Monday, May 28, 2007

The Early Retirement Portfolio

It occurs to me that I need to do some more planning about how my portfolio is going to look in early retirement. I specifically need to be conservative with that money that is going to bridge the gap between 45 to 65.

Currently most of this money is in index funds with the following allocation:

25% Bond index
25% TSX index (Canada)
25% SP 500 index (US)
25% International index

This is what I'm thinking about using when I turn 45:

60% bond index or other fixed income
15% Real Estate Income Trust or similar
10% TSX index (Canada)
10% S&P 500 index (US)
5% Cash

At the same time I'm unsure about dropping the international portion of the portfolio. Despite being subject shifts in the currency exchange international markets does offer some diversification outside of North America just in case there is an economic slow down just in our local markets.

Another issue I'm a bit unsure on is how do I convert the one portfolio over to the other? Do I just wait until I'm a few years out and start to slowly pull back from the markets into bonds? Or do you just wait until I'm three or two years out and change over the entire thing?

I'm still a bit unsure on the international idea, but I think I've got a way to handle the portfolio conversion. I would use that old rule of thumb of having your age as your percentage of bonds in your portfolio. Therefore on Jan 1, 2008 I should rebalance my current portfolio to have 29% bond index.

I'm still working all this out so any ideas on how to handle all this would be appreciated.


Middle Class Millionaire said...

Hi CD,

I just have a few questions for you about your retirement plan.

1. Why have you decided to have such a high percentage of your retirement portfolio in fixed income at age 45? Obviously I don’t know your exact income requirements but are you at all concerned about growing your cash flow in retirement to keep pace with inflation?

2. What is the purpose of the 5% cash allocation in retirement? Why do you need 5% in retirement and 0% now?


Canadian Dream said...


1. Due to the fact I will be drawing down this part of my retirement funding I decided I would want to stabilize the money and take a lower yield overall. My pension funds would still remain in higher risk investments since I don't plan on using those until I turn 55. I'm not very worry about inflation since I can always buy real return bonds if I feel that is a significant issue.

2. The cash as a fixed % is somewhat misleading. I intend to start the year with my full required cash for the year in an ING account, hence a portion of the portfolio will always be cash, but the actual amount will change from year to year as the portfolio is drawn down.

Hope that helps,

The Financial Blogger said...

Hi CD,
I'm also wondering why you would put such a high percentage of your retirement portfolio in fixed income so early. Your life expectancy is probably around 75. Therefore, at the age of 45, you still have 30 years in front of you. That gives you a lot of time to catch up for the bad years.

On top of that, you investment income will be taxed as interest income and therefore at the highest bracket. I don't know you age, but if you are planning your retirement that fast, you might end up with a huge amount of money at 45.


FourPillars said...

Quick note - I wrote this comment at work this afternoon so some of my points are a bit redundant...

A few things - I think you have too little in equities - only you know your risk tolerance but having too much in bonds/cash will subject you to more risk from inflation. Equities (in the long run) are supposed to be able to handle inflation. According to Bernstein (Four Pillars of Investing) you should have between 50% & 75% equities. He says 75% is the best percentage but you can lower it for more stability.

REITs - I don't know a whole lot about these or how much you (or I) should have, but 15% seems to be a lot. Are these Canadian Reits?

International - I think diversification is very important - you should definitely have EAFE or something, maybe in the same proportion as the Cdn and US equity?

Bonds - According to Bernstein and others - long term bonds are not worth owning - buy short term bonds (XSB) and some real return bonds (XRB). Another thing which Bernstein says is to have five years of withdrawals in cash in order to weather any turbulence. This would be considered part of the fixed income portion.

If you haven't read Four Pillars, I encourage you to do so, as well there are many great retirement portfolio articles on Bernstein has a series entitled "Retirement calculator from hell".

Regardless of what you end up doing, please update up via posts - I'd also be interested to see some actual numbers ie how much gross withdrawals, net amount will you be taking each year. How big is the portfolio? You also didn't mention if part or all of the portfolio was in an rrsp?

Canadian Dream said...


Actually my family typically lives a LONG time. So my life expectancy is at least 85 if not 90.

Yet to this pool of cash that time line doesn't matter. I only talking about the cash I will use from 45 to 65 which will become a smaller pool as I draw it down in this post. Hence the low risk. All the bond money will likely be held in the RRSP to avoid yearly tax issues.


Actually the pension money will likely have a higher % of equities like 50% since that pool of cash will be used until I die. Unlike the post pool of money in which I will only use it from 45 to 65.

So far I'm basically all in Canadian REIT's and other income trusts. My wife currently holds EIT.UN in her taxable account which with compounding growth will be roughly the 15% I indicated.

Thanks for the input on international holdings. As for the bond tip, I was already thinking of something similar.

I tried to read Four Pillars a while back. I skimmed most of the book and read the two chapters that looked really new for me. The man is smart, but his writing is boring as hell.

As for updates with posts, you will be waiting for a while for withdrawal posts. I'm only 29 this year so I've got 16 more years to figure this all out.

I think I've covered all the points in everyone's comments. If I did miss something please let me know.

Also thanks everyone for the discussion it helped iron out a few ideas for me.


Thicken My Wallet said...

I ended up doing some research on international equities as a diversification strategy and the traditional reasoning behind buying internationally to cover losses domestically is not what it use to be:

I also believe you are overweighed in fixed income but its easier to switch fixed income to equity rather than the other way around for tax purposes.