Happy Father’s Day! Today seems like a good day to talk about the changes I plan on making to reboot our kids’ RESP portfolio.

For years, I’ve invested our RESP contributions into TD’s e-Series funds – contributing $416.66 per month and then buying one of four e-Series funds (Canadian, US, or International equities, plus Canadian bonds). Rather than rebalancing, I’d simply buy the fund that was lagging my target asset mix. This kept the portfolio in balance and relatively easy to manage.

I’ve often considered RESPs to be like a practice run for managing your retirement accounts. You’ve got a condensed timeline to contribute (17 years or so). You need to consider de-risking the portfolio as you get closer to accessing the funds. And, you need to manage withdrawals over a period of, say, four to 10 years. 

That means making difficult decisions around market timing, changing asset mixes, and tax efficient withdrawals. It’s not easy.

Further complicating things is that we have one family RESP portfolio with two beneficiaries of different ages. Our oldest daughter’s share of the pot should be a bit more conservative than my youngest daughter’s, but all of the funds are lumped together.

A lightbulb went off when PWL Capital’s Justin Bender released a video on how to invest your RESP. Justin brilliantly explained how to set up your family RESP in such a way that you can separate out each child’s share of the funds while still keeping costs low and the portfolio easy to manage. 

The TL;DW version is that you’d use an all-equity ETF, a short-term bond ETF, and eventually a high interest savings ETF from different ETF providers (say, Vanguard and iShares) for each child to separate their share of the portfolio. In fact, it’s very similar to the two-fund solution for investing in retirement that I wrote about recently.

So, I’ll just change my oldest daughter’s name to Vanguard, and my youngest daughter’s name to iShares as I attempt to reboot their RESP portfolio.

Rebooting the RESP Portfolio

It’ll take a few steps to make the appropriate changes in their RESP.

First, I need to determine the proportion of contributions, CESG, and investment growth assigned to each child. To do this, you can call the Canada Education Savings Plan hotline at 1-888-276-3624 and get a Statement of Account for each beneficiary. Have their Social Insurance Numbers handy.

Second, I’ll need to sell off the TD e-Series funds and then purchase the new ETF portfolio for each child.

Finally, I’ll need to stop contributing $416.66 monthly and instead contribute one lump sum of $5,000 in January. That limits my rebalancing efforts to once per year and also keeps transactions costs low since I’m switching from no-commission e-Series funds to potentially $9.99 per trade ETFs (if I keep this account at TD Direct). 

For all of these reasons it makes sense to start this portfolio reboot in January, 2024.

The Current TD e-Series RESP

Here’s what the current RESP portfolio of ~$92,000 looks like:

• TDB900 – Canadian Equity – $26,530
• TDB902 – US Equity – $28,815
• TDB911 – International Equity – $29,720
• TDB909 – Canadian Bonds – $6,935

As you can see, the current portfolio is way lighter on bonds than it should be for our kids’ ages. That’s partly the reason for this portfolio reboot – I know we need to de-risk the RESP as our oldest daughter is just 3.5 years away from making her first withdrawal(!).

I’m okay with that. You’ll see that Justin Bender’s proposed asset mix is much more conservative than I think most people would expect. But that’s because the lifetime of this account is actually much shorter than we think. Even the most aggressive investor in their own retirement account has to admit that it doesn’t make sense to hold a large portion of equities when you’re close to making significant withdrawals.

The newly rebooted RESP Portfolio (as of January 2024)

Remember, I’m going to contribute $5,000 in January, 2024 to front-load their contributions for the year. That will earn $1,000 in CESG. I’ll also assume some investment growth between now and the end of the year, bringing up the portfolio balance to $100,000.

I’ll assign 56% of the portfolio to my oldest daughter (now named Vanguard – sorry!), and 44% of the portfolio to my youngest daughter (now named iShares – again, sorry!).

Vanguard’s share of the pot will follow the age 14 glide path and look like this:

• VEQT – Global Equities – $11,200 (20%)
• VSB – Short-term Bonds – $44,800 (80%)

iShares’ share of the pot will follow the age 11 glide path and look like this:

• XEQT – Global Equities – $17,600 (40%)
• XSB – Short-term Bonds – $26,400 (60%)

Once Vanguard approaches university age I’ll add a new high interest savings ETF to the mix, which will cover at least that year’s expected withdrawals.

This change will represent a significant “de-risking” of our kids’ RESP portfolio but one that has been largely overdue.

Readers, if you manage an RESP I’d love to hear your thoughts on this proposed change.

This Week’s Recap:

A few weeks ago I asked if outsourcing was the key to happiness. Some interesting responses!

I also explained how investors can control their urgency instinct. Don’t just do something, stand there!

Earlier this week I looked at a simple way for retirees to manage their investments using just two ETFs.

Weekend Reading:

Is this the end for attainable home ownership in Canada? Sadly, that seems to be the case in some parts of the country.

More on the increasingly narrow path to owning a house, without becoming house poor.

Meanwhile, unaffordable Toronto and Vancouver are ranked as top cities for young people to live and work in.

The Globe & Mail’s Erica Alini explains why living with your parents in your 20s is becoming common financial advice (subs).

Investment industry lobbyists have fought hard against measures such as banning embedded commissions and providing a fiduciary standard of care, largely claiming this would drive advisors out of business and lead to an “advice gap” for regular Canadians. Preet Banerjee rightly argues that there isn’t so much an advice gap as there is a quality-advice gap.

PWL Capital’s Peter Guay wrote an incredible guide for families on how to pass on the cottage to the next generation.

Millionaire Teacher Andrew Hallam on why you find it hard to invest (plus, what makes the best investors).

Of Dollars and Data blogger Nick Maggiulli claps back at finfluencers, saying if you’re so rich, why are you so desperate?

“After all, if you’re so good at building wealth, why don’t you just go and build more for yourself instead of selling me on how to build it?”

Should you buy a covered-call ETF? You could, but you might be giving up as much as 9.5% in annualized returns.

What do to with a spousal RRSP at age 71? Converting the account to a spousal RRIF is a common option, but be aware of the income attribution rules.

A lot of research around retirement spending strongly suggests that spending declines as we age (go-go, slow-go, and no-go years) for reasons related to declining health and waning interest in travel and hobbies. But, as Michael James on Money has long argued, another reason for this is because of bad spending plans in the early retirement years that force spending cuts later in retirement.

Why buying a car has never been more expensive, assuming you can even find one.

Travel costs have also soared, but travel expert Barry Choi explains how loyalty programs can still help.

Finally, economist Tim Harford’s take on the cheese, the rats, and why some of us are poorer than others.

Have a great weekend, everyone!

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:

Chris

• RRSP – $268,000 (VBAL)
• LIRA – $121,000 (VBAL)
• TFSA – $80,000 (VGRO)
• Non-registered – $22,000 (VBAL)

Liza

• 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:

Chris

• 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)

Liza

• 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.

Final Thoughts

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.

As investors we face a constant barrage of information every day that triggers our urgency instinct. The urgency instinct makes us want to take immediate action in the face of a perceived imminent danger.

This instinct must have served us well in the distant past. If we thought there might be a lion in the grass, it wasn’t sensible to stop and analyze the probabilities. We needed to act quickly with the information we had.

Urgency instinct is still useful today when we need to take evasive action, but it can backfire when it comes to making complex decisions.

In his book Factfulness: Ten Reasons We’re Wrong About the World–and Why Things Are Better Than You Think, author Hans Rosling shared a painful yet important story about controlling our urgency instinct.

Working as the only doctor in Nacala, a district of more than 200,000 extremely poor people in Mozambique, Rosling diagnosed hundreds of patients with a terrible, unexplained disease that had completely paralyzed their legs within minutes of onset and, in severe cases, made them blind.

Not 100% sure the disease wasn’t contagious, Rosling met with the mayor to discuss their options. “If you think it could be contagious,” the mayor said, “then I must avoid catastrophe and stop the disease from reaching the city.”

The mayor was a man of action. He stood up and said, “Should I tell the military to set up a roadblock and stop the buses from the north?”

“Yes,” said Rosling. “I think it’s a good idea. You have to do something.”

The mayor disappeared to make some calls. The next morning, some 20 women and their youngest children were already up, waiting for the morning bus to take them to the market in Nacala to sell their goods. When they learned the bus had been cancelled, they walked down to the beach and asked the fishermen to take them by the sea route instead.

The fishermen made room for everyone in their small boats and sailed south along the coast. Tragically, nobody could swim and when the boats capsized in the waves, all of the passengers drowned.

That afternoon Rosling headed north again, past the roadblocks, to investigate the strange disease. Along the way he came across a group of people pulling bodies out of the sea. He ran down the beach to help, but it was too late. He asked one of the villagers, “Why were all these children and mothers out in those fragile boats?”

“There was no bus this morning,” he said. Several minutes later Rosling could barely understand what he had done, and 35 years later still never forgave himself.

Why did he have to say to the mayor, “You must do something?”

Rosling writes,

When we are afraid and under time pressure and thinking of worse-case scenarios, we tend to make really stupid decisions. Our ability to think analytically can be overwhelmed by an urge to make quick decisions and take immediate action.

Recognize when a decision feels urgent and remember that it rarely is. To control the urgency instinct, take small steps:

• Take a breath. When your urgency instinct is triggered, your other instincts kick in and your analysis shuts down. Ask for more time and more information. It’s rarely now or never, and it’s rarely either/or.
• Insist on the data. If something is urgent and important, it should also be measured. Beware of data that is relevant but inaccurate, or accurate but irrelevant. Only relevant and accurate data is useful.
• Beware of fortune-tellers. Any prediction about the future is uncertain. Be wary of predictions that fail to acknowledge that. Insist on a full range of scenarios, never just the best or worst case. Ask how often such predictions have been right before.
• Be wary of drastic action. Ask what the side effects will be. Ask how the idea has been tested. Step-by-step practical improvements, and evaluation of their impact, are less dramatic but usually more effective.

As investors our instincts are constantly put to the test. Like during the last quarter of 2018 – when the market bottomed out on Christmas Eve after nearly a 20% decline. Or during the onset of the pandemic, when markets crashed 34% in March 2020. Or in 2022, when stocks and bonds crashed after Russia invaded Ukraine and central banks began hiking interest rates to curb inflation.

Gloomy headlines often proclaim the worst days ever for the stock market, while market pundits almost gleefully predict more pain in the future.

Did you act on your urgency instinct and make changes to your portfolio during any of those periods? Cut your losses and move to cash? Or did you control the urge and stick to your plan?

Patient investors have always been rewarded handsomely for staying the course. Despite the volatility and some doom and gloom, a global stock portfolio would have earned an annualized return of 10.13% over the past 10 years.

Final thoughts

“Back in Nacala in 1981, I spent several days carefully investigating the disease but less than a minute thinking about the consequences of closing the road. Urgency, fear, and a single-minded focus on the risks of a pandemic shut down my ability to think things through. In the rush to do something, I did something terrible.”

We spend years carefully crafting our investment strategy, saving diligently, and promising ourselves we’ll stick to our plan through thick and thin. But all of that planning can be wiped away when something triggers our urgency instinct and forces us to act irrationally.

Maybe you heard about an investment opportunity and had to ‘act now or lose the chance forever.’ Or, the slightest market correction triggers financial crisis flashbacks and you panic.

Relax. Take a breath. Things are almost never that urgent – especially when it comes to investing.

As the late Jack Bogle once said, “don’t just do something, stand there.”