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Why keep so much in a savings account?
September 4, 2021
2:11 pm
Bruford
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So we can be ready to POUNCE when the market collapse.

September 4, 2021
2:22 pm
AltaRed
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Kidd said
Sorry BUT the original question was... why do you keep so much in savings?  

There are a number of reasons to have X in HISA accounts and/or GIC ladders. One of them is to be the 5? or 10? year fixed income component in an otherwise all equity portfolio. Or to be a portion of the fixed income component of, for example, a 60/40 balanced portfolio. Or - take your pick.....

September 4, 2021
2:51 pm
dougjp
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Kidd said
Sorry BUT the original question was... why do you keep so much in savings?  

OK there are already lots of answers, mainly in the first 2 1/2 pages of this thread, but after there too.

I'll add some more.
- Bad decisions.
- Too short GIC and other asset terms picked originally on the assumption the historically very low rates 2-3 years ago wouldn't drop further, but rather would go back up.
- Thinking the stock market drop 1 1/2 years ago would to sustain or get worse because of the pandemic.
- To repeat Loonie's point in a slightly different way, retirees concerned about buying stocks that are at historically high levels, that equity would be lost.
- "Waiting for Godot" syndrome.
- Seizing on interest rate specials in HISA and GIC and then in the former case, not wanting to leave while better than market rates are being paid, and in the latter case, money locked in for the term.
- Peace of mind.

"Tell a man that there are 400 billion stars and he'll believe you. Tell him a bench has wet paint and he has to touch it." ~ Steven Wright

September 10, 2021
2:15 pm
Norman1
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dougjp said


I'll add some more.
- Bad decisions.

- Thinking the stock market drop 1 1/2 years ago would to sustain or get worse because of the pandemic.
- To repeat Loonie's point in a slightly different way, retirees concerned about buying stocks that are at historically high levels, that equity would be lost.

It would be unfortunate if those were the reasons.

Those "unlucky" to have invested in the stock markets in 2007 nearly doubled their investment by 2017.

September 10, 2021
2:26 pm
Norman1
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Loonie said

We are very far along in a bull market. Anyone who counts on coming out at 6.5% annually in growth stocks in 10 years might well be in for a disaster. In the scenario described, the retiree is absolutely dependent on this outcome. This is far too risky.

A more sensible and well thought out approach to securing retirement income for middle income people can be found in Frank Vettese's book, Retirement Income for Life, second edition 2020.

One shouldn't be counting on a particular rate of return. One should be counting on getting a higher rate of return than from GIC's and bonds.

That's the problem with some: Too fixated on having a rate of return predictable to two decimal places. That certainty and precision are what one trades off to achieve the higher rates of return with stocks. If one can't make that trade off, then one should stay away from stocks as one will bail at the next correction.

Life annuities are not the answer. One will never run out of money. But, returns are poor unless one survives significantly past the average expectancy these days of around 84 years. However, you literally won't live to complain about it!

September 10, 2021
3:11 pm
Loonie
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Did someone say something about annuities? I don't recall that being mentioned but perhaps it was.
Perhaps you were thinking of the fact that Vettese has advocated them as a useful income stream to help guarantee a sustainable retirement.
Before dismissing them, I suggest the curious reader absorb Vettese's second edition of Retirement Income for Life. He gives a lot of detail on the pros and cons and related research. The research he cites indicates that it will be useful or neutral for most people but not all, and that it is less useful than it used to be due to low rates.
If someone wants to read it and tell me where he's wrong, I'll listen, although i sent my library copy back already. Avoid the first edition as the second one has significant revisions.
As Norman has noted in a roundabout way, post-mortem regret is not really the primary consideration; having a sustainable income for life is.

September 10, 2021
4:34 pm
COIN
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Annuities don't pay much now because of the super low interest rates.

September 10, 2021
4:54 pm
AltaRed
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Loonie said
As Norman has noted in a roundabout way, post-mortem regret is not really the primary consideration; having a sustainable income for life is.  

I agree but from a different perspective. Those who are predominately in fixed income products like GICs and HISAs have taken a thorough beating over the past several years. There clearly has been a loss of recurring income.

In the meantime, equities have been just marching along, with one sinkhole (2008-2009) and one pothole (Mar-Apr 2020) along the way. In the meantime, had one owned units of XIU ETF, which represents the TSX60 index, one would have quadrupled their annual distributions per unit over the past 20 years, for a distribution compound annual growth rate somewhere in the 7% range per year. The future may not be nearly as rosy for dividend growth rates but it sure beats stagnant, if not decreasing investment income off GICs, bonds and HISAs.

The point is that it is risky to put all of one's eggs into one asset class. No one can be certain that a particular asset class will be a winner or loser on a forward basis and it is best to have a foot in each one.

September 10, 2021
5:26 pm
Bill
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If equities always beat GICs in the long run, if the future is that dividends will beat gic interest income, what's the point of telling young people to diversify? Fixed income portion will just be a drag on their portfolios over the long-term, should be 100% in equities.

September 10, 2021
6:19 pm
savemoresaveoften
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Bill said
If equities always beat GICs in the long run, if the future is that dividends will beat gic interest income, what's the point of telling young people to diversify? Fixed income portion will just be a drag on their portfolios over the long-term, should be 100% in equities.  

There is no 100% certainty in anything.

September 10, 2021
7:54 pm
Norman1
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For 10+ year money, it should be 100% in equities. The fixed income portion will be a drag.

However, not all the money can be left for 10 years or more. Wouldn't want the next two years of money for living expenses in equities. Might have a temporary setback, like in 2008 or 2020, and end up 30% short when selling that year.

September 10, 2021
7:56 pm
AltaRed
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Most withdrawal plans include some depletion of invested capital so one would prefer to tap into fixed income assets in the years equities are down. Further, there are also those big one off expenses such as a home reno or a new Porsche where one would want to tap into extra invested capital. Plus there is that sleep-at-night factor.

I am heavily into equities in my portfolio but I still have HISA assets as a check and balance and insurance policy that helps me sleep at night. 100% in anything is unnecessary risk taking.

September 11, 2021
6:39 am
Loonie
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I would agree with both of you, but I would add that we were talking about retirees. Retirement doesn't last forever. Ten years is an absolute minimum if you want to be reasonably confident about return on equities. Longer is much better. For a great many retirees, and for all of you as you age, that is not a realistic horizon, so you need to have enough money in fixed income and pensions to ensure your standard of living for quite a while.

Given the current turbulence in climate and so many "unprecedented" phenomena, I would not count on ten years being adequate because that is based on an assessment of the past rather than the future. But it's also hard to predict currency stability, inflation, returns from some pension plans, government initiatives, etc., so the answer is not crystal clear. Some of us are going to get a 10% boost in OAS starting next July and already received a $500 bonus, which can impact income planning and tax planning, but the rest of you will have to wait until you too are 75 (and some will have all or part clawed back).

It's all a moving target. Vettese recommends that retirees run his calculator annually to determine how much they can spend without endangering their sustainability, although it is an imperfect instrument.

Again, for middle income people, I strongly recommend a close reading of Vettese and Diamond, who get into a lot of detail about how to ensure an adequate sustainable income in retirement - more than any of us can get into here.

As they both note, decumulation or spending down one's assets in retirement is not a subject that has gotten very thorough attention and is quite tricky. The investment industry is focused on accumulation and doesn't do much to encourage it. Decumulation strategies are somewhat counter-intuitive, in part because of the continuous emphasis on accumulation in the industry and the media.

September 11, 2021
7:26 am
dougjp
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Norman1 said

dougjp said


I'll add some more.
- Bad decisions.

- Thinking the stock market drop 1 1/2 years ago would to sustain or get worse because of the pandemic.
- To repeat Loonie's point in a slightly different way, retirees concerned about buying stocks that are at historically high levels, that equity would be lost.

It would be unfortunate if those were the reasons.

Those "unlucky" to have invested in the stock markets in 2007 nearly doubled their investment by 2017.  

Can't make decisions in hindsight. And I should have clarified that everything mentioned relates to retirees in their 70's or +. So some of these decisions looked good at the time, in that context.

For example, when it comes to 'pandemics' (and most other topics too), people have short memories and probably only think of the world economy and the stock market getting out of SARS unscathed. And re: the timing of buying stocks - my view is the approach changes compared to earlier years. When young, timing of purchase doesn't matter.

To Loonie's last paragraph comment above, decumulation and intentional spending can be huge factors for some.

Tax strategies also change in retirement compared to younger years. For example, I find being obsessed with continuous tax deferral for many years has melted away and partly replaced by things like larger RRIF withdrawals, as long as it doesn't trigger clawback or major tax increases. I like getting funds into tax paid status, not just for beneficiaries, but also to invest with more freedom (even if it only means the gap between earning 1.25% on cash vs 0.25% within a RRIF).

To me, Cash is King, not as a technical mathematical exercise, but as a lifestyle. I currently have 58% in the market. Now if there is a market correction, that will increase. sf-wink

"Tell a man that there are 400 billion stars and he'll believe you. Tell him a bench has wet paint and he has to touch it." ~ Steven Wright

September 11, 2021
7:33 am
Bill
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Not sure where the 10 years comes from, maybe there's research underpinning that. The US stock market peaked in 1929 and didn't get back to that level until about 1954 so for 25 years 100% fixed income would have been better. But, just as our civilization will be the first never to decay, we all know that such ancient history is irrelevant, similar events can never happen to our modern society.

With regard to young investors, I'd advise them to examine a broad range of human history as older folks tend to regurgitate advice based on their particular few decades of experience, imo.

And don't forget that we all have significant equity exposure already via our government and workplace pension plans' investments.

September 11, 2021
7:46 am
cgouimet
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Norman ... You need a better RIF! Where the h___ are you getting 0.25%?

September 11, 2021
8:15 am
dougjp
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cgouimet said
Norman ... You need a better RIF! Where the h___ are you getting 0.25%?  

That's a comparison of available savings accounts (cash) in and out of a RRIF.

"Tell a man that there are 400 billion stars and he'll believe you. Tell him a bench has wet paint and he has to touch it." ~ Steven Wright

September 11, 2021
8:20 am
cgouimet
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dougjp said

That's a comparison of available savings accounts (cash) in and out of a RRIF.  

Perhaps a Sr or stupid moment but I don't know what that means ...

September 11, 2021
8:28 am
Norman1
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COIN said
Annuities don't pay much now because of the super low interest rates.

I think life annuities have always been poor investments, even when interest rates were higher. They are insurance against the financial consequences of living a long time.

Insurance is never free and the cost of the insurance is reflected in the lower return compared to underlying bonds.

I did a calculation in 2017. Internal rate of return is a pittance unless the annuitant survives significantly longer than expected life expectancy.

September 11, 2021
8:40 am
dougjp
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cgouimet said

Perhaps a Sr or stupid moment but I don't know what that means ...  

You can't shop rates and move money into these;

https://www.highinterestsavings.ca/chart/

You are stuck with available inside registered savings accounts. For example;
https://www.renaissanceinvestments.ca/products/hisa

Some are 0%, or 0.15% in the case of Manulife. Some RRSP/RRIF in discount brokerages only have captive investment savings available and don't allow going to other FI's products. I believe TD operates that way, or used to years ago.

"Tell a man that there are 400 billion stars and he'll believe you. Tell him a bench has wet paint and he has to touch it." ~ Steven Wright

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