it's running back over 2%, I follow it more closely. Then I give my broker at RBC a call to put an order in. That's about the only time I use his services -- to buy bonds.

In a hyperinflationary environment, even a thin 1.46% would look pretty damned good: 200% inflation + 1.46% yield = Better Than a Kick in the Pants.

[like_to_retire]

equities -- even if they MIGHT return more -- may not be the best choice

MIGHT is the important word. If it was a forgone conclusion that equities would offer a better return, there'd be no reason to ever buy fixed income products.

It never fails to amaze me how sure everyone always seems to be that equities will outperform. Isn't the nature of risk that they may well under-perform safe products. Equities only offer you the chance to outperform, not the guarantee.

I also don't buy into the idea that if you have a secure pension or enough safe investments that the rest should go into equities. My thinking says the opposite. You don't need to take the risk because you're already secure.


ltr

[twocentsworth]

God bless ya, ltr. A man after my own heart.

[twocentsworth]

If you were the philosophical type -- let's say a modern day Diogenes -- then you might have other reasons for shunning equities and the greedy capitalist outlook on life. Billions of poor folk on this earth barely have two cents to rub together yet are likely happier than the majority of overweight, out-of-shape North Americans. Whether you call it voluntary simplicity or the slow movement (not to be confused with constipation), the lighter, slower pace associated with a fixed income retirement suits many of us to a tee. I have a folding kayak not a yacht. A 22 year-old VW camper, not a Lexus. A single dwelling, not winter and summer homes. Yet that is still better materialistically than 90%+ of the planet's population. Small is beautiful. Less is more. Especially if you have a very large stash of fixed income to live on.

In a reflective moment, Alexander the Great confessed: "If I were not Alexander, I should wish to be Diogenes." However, Diogenes did push his strange thrifty lifestyle to the limits http://en.wikipedia.org/wiki/Diogenes_of_Sinope and a happy medium may be a better way to go. Not all of us want to live in a tub on a street corner!

[adrian2]

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.

Instead of buying T-Bills which may yield peanuts, I'd say buy annuities or GLWB's if you want to have a chance of leaving something to your heirs. This way you've guaranteed yourself pensionized income for the rest of your life. If using GLWB's, I'd agree with the statement in FoF's book that one should aim for maximum allowed equity exposure inside the plan; after all the MER's are quite high, so let the insurance company underwrite equity risk for that annual wallop.

[twocentsworth]

I won't argue about the T-Bills but I also included GICs. Hank Cunningham's solution is to go with a 10yr ladder of 10yr govt bonds. You'd still get a tax hit but if you split the income between spouses and were in the lower tax brackets, then the tax hit would be less.

I think you would do OK if 1/3 to 1/2 the stash was in RRSPs (where bond/GIC interest isn't taxed and RRBs can be kept) with the other portion outside in non-registered. Again, assuming a tax split and lower income brackets.

Let's use that couple with the $1.8mil as an example. $1.2mil is outside, with the rest in RRSPs. At even the current 3% rate for 5yr GICs, they'd be taking in $36,000 gross from non-registered. Split it tax-wise and most of it remains in the pot. And if they only go through $40,000/yr (they claim $30,000 but I think that's on the low side), that $1.2 would last a long time -- especially once CPP and OAS kicked in. If that couple were closer to 60, with less time to wait for those govt benefits, could you see a problem with fixed income only? Remember, their RRSPs are growing untaxed as another portion of the stash for later years.

Here's a scenario for steves to run through his program:
Ages 57, no DB pensions, $1.2mil in non-registered, $0.6mil in RRSP (let's make it worst case and have it in only one RRSP), with paid off home and CPP at 60 (again worst case with only 1/2 full benefits for both) with full OAS for two at 65. Assume 3% inflation with real return of only 2% above that. And budget of $38,000/yr increasing with inflation. How long would that last?

My guess? A looooong time with money leftover for heirs (or at least the house for them).

[BRIAN5000]

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.

Instead of buying T-Bills which may yield peanuts, I'd say buy annuities or GLWB's if you want to have a chance of leaving something to your heirs. This way you've guaranteed yourself pensionized income for the rest of your life. If using GLWB's, I'd agree with the statement in FoF's book that one should aim for maximum allowed equity exposure inside the plan; after all the MER's are quite high, so let the insurance company underwrite equity risk for that annual wallop.

I'm only 55 so annuities or GLWB's

Depends on inflation in the next 15 years you/I may have our capital but need a wheelbarrow full to buy a loaf of bread.

Putting a whole bunch in RRB's right now, don't know?

The easiest clearest thing for me is keep my withdraw rate low and maybe end up with millions when I'm 75-90

I saw a term the other day "Multi Driver Income Portfolio" sounds great, short of specifics. The general principle was have income coming from sources which wasn't all effected by the change in interest rates like your large amount of T-bills would be.

[twocentsworth]

Cherry pick the RRBs only when they hit 2+%. (But read Bylo's section about comparing RRB rate to nominal bond rate for the same date before deciding.)

Also please note that T-Bills go up with inflation as well. They don't remain static. If inflation is running 15%, guess what? So are short-term T-Bills (or at least in that ball-park range). Rates shouldn't go from zero to 60 in less than a year. T-Bills will follow right along. In fact, under a scenario of quickly escalating (hyper?)inflation, T-Bills would trump 5yr GICs or a 10yr govt bond ladder.

[adrian2]

Let's use that couple with the $1.8mil as an example. $1.2mil is outside, with the rest in RRSPs. At even the current 3% rate for 5yr GICs, they'd be taking in $36,000 gross from non-registered. Split it tax-wise and most of it remains in the pot. And if they only go through $40,000/yr (they claim $30,000 but I think that's on the low side), that $1.2 would last a long time -- especially once CPP and OAS kicked in. If that couple were closer to 60, with less time to wait for those govt benefits, could you see a problem with fixed income only? Remember, their RRSPs are growing untaxed as another portion of the stash for later years.

If the couple has $1.8mil they can live off the principal.

But, as I've suggested earlier:
- if they don't care to leave an inheritance, an annuity will give them much more money than T-Bills or GICs;
- if they do care about their heirs, a GLWB plan full of equities would again give them more than T-Bills or GICs.

So, even though we differ materially in risk tolerance, IMO you have not presented a case where your plan is better than my suggestions.

[twocentsworth]

Well, let's go back to the title of this thread: "A SIMPLE Retirement Plan..."

No argument with your annuities pitch -- annuities will definitely provide more income in your declining years. But let's assume you have dependent offspring that need some cash from your estate.

That brings us to so-called guaranteed products. One word to describe them: Complicated. They are not simple nor are they guaranteed by the government (like govt bonds, T-Bills and GICs). They are insurance products which make a lot of assumptions:
http://www.advisor.ca/advisors/news/ind ... 4425_12368 Read that signpost. Applies to pretty much anything that isn't govt guaranteed.

Now read this article: http://business.financialpost.com/2011/ ... continues/ . Yup, "never seen anything like it". Now imagine that you loaded up on those "guaranteed" products and then the market crashed big-time -- and stayed that way for a decade or two. Would those insurance companies still be around? Not likely.

Pass me the T-Bills, GICs, 10yr govt bonds and RRBs please. If I was going to get complicated, I'd just plonk 15% of the non-registered portfolio in broad-market equity dividend ETFs (after the crash).

[AltaRed]

Pass me the T-Bills, GICs, 10yr govt bonds and RRBs please. If I was going to get complicated, I'd just plonk 15% of the non-registered portfolio in broad-market equity dividend ETFs (after the crash).

Most regular posters on FWF do not have the capability to keep it simple because they 'know' or are 'confident' of the alternatives including equities, RRBs and annuities. Speaking to the wrong crowd here about a simple DIY retirement plan.

I do like the 10 year bond letter idea to pick up another percentage point (~25% gain in return) and may go there myself when I get closer to a 50/50 asset allocation. For many people though, the local bank branch is as far as they want to go and a 5 year GIC ladder is still the default.

[twocentsworth]

Wrong crowd? Better re-read ltr's comment.

What many newbie readers of these thread's overlook is that a lot of the posters who push/favour equities also happen to have DB pensions (like yourself). Those of us who don't -- even if we KNOW that something else MIGHT return more -- may be better off just sticking with a tried-and-true simple plan. One big mistake or misstep along the way, and we don't have that DB cushion to fall back on. And I hate hitting hard ground.

I do indeed think that I'm preaching to the right crowd, albeit a segment that may only be lurking and not posting.

BTW I locked in years ago with 30yr govt strips paying 6.5%+ in the RRSP and that's served me well instead of the 10yr ladder. But well-priced RRBs should be a better bet with all that quantitative easing ready to burst out at the seams.

And let me re-emphasize the original point of the thread: You don't need equities if you save enough cash each year during your pre-retirement years which may number 30 or more. The important idea is to save the cash. Eventually it adds up, especially during your peak earning years. If you scrimped and saved and the stash now adds up to 1.5mil or beyond, a simple plan may be all you really need. Getting greedy may hurt you. If you want to add some long-life insurance, then "pensionize" about 30% of the remaining stash with annuities at RRIF time. That's still simple.

[like_to_retire]

I do like the 10 year bond letter idea to pick up another percentage point (~25% gain in return) and may go there myself when I get closer to a 50/50 asset allocation.

Problem is that right now a 5 year GIC pays the same as the 10 year federal gov bond. Hard to make the case for the 10 year IMO.

ltr

[twocentsworth]

The only way to beat that is to go with provincials or, gulp, municipals.

[adrian2]

That brings us to so-called guaranteed products. One word to describe them: Complicated. They are not simple nor are they guaranteed by the government (like govt bonds, T-Bills and GICs). They are insurance products

Yes, they are insurance products which makes them covered by Assuris. If you don't trust Assuris, let me remind you that you were suggesting provincial or (gulp) municipal bonds -- last time I've checked, there were no printing presses under provincial or municpal control.

As for being complicated: yes, they usually have all kinds of bells and whistles. But the basic premise is simple enough to grasp: a GLWB plan will annually pay you (say) 5% of your original investment for as long as you live, guaranteed. This is significantly more than your alternative. Let's not forget that 10 years ago, few of us would have envisioned T-Bills paying less than 0.5%; in the next decades, who knows what bonds and GICs will be paying? Look at Japan and imagine your income cut to that level of interest rates.

[twocentsworth]

I have imagined the Japan scenario -- which is why we could eat capital and still be fine. And speaking of Japan, didn't its stock market tank at the same time?
Assuris has a cap so it isn't completely guaranteed either. A province or city raises taxes which equates to a printing press. No problem with that and far better than an insurance bailout.

Nothing is guaranteed for as long as you live -- at least anything based on the stock market. If stocks and interest rates were to drop substantially and stay that way (think Japan again) where exactly would those "guaranteed" products get their payout capital from??

My form of preservation: Save a bundle. In the worst case scenario, you eat it gradually for breakfast and lunch and have CPP and OAS for dinner.

[adrian2]

Assuris has a cap so it isn't completely guaranteed either.

The cap is $2000 monthly pension, IIRC, which equates to about half a million capital in a GLWB plan. You can split your purchase among the 8 insurance companies offering this type of product and still guarantee about $4 million, which is more than your case presented upthread.

Nothing is guaranteed for as long as you live -- at least anything based on the stock market. If stocks and interest rates were to drop substantially and stay that way (think Japan again) where exactly would those "guaranteed" products get their payout capital from??

From insurance companies' retained earnings, from other parts of their profits, from secondary offerings to new investors, from Assuris, from American style bailouts.

My form of preservation: Save a bundle.

Agreed.

[twocentsworth]

Looks like we finally agree on one thing: Save as much as you can while the sun shines.
'Cause tomorrow something/someone could be raining on your financial parade.

I think you're grasping at straws with regard to how the insurance companies would cover the payouts during a protracted shortfall period: ALL the insurance companies would be running for cover because they'd also have annuity obligations to pay out and Assuris might not be so, um, assured during a crisis of that magnitude. New investors? There might be a few dumb enough to fall for a sales pitch but not many. Shareholders would not be impressed if the insurance company was stealing from them to pay the old geezer crowd. And taxpayers certainly wouldn't be too thrilled about bailing them out either. I'll stick with govt guaranteed securities, thank you very much. More than a few DB pension funds may also be facing the grim realities of a nasty combo of low stock returns and low interest rates in the future. If so, who's going to bail them out? Taxpayers again?

[adrian2]

Shareholders would not be impressed if the insurance company was stealing from them to pay the old geezer crowd.

No stealing at all, just meeting their contractual obligations, quite similar to their annuity commitments.

I'll stick with govt guaranteed securities, thank you very much.

There are no absolute guarantees anywhere. You've mentioned municipal bonds, you think Orange county cannot happen north of 49? If you doubt Assuris will honour its obligations, why stop there? Paper money it's just a piece of paper, right? Gold, guns and ammo - where do you draw the line?

[twocentsworth]

No stealing at all, just meeting their contractual obligations, quite similar to their annuity commitments.

Tell that to the stockholders who are having their dividends bagged and share price hit. Those combined obligations -- "g" products and annuities -- would be massive.

Gold, guns and ammo - where do you draw the line?

I don't. I always have a good store of food and water on hand, too.

[adrian2]

No stealing at all, just meeting their contractual obligations, quite similar to their annuity commitments.

Tell that to the stockholders who are having their dividends bagged and share price hit. Those combined obligations -- "g" products and annuities -- would be massive.

My point is that on the books of insurance companies, GLWB obligations are at the same level of annuities, they have to pay one and the other. Both such payments rank way ahead of dividends. No stealing (your phrase) involved.

If you trust annuity obligations under the Assuris limit as ironclad, you should trust GLWB payments, same pot of money. If you think it's conceivable Assuris could go under and the government of the day leaving pensioners less than whole, well it's your call -- I won't give that a meaningful chance. But an asteroid could also hit Ontario, or Iran could launch a nuclear strike against us infidels.

[AltaRed]

Wrong crowd? Better re-read ltr's comment.

Maybe poor wording on my part, but I was agreeing with you. Too many on FWF have a love affair with equities and other 'sophisticated' investments. I see nothing wrong with a Retirement Plan built specifically on fixed income investments (under the right conditions).

[freedom_2008]

Wrong crowd? Better re-read ltr's comment.

What many newbie readers of these thread's overlook is that a lot of the posters who push/favour equities also happen to have DB pensions (like yourself). Those of us who don't -- even if we KNOW that something else MIGHT return more -- may be better off just sticking with a tried-and-true simple plan. One big mistake or misstep along the way, and we don't have that DB cushion to fall back on. And I hate hitting hard ground.

I do indeed think that I'm preaching to the right crowd, albeit a segment that may only be lurking and not posting.

BTW I locked in years ago with 30yr govt strips paying 6.5%+ in the RRSP and that's served me well instead of the 10yr ladder. But well-priced RRBs should be a better bet with all that quantitative easing ready to burst out at the seams.

And let me re-emphasize the original point of the thread: You don't need equities if you save enough cash each year during your pre-retirement years which may number 30 or more. The important idea is to save the cash. Eventually it adds up, especially during your peak earning years. If you scrimped and saved and the stash now adds up to 1.5mil or beyond, a simple plan may be all you really need. Getting greedy may hurt you. If you want to add some long-life insurance, then "pensionize" about 30% of the remaining stash with annuities at RRIF time. That's still simple.

We are on the same boat as you, no DB, but have saved a good bundle during our working years. 1/3 in RRSP, 2/3 in non-reg.

You have a good point that for people who without a DB plan want to play safe. Our way to achieving the safety is to use our RRSPs to create a pension in a very simple way: take out about 15K/yr each before we reach 65 (just over 50 now. Although we pay 20% tax on taking out amount, it is less half of the tax refund we got when we put them in). After age 65, we will use the reaming RRSPs to buy annuities (should still be a good amount since the withdrawals match the gain inside our RRSPs). These, plus future partial CPP/OAS, are enough to cover our core normal living, same amount as when we were working.

After we have a self created pension plan in place, our goal for non-reg portion is 40% 5-year GIC ladder (average over 3% now, but should improve after a few years), to build up 25% with pref/dividend stocks (average dividend over 4%), 20% bonds (we bought mostly new issues of provincial bonds under 10 years with coupons around 4-5%) and RRB, 5% "play stock" inside TFSA only, and 10% cash (it is 30% now with 2% rate).

We could do it more simpler, put everything into GIC (need more vendors to get $100K CDIC protection) and bonds and cash, still have enough to live. Actually that was our position in late 2008 by chance and luck (just left work and about to travel then). But since late 2009 we started to carefully build up a small equity portion as mentioned above, to learn and to practice (had good ones like MFC and SC, funny ones like CL.PR). We want to take our time, say 5 years plus to slowly get there. With back up from RRSP and lots free time now, why not

[twocentsworth]

Wrong crowd? Better re-read ltr's comment.

Maybe poor wording on my part, but I was agreeing with you. Too many on FWF have a love affair with equities and other 'sophisticated' investments. I see nothing wrong with a Retirement Plan built specifically on fixed income investments (under the right conditions).

I know your thoughts on simplicity, Alta. Some time ago -- I believe it was in a thread on Prefs -- you flatly stated that a lot of folks might be better off holding just GICs with some prefs on the side. What many forget is that equities have a nasty downside and that's been revealed a couple of times in the last decade with BIG drops. The recent big bounce back has nothing to do with a normal market movement and everything to do with manipulation by governments. Plus, sophisticated investments = complicated investments.

If you have enough capital, then fixed income -- even with the minor tax hit -- may suit a lot of conservative folks. K.I.S.S.

Good on ya, freedom2008! If you don't mind my asking, how much did you two sock away before packing it in?