The transition to retirement can be hard enough without having to deal with a mess of individual stocks, mutual funds, and/or ETFs held across several accounts and institutions. Indeed, one of the most sophisticated moves you can make is to simplify your investment portfolio as you head into retirement.
Consider Chris and Liza, a couple in their early 60s who intend to fully retire this year. In fact, Liza (63) retired at the end of last year and Chris (62) will retire this summer. They have combined savings and investments of just under $800,000 across their RRSPs, TFSAs, a LIRA, and a small joint non-registered account. Liza also has a modest pension of $12,000 that began in January this year.
Their desired after-tax spending in retirement is about $60,000 per year. They plan to start their RRSP withdrawals next year and delay taking CPP until at least age 65. That means making some fairly aggressive RRSP withdrawals for a couple of years while they delay their government benefits.
Meanwhile, they’ll have enough income from RRSP and non-registered withdrawals to meet their spending needs, so their TFSAs will stay intact and invested for the long-term (though they no longer plan to contribute to their TFSAs annually).
Two-Fund Retirement Solution
How do they structure their investments to generate the income they need while keeping costs low and the portfolio easy to manage?
Enter the two fund solution for investing in retirement.
You know that I’m a big fan of asset allocation ETFs and believe that many investors can and should simply hold a risk appropriate all-in-one ETF in each of their investment accounts (and reach out to a fee-only advisor as needed for financial planning advice) during their working years.
Not much needs to change in retirement. That’s right – simply carve out 10-15% of your portfolio and use those funds to purchase a high interest savings ETF. Examples include:
- CI High-Interest Savings ETF (CSAV)
- Horizons High-Interest Savings ETF (CASH)
- Purpose High-Interest Savings ETF (PSA)
- Horizons Cash Maximizer ETF (HSAV)
The cash held in a high interest savings ETF should represent approximately 18-24 months in expected annual withdrawals. Note, you’d need to do this in each account type that you’d expect to withdraw from in retirement. In Chris and Liza’s case, that would include their RRSPs, Chris’s LIRA, and their non-registered investments.
Let’s take a look at the couple’s current account balances and holdings:
- RRSP – $268,000 (VBAL)
- LIRA – $121,000 (VBAL)
- TFSA – $80,000 (VGRO)
- Non-registered – $22,000 (VBAL)
- RRSP – $203,000 (XBAL)
- TFSA – $80,000 (XGRO)
- Non-registered – $22,000 (XBAL)
Chris expects to withdraw $20,000 per year from his RRSP (RRIF), $6,000 per year from his LIRA (LIF), and $6,000 per year from non-registered investments until his CPP and OAS kicks-in at 65.
Liza will draw $16,000 per year from her RRSP and $6,000 per year from non-registered investments until her government benefits kick-in at 65.
With Liza’s $12,000 pension, this covers the couple’s annual spending needs, plus taxes.
They both like the idea of the two fund retirement solution and want to queue-up their “cash bucket” this year so it’s ready for withdrawals to begin next January. They also want to be conservative, given their higher than normal first few years of withdrawals, so they opt to hold 15% in cash in their RRSPs and Chris’s LIRA, and 50% in cash in their non-registered investments.
Chris and Liza sell off units of VBAL and XBAL (respectively) so their accounts now look like this:
- RRSP – $40,200 (CASH) / $227,800 (VBAL)
- LIRA – $18,150 (CASH) / $102,850 (VBAL)
- TFSA – $80,000 (VGRO – no change)
- Non-registered – $11,000 (CASH) / $11,000 (VBAL)
- RRSP – $30,450 (PSA) / $172,550 (XBAL)
- TFSA – $80,000 (XGRO – no change)
- Non-registered – $11,000 (PSA) / $11,000 (XBAL)
The couple will also turn off automatic dividend reinvestment so that the quarterly distributions from VBAL and XBAL will now just land in the cash portion of their respective accounts (and help refill the cash bucket).
Using a RRIF and LIF for Withdrawals
They each decide to open a RRIF account and transfer the high interest savings ETF into the newly opened RRIF. Again, the goal is to queue-up next year’s withdrawals and to reduce any fees they might incur by withdrawing directly from their RRSP.
RRIF minimum mandatory withdrawals won’t begin until the calendar year after the account is opened. Chris also opens a LIF, as that’s the only way to begin withdrawals from his LIRA next year.
Fast forward to next January. Chris starts withdrawing $5,000 per quarter (January, April, July, and October) from his RRIF – literally selling off units of CASH.TO to meet his withdrawal needs. He also starts withdrawing $500 per month from his LIF account, again selling off units of CASH.TO as needed.
Liza also withdraws from her RRIF quarterly, taking $4,000 every January, April, July, and October.
The couple dips into their non-registered account to top-up spending as needed, and earmark the remaining cash for taxes the following year.
We often end up with a tangled mess of investment accounts and investment products by the time we get to retirement. It’s common to have accounts at multiple institutions, group savings plans from previous employers, and a mix of stocks and funds from dabbling in different investment strategies over time.
Fight for simplicity as you enter retirement. Consolidate accounts into one institution – ideally at the brokerage arm of your main bank, but an online broker like Questrade is fine. Consolidate your investments from a messy mix of stocks and funds to a low cost, risk appropriate, globally diversified all-in-one ETF and then carve out 10-15% of expected cash withdrawals to hold inside a high interest savings ETF.
This creates a subtly sophisticated, dare I say elegant, investing solution that you can hold throughout retirement.