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At what rate would you re-allocate the majority of your portfolio to fixed income?
June 5, 2022
7:56 am
savemoresaveoften
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Alexandre said

Bill said
I just personally don't get how one can do such specific calculations to determine 6% exactly, i.e. not 5.75%, or 6.25%, is the magic number... 

It is basics, but first step is to start tracking your retirement income and expenses.  

But the biggest wild card is the inflation which directly drives your expenses.

June 5, 2022
8:01 am
AltaRed
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savemoresaveoften said

If one is willing to take name risk and dont need to regularly sell to supplement income, one can add corporate bonds, pref shares and high yield bond funds to the mix. Personally I just hand pick a few high yield bonds myself ($5k-$10k a name for diversification), instead of paying a PM up to 100bps a year for it (HY bond funds)  

High yield bonds have higher insolvency risk. They feel safe until they are not (as in a financial crisis and one is held hostage). But this post is less about that than about the spread (cost) one is taking buying such low face values in bonds.

Individual bond commissions vary a lot by brokerage and are atrocious at some (such as BMO Investorline) and built into the bid/ask spread, while more granular and transparent at others (Scotia iTrade). The minimum par value one should be buying is ~$25k to make commissions less than $1/$1000. That would cost $25 at Scotia (not including the bid/ask spread) based on the formula 1$/$1000, minimum of $24.99. Purchasing only $5k raises the commission "rate" by a factor of 5 (5$/$1000).

I do agree high yield bond ETFs have high MERs but they do provide diversification risk in event of some going insolvent. For the record, I don't buy pure bond funds/ETFs of any type but have bought BBB investment grade corporate bonds like Enbridge and Capital Power in the past.

Added: I do agree though with the premise that one can diversify across fixed income types though I consider preferred shares a hybrid security. It is technically an equity whose market value can vary tremendously like that of a long bond. Prefs are not for novice investors albeit they are most often held by retail investors.

June 5, 2022
8:06 am
lifeonanisland
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Bill said
Yes, lifeonanisland, I do completely agree everybody's situation is different. I just personally don't get how one can do such specific calculations to determine 6% exactly, i.e. not 5.75%, or 6.25%, is the magic number, given that for me there's a lot of guesswork/estimates involved in how the future plays out. But that's just me, i.e. aside for tax purposes I've never done much specific calculations re my money, I've always kind of broad brushed my finances, so credit to you if you can calculate the GIC rates that let you sleep soundly.  

Well, you're correct in the sense that it's dynamic situation...in other words, what will the situation be when rates hit 6 percent? Will the impact on the economy and Canadian households be so dramatic that rates will soon be reduced to reintroduce some stimulus? Or will inflation be so sticky amidst a backdrop of low unemployment that further hikes are surely coming? Lots can change. All I'm saying is that the number in my head at this point would be six. My wife and I haven't had any debt for 30 years, and have saved and invested well for retirement. Six percent laddered GICs, diversified across multiple institutions in TFSA, RRSP and cash accounts, would provide a very comfortable income for us, regardless of what inflation brings--and in a manner that is uncomplicated, and as worry-free for us as possible (if CDIC-insured GICs fail, then I think the stock markets/economy as we know them are pretty much gone as well). To each their own.

June 5, 2022
8:18 am
AltaRed
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While I recognize what post #23 is saying, it is akin to a frog in a pot. 3% annual inflation will double costs every 24 years (not so bad for a 30 year retirement) but it gets really tough if annual inflation is 6% where living expenses are up 4 times or 400% in the same 24 years. Maybe less, maybe more for seniors depending on their cost mix, e.g. rent vs own, health care demands, etc, etc.

A specific percentage number only makes sense for today, based on individual perceptions of forward inflation.

June 5, 2022
8:30 am
Alexandre
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savemoresaveoften said

But the biggest wild card is the inflation which directly drives your expenses.  

Inflation does drive my expenses. It is included in my "magic number" that Bill mentioned.

In 2021, I needed 2.31% average interest in my HISA/GIC to break even. For actual 6 months of 2022 I have my data for, extrapolated to the whole year, it is going to be 2.50%. Which is consistent with inflation of about 8% (2.50/2.31=1.08).

Yet, it is much easier to find 2.5% HISA and short term GICs in 2022 than it were to find 2.3% in 2021.
In fact, currently more than half entries in GIC chart for one year GICs exceed 3%. HISA promos over 2.5% are nothing extraordinary.

June 5, 2022
8:35 am
lifeonanisland
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AltaRed said
While I recognize what post #23 is saying, it is akin to a frog in a pot. 3% annual inflation will double costs every 24 years (not so bad for a 30 year retirement) but it gets really tough if annual inflation is 6% where living expenses are up 4 times or 400% in the same 24 years. Maybe less, maybe more for seniors depending on their cost mix, e.g. rent vs own, health care demands, etc, etc.

A specific percentage number only makes sense for today, based on individual perceptions of forward inflation.  

I understand this, and have factored this into my personal situation. Not sure you understand. The figure I referred to does not require even touching my principal, which can allocated as changing conditions require. Too many people complicate this. I might be a frog in water, but imagine it as a crystalline pool with a regulated, pleasant temperature -- not a pot.

June 5, 2022
10:09 am
savemoresaveoften
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lifeonanisland said

I understand this, and have factored this into my personal situation. Not sure you understand. The figure I referred to does not require even touching my principal, which can allocated as changing conditions require. Too many people complicate this. I might be a frog in water, but imagine it as a crystalline pool with a regulated, pleasant temperature -- not a pot.  

Yes if one is lucky enuf to have a big enuf pot to generate income that principal does not need to be drawn down at all, then some %number for income makes sense. However the majority relies on a principal drawn down over time to fill the gap.

June 5, 2022
10:12 am
Loonie
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savemoresaveoften said

If one is willing to take name risk and dont need to regularly sell to supplement income, one can add corporate bonds, pref shares and high yield bond funds to the mix. Personally I just hand pick a few high yield bonds myself ($5k-$10k a name for diversification), instead of paying a PM up to 100bps a year for it (HY bond funds)  

Yes, I did consider these options as possible alternatives to GICs etc but decided not to include them because of the added risk and volatility.

June 5, 2022
11:14 am
Bill
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If you don't want to exceed CDIC limits then there's only so much you can put at each bank so that means some of your GICs (if you've got a nice pile all in GICs) might have to be at banks with relatively unattractive rates, something to factor in when you're aiming at a particular overall rate number. Unless you're comfy with higher credit union insurance limits.

June 5, 2022
11:15 am
Dean
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Dean said

Silly people ... GICs are just so 'Yesterday'.

Bitcoin is Low now. It's time to Dive-In . . .

Kowa-Bunga ❗❗

    Dean sf-wink

  

lifeonanisland said

Exactly.  

Good on you, Lifeonanisland. At least there's two Smart people here ... LOL

    Dean sf-cool

sf-cool " Live Long And Prosper " sf-cool

June 5, 2022
12:00 pm
AltaRed
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lifeonanisland said

I understand this, and have factored this into my personal situation. Not sure you understand. The figure I referred to does not require even touching my principal, which can allocated as changing conditions require. Too many people complicate this. I might be a frog in water, but imagine it as a crystalline pool with a regulated, pleasant temperature -- not a pot.  

I do get it loud and clear but whether one can do it with, or without, touching principal is really not the issue. It is simply a matter of how to get the cash flow to meet annual expenses which increase with inflation. That might, or might not, come solely from matching increases in investment income by seeking out higher return products.

Today 5% in invested capital (principal) might do it but next year it might not because one's capital (principal) has also depreciated in real terms. At 3% annual CPI, today's $1M is only worth $500k in real terms 24 years from now.

June 5, 2022
12:19 pm
Bill
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If you're retired and your present GIC and other income is double your needs you might not care that in 24 years every million you have is worth half what it is today, especially if you think equities might not do well in the future. That's what I'm understanding.

June 5, 2022
12:31 pm
AltaRed
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Bill said
If you're retired and your present GIC and other income is double your needs you might not care that in 24 years every million you have is worth half what it is today, especially if you think equities might not do well in the future. That's what I'm understanding.  

That is entirely possible but I don't necessarily see that in at least some of the posts, or at least that is not made clear. Such is the imprecision of posts.

June 5, 2022
1:04 pm
lifeonanisland
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AltaRed said

That is entirely possible but I don't necessarily see that in at least some of the posts, or at least that is not made clear. Such is the imprecision of posts.  

AltaRed, how about this: you do you and I do me. The OP was curious as to what rate others might pull the trigger on. I replied based on what I've carefully thought out. The number I suggested works so well for us that we'd probably defer CPP and OAS until 71. So agonize all you want on depreciating capital; I have no need for investing in equities in a highly fraught-with-danger environment. And I suspect that the OP is also in a similar position.

June 5, 2022
2:34 pm
AltaRed
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A discussion with a range of views and considerations would seem to be beneficial to all. That is all it is.

June 5, 2022
3:38 pm
RetirEd
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Bitcoin is like Beanie Babies. Someone has to want it, as it has no base value. Less than Beanie Babies, actually.
RetirEd

June 5, 2022
3:40 pm
Bill
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Alexandre, I agree, your approach can work if you're buying 1-year GICs and using HISAs i.e. you can pretty well match current year expenses with revenue. But if you buy a 5-year GIC you can't be guaranteed your expenses in the last few years won't go up a lot due to spike in inflation (like now) yet your revenue's stuck with the GIC rate for the duration.

And I agree, AltaRed. I'm pretty sure most of us get that no-one is here to try to stop anyone from "doing me", we actually really don't care at all if a stranger buys 100% GICs, 100% crypto, or 100% firearms and goats, but we do ask questions, etc to understand and maybe learn too.

June 5, 2022
4:04 pm
NCC1701Z
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lifeonanisland said

Well, Bill, I don't really care if you don't see the logic of my magic number of six. The point is, it's perfectly logical given my situation. If we see persistent 12 percent inflation, the proceeds of my 6 percent ladder would still cover me nicely. If it's higher than that, well, I guess I'll have to dip into my principal. And if we see persistent 12 percent inflation, I suspect you can kiss your stock market returns goodbye. The point is, it works for me. And I sleep well at night, not worrying if Elon's predictions are on point. Everyone's situation is different, don't you think?  

Inflation has far less impact on us retirees. We usually have our houses and major assets paid off. We consume less, will have less time to worry about inflation and a good part of our income is indexed (CPP/OAS). I've been retired 21 years and honestly have not noticed any significant impact from inflation.

June 6, 2022
5:52 am
Alexandre
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Bill said
Alexandre, I agree, your approach can work if you're buying 1-year GICs and using HISAs i.e. you can pretty well match current year expenses with revenue. But if you buy a 5-year GIC you can't be guaranteed your expenses in the last few years won't go up a lot due to spike in inflation (like now) yet your revenue's stuck with the GIC rate for the duration.

Bill, I agree with that. It is the reason I only buy 1-year GICs. With the one exception of Motus 3-year Escalator GIC, but it can be cashed annually on anniversary. Currently getting 2.7% interest on that one, matures this year. New one has even better rates, again exceeding my "magic number."

I am not going with investing that keeps my money frozen long term, in exchange for better returns.

I might not maximize my ROI with that strategy, but it is not my objective. My objective is ROI exceeding the "magic number" year after year, and cash in hand when I need it.

June 12, 2022
10:09 am
TommyT
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mechone said
5% and I'm thinking of selling all stock and investing all in GIC's 5 to 10 years will give me an income of 78k without CCP or OAS or pension and not reducing any of my capital  

GIC's are not insured for periods of time longer than 5 years.

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