Vanguard’s VRIF: Your New Single Ticket Retirement Income Solution

By Robb Engen | September 16, 2020 |
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Vanguard’s VRIF: Your New Single Ticket Retirement Income SolutionTwo years ago, Vanguard launched a suite of asset allocation ETFs that changed the game for DIY investors in their accumulation years. These balanced ETFs provide low-cost, global diversification, and automatic rebalancing with just one fund.

Today, Vanguard announced another evolution in the asset allocation ETF space with a new product aimed at retirees in the decumulation phase. The Vanguard Retirement Income ETF Portfolio, or VRIF, uses global diversification and a total return approach to provide steady monthly income at a target payout rate of 4% per year.

ETFTSX SymbolManagement feeTarget annual payout
Vanguard Retirement Income ETF PortfolioVRIF0.29%4%

Saving for retirement is by far the number one objective for investors and Vanguard believes that space is well covered with their now flagship products like VEQT, VGRO, and VBAL. An investor in his or her accumulation phase could simply move down the risk ladder, switching from VEQT to VGRO to VBAL as they get closer to retirement age.

But what to do with your ETF portfolio in retirement? It’s a question I get every time I mention the benefits of investing in asset allocation ETFs. Prior to today, the answer was to sell ETF units as necessary to meet your spending needs or rely on smaller, quarterly distributions of around 2% per year.

With VRIF, investors get a predictable monthly income stream (targeted at 4% per year) to help meet their regular spending needs and not have to worry about rebalancing and/or selling ETF units.

Indeed, you could think of VRIF as the retirement equivalent of VBAL.

Vanguard Retirement Income ETF Portfolio (VRIF)

VRIF is a single-ticket income solution. It’s a wrapper containing eight underlying Vanguard ETFs that offer global exposure to more than 29,000 individual equity and fixed income securities.

Related: Top ETFs and Model Portfolios in Canada

Here’s a look under the hood of VRIF:

Asset classETFWeight
Canadian equityVCN9.0%
Canadian aggregate fixed incomeVAB2.0%
Canadian corporate fixed incomeVCB24.0%
Emerging markets equityVEE1.0%
U.S. fixed income (CAD-hedged)VBU2.0%
U.S. equityVUN18.0%
Developed ex North America equityVIU22.0%
Global ex U.S. fixed income (CAD-hedged)VBG22.0%

Here is the geographic breakdown of VRIF’s holdings:

  • Canada – 35%
  • United States – 20%
  • Developed ex North America – 44%
  • Emerging markets – 1%

VRIF focuses on a total return approach using an approximate asset allocation of 50% equity and 50% fixed income. This approach allows the portfolio to payout from capital appreciation in years when the portfolio yields fall below the target.

A total-return approach is more tax-friendly because VRIF can distribute from capital appreciation. In that case, only the difference between the cost basis and the sale price is taxed. Meanwhile, the full dividend distribution from underlying securities is taxable.

Vanguard highlights the transparency of VRIF and its underlying holdings, saying because its building blocks are clear, you always know what you’re investing in and why, adding that regular monitoring and rebalancing helps maintain exposures across key sub asset classes and risk levels.

VRIF’s 0.29% management fee (before taxes) is roughly one-third the cost of any comparable monthly income mutual fund in Canada. Costs matter, especially to retirees with sizeable portfolios who are looking to keep more of their returns and protect their investment base.

I spoke with Scott Johnston, head of product at Vanguard Canada, about the launch of VRIF and got the chance to ask him some questions about the new product.

He said the success of Vanguard’s asset allocation ETFs were a big part of the background on creating VRIF. Both investors and advisors were looking for the simplicity of a balanced ETF, but something that could deliver regular and stable income to help achieve retirement income goals.

Investors with a keen eye will notice that the underlying holdings of VRIF don’t generate 4% income. Mr. Johnston says with the total-return focus, VRIF will naturally pay out about 60% of its distributions through interest and dividends, with the remaining 40% coming from capital appreciation.

I asked if that would lead to the dreaded ‘return of capital’ and Mr. Johnston said that would only be expected to occur one out of every ten years.

“VRIF has a 5% annual return target,” he said.

One benefit of VRIF’s total return approach and transparency with its underlying ETF holdings is that it doesn’t have to chase yield to meet its distribution target. Rather than guaranteeing a fixed return for the long term, Mr. Johnston says Vanguard will adjust VRIF’s target distribution once per year to meet its objectives.

“In the current low interest rate environment, there is increased interest in higher-yielding products and narrow sectors. Investing in these products (and their riskier asset classes) might be appealing in the short term, but it could lead to capital loss over the longer term as these products experience more performance and distribution volatility during periods of market turbulence.”

VRIF is also tax efficient enough to hold in both taxable and tax-sheltered accounts. This aligns with the idea that an asset allocation ETF like VBAL is also appropriate to hold across all accounts. VRIF, as the retirement equivalent of VBAL, would then be appropriate as a single ticket holding across all accounts in retirement.

When asked about Vanguard’s approach to holding CAD-hedged versions of U.S. and Global fixed income, Mr. Johnston says their considerable research has shown that the risk return is improved when hedging foreign income back to Canadian dollars. That way it’s not subject to the potentially volatile movements of foreign currency.

Final Thoughts

I’m excited to see Vanguard launch an asset allocation ETF aimed at solving one of the more difficult problems in retirement planning: How to derive income from an ETF portfolio.

VRIF is a low cost, globally diversified, single ticket solution for retirees to earn a predictable and tax efficient stream of monthly income. VRIF can be held across all accounts, making it a true game changer for retirees looking for income from a simple and easy-to-manage solution.

Now, ETF investors don’t have to worry about the complexities of selling ETF units or relying on smaller, quarterly distributions to generate their retirement income needs. Simply convert your portfolio to VRIF to get a 4% annual payout target with a 5% annual return target.

Thanks to Vanguard Canada for the early preview of the VRIF. Let me know your thoughts on the new retirement income solution VRIF in the comments below.

Weekend Reading: What’s Your Savings Rate Edition

By Robb Engen | September 12, 2020 |
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What's Your Savings Rate EditionHow has Covid-19 impacted your personal finances? For the past six months the focus has been on making sure income supports were in place for employees who lost their jobs and for businesses who were forced to shutdown or reduce their operating capacity. 

Outside of weekly trips to the grocery store, most of us sheltered in place for many weeks before the economy slowly opened back up across the country. That meant little to no spending on travel, dining, and entertainment – three of the hardest hit industries.

That resulted in Canadians stashing away $127 billion into their chequing and savings accounts in the first half of 2020. In other words, Statistics Canada reported the national savings rate jumped from 2-3% pre-pandemic to a whopping 28.2% from April through June.

That’s a seriously impressive savings rate, but one that has to be reconciled with unemployment still at 10.2% and more than 500,000 mortgage deferrals soon coming to an end. There’s clearly a disparity between those with the means to work from home and save, and those whose livelihoods have been turned upside down.

We are, thankfully, in the former group and have managed to keep a consistent income working from home. Our big savings were travel refunds from our trips to Italy and the U.K. But we put most of that into our backyard; pouring a concrete pad, buying a hot tub, and replacing our patio furniture.

I don’t keep a close eye on our savings rate but I was curious so I pulled up our budgets from the previous five years. Our savings rate has increased this year and we’re projected to save 36.5% of our income. The increase is mainly due to pausing our gym memberships, less restaurant spending, and less on entertainment and travel. It might have hit 40% if our wine budget didn’t increase 🙂

Our savings rate for the past five years:

  • 2020 – 36.5%
  • 2019 – 30.8%
  • 2018 – 31.7%
  • 2017 – 29.4%
  • 2016 – 26.6%

Has your savings rate changed during Covid-19? Let me know in the comments.

This Week(s) Recap:

I wrote a bit of a tongue in cheek post about whether I’ve already achieve F.I.R.E. (Financial Independence, Retire Early). To be clear, I’m definitely not retired. It just feels that way when you can work on what you want, when you want.

From the archives: 5 financial traps seniors fall into and how to avoid them

In case you missed this on Rewards Cards Canada, here’s a look at Air Canada’s reimagined Aeroplan program.

I got to see a sneak preview of a new investment product that will be launching this week. Without giving anything away, I’ll just say that you’ll definitely want to keep an eye out for my review on Wednesday.

Weekend Reading:

The credit card sign-up wars are starting to heat up so now’s the time to start looking for a new rewards card (or add a new one to your line-up). Our friends at Credit Card Genius have you covered with the best credit cards in Canada.

Jason Heath looks at the financial implications of buying a vacation property.

Nick Maggiulli looks at why poor people stay poor. The answer is complicated, but they are, in essence, stuck in a poverty trap.

An interesting take by Max Fawcett – Progressive parties have spent too long insisting that they won’t tax home equity. Here’s a thought: Maybe they should.

I loved this post from Morgan Housel, who explains why you should save like a pessimist and invest like an optimist:

“Be a little bit paranoid, knowing the assumptions you hold today could break tomorrow, and you’ll need enough room for error to make it to the next round.”

Morgan’s new book, The Psychology of Money, just launched last week. Here’s why he wrote it.

Here’s Nick Maggiulli again explaining what your psychology says about your relationship with money.

Related to my introduction on spending and saving during the pandemic, Preet Banerjee’s latest SPENT video shows how Americans spent their weekly $600 unemployment benefits:

The Irrelevant Investor Michael Batnick explains why money printing won’t cause inflation.

Speaking of inflation, Alexandra Macqueen wrote a guide to help you understand inflation, how it’s calculated, and what it means for your personal finances:

“The CPI is not without controversy, however, and one of the most disputed aspects is how the index treats the cost of shelter. 

The cost of housing prices is excluded from the CPI, although runaway housing costs have characterized the last decade in Canada’s major cities.”

The Michelle is Money Hungry blog shares an important conversation about time freedom.

Millionaire Teacher Andrew Hallam explains why the intelligence of an investment decision shouldn’t be judged based on stories, hopes, forecasts…or an isolated result.

A Wealth of Common Sense blogger Ben Carlson shares a key lesson on why even the best stocks have to crash.

Curious about the 4% safe withdrawal rule? See if you can pass this quiz on the Michael James on Money blog.

Travel expert Barry Choi shares a guest post on the My Own Advisor blog on whether travel hacking is worth it.

Another addition to the asset allocation ETF game. This time it’s TD, with what they call their One-Click portfolios.

Finally, check out this fascinating read on money – the true story of a made up thing.

Have a great weekend, everyone!

Financial Freedom 45 Update: Have I Already Achieved F.I.R.E.?

By Robb Engen | September 5, 2020 |
Posted in
For years I’ve been tracking my net worth with the dual goal of becoming a millionaire by the end of 2020 (Ha!), and achieving financial freedom by age 45 (in 2024). The financial freedom target did not necessarily mean a full-stop early retirement, but a point when I could realistically leave my day job to pursue other interests – namely blogging, financial planning, and freelance writing.

In my last financial freedom update I mentioned I was still on track to reach my goal, although what life would look like afterwards wasn’t exactly clear. Now I have a much better idea. What a difference two years can make! 

Since then, I quit my day job and turned my side hustle into a “full-time” pursuit. I’m working for myself and doing what I love – helping people with their finances by writing educational content and providing one-on-one coaching.

They say if you do what you love, you’ll never work a day in your life. According to many in the personal finance community, by that definition I’ve already achieved F.I.R.E., or financial independence, retire early.

I’ve left the commute, the cubicle, and the drudgery of the 9-to-5 to pursue my dream. I work when I want, and for as long as I want. That, to me, is freedom.

Now, before the retirement police come out with a cold dose of reality, I am fully aware that I’m not retired. I need to earn an income to meet our current and future spending needs. In fact, my best estimate is that we could survive for about 10 years on our existing resources – not an ideal F.I.R.E. scenario.

On the other hand, I’m not looking to retire on a meagre budget of $30,000 per year. We still have big dreams to travel the world (eventually). We like good quality food and wine. We still have growing children to feed and clothe. And we’re not the kind of people who want to sell it all and roam the continent in an RV.

after tax spending to age 95

After tax spending to age 95

Have I already achieved F.I.R.E.? I’ve never branded myself as a F.I.R.E. blogger because I don’t believe you can call yourself retired if you’re still earning an income. But I’ll admit I’ve had a loose definition of financial freedom because what I really meant was the freedom to stop working for someone else and start working on my own terms.

The truth is, I’m still striving for that freedom – just now I aim to be a financially independent entrepreneur (FIE?). Here’s what that might look like:

Financially Independent Entrepreneur

I’ve been working on my own business full-time since December 2019. Revenue has exceeded my wildest expectations. But when I say ‘full-time’, just know that means working an average of 20-25 hours a week. I’m not busting my butt 24-7.

In a typical work day this summer, I’d get up at 6am and go for a run, come home and make breakfast for the kids, then sit on the deck with a coffee and eat breakfast with my wife, clean up and have a shower, and start working on projects by 10am. I’d pause for lunch and a 30-minute walk around the neighbourhood, and then finish up any writing or financial planning by 3:30pm. I like to be finished by noon on Friday.

Now, just because I love what I do doesn’t mean I want to do it forever. I’ve mapped out a plan that has me ‘working’ until age 55. I doubt I’ll stop at that age, but it’s a reasonable guess at this point.

I’d also like a large enough annual spending target that gives us the flexibility to travel and maintain our current standard of living. We’ve built $15,000 per year in travel expenses into our budget (spending is that much lower in the chart this year because 2020).

We’ve talked about spending our summers abroad when we’re able to travel again – renting a house somewhere in Europe or the U.K. for two months and using it as a jumping off point for other destinations. Working online means I can check-in from anywhere in the world if needed.

I’ve given us a spending boost once both of our kids are in post-secondary (my age 50 year). The thinking is that we’ll have a lot more flexibility to travel during the school year.

New worth projections to age 95

New worth projections to age 95

Our net worth will reach around $2.9M by my final working year (age 55) and stay relatively constant for 20 years before we spend down our investments and savings by my wife’s age 95 year. That’s the “die-broke” scenario that has us spending all of our savings and investments, but still leaving the house in our estate.

I’ve mentioned before why I’m not aggressively paying off the mortgage – not while the interest rate is at 1.45%. This projection has us paying off our mortgage in 7.5 years – well before I stop ‘working’ so we avoid the risk of carrying a mortgage into retirement.

One important note is that we don’t have big annual savings targets. Both of our RRSPs are already maxed-out, as is my TFSA. The next three years will see some pretty big catch-up contributions to get my wife’s TFSA fully funded. Outside of that, we’re only projecting to max out our TFSA contributions each year. We’ll also continue to max-out the kids’ RESPs.

That means I can work just enough to meet our spending needs and hit those modest savings targets while our investments grow. 

Final Thoughts on Financial Freedom 45

I’m going to ‘retire’ this financial freedom 45 series now that I’ve officially quit my day job and started working on my own terms. While I haven’t achieved F.I.R.E., I do think I’ve unlocked what most F.I.R.E. enthusiasts are searching for – the freedom to stop working for someone else and start pursuing your passion.

Truth be told, it does sort of feel like I’m retired. I mean, I am working a bit more than I need to right now. But that’s because we’re in the middle of a pandemic and I’ve spent more time at home than I had planned. Stuck at home, I might as well write an article or work on a financial plan. That’s actually how I started my blog in the first place – when our first born daughter started sleeping through the night from 7pm – 7am and we were stuck in the house with free time every night.

I’ll keep tracking and updating my net worth, but that $1M goal has never mattered to me as much as achieving financial freedom. Now that I’m doing what I love, I have a better idea of what financial freedom actually means.