A Smarter Way to Spend Without Stress in Retirement
A few years ago, I shared a simple yet powerful idea for managing your portfolio in retirement: hold a low-cost, globally diversified equity ETF for long-term growth, and pair it with a high-interest savings ETF or money market fund to cover short-term cash flow needs (12-24 months).
I called it a two-fund solution, and the core idea was to eliminate complexity while reducing the behavioural risks that trip up so many retirees – things like selling during market downturns, holding too much cash out of fear, or managing a complicated mess of stocks and funds.
More recently, after digging into research from Scott Cederburg and others, it’s become clear that a globally diversified all-equity strategy may be optimal for investors to hold throughout their lifetime.
That’s why a fund like VEQT (with its roughly 30% domestic, 70% international mix) may be ideal for self-directed investors to hold both during their working years AND throughout retirement.
Related: VEQT and Chill for Life?
Indeed, VEQT’s structure not only simplifies investing for self-directed investors but also aligns with cutting-edge research on optimal lifetime asset allocation.
In this updated article, we’re blending the academic research with behavioural practicality. The Two-Fund Retirement Solution gives you long-term growth, short-term stability, and (in theory) a higher chance of staying invested when it matters most.
The Problem: Selling When Markets Are Down
Even the most diversified, evidence-based portfolios like VEQT are still 100% equities. That’s great for long-term growth. But it also means they’ll experience steep drawdowns from time to time.
For retirees who rely on portfolio withdrawals, that’s a real problem. It’s incredibly hard – psychologically – to sell shares when they’re down 20% or more. You know you’re supposed to stay the course, but when your income depends on those shares, logic takes a backseat. This triggers:
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Loss aversion (“I’m locking in a loss!”)
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Market timing impulses (“Maybe I’ll wait until it comes back up…”)
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Cash flow stress if income needs are inflexible
This is how people start with an equity portfolio and end up in GICs.
The Solution: Pair Growth with Liquidity
The Two-Fund Retirement Solution solves for this by carving out a small portion of your portfolio – 10% or so – and parking it in a high-interest savings ETF or money market fund (like CASH.TO, CSAV, or PSA).
| Holding | Allocation |
| VEQT (or similar) | 90% |
| HISA ETF | 10% |
How To Use It
- Withdrawals come from the HISA fund, not your VEQT holdings.
- Turn off automatic dividend reinvestment (DRIP) on VEQT. Let those dividends flow into cash instead – this helps refill the HISA sleeve passively over time.
- Refill the HISA bucket during up markets (or on a regular annual schedule).
- Keep roughly 12 months of planned withdrawals in the HISA fund to weather market storms.
Case Study: Two-Fund Retirement Solution in Action
Meet Sarah, a 60-year-old single retiree who retired at the end of 2024. She has the following assets:
- $500,000 in an RRSP
- $240,000 in a LIRA
- $150,000 in a TFSA
- $100,000 in a non-registered investment account
- $50,000 in a high-interest savings account
Her goal: Spend $60,000 per year after tax and defer CPP and OAS until age 70 to maximize guaranteed income.
The Two-Fund Strategy in Action
Sarah invests 90% of her RRSP, LIRA, and non-registered portfolio in VEQT, taking advantage of its global equity exposure and low cost. She keeps the remaining 10% in a high-interest savings ETF, which she uses for withdrawals in the early years. Her TFSA remains in 100% VEQT until age 65 – it’s the account she’ll touch last, once the non-registered funds are exhausted.
- She turns off dividend reinvestment on VEQT, allowing dividends to accumulate in cash.
- From age 60 to 69, she draws primarily from her RRSP and LIRA, gradually reducing her tax-deferred balances.
- Her TFSA is untouched during this phase, growing tax-free and serving as a long-term reserve or legacy asset.
What the Projections Show
Using realistic return and inflation assumptions (5.6% after-tax return, 2.1% inflation), Sarah’s plan is well within reach:
- Her withdrawal strategy maintains a 105% funded status
- Her portfolio lasts to age 95, even with conservative assumptions
- By delaying CPP and OAS to age 70, she increases her benefits by 42% and 36% respectively, versus taking the benefits at 65.
Final Thoughts
I tell my clients they should aim to take as much equity risk as they’re willing to stomach in retirement. For some, that’s 50-60% equities, for others that’s up to 100% equities.
Meanwhile, good recent research says the optimal portfolio to hold throughout your lifetime is 1/3 domestic equities and 2/3 international equities.
The problem is that research was done with numbers on a spreadsheet – and while the numbers recovered after steep losses from major market crashes, a spreadsheet is not reflective of how a real-life retiree would feel about their portfolio and staying the course.
In other words, it’s easier to look backwards and see that everything worked out, but it’s much more difficult staring at actual losses in your portfolio without a crystal ball to show you the path forward.
That’s why, while “sub-optimal”, I suggest investors pair their risk appropriate asset allocation ETF with a 10% cash wedge (HISA ETF) to help facilitate withdrawals in retirement. What you give up in expected returns by holding some cash, you gain in peace of mind and psychological benefits to combat heuristics like loss aversion.
Have any retirees put the Two-Fund Retirement Solution into action? Let us know in the comments.
Nicely laid out and explained. Confirmation bias kicking in, especially as the EQUITY+HISA is the path I follow.
Hey, confirmation bias was kicking in for me to when I read the Scott Cederburg paper on holding 1/3 domestic and 2/3 international!
Thanks Robb- this is exactly the kind of simple and evidence-based longterm plan that helps me wrap my head around investment/withdrawal strategies.
Great approach! I like the all equity holding and just sell when markets are up to cover expenses over the next 4 months ish. For small down turns I don’t worry but for steep falls I have HELOC that I use just in case.
Will see how this strategy works. Seems good for the last few years…
“Turn off automatic dividend reinvestment (DRIP) on VEQT. Let those quarterly dividends flow into cash instead…”
I think VEQT pays annual dividends not quarterly. But the idea still holds.
Great read.
Good catch, JP – you’d think that would be ingrained in my mind after holding VEQT for six years.
Quarterly for your VBAL and VGRO, annual for VEQT.
Thanks!
Theory sounds good.
What about black swan market crash events?
What happens if the stock market is down two or more years in a row? You might need to sell some stocks in a down market?
Hi Gail, the research looked back at the experience of a domestic investor in 38 countries using stock market data as far back as it goes and it determined the optimal portfolio was 33% domestic stocks and 67% international stocks (optimal for saving less, spending more, and leaving larger bequests).
That included the worst periods – black swan events.
The challenge is that holding cash or bonds all the time in anticipation of a black swan event drags down your expected returns, whereas global stocks give the best chance of a strong recovery coming out of that bear market – AND offer higher expected returns in normal times.
The two fund solution aims to add some behavioural practicality by adding a cash wedge (10%). In my experience that’s enough for 12-24 months’ worth of expected withdrawals, but everyone’s plan is different. Turning off the DRIP extends the life of the cash wedge by a few more months.
Adjust the percentage if you want a bigger buffer (15%, 20%), but just know the trade-off is a lower overall expected return.
How much you hold in your HISA should be based on a combination of your risk tolerance and the amount you need to top-up your pension(s), CPP, OAS, dividends, etc… to maintain your desired spend. If you are conservative, you might want to consider 3-5 years worth of HISA. Even though it might be sub-optimal on a spreadsheet, if that’s what you need for peace of mind and to stay the course, then it’s the right answer.
Note: The above is not financial advice 🙂
I started retirement 10 years ago with 60/40 VEQT /VSB (small market bonds), but the latter had done so poorly that I’m slowly moving to 70/30 VEQT/HSAV (non-registered) and VEQT/CASH (RRSP), plus 100% VEQT on my TFSA. All is great except I hesitate to cut my losses and sell all my VSB right away to buy HSAV and CASH. People keep saying bonds will recover but I don’t see any signs. What’s your take, Robb?
Hi Terry, my crystal ball is as cloudy as anyone’s. Short-term bonds are up about 7.5% over the past 12 months. That’s not nothing, but it barely makes up for the stinging losses in 2022.
Yields have stayed stubbornly high this year so we haven’t seen much growth in short or longer term bonds YTD.
Would it be terribly onerous to have a “three-fund” solution, selling half your VSB for CASH and holding a 70/15/15 portfolio? Sounds like a pretty reasonable compromise to me.
It does indeed, Robb – thanks.
Wade Pfau in one of his books discussed one “problem” with a bucket approach: How many years to set aside AND when to refill buckets. Your suggestion to turn off DRIP and use that to replenish your cash bucket partly solves the problem. With a prolonged downturn of markets you will eventually need to sell at a loss.
My own approach is more nuanced in trying to get some factor exposure and also holding US ETFs directly. On an annual basis, determine how much to draw from portfolio and set 110% of that aside in XGRO. Slightly sub-optimal but should be able to manage downturns. In a “bad” year, might need to take one fewer vacation.
How do you define selling at a loss? For me I have ETFs that I bought a dozen years ago that would have to drop a lot to push me into an actual loss. VDU at average price of 29.18, currently sitting at 48.03, so even if it drops 30% Monday to 33.62, I’m still selling at a profit, although not as good a profit as if I’d sold yesterday. So is not selling at a price you could have had at some point in time really a loss if you need to sell at a price that’s lower in the future but is still higher than when you bought?
This is a very good question. I struggle with this too. Would it be right to hold until the ANNUAL growth since you bought it, meets or exceeds the average growth rate you have forecasted for that ETF. If the rate is below that, its not the right time to sell. Not so easy to calculate with multiple purchases and distributions.
When you say ” Fill up the HISA bucket in up markets” I need help defining that. I recently implemented this strategy but am having trouble with some details. Let’s say my overall portfolio performance goal is 5% but the goal for the equity holdings is 7%. This means I want my equities to AVERAGE 7% but there will be better and worse years. If I keep selling part of my equities at 7% each year, won’t it be harder to average 7% because that money doesn’t get a chance to have a really good year?. Or should the definition of “up markets” mean a higher return than 7%?
Hi Craig, this is a great question and might be different for everyone. I like rules, so my suggestion would be coming up with a rebalancing “check-in” schedule:
On June 30th I’ll check-in on my portfolio allocation and rebalance if stocks are up over 7% year-over-year (not YTD).
If not, then wait until the next rebalancing check-in which is December 15th (pick your own dates) and rebalance if stocks are up over 7% year-over-year.
If it’s a down market like 2022, for example, those check-ins would both say “don’t rebalance”. Now you need to increase the frequency of your check-ins so you might do that again on, say, March 15th.
Again, that check-in would say “no”, so you’d wait until the next check-in (June 30th) and the market is now up 15% year-over-year so you sell and refill your cash wedge.
That means 18 months’ of expected withdrawals in your cash bucket – from your original 10% cash wedge, plus the dividends you’d have received each January (if holding VEQT).
Remember, annual returns don’t tend to cluster around the average – they tend to be much higher or much lower.
Another way to think about this is to simply say I will rebalance (sell shares) every quarter or semi-annually regardless of the price.
And yet another way would be to say I will rebalance on a predetermined schedule as long as stocks are not negative (so even up 1% Y-o-Y would trigger a rebalance).
In either case I think some regular (yet infrequent) schedule is important to prevent you from obsessing daily.
Thanks Robb and to your readers who’ve commented. Do HISAs, money market funds and high interest ETFs have about the same returns after considering the management fee for ETFs?
Hi Paul, I haven’t looked too closely at all of them but I think you’ll find a net return of around 2.5% for most of the HISA ETFs today. Bank ISAs might be a bit lower, but in the ballpark.
I’m thinking of adopting this strategy – love the simplicity of it – thanks Rob!
For the HISA portion, I’m looking at ZMMK – currently yielding roughly 4% – any cautions with this fund?
Thanks!
One thing I’ve noticed with ZMMK is that a significant portion of the “return” is actually “return of capital” (not “real” return). This could have to do with currently falling yields??? The latest “dividend” equates to less than 3% yield on a forward basis anyway, and some of that may be ROC again…
Maybe it doesn’t matter unless you’re holding in a non-registered account, I’m a bit unclear on that … Not an expert
Hi Kevin, I don’t think the yield of 4% is correct. I’m seeing a current yield of 2.42% as of June 6th (from their website). It looks like the fund holds some corporate bonds as well as short-term cash deposits.
I wouldn’t try to get too cute with the cash wedge. Most of these funds are in the 2.5% range right now. Pick one and move on.
Do you know how the ‘One, Big, Beautiful Bill Act’ affects US ETF distributions for non-US citizens? Believe a 5% tax (going up every year till it reaches 20%) on all outward dividends, interest, real estate revenue and even cash remittance is on the cards – which is HUGE if you’re earning USD distribution through ETFs or other assets. More importantly CRA has a clause in the tax code that does not allow dual tax avoidance (of withholding taxes) for such instances outside the original US-Can tax treaty (so only the baseline 15% US withholding will be exempted if holding assets in a non-reg account). Hopefully it stalls in the House before being passed as a bill but chances are slim, given Republican control of the House.
Hi Rick, I have spent zero time thinking about this. I don’t hold, and have never advocated for holding US-listed stocks or funds.
As we’ve seen with the on again, off again, on again tariffs, it’s impossible to make decisions based on policies that may change daily.
I hear you – all thess applying of tarriffs and undoing them a couple days later is making the administration look such finicky if not unscientific in aproach.
Unfortunately for us though, the Big, Beautiful Bill Act is being driven by Republicans and not the administration per say and has large impacts on not just us but also pension funds like the CPP that is heavily (47%) weighted in the US.
VEQT for example, has 43.6% invested in the US and on top of the 15% withholding drag, we will be subject to another 5% progressively over 4 years!
We’ll see how it goes after House review.
we are in our 80’s….Do you not think your plan is a little aggressive at this stage of life
should you not more invested in GIC”s and very little in equities
Thoughts ?
Hi Bill, it really depends on your goals, risk tolerance, spending needs, etc. Of course, if there is no *need* to take on more risk then you can stick with safer cash and GICs.
That said, many of my retired clients will have no need to spend from their TFSAs and will try to maximize tax free growth in that account type by investing in global equities.
Also keep in mind that interest from savings deposits and GICs are fully taxable as income in non-registered accounts, so investing a portion of your non-registered funds in equity ETFs can be quite tax efficient.
If I’m interpreting Scott Cederburg’s research correctly, it might be worth reiterating that his research assumes an all-equity globally diversified portfolio from the very start of an individual’s investing journey. What this implies is that you can’t necessarily swap over to an all-equity globally diversified portfolio 20 or 30 years after the fact and expect optimal results.
A subsequent black swan event for example can be optimally absorbed only if you have the benefit of superior all-equity globally diversified returns over the previous decades. As best I can tell, Cederburg’s paper does not address the impact of a mid-horizon switch in portfolio construction.
My analysis is subject to error of course, but I think there is a tendency to extrapolate that a mid-horizon shift in portfolio construction is perfectly consistent with Cederburg’s thesis and that may not be the case as the equity premium risk becomes more reliable over longer periods of time. I don’t see a research basis to make a judgement on this one way or the other.
It’s a fair point, Alan. And again I’m not suggesting people ditch their long held and hopefully well thought out portfolio for a 100% global stock strategy.
One way to interpret this research for real life is that we shouldn’t think we *have to* reduce our equity exposure leading up to and into retirement. If you’re an 80/20 investor, stay an 80/20 investor and maybe pair that with a cash wedge in retirement.
Again, my take is that this interpretation is supported empirically by Cederburg only if the 80/20 static allocation was held throughout an entire 60+ years investing life cycle.
My situation is likely not that uncommon. I have been investing for more than 40 years. The first 20+ years was a random event – a hodgepodge of stocks invested in an inconsistent fashion. The next 10 years was random ETFs – more structure, but still undisciplined. It’s only in the last 10 years that I latched onto globally diversified indexing and a far more disciplined approach. My background is academic in the mathematical disciplines and I found it funny and depressing how I missed the very basic maths of investing for so long.
Cederburg’s paper is interesting and counter-intuitive but I suspect really only actionable if you are an investor in your 20s and perhaps no older than 30. Even then, Google Scholar has it cited only 7 times which likely means the idea needs some additional time to mature and to be examined – at least from an academic perspective.
Of greater interest and relevance to me is the idea of Rising Equity Glidepaths as promoted in a paper by Pfau and Kitces (cited 75 times).
An interesting nuance in the Cederberg paper relates to your HISA allocation suggestion (which I agree with from a real-life standpoint as I stare retirement in the eye). On page 23 and 24, they talk about dynamic optimal asset allocation. All equity over the lifespan was optimal as a static allocation. That was a whole lifetime and the high equity during accumulation gave a large pot to draw from. For the dynamic allocation, they found optimal each year at different ages in the lifecycle. It remained all equity except for a 10 year period around retirement where it was ~75% equity and ~25% US treasury, and spending down the US treasuries. The numerical advantage of that was miniscule, but from a real-life ability to tolerate this and sleep at night, it would make a big difference I suspect. Kind of like your 10% HISA. So, there is some evidence buried in there.
Thanks for bringing this up, Mark!
This invites another question, how to queue up this cash wedge? New contributions going into cash for a few years? Some regular rebalancing leading up to a predetermined date? Just sell equities in one shot?
Personally, I’d suggest directing new contributions into cash 2-3 years leading up to retirement (if your plan called for new contributions) and to also turn off the DRIP on your equities around that time.
Thx Robb. I’m late but have you read Karsten Jeske’s (Big Ern) review of Prof. Cederburg (and colleagues) studies? I scanned through the studies (nerd I am) and watched all related Rational Reminder videos. Good to have counter views for bal esp well thought out independent ones (hard to find.) To me RR did seem to cover similar counter points just in a diff way incl the fear issue w/all equity. Karsten also did a post on small caps. Also interesting.
Hi Joanne, I skimmed it (long read!) and it seemed like he took issue with including markets from countries that had been wiped out due to war or other catastrophic events. He also seemed pro-American exceptionalism – which is fine but still may not lead to stock outperformance in the future.
My issue with all the research on safe withdrawal rates is that most retirees already do not spend up to their capacity. So fretting over a withdrawal rate of 3-5% seems silly when you’re drawing down one account (RRIF) and then turning around and adding to another account (TFSA).
We also don’t have one pot of money called retirement savings. Instead we might have four or five accounts, maybe a workplace pension, and CPP and OAS as puzzle pieces to consider. Some have different tax treatments, some income streams come online at different ages, some can be split with a spouse, etc.
A long read for sure so I also skimmed. Maybe more an academic reply but still interesting. He said he doesn’t personally use his SWR. Funny. Just being honest I guess. @1:02:21
https://www.youtube.com/live/k6Eu5SXo4V8?feature=shared
Great post. After many years, I’m in the exact same boat, VEQT and CBIL (rhymes with Chill).
I had been a bond fund investor for the fixed income portion of my port.. But watching VAB tank during COVID, I got out – the whole point of owning bonds was to offset equity losses, not mimic them. Watching since, VAB hit $28 then tanked to where it is now at $23, way too much drama thanks!
The benefit of diversity has been obvious for a long time. Two ETF notion seems very simple approach and it does keep your fingers off the keyboard. I keep my rainy-day funds in short-term corporate bonds (high-class junk, some would say, and rather correlated with equities) although a HISA is more liquid and accessible.
Odd to hear questions about reluctance to change horses mid-stream. Is that the sunk investment fallacy? Because each day is a new start on the future.
The brilliant York professor, Moshe Milevsky, uses the Monte Carlo approach. He simulates a vast number of market courses, based on their occurrence in the past. That results in a quite different analysis in which he can predict how often you would go broke if things worked badly. That leads to a different (or supplementary) way of assessing how you like one or another portfolio.
Milevsky also has a book titled, “Are you a stock or a bond?” If your sources of income, stability in various aspects, and future prospects (say looking at annuities or a large fixed payout pension), then YOU are a bond. If you are a bond, you don’t need much bond-like ballast in your portfolio. And conversely for those with unstable work, no pensions, and so on. That concept vastly well clarifies how to think about risk.
Hi, great article. I wonder what will happen with ETF’s like XGRO etc. that have about 35% US equities if they increase the holding tax on foreign investors!
Hi Norm, with a 15% foreign withholding tax on US dividends you can expect to sacrifice 0.30% from your US equity returns (15% of a 2% dividend yield). Let’s say that the tax doubles to 30%, so now you’d deduct 0.60% from your US equity returns.
Sure, you could try to work around that to avoid the foreign withholding tax, but if that means not holding US equities at all I think it would be a mistake. After all, US equities have outperformed other markets, and while that is certainly not guaranteed to continue I would not want to be completely out of the US market just to avoid tax on dividends.
Hello
One way to avoid the US withholding tax would be to eliminate the dividend.
Global X Corporate (Horizon) does that with its structured funds using derivatives.
Their equivalent to VEQT fund is HXDM-T.
Thanks
Yves Poisson , Bromont
Great Article rob..i am far away from retirement but just wondering is ZMMK a good option as well for short term goals and liquidity. Your thoughts and any pros and cons for holding it. Thanks