Which currency should we invest in, Canadian or US dollars?
In this example, we’ll compare Vanguard’s US listed & US dollar denominated ETF (VOO), against the Canadian listed & Canadian dollar denominated equivalent (VFV) from Vanguard Canada. Imagine investing $10k back in 2012 in each of these ETFs. Conveniently, the Loonie & the greenback were approximately equal back then. One Canadian dollar was worth one US dollar. That means the $10k investment was of equal value, regardless of the currency.
With all dividends reinvested, here’s what the performance has looked like since then …
VOO vs VFV 2012 to 2025
By March 2025, VOO grew from $10k to $52k, in American dollars. While VFV soared to about $73k, in Canadian dollars. VFV looks like the big winner. But it’s not. Back then the currencies were at par. By the end of this chart, it costs $1.44 Canadian to buy one US dollar. If we sold off VFV at the end & converted the proceeds to US dollars, we’d have a bit less than $51k American. pretty close to the US dollar value of VOO. Similarly, if we sold all our VOO holdings & converted those US dollars to loonies, we’d have almost $75k Canadian. Bottom line is that they’re about the same. We’re only looking at about a fifteen hundred dollar (Canadian) difference in total return, with the American listed VOO coming out slightly ahead.
VOO should come out slightly ahead. There a few reasons for that, including the following …
1. It has the lower fund fee of 0.03%, compared to the 0.09% fee of VFV in Canada. 2. While it all happens inside the ETF, VFV loses a little of the dividend payout due to the 15% dividend withholding tax that the IRS (the US equivalent to the CRA) collects. This happens regardless of the account the Canadian listed ETF is held inside. 3. Though ETFs can do currency exchange at better rates than the typical DIY investor, there might be some additional currency exchange drag on VFV too.
If the fund fees were the same, if currency exchange didn’t have any fees, & if there were no dividend withholding taxes, the performance of the two ETFs would be practically identical. The apparent outperformance of VFV in the chart above is mainly due to the declining value of the Canadian dollar against the US dollar over that 12 year period. Both funds grew similarly in real value (as they should, since they both hold the same stocks). But VFV grew “extra” Canadian dollars over that time, in line with the increasing real value of the stocks inside the EFT. This compensated for the Canadian dollar falling in value against the US dollar. If the reverse had happened, & the Canadian dollar had gained strength against the US dollar over this time, VFV’s numbers would have lagged VOO on the chart. It would have “looked” worse. But, once you convert the currency in either direction, both would have looked pretty much the same again. That said, there are some pros & cons with either choice.
If you have a bunch of US dollars already & you want to invest these greenbacks inside an RRSP account, VOO would be the better choice. It may not always be this way going forward but, under the current agreement between Canada & the US (& as it was over this timeline), the RRSP account shelters the investor from the dividend withholding tax that would otherwise apply to US based ETFs. On the flip side, if you don’t already have US dollars, you’ll have to pay currency conversion fees. Or learn the Norbert’s Gambit technique to minimise the currency conversion costs. If you want to avoid that currency conversion work, the outcome resulting from sticking with VFV is still pretty good. Particularly when investing outside a registered retirement account, where neither fund can avoid the withholding tax. That would bring the results a little closer together. It is worth noting that the bigger the investment, & the longer the time invested, the greater the potential impact. The $1,500 difference on this $10k investment example, would have been $15,000 on a 100k investment. You can do the math for a million dollar investment as your portfolio grows! And, for a more precise comparison, you’ll need to figure out the impact of currency exchange costs, back & forth, on the end result too.
I’ve ignored some other critically important tax wrinkles (there are some potentially significant exposures here) that come with foreign investing during the course of this comparison, so be sure to consult a tax specialist if you want to invest on exchanges outside of Canada. There are tax reporting requirements with the CRA above a certain value of foreign owned investments, for example. There are also potential IRS tax reporting requirements. And perhaps even US tax liabilities along the way. There’s a lot to learn. And if you don’t know, you’d be well advised to check with a professional advisor to help you figure out your US & foreign investing strategy. In addition, the outcomes may require the inclusion of more than just stocks, bonds, & ETFs. Any additional foreign property, like a holiday home outside Canada, for example, will impact your tax situation. Talk to an expert!
On the other hand, there is nothing wrong with investing in Canadian listed ETFs while you learn more about investing on foreign exchanges & in other currencies. It is a little less work to stick with the loonie. And the end result here was not too far behind the American equivalent. Many investors stick with Canadian listed ETFs, while still getting the necessary foreign exposure. There are also currency hedged ETFs that can help offset those currency fluctuations. But that’s a conversation for a another day.
Just remember that things would begin to reverse in the above chart, if the loonie were to gain in value against the US dollar going forward. In other words, VOO would then start looking better when charted against VFV. In the first 6 months of 2025, for example, VOO is up about 5%. While VFV is essentially flat. The real value of both is still close to the same. But the numbers are different due to a weakening US dollar this year, making VOO look better over this different timeline. This is more about how the numbers look, it’s not that the value is substantially different. Looks can be deceiving, eh!
If you want to learn more about saving & investing from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.
Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.
After a lifetime of saving for retirement, spending what we’ve saved can get pretty messy. Even a flock of pros would all come up with a different, at least slightly, spending plan for each of us. We don’t want to go broke too early. But we don’t want to make our retirement miserable by not spending enough either!
While it’s not actually a rule, the so-called “4% Rule” is often used as a guideline for determining a safe withdrawal rate over a 30 year retirement timeline. The rule suggests we can take out 4% the first year of retirement & take out inflation adjusted amounts (i.e. 4% + inflation adjustment) every year thereafter. And we can do that for 30 years, with a high degree of probability that the portfolio will make it all the way to the end. Bill Bengen originally used a portfolio of US stocks & bonds to develop this strategy. In recent years, he created a more diversified portfolio that he calculates allows a higher withdrawal rate of around 5%. Other experts point to the greater capability of an all-equity portfolio to deliver improved lifelong results. And still other experts in the space present models that suggested we might have to drop down closer to a 3% withdrawal rate to ensure portfolio survival. What gives?
There are a few things to consider here. The markets, particularly the US market, have produced great returns over the past decade & a half. An investor, convinced of the strength of the US market, who retired in 2010, might be looking like an investing genius today! Since 2010, a million dollar portfolio, all invested in the SPDR S&P 500 ETF Trust (SPY), being drawn down at an inflation-adjusted rate of 4%, would have a portfolio value of over $5m today. Not a typo. Using the 4% withdrawal methodology for more than 15 years, the portfolio would still have grown to a value of over five million dollars today. This retiree could have withdrawn a whopping 12% for year one. And, even after increasing that far bigger income by inflation every year, the portfolio would still be worth almost a million bucks today. That is an amazing outcome, eh?
Yeah, it is. But we can’t always take big withdrawal rates to the bank!
Let’s jump back another 10 years & look at a retiree who quit working in 2000. Exactly the same scenario as above. This retiree also has a million dollar portfolio & starts out with a $40k withdrawal the first year, or 4%. By today, the portfolio is only worth just under $340k. Even less in inflation adjusted value. What happened to the five million bucks from the previous scenario? The lost decade, including the dot-com crash & the great financial crisis, is what happened! Early poor returns damaged the future value of the portfolio.
If this “Year 2000 retiree” had used the 12% withdrawal rate from the other example, the Year 2000 portfolio would have gone to zero by 2006. Yes … zero. Nothing left after only 6 years. This is not a good outcome. In fact, just blindly following the 4% guideline in this example would have been a cause for worry by today. And withdrawing much more than an inflation-indexed 4% would almost certainly have resulted in a portfolio that died before the investor did!
Those examples are from the past. But the big lesson is that there is no guarantee that the future will be all rainbows & sunshine. We need a plan that handles grey skies & storms too. As we progress through retirement, financial plans must be reviewed & revised on a regular basis. To account for changes in the markets & in our lives. There may be the potential to increase our income for greater enjoyment during some years. Or there may be a requirement to reduce spending, to ensure we have income to the end of our days. Flexibility may be required en route.
And that’s what makes retirement planning so challenging. Financial planning is not a set it & forget it deal. As we saw above, we can’t depend on a financial plan that was created in 2000 or 2010 delivering the same results all the way to today. Modifications along the way are warranted. Similarly, if we were to start retirement this year, it is very unlikely that a financial plan created in 2025 will see us, cleanly & smoothly, all the way to the end. Will our asset allocation selections & portfolio choices allow us to spend way more than 4% every year? Or will we get trapped in a scenario where even 4% might be too aggressive? If we don’t use the 4% Rule, how do we handle the added burden of inflation through the years? There are a few challenges there, eh!
Some investors put their trust in dividend growth portfolios to sustain a growing income stream for a lifetime. And a plethora of new high income funds are proving very popular with investors who see early retirement calling via funds with huge distributions. Can these alternatives work? Some of these new funds offer distributions of 10 or 15%, some even more than that. Imagine you need a million dollar portfolio to produce 4%, or $40k, of annual income to retire on. If you’ve only got $400k saved, how about building an ETF portfolio yielding 10% & calling it quits? This might work. Or it might not. We’ll have to look at how we might compare, & perhaps even combine, these different strategies. However, that’s a whole other bunch of numbers & I’m getting grumpy now, so we’ll leave those questions for another day.
Meantime, take care out there & make sure you have an up-to-date financial plan.
If you want to learn more about saving & investing from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.
Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.
This is a departure from my usual subject matter, but I’m just back from a fantastic holiday in Brisbane, Australia. It was great because of the people I got to share the adventure with. And because Brisbane is such an amazing place. This city delivered lots of surprises. One such surprise was the most amazing transit system. Those Brisbane City Cats & Kitty Cats that zip up & down the meandering Brisbane River are an unbelievable treat. And you can go anywhere in southeast Queensland for 50 cents! Hey, I’m frugal, what can I say! That 50c fare had me smiling every time I tapped onto a bus, train, or river boat! And, for a change, I was not the designated holiday driver. I got to be a real tourist this trip! LOL
There was one other enjoyable thing that I didn’t even realise had any significance ’til I got back home. This was something simple. A thing that added a little extra joy to every dining experience down under. There is no tipping there!
I grew up in a country that only hinted at the occasional requirement for a small, token tip. And even that would require some very exceptional service. And maybe slight inebriation on the part of the tipper! For me, tipping was not the norm way back then. It was a bit of a culture shock when I first came to Canada. But after decades of living here, I am totally conditioned to providing the obligatory tip. Even when the food or service is pretty awful. In Australia, tipping is not the norm. And I think the Aussies might have it right!
For starters, the minimum wage in Oz is over $24 an hour. Servers get paid a reasonable wage, without having to generate some high-energy Hollywood charm to “earn” a decent tip. The Aussie system might be especially appreciated by servers who provide great service on days when the chef is having an off-day. Their paycheque is not negatively impacted by someone else screwing things up! Whilst there, I spoke with some people who have had experience in the service industry in both Canada & down under. While it’s too small a sample group to be of any value to make generalisations, they were unanimous in their preference for the Australian way of doing things. Especially the higher basic wage.
As a consumer, I learned something new about all this too. I had no idea there was so much subliminal stress involved in eating out in North America! I’m calling it subliminal because, day to day, I didn’t even notice it. Until I was subjected to the tip-free process down under. When it comes to paying the bill, you don’t even need to do any math in Oz. There are no tip calculations to consider! My first meal out in Australia was a bit of a disaster. Not because of the quality of the meal, that was great. But because I was trying to tip a confused server. The machine didn’t prompt me for a tip & I had no idea how to handle that! 😜 I finally managed to get the tip into the machine, but I never mention tipping again for the rest of my stay.
Not having to tip means no there is no weighing up whether service was good or bad. If it was terrible, sure, you might complain. If it was amazing, you might flag the server’s efforts to the manager. But if it falls into that very broad band of acceptability, you just enjoy the parting exchange with another human being. The slightly horrible process of one human being sitting in judgement of another, while the amount of the tip is considered, is eliminated. And how about those times when the service is good, but the food is terrible? Should we reduce the tip? That’s punishing the server for the quality of the food & that wasn’t their responsibility. No fair, eh? In Australia, all that goes away.
The machines don’t arrive with the suggestion that tipping starts at 15% either! Wasn’t 10% a good tip way back when I first came to Canada? In Oz, they just show the final amount that you see on your bill. And this is for a dining in experience. Not having a tip suggested at a take-away (take-out!) counter was even better! And I never found myself having to supress a surge of anger towards any machine having the audacity to suggest that 20% was just a mediocre starting tip! All in all, finishing up the dining experience & paying for a meal is just a slightly nicer & better experience in Australia, compared to here.
While the consumer (me!) certainly benefits from the Aussie system, it feels like the bigger advantage of their non-tipping culture might be for the service staff. For starters, they are paid a decent wage. Canadian minimum wage levels are lower than the Australian rates. Canada doesn’t have any of the super-low hourly rates that apply to servers in some US states, but wages are still lower here than in Australia. Potentially, at the end of every meal, there are some slightly judgemental things that surround the whole tipping culture in North America. It may be subtle & almost insignificant, but they are there nonetheless. With worse potential for abuse are things like the tip-out practice. This requires servers to share their tips with other members of staff. So the chef that did a lousy job preparing the food still gets a cut of the tip from the server who provided great service. Even when the poor quality of the chef’s work triggered a tip reduction. In some places, I’m told the tip-out is calculated on the amount of the table bill. Even when the server gets no tip! So a server who provides great service, but delivers poorly prepared food might get no tip. And they have to pay a tip-out fee to the chef or other staff members who may have done the lousy job that encouraged the customer not to tip. Is this for real? The server could actually be financially penalised for the poor quality of someone else’s work!?! This feels like a really bad system to me. Dining out is supposed to be a pleasant & relaxing experience. Thinking about all this stuff is anything but! I really don’t know how the average server in Canada feels about all this, but I really enjoyed the Aussie experience as a consumer. And Aussie service staff seem to like it too.
I’m not sure if we can change anything for the better up here, but if there are there any Canadian restaurants that are boosting pay & prohibiting tipping, please let me know where. I’d certainly be willing to pay a little more to dine in that kind of environment. Assuming the chef wasn’t screwing up the food every time! LOL
It’ll be back to boring investing type stuff next time but, despite the horrendously long journey & the awful jet lag, I highly recommend a visit to Brisbane. It is a wonderful city, in an amazing country, with really nice people, & great weather. While I would probably try to avoid the heat of the Queensland summer (🥵), it’s definitely a worthwhile bucket-list destination & experience at other times of the year!
If you want to learn more about saving & investing from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.
Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.
I’m jumping the gun on this one, but I’m so excited to have stumbled across this financial planning tool that I want to share it with you now. Funny enough, Microsoft’s Copilot chatbot introduced me to this. I asked Copilot to help with a financial plan & after providing some insights & encouragement, the first link it provided was to planeasy.ca. This led me to their financial planning platform adviice.ca. While I’ve only played with it for a few hours yet, I’m really excited about what these guys are doing. And what this platform can do for DIY investors who are also doing DIY financial planning.
One of the drivers for DIY investors to do the DIY thing is our frugal nature. We want to save on investment & advisory fees so that we keep more of our money. That may, or may not, work out well for us, but we just can’t escape the desire to be frugal. This frugal nature also extends to financial planning. Though many DIY investors recognise the value of a financial plan, we tend not to want to pay the fee for having a plan done professionally. And no wonder, it’s not difficult to find fees in the two to five thousand dollar range for having a single financial plan prepared by a professional. Despite the value, that’s still a lot of coin for a one-shot deal. I’m not sure what plan revisions would cost in subsequent years, but it’s fair to assume that as time goes by & circumstances change, it probably makes sense to have the plan updated periodically.
If you’ve watched YouTube® videos on financial planning, you’ll have seen them use software for those sexy charts & graphs that are easily modified for viewing different scenarios. We know we want this, but the software isn’t available to non-professionals in many cases. And some of us are unwilling to pay the price for the professional to do a plan. The Adviice.ca platform costs $9 for a 30 day trial. And $9 a month if you decide to keep the subscription. At these prices, that’s almost 28 years of DIY financial planning for the same cost as one $3,000 plan! There are so many threads to weaving an accumulation or retirement plan. It is very difficult to do it on a notepad or with spreadsheets. Adviice does the calculation grunt work in the background & shows the results in an easy-to-read visual format. It’s also updated to reflect current details on taxation, government income streams, etc. At this point, I haven’t played with the platform for long enough to write a review. Frankly, I’m not qualified to do a real review anyway. The best I could do is provide a DIY appraisal of what I’ve found. However, this post is more about my early enthusiastic reaction to finding it & using it.
Within 2 hours of signing up for this platform, I had a rough-tuned retirement plan done. Much of that time was spent inputting the foundational data. It took another couple of hours to learn enough about how it worked to improve on the first pass. This particular plan embraces a situation that covers another three or four years of working, reviewing different RRSP drawdown strategies, looking at the tax implications of different withdrawal rates across different account types, & so on. I still have much to learn & a lot of fine-tuning to do, but I think I’ve got a pretty respectable financial plan pulled together already. Now the beauty of this is that you can spend as long as you want fine-tuning a plan. Or, to avoid the law of diminishing returns, you can book a one hour session with an advisor at Planeasy, or with other professionals using the platform. You can do this right within the Adviice platform. And for only $499! Or you can book a more comprehensive package for $1,999.00, which could include multiple retirement scenarios, additional tuning sessions, etc. The beauty of this offering is that you can do the DIY thing at a low cost, but then you can add some professional assessment at a lower price than the typical financial planning service might cost. Along with pandering to the hands-on thing favoured by many DIY folk, this could be a cost-effective combination of DIY & professional advice.
Rather than share screenshots, which won’t capture the full scope of what this platform really does, here’s a link to a PlanEasy YouTube® video that covers one example of doing a retirement plan for a couple. It captures a lot of the features & functionality of the system. If you’ve watched financial planning videos in the past, you’ll find a lot you can relate to in this. This clip shows the software with the green PlanEasy branding, mine has the blue Adviice branding, but is otherwise identical. Though there may be some additional features on the latest version. It’s not yet a perfect solution for all scenarios. I’d like to try scenarios where I pass away earlier than my spouse, for example. You can work around most of these limitations by manually adjusting the data columns, but it looks like they are working on improving the functionality & adding features on an ongoing basis. I joined their Reddit® group (r/adviice) where you’ll see feature requests & the company’s responses to these. They are really quick to respond to questions.
The biggest limitation to the client version that I’ve seen, so far, is that we can only create one foundational data set. In other words, short of starting over, we can only do our own plan, for a single or a couple. And that’s fair enough. The advisors pay more & can obviously prepare plans for multiple clients. For those who take advantage of a session with an advisor, the advisors can then use our base plans to add their professional input on top of ours. I guess part of the reason we can get the lower cost professional oversight is because we have already done the work to build the foundational data set. We can still, however, create multiple scenarios based on our own foundational data set. That allows us to explore different accumulation & withdrawal strategies, & so on. The other limitation is that we cannot create reports. Those are delivered to us after a session with an Adviice advisor. That too is fair. It would be possible to change the foundational data to create reports for others if this was open. Just doing the DIY thing for ourselves, we can get all the relevant info right on the screen. And we can export the plan’s data, for those who want to play with the numbers in a spreadsheet. The reports are not essential for getting value from this software.
Bottom line is that I think this is the first affordable solution that is accessible for Canadians who want to be more involved in creating their own financial plan. Not only is it more affordable to begin with, but it may offer access to professional planning & fine tuning at a more affordable price too. It is a really smart product approach from this company. I think they will find many takers at $9 a month that might otherwise never have spent a penny on financial planning. And I think many of those takers will avail of the tune-up sessions with a professional advisor. And there will be those who will take advantage of the larger, more comprehensive professional support packages too. I hate this way-overused phrase, but this product has all the feel of one of those really good win-win solutions!
If I’m sounding like I work for these guys, I apologise, but I have absolutely no affiliation. I found it last weekend & I ponied up the $9 within 10 minutes of reading about it. Within an hour of playing with it, I knew this was going to be an enjoyable experience. When I compare the number of hours I spend with calculators & spreadsheets trying to do all this, Adviice is a great option for me. However, learning anything new does require some brain activity. And it might not be suitable for everyone. Of course, we all know that we need to challenge our brains as we age. And learning to use this will certainly exercise the brain. In my case, that might be a bonus! 😜
Despite my enthusiasm, I would also strongly caution against using this as the total solution to a problem that you might not fully understand. If you don’t know enough to have confidence in your current DIY financial plan, you might not know enough to understand if the results produced by Adviice are good enough to live by. Particularly when it comes to depending on a plan that needs to survive your retirements years. I know I’ll enjoy playing & refining a plan with these tools going forward. But I will also take advantage of a one hour session with a professional down the road. Just in case I’ve screwed it up. Please be careful here! It may turn out that this product is not suitable for you. But if you enjoy doing this kind of thing, & if you are spending a lot of time with spreadsheets & online calculators, I highly recommend investing the $9 to test drive it.
While I have focused on the older demographic in the course of this conversation, this is also of potential value for the young accumulator. At long last, there is almost an app for this stuff! LOL
If you want to learn more about saving & investing from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.
Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.
Since Bill Bengen’s study on this approach back in the 90s, some variation of his 4% Rule is often used in Monte Carlo simulations to see if a retiree’s portfolio is capable of outliving the retiree. While some just look at the high market returns of recent years & suggest that we can withdraw at a far higher rate, there are others who suggest that even the 4% withdrawal rate might be too high to use going forward. Who is right?
As I get closer to retirement, I’d love to buy a basket of funds yielding 8 or 10% & live high on the hog with those juicy distributions all the way to the end. But I probably won’t do that. Here, I’m going to use 4 funds that have been around for more than 25 years to illustrate why it might be worth paying attention to the 4% Rule. I’m using a mix of American & Canadian funds. I’m ignoring the currency differences, the tax implications, & many other things but, despite that, I think this example will illustrate some interesting points. Many of the newer funds are too new to have much history to look at, but SPY (SPDR® S&P 500® ETF Trust), XIU (iShares® S&P/TSX 60® Index ETF), CLM (Cornerstone Strategic Value Fund, Inc.®), & FBNDX (Fidelity® Investment Grade Bond Fund) all have some history behind them. Indeed, the S&P 500® Index is often used as the benchmark that other funds are measured against. And very few can outperform this index, for total return, over the long haul.
For this example, we’ll look at four retirees with a million dollar investment in each of those funds. And we’ll start the exercise with some folk who retired at the beginning of 2020. That $1m is more than the average Canadian retirement savings, by the way, but it’s a nice round number for doing mental math. Each retiree withdraws 4% in the first year & increases that amount by the rate of inflation (US inflation numbers used for all) for each subsequent year. Why that approach? Because the portfolio income stream then compensates for inflation in a manner similar to OAS & CPP. Income will be able to keep pace with the increasing cost of groceries, gas, rent, etc. Going from 2020 up to the end of 2023, the income stream would grow from $40k to just under $48k for all four portfolios. All good, considering the higher inflation rates of recent years. After those withdrawals, the underlying portfolio values at the end of the period are SPY ($1.37m), XIU ($1.21m), CLM ($1.18m), & FBNDX ($830k). All four portfolios delivered exactly the same income stream, but the underlying value of all the equity funds went up. While the bond portfolio lost value. But don’t give up on bonds just yet, we’re not done!
As a side note, the idea that we can just live off the distributions feels great, but it doesn’t always work. CLM would have delivered huge distribution cashflows, almost $200k in the first year. But if we sucked everything out along the way the underlying fund value would have dropped to about $641k at the end of 2023. And the total distribution for 2023 would have dropped to $131k. Those are not desirable trends. On the other hand, all the other funds would have distributed too little income & selling some shares to boost income to the 4% level would have been required. I know retirees don’t like having to sell shares for income but, for the rest of this example, we’re going to stick with the approach of reinvesting all the dividends & distributions throughout the year. And then selling shares equivalent to the annual income requirement going into the next year.
Now let’s back it up to retirees starting this whole process in 2015. At the end of 2023, they have been retired for 9 years in this scenario. All portfolios delivered the 4% income stream, indexed to inflation, so that income went from $40k at the beginning, to $52.3k at the end. Ending portfolio values were SPY ($2.05m), XIU ($1.36m), CLM ($1.6m), & FBNDX ($760k). SPY put in a stellar performance over this time, the SPY retiree might be adding a luxury cruise or a boat to the retirement bucket list now, eh! CLM, the high yield fund, outperformed the Canadian index by a nice amount, while the poor bond fund took it in the teeth again.
Next, we’ll jump back another 5 years, to start the process in 2010. Once again, income increased for all portfolios, going from the starting $40k up to $56.8k in the final year. Portfolio values at the end were SPY ($4.00m), XIU ($1.62m), CLM ($1.09m), FBNDX ($799k). OMG (that’s not a ticker symbol!), I wish I could go back in time & stick everything into an S&P 500® Index fund! It looks so good, we should just go all in & look forward to retirement, eh? Not so fast!
For retirees starting in 2005, the income stream would grow from $40k at the beginning, to $64.5k at the end. The portfolio values at the end of this time period are SPY ($2.72m), XIU ($2.28m), CLM ($77k), FBNDX ($637k). That’s a bit of a shocker, CLM is almost wiped out this time. I should point out that American investors can reinvest the CLM distributions at the lower of Net Asset Value or market value. I’m not sure how much this would improve the results for a US investor. But this is focused on Canadians & we can’t do that. Instead, we would have suffered from the significant drawdowns in 2007 & 2008. Those impacted CLM’s value from that point forward. Over this time period, the Canadian fund didn’t look so bad against the American index. And the bond fund, though it lost value, is still hanging in there & delivering income 19 years later. It’s also notable that investing in SPY five years earlier resulted in a significantly lower end portfolio value today, than we had in the last pass. While XIU, under its market conditions, did comparatively better by starting earlier.
One last entry point, this time we’ll start in the year 2000. It’s the same story for starting out with a $40k income, gradually increasing in line with inflation. But the first-pass results only go up to 2014, not our 2023 end point. Because CLM went to $0 in 2014! The dot-com bubble bursting in 2000 hurt all the equity funds for a couple or three years after the bubble burst, but CLM took it hardest. When it got hit again in 2007 & 2008, there just wasn’t enough gas left in the tank to support the 4% withdrawal guideline & it went to zero. Here are the portfolio values at the end of 2014 … SPY ($464k), XIU ($1.19m), CLM ($0.00), FBNDX ($1.22m). That’s pretty interesting now. The American index is seriously suffering & it’s been well surpassed by the Canadian Index. And who knew bonds were so useful. Over this time period, when some pretty bad stuff was happening in the markets, FBNDX was the best performing fund of the bunch!
Let’s do one more run, but without CLM this time. All the remaining portfolios survived up to today & they delivered an income stream that grew from $40k back in 2000, up to $72.9k in 2023. Job done on the income front. Portfolio values at the end of 2023 were SPY ($327k), XIU ($1.50m), FBNDX ($850k). Over this 24 year period, given the withdrawal schedule, the Canadian index fund was a clear winner for end value. And while the bond fund also did well, the American index underperformed. This might be unimaginable for an investor who’s been getting rich on the S&P 500® Index over the past decade & a half. Interestingly, if no withdrawals were being made (an accumulator’s portfolio, rather than a retiree’s portfolio), SPY would have a value of $5.0m at the end of 2023, compared to XIU at $4.7m, & FBNDX at $2.64m. The timing of withdrawals over different timelines & under different market conditions can seriously impact end values. That’s the sequence of returns risk that retirees worry about.
Just for fun, let’s look at a couple of time periods where we start with a 10% withdrawal rate. That means that the million dollar portfolio starts out with a $100,000.00 income stream, increasing by the rate of inflation thereafter. If we begin in 2000, CLM went to zero in 2006. SPY went to zero in 2007. XIU went to zero in 2010. FBNDX went to zero in 2012. None of these portfolios survived more than 13 years. Let’s be real here, the period from 2000 to 2010 was a bad one. But nobody knows when the next bad decade will arrive. If we leapfrog that terrible decade & start in 2010, CLM delivers that $100k+ income stream up to 2019. FBNDX expires in 2021. XIU dies in 2023. Only SPY survives ’til the end of 2023 & the portfolio is still worth $1.68m at that withdrawal rate. Makes for great retirement guesswork, sorry planning, when we do this for ourselves, eh!
On every funds’ website & literature, you’ll find a line about past performance not being of any use in predicting future performance. While that is 100% true, that does not mean that we can’t learn something from historical performance. And this little exercise highlights a few things that should make us pause & think.
One of the most important insights for retirees is that a high withdrawal rate, or living off a high yield, is a bet on good returns over the course of that retiree’s retirement timeline. And it is a bet that the retiree won’t be hit by sequence of returns risk, where an early big hit hurts the durability of the portfolio for the rest of the retiree’s, or the portfolio’s, lifespan. It’s also a bet that high inflation won’t destroy portfolio value in the early years. Look, retirement is a bit of a gamble anyway. Most of us have no idea how long we’ll survive. But we would like our portfolios to survive as least as long as we do. It’s all about striking a balance between living the good life in the go-go years. And, should it be necessary, having enough money for a long term care home at the back end. Everyone’s situation is different too. Some retirees will have a bigger & more secure income from OAS, CPP & company pensions than others. Leaving something for the kids will be important to some, but not for all. There are many factors that can influence withdrawal rates. But all retirees will want their portfolio to survive to the end. Now these sample “portfolios” won’t represent the typical well-balanced or well-diversified portfolio of the average Canadian retiree. However, that wasn’t the point of the exercise. It’s more about thinking cautiously. And using the lessons of history to guide an appropriate level of caution when it comes to withdrawal rates.
Despite Warren Buffet’s advice to just buy an American index fund (& there may be nothing wrong with just owning an S&P 500®Index fund for a 100 year investing horizon!), it might not be an appropriate sole holding based on the real retirement timeline for many retirees. While we would all love to have a high yielding portfolio that delivers steady income, going all in on high income funds may not be the solution for everyone either. It’s worth comparing the total return of any such funds against a selection of domestic & international equity & bond index funds. It’s hard to beat index funds for total return. And if the index funds can’t always guarantee the 4% income stream over a long retirement, then living off the proceeds of a fund that yields 10% might not be viable over the long haul either. Compare the total return performance over a long enough timeline to see if the fund is outperforming the market index funds by enough to justify the higher withdrawal rate. Through good times & bad. If it’s not, then caution is warranted. That doesn’t mean that such funds have no place in a portfolio. There may well be a justification for adding a little income boost in the go-go years, for example. But it does require some careful assessment. After all, it’s never a bad thing to cover your donkey (😜)! In case the markets deliver some negative surprises at the wrong time. Or if retirement goes on for longer than your portfolio expects!
At the end of this exercise, all we can really take away is that the 4% Rule might serve as a good baseline to assess the durability of our retirement income stream. Retire at the right time & we might get away with a far larger withdrawal rate. Retire at the wrong time & even a 4% withdrawal rate might be challenged. Unfortunately, none of us knows what happens next.
Newer investors should also be cautious about recency bias. The outstanding performance of the S&P 500® over the past decade & a half might, or might not, continue. The performance of bonds in 2022 was so bad that some newer investors are avoiding bonds altogether. Note that the original study that created the 4% Rule was based on a 50:50 portfolio of US stocks & bonds. However, there are times when international markets outperform the US. The Canadian market outperformed the US market from 2000 to 2010. Many new high yield funds are considered safe because the underlying holdings are blue chip companies. Just remember that a bad baker can start out with great ingredients & still bake a lousy pie! Only time will tell which of these fund managers will be able to deliver a good total return from these newer income funds. And even for those with a market-matching, or even with a market-beating, performance, taking all the distributions for living income may not allow the portfolio to survive over the course of a long retirement. And finally, all our circumstances are different. A retiree with a lower expected number of years in retirement might withdraw more aggressively. One with a greater life expectancy, & with a goal of leaving lots to the kids, might play a far more conservative game.
Since my crystal ball is broken, I think I’ll be sticking closer to a 4% withdrawal rate when my retirement day rolls around. If you know how to do better, please let me know.
For some, all this may be too challenging to manage. Despite the fees involved, there is nothing wrong with paying a professional to manage your portfolio for you. And to manage the retirement income stream throughout retirement. For some, that will be a good choice. Though figuring out how to choose a good financial advisor has its challenges too.
If you want to learn more about all this from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.
Important – this is not investing, tax or legal advice, it is for entertainment & thought-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at each fund’s website. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.
The Wry Eye 