Maybe I need to retire, but can I? [US, Canada]

[Saintor]

Emergency funds: 5 years of expenses

Debt: None, no mortgage

Tax Filing Status: Divorced, with grown-up children

Tax Rate: 15% Federal, 16.5% State

State of Residence: Will Canada be another state?

Age: 58yo this year.

Desired Asset allocation: 100% stocks / 0% bonds
As mentionned above, 5 years of expenses.

Size;around 3M
I contribute to the max of my tax-deferred accounts(including from my salary; me 6% employer 8%)

Taxable: 14% (25% stock market equities, 75% in others)
401K: 73% (94% stock market equities, 6%,, 75% in others)
Roth IRA 13% (100% stock market equities)

Geographical stock market equities; 42% US (mostly large value cap), 58% international (including 48% Canada).
Stock market equities Investing style; in 92% large index ETF/MF, 8% in stocks.
Others investing style; 100% in cash-like TIPS that return >4%.
Overall planned return; 7%

Goals;
In 22 years, (80yo) to have less than 50% of my current assets + home, 401K mostly depleted
At death, leave 33% of estate + home

Income;
24K/yr at 65yo
1.4% withdrawal per quarter (5.6% annual), using Vanguard Dynamic Spending
In bad years, I would not pull from my stock market equities
Overall planned income; 125-200K, both average and median would be 160K, 25% of it is discretionary.

Other key points;
No advisor, I control my portfolio and do a quarterly review
Medical insurance coverage when at home, no known health issue.
I can pull from my 401K right away (no 59.5 yo constraint)
Discretionary spending (4K /mo) is mostly for traveling, I can trim easily.
I will likely replace my 3yo car in 5 years, and possibly downgrade if required.

I played with a few retirement calculators, including this FICALC.app simulation.

If I would trust them (can they be trusted), I should be ok. So can I retire?

[Mike Scott]

Depends on your budget. Does the budget fit within a conservative estimate of your income?

[LadyGeek]

This thread is now in the Non-US Investing forum (Non-US investing - Canada). This thread also attracts members with cross-border (US / Canada) investing experience.

Are you a US citizen, dual US / Canada citizen, or ex-pat (US citizen in Canada or vice versa)?

State of Residence: Will Canada be another state?

We also have a template for non-US members. See: My portfolio: seeking advice

[Watty]

Age: 58yo this year.
.....
Size;around 3M

Maybe I need to retire, but can I?

Even if those are Canadian dollars you should be fine if your expenses are halfway reasonable.

As a thought experiment I would not suggest doing it but if you just put your $3 million under a mattress and took out $100K a year that would last you 30 years until you are 89.

If those are US dollars and you will also get Social Security then you will be in even better shape.

You can edit your post using the icon with a pencil on it to indicate if you are a US citizen, if those are Canadian or US dollars, if you will get US Social Security or Canadian CCP and OAS and how much and when, and your expected expenses.

[Valuethinker]

State of Residence: Will Canada be another state?

So no. That's easily answered. And I assume that was the dry and mordant Canadian sense of humour at work? Americans wouldn't want Canada. Canada wouldn't want America.

The rest is quite contingent upon various Canadian arrangements re tax etc. Healthcare. CPP & OAP.

I might suggest you also try the associated Canadian Financial Wisdom Forum (linked through from here if you go to the list of sub boards). You'd get more Canada specific help.

If you aim for an under 3% withdrawal rate you should be alright.

[Saintor]

Depends on your budget. Does the budget fit within a conservative estimate of your income?

Yes, I track all my expenses with an app. Also, I live a low-cost of living area.

If you aim for an under 3% withdrawal rate you should be alright.

As stated, I aim at withdrawing 5.6% and I am fine with my PF going 50% after 22 years. I used all data since 1871, my scenario was test-stressed since then and no fail. Even if I had a 20% fail, it just means that I would to reduce my discretinary spending.

[mchampse]

Would consider lowering Canadian exposure in your portfolio. RRSPs don’t require Canadian investments anymore.

[jg12345]

Depends on your budget. Does the budget fit within a conservative estimate of your income?

Yes, I track all my expenses with an app. Also, I live a low-cost of living area.

If you aim for an under 3% withdrawal rate you should be alright.

As stated, I aim at withdrawing 5.6% and I am fine with my PF going 50% after 22 years. I used all data since 1871, my scenario was test-stressed since then and no fail. Even if I had a 20% fail, it just means that I would to reduce my discretinary spending.

I do not trust the returns from 1871 to today (and all the various simulations) are relevant in today's world.

I think that presumes on average 7% real? all long term forecast from 2025 onwards are not suggesting we will see the same growth

Someone suggested 100k and 3m= 30 years, but you really are saying you will be spending 125-200k, so assume 165k/year I guess. with the same accounting of 3m divided by 165k ... it's less than 20y. In fact, a withdrawal rate at 5.6% seems very high.

Nope, I am not sure you're safe with these numbers, but of course I haven't done the math.

My suggestion. Try firecalc, and put growth of portfolio at 2-4% above inflation, and see what it says.

[Valuethinker]

Would consider lowering Canadian exposure in your portfolio. RRSPs don’t require Canadian investments anymore.

I missed that.

Yes. The Canadian index is heavily weighted towards banks & natural resources (primarily oil & gas).

As the domestic economy goes into recession, real estate prices will probably slip. Canadian consumers are heavily borrowed. The banks will take losses.

Oil. Who knows? Depends how it plays out.

A globally diversified portfolio is optimum. Canada shouldn't be more than 10-20% ie more than 4x its actual weighting in the index.

Also none of what is going on is good for CAD. You have a trade war with the destination of 75% of your exports. You have a weak government with a lame duck PM with a minority. It's quite something when the strongest voices in Canadian foreign policy seem to be the Premiers of (checks notes) Alberta and Ontario

So global equity diversification is a way of fighting that. Given that CPP etc are in CAD (so is home equity) -- plenty of Canadian dollar exposure for a Canadian retiree.

[Valuethinker]

Yes, I track all my expenses with an app. Also, I live a low-cost of living area.



As stated, I aim at withdrawing 5.6% and I am fine with my PF going 50% after 22 years. I used all data since 1871, my scenario was test-stressed since then and no fail. Even if I had a 20% fail, it just means that I would to reduce my discretinary spending.

I do not trust the returns from 1871 to today (and all the various simulations) are relevant in today's world.

I think that presumes on average 7% real? all long term forecast from 2025 onwards are not suggesting we will see the same growth

Someone suggested 100k and 3m= 30 years, but you really are saying you will be spending 125-200k, so assume 165k/year I guess. with the same accounting of 3m divided by 165k ... it's less than 20y. In fact, a withdrawal rate at 5.6% seems very high.

Nope, I am not sure you're safe with these numbers, but of course I haven't done the math.

My suggestion. Try firecalc, and put growth of portfolio at 2-4% above inflation, and see what it says.

Just to second this.

Long run US average before costs & taxes is 6% real. That's for equities.

Long run world average is 5% real.

We can't bank on the US continuing to outperform. And we cannot bank on an absolute outperformance of 6% real. Reality is much of that came with a rerating (uplift) in the valuation put on future earnings (P/E ratio) by investors. Ie from growth in the PE multiple, not the "E".

3-4% real returns for equities is realistic. 5% real is an aspiration.

Bonds long run should average about 1% real. Canada is terminating Real Return Bonds, but if you can deal with the tax issues you can buy US TIPS which should give a higher return than that. I would say most retirees should have c 50% of their bonds in RRBs/ TIPS.

Cash about 0% real, long run.

If we repeat the 1966-1981 period, bonds were trashed by inflation (something like -40% total return?). Stocks something like -20% total return in real terms? Cash was pretty close to 0.

[Saintor]

I didn't specify it, but the 7% return I mentioned is nominal and expect the real one to be around 4%. And I go go lower if needed.

I clearly have [had] an home bias. This is in good part due to the arrangements with the financial company through my employers. My new contributions since 3 years is 80% US 20% Canada. I wished that I knew better earlier.

Also none of what is going on is good for CAD. You have a trade war with the destination of 75% of your exports. You have a weak government with a lame duck PM with a minority. It's quite something when the strongest voices in Canadian foreign policy seem to be the Premiers of (checks notes) Alberta and Ontario}

I know. But you had a weak administration until recently too.... I'd say even worse if possible! Also this explains why I might to retire. Our company exports more than 80% in the US.

At the same time, I am also hesitant to go further with the US, especially the funds with too much magnificent seven weight. Canada funds are typically not that much over-inflated. I was happy to have these Canadian funds between 2000-2009 when TSX dominated over S&P500. The 1966-1980 was another plateau period for the US. I am happy with the returns of my top 3 Canadian holdings (70%)

Fund 1/3/5/10
FID631 Fidelity Canadian Large Cap 17.5 / 12 / 14 / 10
BTG104 Beutel-Goodman Small-Mid Cap 20 /10 /12 / 9
XIC Blackrock's replica of Canadian Equity Index index 25 / 10 / 11.5 / 9

...not bad IMO! And it offers the diversification out of the USA market that I need.

My main US exposure (800K, almost 25% of my PF) is BTG308 but without most of the MER fees through my employer.
BTG308 22 / 14 / 13 / 12.5 no magnificent seven in the top 10.

I didn't have much success finding an international fund with comparable returns. My preferred is;

ZDM 15 / 10.5 / 10 / 8

I do not trust the returns from 1871 to today (and all the various simulations) are relevant in today's world.

I am a bit with you on this one. A system works until it doesn't. Case in evidence the bonds that returned pratically no real money since 2012. A win for me as I didn't have any.

The scenario that I am working with has two important points. It is NOT an initial typical 4% or 6% inflation-adjusted forward. It is a every-year % of PF and no shortage of money is possible is the floor default value is ok; it self-adjusts with lower and upper guardrails.

[jg12345]

I didn't specify it, but the 7% return I mentioned is nominal and expect the real one to be around 4%. And I go go lower if needed.

I do not trust the returns from 1871 to today (and all the various simulations) are relevant in today's world.

I am a bit with you on this one. A system works until it doesn't. Case in evidence the bonds that returned pratically no real money since 2012. A win for me as I didn't any.

The scenario that I am working with has two important points. It is NOT an initial typical 4% or 6% inflation-adjusted forward. It is a every-year % of PF and no shortage of money is possible is the floor default value is ok; it self-adjusts with lower and upper guardrails.

Just to be clear: the simulation you sent via link uses returns, and simulates, from 1871 - if I understand correctly.

meaning, if you want to use 7% nominal, 4% real, this is not what you're getting there. You will probably need to use firecalc.

As Valuethinker mentioned I think the historical return is ballpark 6% real.

I never used that tool, so I might be mistaken ofc!

[Valuethinker]

I didn't specify it, but the 7% return I mentioned is nominal and expect the real one to be around 4%. And I go go lower if needed.

I clearly have [had] an home bias. This is in good part due to the arrangements with the financial company through my employers. My new contributions since 3 years is 80% US 20% Canada. I wished that I knew better earlier.


My main US exposure (800K, almost 25% of my PF) is BTG308 but without most of the MER fees through my employer.
BTG308 22 / 14 / 13 / 12.5 no magnificent seven in the top 10.

I didn't have much success finding an international fund with comparable returns. My preferred is;

So with indexing, past performance is irrelevant. What matters is being "market weight". So if non US stocks are c 35% of the world index, that's why you hold.** One can't use past performance to predict future performance. Despite all the "USA is best" shouting that goes on here.

I do not trust the returns from 1871 to today (and all the various simulations) are relevant in today's world.

I am a bit with you on this one. A system works until it doesn't. Case in evidence the bonds that returned pratically no real money since 2012. A win for me as I didn't have any.

The scenario that I am working with has two important points. It is NOT an initial typical 4% or 6% inflation-adjusted forward. It is a every-year % of PF and no shortage of money is possible is the floor default value is ok; it self-adjusts with lower and upper guardrails.

[/quote]

The thing you should note in 2000-2010 where stocks returned 0% real (having 2 bad bear markets in that period). And 1966-1981 when they returned negative in real returns.

This is the thing about retirement portfolios. You have to be bomb proof. That 10 year 0% real return (or worse) could start the day you retire.

I would say most retirees should have a healthy weighting of Real Return Bonds/ TIPS-- as much as 50% of their portfolio (but a 50% equities 25% straight bonds 25% RRBs is perfectly reasonable -- depending on how you plan to fund the next 1-3 years of retirement, which could be in bank Term Deposits or ST bonds). Canada is not issuing new RRBs, which is a real pity. So you may have to take on currency risk.

CPP provides a degree of inflation protection, but the max benefit is much lower than US Social Security.

** there is an open question on Emerging Markets. Remembering half the index is China + Taiwan. I would say for Canada, which is a resource dependent economy that largely exports to the USA (ie is quite like an EM in some ways), you don't *need* EM. If you do hold them, I would say 10-15% (of your total equities).

[Valuethinker]

I didn't specify it, but the 7% return I mentioned is nominal and expect the real one to be around 4%. And I go go lower if needed.




I am a bit with you on this one. A system works until it doesn't. Case in evidence the bonds that returned pratically no real money since 2012. A win for me as I didn't any.

The scenario that I am working with has two important points. It is NOT an initial typical 4% or 6% inflation-adjusted forward. It is a every-year % of PF and no shortage of money is possible is the floor default value is ok; it self-adjusts with lower and upper guardrails.

Just to be clear: the simulation you sent via link uses returns, and simulates, from 1871 - if I understand correctly.

meaning, if you want to use 7% nominal, 4% real, this is not what you're getting there. You will probably need to use firecalc.

As Valuethinker mentioned I think the historical return is ballpark 6% real.

I never used that tool, so I might be mistaken ofc!

Ballpark return is 6% real for US stock investors.

Return an international investor should use is 5% real. And that's very long run. I think it's quite sensible to use 3-4% real now. Might still be too high for the next 10 years.

[jg12345]

Just to be clear: the simulation you sent via link uses returns, and simulates, from 1871 - if I understand correctly.

meaning, if you want to use 7% nominal, 4% real, this is not what you're getting there. You will probably need to use firecalc.

As Valuethinker mentioned I think the historical return is ballpark 6% real.

I never used that tool, so I might be mistaken ofc!

Ballpark return is 6% real for US stock investors.

Return an international investor should use is 5% real. And that's very long run. I think it's quite sensible to use 3-4% real now. Might still be too high for the next 10 years.

Thanks!

I have just checked the stocks part used in the simulation posted by OP in their first post

It says: "Stock are represented by large cap US index funds (S&P 500)." (bonds is 10y US bond)

Which means that OP simulation is assuming roughly 6% real for stocks, a very optimistic scenario nowadays

[Valuethinker]

Ballpark return is 6% real for US stock investors.

Return an international investor should use is 5% real. And that's very long run. I think it's quite sensible to use 3-4% real now. Might still be too high for the next 10 years.

Thanks!

I have just checked the stocks part used in the simulation posted by OP in their first post

It says: "Stock are represented by large cap US index funds (S&P 500)." (bonds is 10y US bond)

Which means that OP simulation is assuming roughly 6% real for stocks, a very optimistic scenario nowadays

The problem for a retiree is, as always, Sequence of Returns Risk (SORR)).

Although I am pretty confident stocks can return 3% to 5% real, before taxes and costs, over the long run, the actual outcome, as we know, can be very very different from that. Even negative. And for quite long periods.

So your risk going into 30-35 years of retirement is of one of those bear markets just after you retire, that hammers your retirement spending plans.

[Valuethinker]

The scenario that I am working with has two important points. It is NOT an initial typical 4% or 6% inflation-adjusted forward. It is a every-year % of PF and no shortage of money is possible is the floor default value is ok; it self-adjusts with lower and upper guardrails.

I am not sure what you mean there?

Could you explain?

The Monte Carlo simulators typically assume a fixed withdrawal from the portfolio (say 3% real). Then that withdrawal grows with inflation.

So 3% of $1m would be $30k pa, held constant in real terms through retirement. Then you make assumptions about asset returns, and that gives you your probability of success (ie running the simulation thousands of times using a random selection from the database of annual returns).

The typical problem is that the returns are assumed to be random (from the sample):

- but we have periods like the Great Depression, or the great stagflation of the 60s & 70s, or the 2000-2010 period, when returns were serially correlated (and bad)

- just because we haven't had a return in the past, doesn't mean we cannot have in the future. That's good news and bad news. But a -50% or more return on an equity portfolio (which is not followed by a rapid return back to where it was) can cripple retirement financial planning

Hence the admonition to be cautious. And the "4% rule" was, by the admissions of its authors, taken at an unusually favourable time in asset returns.

How would your approach differ?

[Fireishere]

That is a constant percentage withdrawal with guardrails. The trickiest part is to set floor and ceiling correctly because they’re only known afterwards. For example: withdrawal is 4% of the portfolios current value not initial as it is in SWR method. Then there is a floor of 3% and a ceiling 6% of the initial value adjusted to inflation.

[Saintor]

Ballpark return is 6% real for US stock investors.

Return an international investor should use is 5% real. And that's very long run. I think it's quite sensible to use 3-4% real now. Might still be too high for the next 10 years.

Thanks!

I have just checked the stocks part used in the simulation posted by OP in their first post

It says: "Stock are represented by large cap US index funds (S&P 500)." (bonds is 10y US bond)

Which means that OP simulation is assuming roughly 6% real for stocks, a very optimistic scenario nowadays

I cheated.

I used 35% stock / 65% bonds to emulate the closest I could to get a 7% nominal. As mentionned, I expect something like 7% nominal, 3% inflation + 4% real return.

I played entensively with ficalc.app cfiresim, firecalc and portfoliovizualizer. These last two allow to fine-tweak a portfolio. PFV now back-tests only in a limited time in its free version, since a few months.

I used in my PFV simulation over 25 years
25% US Large Value Cap
5% US Large Growth Cap
55% Ex-US developped markets
15% Short -term treasury

7% nominal stands between 25th-50th percentile

The Monte Carlo simulators typically assume a fixed withdrawal from the portfolio (say 3% real).

In my PFV simulation above (Monte Carlo), I used "Withdraw Fixed Percentage Periodically", 1.4% every quarter.

[jg12345]

Thanks!

I have just checked the stocks part used in the simulation posted by OP in their first post

It says: "Stock are represented by large cap US index funds (S&P 500)." (bonds is 10y US bond)

Which means that OP simulation is assuming roughly 6% real for stocks, a very optimistic scenario nowadays

I cheated.

I used 35% stock / 65% bonds to emulate the closest I could to get a 7% nominal. As mentionned, I expect something like 7% nominal, 3% inflation + 4% real return.

I played entensively with ficalc.app cfiresim, firecalc and portfoliovizualizer. These last two allow to fine-tweak a portfolio. PFV now back-tests only in a limited time in its free version, since a few months.

I used in my PFV simulation over 25 years
25% US Large Value Cap
5% US Large Growth Cap
55% Ex-US developped markets
15% Short -term treasury

7% nominal stands between 25th-50th percentile

The Monte Carlo simulators typically assume a fixed withdrawal from the portfolio (say 3% real).

In my PFV simulation above (Monte Carlo), I used "Withdraw Fixed Percentage Periodically", 1.4% every quarter.

in the link you sent, the 1.4% is set as annual

I ran a simulation with 3m, 7% nominal portfolio return (volatility 12%), 3% inflation (vol 3%), 4% risk free rate and you are still in the green 100% of times. went down to 2% real, and still 0% failures. so I'd say pretty good!

[Saintor]

Fixed, thank you.