Reader Question about Bucket Investing Plan in Retirement
One of this blog’s readers, AT, asks the following question about his retirement bucket investing plan (lightly edited for length):
In my own portfolio, when stocks plunge, I just rebalance rather than make an active decision to spend only from my fixed-income investments. So, to me, your dilemma just looks like a rebalancing question. If stocks go down, your planned annual spending goes down somewhat, and you end up wanting less in GICs than you have in your non-registered (taxable) account. The remedy is to own a small amount of stock in your non-registered account. One possible way to do this is to take an annual RIF or LIF withdrawal in-kind. Alternatively, you could just use cash from the withdrawals to re-buy stocks.
If you have TFSA room to hold the stocks that no longer fit in your RIF and LIF, then you won’t have any loss of tax-efficiency. If not, it is less tax-efficient to own stocks outside registered accounts, but there is no choice if you want to be holding more stock than your registered accounts can hold. At least if you buy and hold low-cost index funds, you can defer capital gains taxes.
If you’re planning to make more active decisions about whether to spend from stocks or GICs, it’s still possible to use the idea of holding stocks in a TFSA or non-registered account. However, there are so many active retirement spending strategies that it’s hard to say what asset location choices make sense without knowing more about your strategy.
So, GICs can still be of use to you as a buffer against stock market declines, as long as you’re willing to hold some stock outside your RIF and LIF.
Loosely following your bucket idea, I put $25,000 in 1, 2, and 3-year GICs. A year came and went and then $25,000 plus change went back into my account. I get CPP, OAS and have activated my RIF and LIF accounts. Does it make sense to have GICs when I have these streams of income which once started, I can't just randomly stop when the market plunges? I'd like to stop them of course and live on a GIC for a year, but if I can't, are GICs any use to me?
In my own portfolio, when stocks plunge, I just rebalance rather than make an active decision to spend only from my fixed-income investments. So, to me, your dilemma just looks like a rebalancing question. If stocks go down, your planned annual spending goes down somewhat, and you end up wanting less in GICs than you have in your non-registered (taxable) account. The remedy is to own a small amount of stock in your non-registered account. One possible way to do this is to take an annual RIF or LIF withdrawal in-kind. Alternatively, you could just use cash from the withdrawals to re-buy stocks.
If you have TFSA room to hold the stocks that no longer fit in your RIF and LIF, then you won’t have any loss of tax-efficiency. If not, it is less tax-efficient to own stocks outside registered accounts, but there is no choice if you want to be holding more stock than your registered accounts can hold. At least if you buy and hold low-cost index funds, you can defer capital gains taxes.
If you’re planning to make more active decisions about whether to spend from stocks or GICs, it’s still possible to use the idea of holding stocks in a TFSA or non-registered account. However, there are so many active retirement spending strategies that it’s hard to say what asset location choices make sense without knowing more about your strategy.
So, GICs can still be of use to you as a buffer against stock market declines, as long as you’re willing to hold some stock outside your RIF and LIF.
TFSA room still grows in retirement ..
ReplyDeletemy mind totally skipped over that.
@aB: Yes, I help manage portfolios for several family members, and they're all slowly shifting assets from non-registered accounts to TFSAs.
Delete