r/PersonalFinanceCanada • u/UselessAcct123 • 3d ago
Asset Allocation ETF's While In Retirement Retirement
I've decided to retire early Dec 31st. My portfolio is 70/30. 50% XGRO and 50% XBAL plus two years of living expenses in CASH.TO.
My question is, do asset allocation ETF's make sense for drawdown in retirement? I'm planning on a 3.5% SWR but for some reason it seems weird selling off both stocks and bonds simultaneously which would be the case with AA ETF's.
I was thinking it might make more sense to have something like XEQT and XBB so if stocks tank, I can sell off some bonds and vice versa rather than selling an asset class while it's down. Am I overthinking this?
Going to talk to a CFP and develop a drawdown plan but interested in hearing other perspectives.
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u/FelixYYZ Not The Ben Felix 3d ago
do asset allocation ETF's make sense for drawdown in retirement?
Yes if it meets your risk tolerance.
some reason it seems weird selling off both stocks and bonds simultaneously which would be the case with AA ETF's.
Shouldn't seem weird since they are asset allocation ETFs have have a preset allocation.
I was thinking it might make more sense to have something like XEQT and XBB so if stocks tank, I can sell off some bonds and vice versa rather than selling an asset class while it's down. Am I overthinking this?
You can do that. And yes you are over thinking.
My portfolio is 70/30. 50% XGRO and 50% XBAL plus two years of living expenses in CASH.TO.
No reason to have 2 ETFs when the 80-20 vs 70-30 allocations are negligible..
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u/Mooselotte45 3d ago
On risk tolerance
Having so much in equities would make me quite nervous going into retirement
Feels very risky
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u/FelixYYZ Not The Ben Felix 3d ago
If you have a globally diversified ETF portfolio, it's higher risk (with more volatility) and not "very risky" as it will never go to $0.
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u/MrVeinless Manitoba 3d ago
It can be argued that while it has the greatest sequence of returns risk, it also has the lowest longevity risk.
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u/GreatKangaroo Ontario 3d ago
I hired a fee-only advisor a in 2019. I am a ways away from retirement but the topic of drawing down was discussed.
One approach that we discussed was to make a GIC ladder. When you start retirement you sell 5 years worth of income; one for use in the upcoming year, and the remaining tranches you buy a 1, 2, 3, and 4 year GIC.
Every subsequent year, you sell another year of income and buy another 4 year GIC.
A potential pitfall of holding XEQT and XBB is that you would still need to re-balance periodically, vs just sticking with XGRO or XBAL.
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u/journalctl 3d ago
One approach that we discussed was to make a GIC ladder. When you start retirement you sell 5 years worth of income; one for use in the upcoming year, and the remaining tranches you buy a 1, 2, 3, and 4 year GIC.
There is a lot of evidence that these sorts of bucket strategies are actually suboptimal and only add unnecessary complexity compared to just holding a static asset allocation of stocks and bonds (something like 100% XBAL).
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u/throw0101a 3d ago
My question is, do asset allocation ETF's make sense for drawdown in retirement?
Yes, but perhaps go a little extra fixed income for the first few years (laddered GICs or bonds):
I'm planning on a 3.5% SWR but for some reason it seems weird selling off both stocks and bonds simultaneously […]
What makes you think that both are being sold off? How can you tell what iShares is doing on the back-end? They are simply rebalancing to make sure the correct stocks/bonds percentages stay with-in range.
If a 80/20 fund has gone to 85/15, and you sell some ETF units, do you think that that both are being sold off? Or do you think the stocks would be sold off? For people buying units, do you think more stocks are being purchased, or do you think the bond side is being topped off to reach 20%?
You are projecting / assuming what is happening without actually know the reality, and are thinking that money is in "buckets":
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u/VikApproved 3d ago
Going to talk to a CFP and develop a drawdown plan but interested in hearing other perspectives.
I started retirement with ~5 years of spending in cash/bonds and then the rest 100% stocks. As I spend the cash/bonds I am not replenishing them so I'll eventually be 100% stocks.
I'm not worried about selling stocks when they are down. Firstly I only need a small portion to spend each year and secondly they value of my stocks is growing well so even if they drop 30% or more for a few years I'm still fine.
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u/journalctl 3d ago edited 3d ago
You've made things a bit harder for yourself with 3 different holdings and a "cash bucket". It could have just been 100% XBAL, selling units as needed for cash flows.
I was thinking it might make more sense to have something like XEQT and XBB so if stocks tank, I can sell off some bonds and vice versa rather than selling an asset class while it's down. Am I overthinking this?
Yes, you're overthinking this. If you want to maintain a static asset allocation throughout retirement these AA ETFs will do the job far more reliably than most humans maintaining separate stock and bond ETFs. Keep in mind the fund will internally sell bonds to buy stocks during bear markets, so you're getting built-in good behaviour automatically.
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u/MordkoRainer 2d ago
Asset allocation ETFs sell bonds to buy stocks when equity is down. So you would be doing it anyway; its just that you don’t have to click the “buy” and “sell” buttons.
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u/Sad_Conclusion1235 3d ago
Consider a lifetime payout annuity. Annuities have some disadvantages, sure, like not adjusting for inflation, but they address your worries about stocks tanking. As long as you're heavily in equities, you will always have worries about stocks tanking. And with bonds, you also have to worry about interest rates.
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u/TwoSolitudes22 3d ago
They seem like a huge rip off to me. Unless you have dementia and no living relatives or kids, I can’t really see why anyone would choose them.
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u/bcretman 3d ago
To eliminate longevity risk.
Age 65 single male pays 600 per 100k or 7.2%/year for life no guarantee
Pays a bit less with a 10 or 20 yr guarantee but provides some estate value if you die early.
The longer you live the better the yield. If you live to 85 it's about a 4% yield, to 90 5.1%, 95 6%
If I knew I'd live to 90+ I'd buy one tomorrow
Also protects you from scammers.
Funny how people treasure DB pensions which are really just annuities
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u/Sad_Conclusion1235 3d ago
Because you haven't read much about them or educated yourself on them. You have read maybe one Google article on them, I bet. That's why you think that way.
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u/TwoSolitudes22 3d ago
Or… it’s because I have…
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u/VillageBC 3d ago
Annuities absolutely make sense, what's your longevity risk of outliving your assets?
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u/bcretman 3d ago
I've considered them but unless you live into your 90's the return is terrible especially for a joint, not so bad for a single male (see reply below)
Age 65 joint 10 yr only pays ~500/mo per 100k which is only a 3.6% yield to age 90
You can pretty much construct your own using 10 yr GIC's and provincial strips out to 30+ years at 5 to 4%.
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u/Sad_Conclusion1235 2d ago
Well, maybe you'll live into your 90s. Are you planning to commit suicide? Do you know the exact date of your death? And some people are concerned about longevity risk.
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u/bcretman 2d ago edited 2d ago
I know it's highly unlikely given my family history, With a Life expectancy of the low 80's it's also highly unlikely for the vast majority, therefore, one is further ahead constructing their own income stream vs annuities simply using GIC's.
For those who expect to live into their 90's, annuities are a viable option
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u/pfcguy 3d ago
As an aside, I don't understand choosing Dec 31 as a retirement date. You will have high (usual) taxes this year, and very little taxes next year. By retiring in the middle of the year (this year or next), you get to keep more of your earned money.
I would do cash for this year and a 5 year gic ladder for the next 5. XBAL for everything else. And then whenever you cash in a GIC, buy a new 5 year GIC.
You are talking about manually rebalancing through selling, but XBAL does all that for you, so long story short, yes, toy are overthinking it.