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Using a Robo-Advisor in Retirement: A Wealthsimple Case Study

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 their first $10,000 managed free for one year when they open up a new Wealthsimple account? 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.

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25 Comments

  1. John S. on September 4, 2019 at 4:00 pm

    This is very thought provoking for me, as well as timely. Am just at the cusp of accepting that I’m not going to work anymore. Wife has been retired for about 10 years and has a DB. We’re wondering if we can live on what we have. This option seems to fit the bill. At least we’ll have a serious look at the options and talk to one or more robos for opinions. Thanks for putting this into our sphere for consideration.

    • Robb Engen on September 5, 2019 at 12:01 pm

      Hi John, thanks for sharing. I get a sense that many readers are feeling the same angst about retirement and how to make all this work. It’s great to see some solutions in the marketplace to help solve the retirement income puzzle.

  2. Charlie on September 4, 2019 at 7:26 pm

    Hi Rob,
    Great example and something my wife and I are considering as well.

    What are your thoughts on just going with an asset allocation etf like vbal across all your accounts? Easy, risk appropriate, diversified and would essentially follow a total return approach. Lower fees vs robo advisor as well.
    Thanks

    • Robb Engen on September 5, 2019 at 12:06 pm

      Hi Charlie, thanks so much. I’m a big fan of the asset allocation ETFs for the reasons you’ve described. The simplicity, global diversification, low fee, and automatic rebalancing between your equities and bonds.

      I think VBAL is completely appropriate for retirees to hold as long as part of their overall retirement portfolio, which I’d hope would also include enough cash on hand for 1-3 years.

      As the situation becomes more complex, with multiple accounts across the household, a robo-advisor solution like this makes a lot of sense to help manage withdrawals.

  3. christina on September 4, 2019 at 10:41 pm

    Is this describing wealth simple black where you need 100k plus or the generation plan where you need 500k+? I think you should clarify that.

    • Robb Engen on September 5, 2019 at 12:11 pm

      Hi Christina, you’re right. Wealthsimple offers three different tiers of pricing / service. Wealthsimple Black starts at $100k, and Wealthsimple Generation starts at $500k. In this example, the couple would be receiving the Wealthsimple Generation treatment.

      I did confirm that Wealthsimple Generation is done on a household basis. For example, if both spouses have $250k that would qualify for Generation.

      Wealthsimple Black includes:

      – All Basic plan features
      – Wealthsimple Invest – 0.4% fee
      – Financial planning session
      – Tax loss harvesting
      – Tax efficient funds
      – VIP airline lounge access

      Wealthsimple Generation includes:

      – All Black plan features
      – In-depth financial planning
      – Asset location
      – Dedicated team of advisors
      – Personalized financial report
      – Individualized portfolios
      – 50% off Medcan health plan

  4. John F. on September 5, 2019 at 6:54 am

    We are in the same boat, more or less, as John S. (see his comment) and I really like what I am reading. The example you use kind of hits the spot. Makes one wonder though: Could it really be that easy? Definitely worth looking into.
    Thanks for the article Robb.

    • Robb Engen on September 5, 2019 at 12:13 pm

      Hi John, thanks for your comment. The retirement income puzzle is one of the greatest financial planning challenges we face and I think this robo solution can help many investors navigate their way through retirement without making expensive errors on their own.

  5. Tom on September 5, 2019 at 8:13 am

    I am curious as to how Wealth Simple actually executes a RIF transfer and the subsequent tax withholding (if possible) and monthly withdrawal/bank deposit as is done by my current adviser (for a seemingly hefty fee.)

    • Robb Engen on September 5, 2019 at 12:14 pm

      Hi Tom, I reached back out to Michael Allen at Wealthsimple to answer this question. Here’s what he had to say:

      The transfer process is very seamless and should take a minute or two to set up. The client will fill out the transfer form online and Wealthsimple will deal directly with the delivering institution. If the RIF minimum was not taken out throughout the year at the delivering institution Wealthsimple can assume responsibility for this withdraw by attaching a Letter of Assumption to the transfer form, if the client instructs us to do so. There is no withholding tax on RIF minimums. Above the RIF minimum the withholding tax is cumulative.

      Example:
      2019 RIF Min Withdrawal = $5,000

      First RIF withdrawal of $5,000 = No withholding tax
      Second RIF Withdrawal of $5,000 = 10% withholding
      Third RIF Withdrawal of $5,000 = 20% withholding tax
      Fourth RIF Withdrawal of $5,100 = 30% withholding tax

      Wealthsimple can set up any frequency for withdrawals (weekly, biweekly, monthly, annual, etc) to be deposited into your bank account. You should not be charged to access your funds. There are no fees to withdrawal funds at Wealthsimple.

      • Tom on September 5, 2019 at 1:16 pm

        Thank you.
        Since I began withdrawing from my RIFs two years ago, on the advice of my accountant, I requested a 35% tax withholding.
        I can see there are some resultant monthly administrative charges and also because a portion of each month’s withdrawal is taken from each fund held in my RIF.

  6. Curt on September 5, 2019 at 10:53 am

    You’ve struck a very common chord here. I knew we weren’t
    alone, but to see the comments really brings it home. I suggest careful decumulation is not in the top tier of financial institutions’ “best interests”. Ergo, the lack of good documentation and guidance. We have an excellent DBPP, the usual CPP and OAS, each, and a combined mid 6 figure portfolio that needs integration and reasoned pruning. Great article… again

    • Robb Engen on September 5, 2019 at 12:23 pm

      Hi Curt, thanks so much. I agree with your assessment about the banks and their conflict of interest with decumulation.

      Look at the Wealthsimple example to defer CPP to age 70. What bank advisor would ever tell you that? No, instead they’d push to take it early and invest it with them.

      What often gets overlooked in the discussion about robo-advisors is that their portfolio managers have a fiduciary duty to look out for your best interest. You get this for a very small management fee (0.4 to 0.5 percent).

  7. Dale Roberts on September 6, 2019 at 6:28 am

    Thanks Robb, at Tangerine I witnessed the core index based approach work more than well for retirees. I’d see RRIF accounts paying out that generous amount and holding steady on their value for many years.

    Simple works. And so does dividend growth and income investing or tweaks. I wrote on that this week and linked to your personal evolution posts – accumulation and retirement approach.

    The most important part is to have a simple low cost plan. And getting some advice is key as well. There are so many basic mistakes made in the order of asset harvesting, that includes CPP and OAS and GIS.

    Nice to see that Wealthsimple is taking care of their retirees in a detailed and personal manner.

    Thanks, Dale

  8. Garth on September 6, 2019 at 9:59 am

    I would like to know more about how Wealthsimple determines the withdrawal amount. Is it a constant based off of the initial portfolio balance? Is it adjusted for annual inflation?

    On first glance it looks like a pretty aggressive burn rate. It also looks like it carries a rather large sequence of returns risk.

    • Robb Engen on September 6, 2019 at 10:14 am

      Hi Garth, it seems to me the withdrawal rate is about 4% of the portfolio and was determined by their spending needs of $80,000 per year (minus what they were receiving from OAS).

      Since the recommendation was to defer CPP until age 70 the goal is to spend down the RRIFs more aggressively for five years to replace the missing CPP (until age 70). Once CPP kicks in, the withdrawals could come down.

      Typically the spend is adjusted for inflation. Let’s also assume the RRIFs were spent first and the TFSAs were left intact.

      Finally, the case study mentions their portfolio was sufficient to meet their spending needs until age 95, and still leave an estate of $500,000 (which sounds like a nice cushion).

      • Garth on September 7, 2019 at 9:03 am

        Don’t get me wrong, I really like having the idea of a robo offering retirement spending services. I am hoping that someday they will offer spend down strategies (dynamic or variable) that can eliminate sequence of return risk.

        Constant withdrawal strategies can result in such a wide range of outcomes…from running out of money at one extreme, to dying with a huge amount of unspent treasure at the other.

  9. Mary on September 8, 2019 at 7:42 am

    Hi Robb, very interesting article. We, retirees or soon to be, are needing more information on healthy lower risk decumulation phase, thank you!

    I read the very interesting Mindy example from Dan Bortolotti and I’m wondering what would her strategy be to replenish her GIC ladder if the market was to crash while the bonds are providing very low yield and GICs barely paying interest as presently.

    Your thoughts?
    What’s your strategy for retirement income/cash flow?

    • Robb Engen on September 8, 2019 at 8:49 am

      Hi Mary, thanks for your feedback. The point of holding bonds and GICs is not so much for yield but to preserve your capital in the event of a market crash. When stocks are down it would make sense to sell bonds to either rebalance your equity allocation and/or to refill your GIC or cash bucket.

      My own strategy will be to add up all of my fixed income sources (CPP, OAS, DBP) and then determine how much I need to meet the rest of my spending goals. From there I’d split my portfolio into long-term equities, short-to-medium term bonds, and 1-3 years of spending cash.

  10. Albert on September 8, 2019 at 8:33 am

    Timely article. Our couple retired some years back and I manage the whole portfolio, though, close to 70, I’m getting a bit tired of looking at my computer screen too often. I manage 7 accounts (joint taxable, TFSAs, LIFs and RRSPs). I have $US and $CAD investment in the taxable account.

    Some questions still bugging me:

    How does Wealthsimple deal with $US in taxable account?
    What about mandatory LIF withdrawal?
    Does the “robot” take into account to transfer some money into TFSAs every year?

    Thanks for your insight!

    • Albert on September 8, 2019 at 8:43 am

      Edit: Forgot to ask one important question:

      Do we need to sell all equities in all accounts before moving over to something like Wealthsimple, because they only carry ETFs I presume?

      My concern is that in the taxable account that would trigger some hefty capital gains.

    • Robb Engen on September 8, 2019 at 8:55 am

      Hi Albert, thanks for your comment. I’d imagine the ‘automation’ of the robo-advisor takes into account your entire portfolio and designs the most tax efficient withdrawal plan. Where the advisor comes in is to deal with the ‘human’ element and the subtle nuances of everyone’s unique situation (that can’t be captured by an algorithm).

      Best to set up an appointment for a free call and find out for yourself: https://wealthsimpleappointments.as.me/boomerandecho

  11. Denis on September 14, 2019 at 5:46 am

    Robb (and others)

    I read this week about Burry from the Big Short saying that the next crisis will be from ETFs since money has been piling into them and they have created a bubble as bad as CDO. He stated they are inflating stock and bond prices.

    I think that I also read that the big drop from last December was due to people getting nervous, getting out of stock ETFs and thus, causing that relentless selling.

    Now that we are near market highs again, I have been selling up to 33% cash.

    What do you think?

    • Denis on September 14, 2019 at 6:07 am

      I just read the rebuttal to Burry in your weekend reading. Sure ETF never caused a crash but CDOs caused a crash for the first time as well, also dot com as well. He claims that this won’t cause it but most crashes are due to investors all rushing into something and then rushing to get out. It happens over and over again.

      • Robb Engen on September 14, 2019 at 9:51 am

        Hi Denis, your portfolio should be built to withstand any market event – meaning it shouldn’t matter whether markets are at all-time highs or they’re correcting – you should be comfortable with your holdings and not try to time the market (especially not because of some news article or headline).

        From Justin Bender, portfolio manager at PWL Capital, responding to a similar question:

        “The ETF bubble warning is nonsense (I would completely ignore this active management fear mongering tactic). Michael Burry was likely bleeding assets and wanted to stop the bleeding (it probably worked).

        ETFs can become overvalued if their underlying holdings are overvalued. If you stick with plain-vanilla ETFs (which have very liquid underlying holdings), there shouldn’t be any issues with liquidity in the next market downturn.

        ETFs that hold illiquid securities (like high-yield corporate bond ETFs) could face extremely wide bid-ask spreads in a market downturn.”

        I’m also working on a post with BMO’s ETF director to dispel some of these myths about ETFs. Stay tuned for that one.

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