Readers often ask how an index investing approach can work for retirees or soon-to-be retirees. A low cost, globally diversified portfolio of ETFs is great for those in the accumulation stage, but retirees need income. How do they get it?

When asked this question I often point to this excellent piece in MoneySense written by Dan Bortolotti. It elegantly explains how to generate retirement income using a total return approach that allows you to maintain a portfolio of equity and bond ETFs.

Dan’s article does indeed show investors a better way to generate retirement income with ETFs. But the strategy can be complicated for a do-it-yourself investor to carry out in practice. Asset-allocation ETFs help simplify the process somewhat, but investors still need to manage multiple accounts, deal with mandatory RRIF withdrawals, and try to keep taxes to a minimum.

A Robo-Advisor Retirement Solution

Enter the robo-advisor. Once thought of as just an investment platform for Millennials, robo-advisors are well-positioned to take on the retirement income challenge. In fact, one of the fastest growing segments at Wealthsimple are retirees and those nearing retirement.

I spoke with Michael Allen, a Portfolio Manager at Wealthsimple, to get a real-life example of someone using a robo-advisor in retirement to manage their investments and withdrawals.

To start, Wealthsimple sets up the client with a globally diversified indexed portfolio that’s well-suited to their lifestyle needs and risk tolerance.

“Many people have the misconception that being in retirement means they need to change their strategy to focus on income producing assets. We don’t think this is true,” says Allen.

What matters is the total return of the portfolio relative to its risk. By relaxing the focus on yield, and using broad market index funds instead, a portfolio can be diversified across all sectors of the market instead of concentrating in companies that typically pay high dividends (e.g. financials, utilities, and consumer staples). This added diversification reduces risk without sacrificing expected return.

What’s more, increased tax efficiency is also a product of a total-return approach since capital gains — which are taxed at a lower rate than dividends or interest — account for more of the expected return over time.

With a total return approach, it is usually necessary to sell holdings periodically in order to generate funds for spending needs. In past times, when it was common to pay significant commissions to trade, this was a problem and a focus on income may have been warranted. Today, however, commissions are minimal for trades, including Wealthsimple where they are typically zero.

“Rather than pay out income, we automate monthly withdrawals. Each month we will sell units of funds to raise the required income need,” says Allen.

This is a form of rebalancing, as holdings that have drifted above their target weight are trimmed before assets that are under their weight. In a scenario where stocks were down significantly, income would be raised by selling bonds.

Related: How to transfer your RRSP to Wealthsimple

Let’s look at a hypothetical example of how this works with a holistic retirement strategy.

Wealthsimple Case Study: Retirement Withdrawals

Allison and Ted were long time clients of one of the bank owned brokerages. Both are 65 and recently retired. They were paying high fees for one phone call each year with their advisor.

They came to Wealthsimple for lower fees. But they also wanted high-quality advice from advisors with a fiduciary responsibility to look out for their best interests. And, the assurance of a consistent investment strategy over the coming decades. That way, if Ted had to one day assume the role of managing the household finances, a responsibility he doesn’t currently own, the transition would be less stressful.

Allison and Ted transferred TFSAs, RRIFs, and Joint accounts to Wealthsimple. Their goal is to fund retirement and leave an estate to their children. Spending needs are $80,000 per year. Their total portfolio is worth $1,700,000.

Understanding their existing accounts, annual spending needs and long term goals, the team at Wealthsimple was able to propose a retirement investment strategy curated specifically for them.

First, Wealthsimple created a financial plan to determine their ability to achieve their desired level of spending until age 95 and developed a tax efficient strategy for pulling funds from their various accounts.

Related: Which accounts to tap first in retirement?

A balanced and globally diversified portfolio was recommended, with 50% equity and 50% fixed income. Broad-based, low-cost ETFs were used to form the portfolio and fund selection was tailored to account type to minimize taxation.

It was also recommended that they defer CPP until 70 and begin drawing down on the RRIFs instead. Pulling on the registered funds earlier than necessary minimizes the risk of higher taxes in the future and potential OAS clawbacks as well.

“We suggested withdrawing $70,000 a year. Combined with Old Age Security benefits and modest withdrawals this satisfied their lifestyle needs and kept all income in the lowest tax bracket,” says Allen.

To produce consistent income, an automated monthly withdrawal of about $5,800 was set up from their RRIFs. Allison and Ted don’t have to worry about what to sell, as a rules-based rebalancing methodology automatically sold funds that were over-weight to generate funds for withdrawals. As a result, their portfolio consistently remained close to its target weight.

At the present time, Allison and Ted are projected to meet their spending needs, adjusted for inflation, and leave an estate of around $500,000 in today’s dollars for their beneficiaries.

Each year the plan is updated to incorporate any changes in Allison and Ted’s circumstances as goals, as well as how markets have performed relative to expectations. And at any point over the course of their retirement, Ted and Allison have access to our team of advisors should they have any thoughts, questions, or concerns about their portfolio and investment strategy.

Final thoughts

Retirees don’t need to chase high yield investments, or substitute dividend stocks for bonds, in order to build a sustainable retirement income stream. You can meet your spending needs using a total return approach with equity and bond ETFs (along with a cash / GIC bucket for short-term spending).

And while asset allocation ETFs have lessened the burden on investors who manage their own portfolio, a robo-advisor solution like the one outlined above can manage your retirement income withdrawals in a simple and tax-efficient manner.

Did you know Boomer & Echo readers get a $50 cash bonus when they open up a new Wealthsimple account and fund it with $500 within 45 days? Transfer your account to Wealthsimple and they will cover the transfer fee.

Readers: Who’s interested in using a robo-advisor in retirement? You can book an appointment to speak with a Wealthsimple portfolio manager today about your personal retirement scenario.

I enjoy listening to Dan Bortolotti’s Canadian Couch Potato podcast. One of the best parts is a regular segment he calls, “bad investment advice”, which takes aim at myths and misunderstandings about the markets. It’s not hard to find an article in mainstream media where the author is spinning half-truths, conflicted advice, and downright dangerous information to their audience. Dan not only found the bad investment advice, but picked apart the arguments to help his listeners uncover the truth.

It’s a shame that Dan has decided to stop producing new episodes of his podcast (this week’s ETF deep dive with Erika Toth will be the final episode) because the Toronto Star offered up some perfect fodder for his bad investment advice segment. In fact, you might call this recent column by Lesley-Anne Scorgie the worst investment advice of the year.

The original headline read, ‘Why Low Fee Investment Products Are Bad For You’, and if the editor was going for a click-bait title then it sure worked on me. I gave it a read, and started fuming. First of all, it read like a mutual fund ad. It made me think of the original Wealthy Barber (published in 1989) and the chapter on picking winning mutual funds that can generate a 12 percent return. Chilton himself has admitted this was a mistake, and corrected it in The Wealthy Barber Returns.

The author made all kinds of head-scratching and outrageous claims, including:

• “Your rate of return is more important than fees.” Actually, your rate of return is not knowable in advance. We do know the fees in advance, and a mountain of evidence says low fees predict better returns.
• “ETFs are one-third the cost of mutual funds.” The average equity mutual fund MER is north of 2 percent. Most market-tracking ETFs charge less than 0.20 percent. That’s one-tenth the cost.
• “The markets in North America have had a very good ride upwards since the beginning of 2016, when they’d taken quite a tumble. This has informed investors wondering if there is much more room for major market growth.” Huh?
• “Could it be that ETF investors are actually buying at a high rather than following Warren Buffett’s most important rule — to buy at a low and then sell at a high?” How dare you invoke Buffett!

Scorgie claims that with research and guidance investors can avoid poor performing investments and instead buy the ones “that are generating a strong rate of return (ROR).” To do that, investors should look for above-average rate of return for the majority of the past 10 years. She also claims there’s independent research that indicates the rate of return is worth the risk.

Finally, she closes with the most egregious take on fees – what you might hear from someone who’s paid to sell actively managed mutual funds with high fees:

“Even if the funds or your adviser’s fees total 2.5 percent, if the ROR is 12 percent, net of fees, you’re making 9.5 percent. So long as the net ROR is above the market ROR, you should be happy to pay those fees.”

Of course it would be great if we knew in advance that we could get a market beating return on our investments, after fees. Then her argument makes sense. But you can only know the return in hindsight. While, sure, a small percentage of actively managed mutual funds might beat their benchmark over a five or even a 10 year period, the vast majority don’t even come close. And it’s impossible to identify the winners in advance.

I got so worked up about this bad investment advice that I went on a bit of a Twitter rant:

Uhhh, ⁦@Lesleyscorgie⁩ – this is bad advice that reads like a mutual fund ad and has been refuted many times.

Why low-fee investment products are bad for you https://t.co/xBzWLECeXk

— Boomer and Echo (@BoomerandEcho) August 26, 2019

Three days later Scorgie offered up a lame explanation that blamed the Star for writing a ‘misleading headline’, which has since been changed to read, “Low fees are important, but don’t overlook net rate of return.”

Sure, the headline was click-bait and as authors we don’t always get to choose the title of our publications. But the problem was the content, not the title. And for that reason, this piece gets nominated for bad investment advice of the year.

This Week(s) Recap:

I’ve been busy working through beta-testing for the new MoneyGaps financial planning tool that I plan to launch in the fall. I’ve completed about half the assessments from the test group, and so far the feedback has been terrific! Thanks to everyone who expressed interest in joining the test group. We had more than 100 comments, but unfortunately could only take 20 people in the trial (even that has proven to be ambitious). But, I promise you’ll be impressed with the launch of this low-cost financial planning tool and I’ll have special introductory pricing for Boomer & Echo readers.

Last week I opened the money bag and answered reader questions about cell phone and data options for travellers, digital savings platforms, indexing versus dividends, and more.

Then I looked at CPP Payments and how much you’ll receive from Canada Pension Plan in retirement.

Earlier this week I shared an easy way to invest responsibly with RBC InvestEase.

Speaking of the RBC InvestEase platform, this article looks at the difference and similarities between their Responsible Portfolio and Standard Portfolio options.

Weekend Reading:

Lots of catching up in this edition of weekend reading, so let’s get to it!

Thanks to Jonathan Chevreau for including me in his latest MoneySense column about the pros and cons of dividend investing.

Stephen at Credit Card Genius explains how you can win 3,500,000 Aeroplan Miles with Air Canada.

Travel expert Barry Choi explains how credit card travel insurance works when booking a flight on points or miles.

A guest poster on Cut the Crap Investing looks at retirement funding and making the most of GIS and CPP benefits.

Jason Heath explains how to save for retirement when most of us aren’t saving much at all:

“Saving for retirement is not an algebraic equation. There is not just one answer, and the answer constantly changes. This is a frustrating financial fact at a time when we are used to getting answers on demand and making decisions based on short, sweet social media posts.”

Ted Rechtshaffen shares his view on why Canada should eliminate minimum RRIF withdrawals entirely. Interesting idea.

Michael James helps a reader who’s wondering whether to start drawing down his RRIF.

Michael Batnick, Ben Carlson and Downtown Josh Brown share the seven deadly sins of investing and why they can be so destructive to investors who aren’t aware of them:

Some people think teaching financial literacy is a waste of time unless we can deliver a ‘just-in-time’ solution as needed. But Preet Banerjee says it’s not time to give up on financial literacy.

My Own Advisor blogger Mark Seed shares 10 ways to get retirement ready.

I love hearing from actual early retirees (not bloggers) about their experience in retirement. Here’s one from the Tread Lightly, Retire Early blog.

City dwellers could be tempted to treat their house as a retirement plan. But what happens if they don’t want to move when they’re old?

As housing costs soar, families are struggling to decide whether to renovate or move.

Here’s Nick Magguilli on the investor arms race and why investing never gets easier.

Finally, Morgan Housel smartly explains why complexity and length sell, when simplicity and brevity will do.

Have a great long weekend, everyone!

This post is sponsored by RBC InvestEase Inc. All views and opinions expressed represent my own and are based on my own research of the subject matter.

Responsible investing is something on the minds of many investors today. They’re concerned about the environmental, social, and governance (ESG) aspects of economic activities. Once considered a fringe movement, retail investors increasingly want to incorporate these considerations into their investment decisions.

With a Responsible Investing Portfolio, like the one offered by RBC InvestEase, investors can help drive positive change by investing in companies aligned with their values without necessarily giving up financial returns.

What is responsible investing? How is it different from “standard” investing?

Responsible Investing (RI) describes an investment approach that measures how a company manages its Environmental, Social and Governance (ESG) risks in the operation of its business.

• Environmental factors include: Carbon emissions, waste disposal, water management.
• Social factors include: Workplace health and safety, labour management, privacy/data security.
• Governance factors include: Tax transparency, board independence and composition, ownership.

The Responsible Investing approach used in RBC InvestEase’s portfolios focuses on companies with the highest ESG factors. The process removes companies involved in the business of tobacco, controversial weapons, and civilian firearms while also omitting companies involved in severe controversies. The remaining companies are assessed on how effectively they manage their ESG risks.  The RBC InvestEase Responsible Investing portfolio emphasizes companies considered to be better managers of these risks versus their industry peers.

Open an RBC InvestEase account today and pay no management fees for 12 months!*

Who is responsible investing for?

It’s a personal choice.

The key is having that choice. RBC InvestEase offers both a Responsible Investing and a Standard portfolio to help clients reach their financial goals. I happen to think that any investor who contributes regularly and has the discipline to stick with their strategy will be successful with either approach.

Responsible Investing will appeal to those looking for choice and wanting to invest with companies that effectively manage environmental, social, and governance risks.

For those who are more focused on fees, or who are not drawn to Responsible Investing, a Standard portfolio remains an excellent solution.

Performance:

Can you expect the same kind of performance from responsible investing as what you’d expect from “standard” investing?

According to RBC InvestEase, they’ve selected an investment approach to Responsible Investing that should not result in lower returns after fees versus a standard portfolio over the long term.

Fees:

One of the knocks against Responsible Investing has been the relatively high fees to gain access to a managed portfolio. So, does it really cost more to invest responsibly?

RBC InvestEase charges the same low fee of 0.50% to manage both their Standard and Responsible Investing portfolios.

The ETFs used in the construction of RBC InvestEase’s Responsible Investing portfolios have a slightly higher management expense ratio (MER) versus their Standard portfolios. Put into dollar terms, if you pay a 0.07% higher MER on a $25,000 portfolio that’s only an extra $17.50 per year to invest in a Responsible Investing Portfolio.

Final thoughts

The world of investing is changing for the better with more individuals and companies linking sustainability efforts with the long-term health of organizations and the economy as a whole.

It’s possible to build an investment portfolio while also doing good things with respect to people and the planet.

Open an RBC InvestEase account today and pay no management fees for 12 months!*

*RBC InvestEase will pay boomerandecho.com a one-time fee when you open an account managed by RBC InvestEase, invest $1000 at account opening and maintain a minimum investment of $1000 for 90 days after the date of account opening.