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How to invest on autopilot before I'm too old to deal with it or it's left to my spouse?
February 25, 2023
8:09 pm
Loonie
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OK. I guess I'm being devil's advocate here but I think it's important to look at worst case scenarios.
Accordingly, in my own planning, I don't even include the value of my house when I count my net worth because I consider it has too much potential volatility. I expect everyone will disagree with me about this, but I feel better about it this way. The house is a bonus. When we sell, if we don't buy a condo, we will add it to net worth because that's when it will crystallize.
I live in Toronto. If I lived in Vancouver, I'd be even more cautious. It's a wonderful city. I lived there briefly and loved it, would be happy to live there again. it's also a city that has experienced extreme volatility in house prices, and there are significant environmental risks.

In any event, it's difficult to give advice when one doesn't have all the info. I'm guessing, based on what you've said, that you have about 300K in RSPs and about 70K in cash, maybe some TFSA as well? Maybe more but I don't think you've mentioned it.
If so, I wouldn't take hardly any unnecessary risk and would avoid all ETFs and funds. I don't think this is what you are going to do, however.

I would stick with the guaranteed investments, and consider if annuities might be needed at about age 71 and reconsider every two years thereafter until about 80.

If you haven't already read Frank Vettese's Retirement Income for Life, I strongly recommend it. Get the second edition.

February 26, 2023
1:53 am
NCC1701Z
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I've read all of Frank's books, that's what got me curious about annuities. It's strange that we all envy DB pensions but are hesitant to commit to an annuity. The "annuity puzzle".

I tend to plan for the more probable scenarios which could include downsizing or even liquidating the house, sure the value could fall and I expect it will but with Canada's unrelenting housing shortage I doubt it would be more than 30% short term but even if it dropped 50% it's not a huge concern. Long term care averages ~2 yrs and we've both agreed to MAID rather than lingering on.

Not sure why you guessing RRSPs at 300k, maybe the planeasy link? We have several times that amount, remember I said we could live to 100+ with almost zero returns but wanted a decent return with low risk.

I'll probably go 70/30ish with GICs and an all-in-one plus 2 years expenses in an HISA with POA to our adult children if we become incapacitated.

If our families had historical longevity I'd consider annuities but no one has lived past their mid-80 on both sides, much less on mine.

Thanks for all your help!

February 26, 2023
4:43 am
savemoresaveoften
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DB is viewed as mostly a benefit for, the employer (even tho a lot of plans req employee contribution as well), while annuity is 100% your money. So yeah DB is like free while annuity is a big upfront to most, even tho the cash flow is actually very similar.

Annuity is purely a bet of longevity, and the majority loses out as it’s really mortality math and not else. It was not attractive to most in the past 10 years given low interest rate.

In my mind, what’s even worse is reverse mortgage, that should be last resort if only every other venue fails, or one simply has no inheritance or anyone they want to hand it down after passing.

February 26, 2023
7:44 am
Norman1
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The "annuity puzzle" is not really a puzzle.

A defined benefit pension comes at a discount to the employee. Usually, both employer and employee contribute towards the defined benefit pension around 50/50. Who wouldn't want a life annuity on sale for 50% off?

It is even better than that for the employee as any shortfall when it comes time to collect the pension is on the employer.

At the start, employer and employee may believe the pension would eventually cost $200,000 to fund at retirement and set the contribution levels based on that. But, if rates of return fall, like the rates have the last 30 years, and the pension ends up costing $400,000 to fund, then the employer is on the hook for the extra $200,000.

February 26, 2023
7:51 am
mordko
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savemoresaveoften said

Annuity is purely a bet of longevity, and the majority loses out as it’s really mortality math and not else. It was not attractive to most in the past 10 years given low interest rate.

In my mind, what’s even worse is reverse mortgage, that should be last resort if only every other venue fails, or one simply has no inheritance or anyone they want to hand it down after passing.  

Annuity isn’t a “bet” any more than a GIC is a “bet”. Its the exact opposite of a bet. Its a guaranteed payment (at least for standard annuities; there are more exotic options out there). Unlike GIC, annuity provides longevity insurance. Like delaying state pension, getting an annuity often translates to ones ability to spend more money safely for life than the alternatives would allow. Having a lot of money in the account feels great but in reality all these money is spoken for if you are trying to mitigate the market risk as well as the risk of living too long.

Obviously if one is focused on inheritance than its not for you.

February 26, 2023
7:57 am
mordko
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Norman1 said
The "annuity puzzle" is not really a puzzle.

A defined benefit pension comes at a discount to the employee. Usually, both employer and employee contribute towards the defined benefit pension around 50/50. Who wouldn't want a life annuity on sale for 50% off?

It is even better than that for the employee as any shortfall when it comes time to collect the pension is on the employer.

At the start, employer and employee may believe the pension would eventually cost $200,000 to fund at retirement and set the contribution levels based on that. But, if rates of return fall, like the rates have the last 30 years, and the pension ends up costing $400,000 to fund, then the employer is on the hook for the extra $200,000.  

The “annuity puzzle” expression has nothing to do with DB pensions. It refers to specialists’ surprise that so few people buy annuities even though its a great deal and peace of mind for many people. The reason is human psychology with people liking a lot zeros in their bank account a little too much, in preference over safety.

February 26, 2023
8:11 am
Norman1
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AltaRed said

That is not really true Norman1. The underlying ETFs of the all-in-one ETFs are the medium term aggregate bond indices, i.e. the ones people normally buy as VAB or XBB with average duration of about 7 years and average maturity of 10 years. These are just where someone needs to be in the fixed income domain over ~30 years each of accumulation and withdrawal.

Examine VBAL for yourself https://www.vanguard.ca/en/advisor/products/products-group/etfs/VBAL VBAL's bond component has 41% 1-5 year bonds and 29% 6-10 year bonds.

Yes, what I said is true.

The portfolio data there shows holdings of bonds over ten years maturity, even beyond 25 years:

Over 25 Years 11.7%
20 - 25 Years 5.4%
15 - 20 Years 5.7%
10 - 15 Years 5.0%

The funds does hold significant amount of government bonds. If one would not put money in a 5-year GIC that pays only 3.4% because one can find those around 5% these days, then why would one indirectly put money into Government of Canada five-year bonds that yield the same 3.4%?

Those average maturity and average duration numbers don't mean what you think they mean. 75% in a one-year bond and 25% in a 30-year bond has an average maturity of 8.25 years. That's not equivalent to a ladder of 6 to 10 year GIC's with the same average maturity in terms of cash flow or interest rate risk.

The packaging doesn't change what's inside. I would stay away from those all-in-ones. If one wishes to have 60/40 equity-to-fixed-income mix, put the 60% into a 100% equity ETF and put the 40% into insured GIC's oneself instead of paying someone to invest in lower-return government bonds.

February 26, 2023
9:29 am
AltaRed
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It does not matter that a portion of the bond portion is in long term bonds. It is what the aggregate bond index is. The bulk of the bond component is in short term and medium term bonds. Duration of a bond (or bond fund) is the critical data point in that it is used to calculate sensitivity of bond price changes to interest rate changes.

The all-in-one ETFs are the best low MER product that has come along in a very long time for a 'set and forget' autopilot portfolio, avoiding the tendency of retail investors to market time, mostly to their detriment. Much has been written on these ETFs for the DIYer who does not want or need to make investment decisions, including the ease for a POA to manage on behalf of an incompetent/aging family member.

While I don't disagree with you that an equity ETF along with a GIC ladder might provide a slightly higher return overall with the right decision making, especially in the lower equity/fixed income ratio portfolios for the reasons you mention on the fixed income side, we have all seen and participated in multiple threads on multiple forums of investors: 1) second guessing their equity/fixed income allocations, and 2) second guessing their 5 year GIC ladders when GIC renewals occur. No one needs a POA playing those interest rate guessing games on their behalf. For most POAs, that would be more decision making responsibility and work than they are willing to take on. Hence why many DIY boomers, senior boomers in particular, are migrating their portfolios to simplicity at a low MER cost of 20-25bp.

The OP, in post #22, appears to be headed to an approach of a GIC ladder, an all-in-one (albeit not which one) and a 2 year HISA reserve for spending flexibility and to mitigate market downturns. It ultimately comes down to making it easy for a POA with his/her own busy life to manage a portfolio on an aging person's behalf.

February 26, 2023
9:31 am
mordko
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There are other considerations to GICs vs a bond ETF.

Its not just about the rate. Liquidity is an obvious issue with GICs. Complexity of having to deal with a bunch of institutions and having to keep within the insured limit for a multitude of accounts is also a consideration. Rates can be higher for either bonds or GICs, depending on your timing. Inability to rebalance between FI and equity portfolios if all your FI is in GICs is also worth a mention.

February 26, 2023
10:15 am
AltaRed
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For the purposes of a low maintenance portfolio, all GICs can be purchased and held in the same* DIY brokerage account as the equity portion of one's portfolio, and should in the case of ease of management by a POA. That is a reasonable approach for a motivated POA as long as they don't start market timing by second guessing GIC term length.

* A real case example was for about 15? years through 2015, my mother's portfolio was all in RBC Direct Investing accounts with a single equity fund and a 5 year GIC ladder, along with ISA cash reserve RBF2010. As each one of the 5 GICs matured, a portion was taken out to supplement cash flow needs and the residual was automatically re-invested in another 5 year GIC....regardless of the interest rate at the time. That was before the time of the Asset Allocation ETFs.

February 26, 2023
11:04 am
mordko
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Yes. The trade-off is that one likely has to exceed CDIC limit. Which might be ok with the big 4. But then the interest won’t be 5% and the op would still have to deal with an illiquid asset.

February 26, 2023
1:34 pm
Loonie
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NCC1701Z said
I've read all of Frank's books, that's what got me curious about annuities. It's strange that we all envy DB pensions but are hesitant to commit to an annuity. The "annuity puzzle".

I tend to plan for the more probable scenarios which could include downsizing or even liquidating the house, sure the value could fall and I expect it will but with Canada's unrelenting housing shortage I doubt it would be more than 30% short term but even if it dropped 50% it's not a huge concern. Long term care averages ~2 yrs and we've both agreed to MAID rather than lingering on.

Not sure why you guessing RRSPs at 300k, maybe the planeasy link? We have several times that amount, remember I said we could live to 100+ with almost zero returns but wanted a decent return with low risk.

I'll probably go 70/30ish with GICs and an all-in-one plus 2 years expenses in an HISA with POA to our adult children if we become incapacitated.

If our families had historical longevity I'd consider annuities but no one has lived past their mid-80 on both sides, much less on mine.

Thanks for all your help!  

The reason I thought your RSP was low was because you talked of rolling it into TFSA.

I have a severe visual disability which makes me disinclined to re-read, so I forgot that you'd said you had enough for 100+. The shortage of financial numbers make it difficult to advise.

I think Vettesse's book is aimed more at people who have less RSP than you appear to have, but still worth considering annuities periodically in case they become relevant.
I was surprised to read recently that AltaRed was considering annuities - at least I think that's what I read.

I think that, generally, people are negative on annuities because they don't like the idea of losing control of their money and potentially lowering estate value. But, as the saying goes, you can't take it with you.Also, most people are relatively optimistic and, like you, plan for what they consider likely. If things go badly, many of them expect the rest of us taxpayers to help them out. Accordingly, I encourage people to be more prudent.

I have what may be a unique plan. I looked at what we will need in future five year lumps and planned for that. Sometimes this involves sacrificing shorter-term possibilities in order to allow for later term needs (which may never materialize) but as long as we have met the goals for each five year term we are content. Our goal is not to have the biggest piggy bank or leave the biggest estate per se. For me, setting these goals was the hardest part of the financial plan since I knew "biggest" wasn't it. The next hardest part was deciding how much was 'enough'. After that it was relatively easy. We don't need any mutual funds or ETFs or more risk in order to meet our goals, so we don't bother with them.

I can't really offer more meaningful advice without more info, and don't think anyone else really can either. I'm tired of guessing.

I agree with Bill on POA. Pick one child only. Yes, there can be some issues as a result sometimes, but the other way can be worse.

February 26, 2023
5:03 pm
AltaRed
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With interest rates and annuity rates* where they are today, it is a reasonable option to annuitize a portion of one's portfolio, especially for someone who may be about 75 today, with a 10 year term guarantee. It would be a way for me to get rid of an RRIF that is taking up time. Alas, it will take me until 2025 to completely dismantle my existing bond/GIC ladder so am not really in the market until then.

* Current inflation and the high(er) interest rates are likely as high as they are going to be for some time. Thus the opportunity we have today probably won't stick for very long.

February 26, 2023
6:16 pm
NCC1701Z
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AltaRed said
For the purposes of a low maintenance portfolio, all GICs can be purchased and held in the same* DIY brokerage account as the equity portion of one's portfolio, and should in the case of ease of management by a POA. That is a reasonable approach for a motivated POA as long as they don't start market timing by second guessing GIC term length.
ETFs.  

I find I must go outside my DIY brokerage to get better rates and CDIC coverage or are you saying forego the slightly higher rates for convenience?

Some FI's allow you to set annual or monthly RRIF GIC payments to cash above the minimums so term length is not so important.

With 30/70 I guess I just need an equity or dividend fund, not all-in-one, since my fixed income is covered. Any suggestions?

February 26, 2023
6:49 pm
mordko
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VEQT. Maximum stock diversification, 100% equity.

February 26, 2023
6:55 pm
AltaRed
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NCC1701Z said

I find I must go outside my DIY brokerage to get better rates and CDIC coverage or are you saying forego the slightly higher rates for convenience?

Some FI's allow you to set annual or monthly RRIF GIC payments to cash above the minimums so term length is not so important.

With 30/70 I guess I just need an equity or dividend fund, not all-in-one, since my fixed income is covered. Any suggestions?  

I think the first thing you need to settle on is what it is you really want to do.

The title of this thread is "How to invest on autopilot before I'm too old to deal with it or it's left to my spouse"

Then in a post you say

Later 60's couple retired but do a little P/T work, 60Equities/40 somewhat balanced. 80% RRSPS. CPP/OAS meets more than our basic needs, maybe need another 20k for fun money. Own house in Vancouver area no mortgage.
We could get zero return and still have enough into ours 100's but of course we'd like to get a decent return with very little risk.

How do you suppose having multiple accounts in multiple institutions chasing GIC rates that many on this site spend time doing correlates with the desire 'investing on autopilot'? That is a nightmare scenario for a POA.

How does yield chasing correlate with the ability to get zero return and the desire to get a 'decent' return? Does 25-50bp make enough difference that you would compromise your objective of an autopilot investment account?

Lastly, you once mentioned a 70/30 portfolio and now mention a 30/70 portfolio. Those two things are contradictory with different strategies.

I've provided a number of examples of how to autopilot a portfolio with maybe a few hours per year of portfolio management on the premise you meant what you said in the title of this thread.

February 26, 2023
8:29 pm
NCC1701Z
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Not sure what the convention is for FI/stocks so I looked at Vanguard which shows stocks 1st so I changed it - sorry for the confusion. I thought it would be obvious since the Fixed income is usually the larger portion during retirement.

The post you quoted: "Later 60's ...." is what I'm doing now, not my auto pilot plan

Thanks for your examples, it's all a learning process with many points of view to be considered. I've also looked thru some discussion on the financialwisdomforum you mentioned.

February 26, 2023
9:48 pm
Loonie
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Nonetheless, I think AltaRed's observation about fuzziness in goal has some validity. From what I've seen, it is the thing that often creates problems down the road for people, and it's what allows them to be swayed by advice that is inappropriate for them.

You can get 'decent' returns, apparently have all the money you will ever need, and run completely on autopilot simply by turning it all into annuities. I'm not pushing for this, but it's clear you don't want this even though it meets your stated goals. This speaks, to me, of a
lack of clarity or consistency in goals. See my earlier comments on the difficulty of setting goals.

Many people get sidetracked from their best intentions by the prospect of even higher returns, or so they hope, from riskier investments. It can get to be a tough psychological issue, not wanting to look like one didn't "do as well" as friends and relatives (assuming they succeeded), even though one didn't necessarily have that need or goal or risk tolerance or whatever.

Pay really close attention to goals and proceed accordingly, whatever they may be. I truly think setting goals is the hardest part of financial planning, and that most people don't do it well. Honestly, it took me about 7 years to work it out. I'm not stupid. It's just really hard to be that honest and clear with yourself, especially if besieged with advice that reflects other people's goals and needs.

I have exceeded my goals.

February 27, 2023
12:51 am
NCC1701Z
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I really don't have a firm goal other than ensuring we have enough income for our desired lifestyle and that my spouse will be able to continue that same lifestyle without me and that this can be accomplished on autopilot should we become less capable.

So you're saying this is not precisely my goal since I cannot commit to annuities and you are right because I do want a larger estate value for our children even though only 1 of 3 needs it. Part of the problem is simple greed, otherwise I'd just go with GIC's and HISA products and be done with it.

My goal setting track record has not been great. I retired over 20 years ago but could never commit to a definitive investment plan. Maybe now I can.

February 27, 2023
5:21 am
mordko
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Part of the reason why it is so hard to stick with investing goals and strategies is human nature. The more complex your portfolio, the harder it is and the more tempting it is to fiddle.

Back to your plan… Having “all in one” for your equities is easy with something like VEQT.

Your plan to have most of your FI in a GIC ladder with a variety of institutions to get best rates and keep under CDIC limit strikes me as the exact opposite of keeping things simple and on autopilot. Obviously doable as long as you and your followers are on the ball and good with spreadsheets.

Re annuities… Keep in mind you don’t have to convert everything you have. You could use a portion of your FI to buy an annuity, bullet proofing your basic needs, thus helping to keep GICs under the CDIC limit and reducing the number of institutions you have to deal with. And still leave a legacy.

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