Investing for Retirees Part 2: The Options

1. Investing for RetireesPart 2: The Options Low fee, tax efficient, diversified, income producing portfolio Session 11.2, Fall, 2019

2. Disclaimer • The Ottawa Branch of the National Association of Federal Retirees and the facilitator of this seminar do not in any way offer financial orinvesting advice. • This seminar and the information in this PowerPoint presentation are provided for education purposes only. • Investing involves risk. Any personal investing decisions should be made only after individual due diligence and/or with the assistance of a registered financial adviser or broker. • Ottawa Branch takes no responsibility for any investment decisions that participants may make. • By attending this seminar and signing the disclaimer provided, you are signifying that you understand and agree to these conditions. Please note that the Ottawa Branch provides information on issues, products and services of general interest to its membership. It does not endorse a particular position on a product or service, as being suitable for individual members, but brings them to the members' attention so that they can make up their own minds

3. Recap: F T D • Control what you can: • Minimize Fees • Optimize Taxes • Diversify to reduce risk through asset class and geography

4. 6. Asset class options

5. Asset class options (1) • Equities • Individual stocks • Mutual funds • Exchange Traded Funds (ETFs) • Real Estate • Real Estate Investment Trusts (REITs) • Physical Real Estate

6. Asset Class Options (2) • Fixed IncomePension • GICs • Bonds • Bond Funds • Preferred Shares • Cash • Money Market Funds • High Interest Savings

7. TSX 300 vs S&P 500The need to diversify(Ex dividends)

8. Examples of Equity (Stock) ETFs • Canadian TSX 300 XIC .05% MER 3.2% Yield • Canadian Dividend Growers XDV .55% 4.6% • Canadian Minimum Volatility ZLB .39% 2.4% • US S&P 500 in US$ VOO .04% 2.1% • US Total Market in C$ unhedged VUN .16% 1.2% • World ex Canada VXC .27% 1.4% • All in One Balanced VBAL .22% 2.3% • All in One Conservative VCNS .22% 2.3%

9. Dividend Growth Strategies

10. 7. Income producing equities

11. Dividend Stock ETF (XDV) performance 5 yearsXDV ETF 4.1% TRP 5% RY 3.9%

12. Real Estate Investment Trust (REIT) ETFsRIT (managed) vs XRE (index) Direct owners of real estate: offices, retirement, apartments, shopping centers Own real estate without fixing broken toilets Interest rate sensitive

13. Examples of REIT ETFs • Managed RIT .75% MER 5.1% Yield • Canadian REIT Index XRE .61% 4.8% • Note: These are NOT recommendations

14. Don’t need income ? Be a DRIP • Dividend ReInvestment Programs (DRIPs) are available on most Canadian listed dividend paying stocks, ETFs & Mutual Funds • No charge to implement or buy shares/units • Easily set up through any broker: Full service, Robo or Online • Great for long term investing • Great for dollar cost averaging

15. 8. Impact of interest rates on hard assets

16. Impact of interest rates on investments57% of Ottawa house price increase explained by declining interest rates

17. Impact of interest rates on investmentsS&P 500 increase dwarfs house price increase

18. 9. Fixed Income Options

19. Fixed income options • Preferred Shares • Bonds and bond funds • Be aware of “duration”, short term safest • Bond prices are inverse to interest rates • GICs • In non registered accounts, possible negative real returns • 2.4% - 30% Tax – 2% inflation = -.32% • Good place to park short term money in Registered Accounts • High Interest Savings & Money Market Funds • About 1.0% less than 1 year GICs

20. Preferred shares – attractive dividends but complex and volatile ZPR vs CPD vs HPR (Managed) excluding dividends • Illiquid -difficult to buy and sell • Very complex • Interest rate sensitive • For very experienced investors only • Case for Preferred ETFs

21. Examples of Preferred Share ETFs • Managed HPR .55% MER 4.4% Yield • Cdn Preferred Share Index CPD .51% 4.7% • 5 year Laddered Rate Resets ZPR .50% 4.7% • Note: These are NOT recommendations

22. The case for Bonds36 years of declining interest rates but how low can it go ? Zero ?

23. 2 Year/10 Year US Treasury SpreadAre you getting paid enough for taking more risk ?

24. Examples of Short Term Bond ETFs • 5 year laddered corporate RBO .28% MER 2.7% Yield • Managed Corporate bond HAB .50% 3.2% • Canadian Short term bond index XSB .09% 2.4% • Note: These are NOT recommendations

25. Bond ETFs: HAB (managed) RBO (laddered)XSB (index)

26. How to select ETFs • Globe and Mail, Rob Carrick’s ETF Buyers Guide 2019 • MoneySense Best ETFs 2019 • Canadian Couch Potato Blog

27. Your pension • The capital value of your pension is equal to your annual pension income before tax X the number of years you expect to receive it • Federal pensioners have a different risk profile than those who do not have an indexed, guaranteed, defined benefit pension. • How much risk do you feel comfortable with ?

28. 10. Constructing your portfolio for tax and cost efficiency

29. Focus on income growth OR asset growth • Most retirees want income and principal protection • Portfolio Models available from Wealth Management companies focus on asset growth rather than income. • In taxable accounts, tax optimization plays a key role in asset selection and location. • These portfolios are optimized for $46,000 - $77,500 taxable income.

30. What to hold first in your RSP • Interest income • Taxed the same upon withdrawal in registered or non registered • Income can accumulate untaxed until withdrawal • US Dividends • No US with holding tax in a RSP or RIF • Taxed at highest marginal rate outside registered plans

31. What to hold first in your RIF • Cash flow producing investments • Mandatory minimum withdrawal requirement • REITs, Prefs, Dividends • Interest income • Taxed the same upon withdrawal in registered or non registered • Income can accumulate untaxed until withdrawal • US Dividends • No US with holding tax in a RSP or RIF • Taxed at highest marginal rate outside registered plans

32. What to hold in your TFSA • Canadian dividend payers • Get your dividend income totally tax free • Get US$ dividends from co-listed Canadian companies tax free (banks, pipelines, infrastructure companies) by holding the US listed version • REITs • Complicated payout structure and tax consequences eliminated • Infrastructure companies • Complicated payout structure and tax consequences eliminated

33. What to hold in your non registered accounts • Capital gains including US and International Equities • Intl companies or ETFs that pay little dividends, eg Berkshire Hathaway • Canadian Dividend payers once your TFSA is maxed out • If other options, do not hold dividend payers in your RSP • Return of Capital payers (some REITs, Infrastructure companies) • For taxable income <$46,000, negative tax on dividends

34. Example of Capital Gains for Tax Efficient IncomeBRK.A (0% Div) versus VOO (1.7% Div)

35. Tax Efficiency Ideas • Donate or will appreciated stocks or ETFs • Donations of stocks with capital gains to registered charities incur no capital gains tax • Donor receives donation credit equal to full value of the shares • Determine which investment has highest after tax income in your taxable accounts • After tax proceeds (depends on income level) from: • Capital Gains = 73-90% • Dividends = 59-107%

36. 11. Where to get investment advice

37. Where to get investment advice • Most big fee based advisers require a minimum of $500,000 investible assets. • Independents will handle $150,000 accounts • Fees are about 1% +- per year, depending on account size • Near fiduciary responsibility • The Value of Simple – Fee based advisors list • www.valueofsimple.ca/links

38. Alternative investment management solutions • BMO Smartfolio • Robo Advisers • Canadian Couch Potato blog • Vanguard, I Shares and BMO Asset Allocation ETFs • Mawer Balanced MFs • Online Discount Brokerages

39. Vanguard, I Shares & BMO Asset Allocation ETFsGlobal stock and bond diversification with one ETF • Vanguard: • VEQT 100% stocks • VGRO 80% stocks, 20% bonds • VBAL 60% stocks, 40% bonds • VCNS 40% stocks, 60% bonds • VCIP 20% stocks, 80 % bonds • MER .22% • I Shares/BMO: • XGRO/ZGRO 80% stocks, 20% bonds • XBAL/ZBAL 60% stocks, 40% bonds • XCON/ZCON 40% stocks, 60 % bonds • MER .18%

40. Vanguard Asset Allocation ETFs

41. Mawer Balanced Mutual Funds • Active management at reasonable cost • .90% MER • Available through Online Brokers (Ex RBC Direct) • 10 year average annual return: 9.9 % • Read an excellent comparison of Mawer Balanced and VBAL here: • https://boomerandecho.com/vbal-vs-mawer-balanced-fund-for-one-stop-investing/

42. 12. How to construct a portfolio

43. The Bucket PlanSleep better

44. Avoid the need to sell lowThe Three Bucket Approach • Bucket 1 – Now money, 1-3 years • Planned major expenses, 2 years of “extra” income • GICs, Money Market Funds, High Interest Savings • Bucket 2 – Soon money, next 10 years • RIFs, needed income • Dividend ETFs, REITs, Prefs • Bucket 3 – Future money, 10+ years • Inflation protection • Diversified asset allocation ETFs

45. Model Portfolio 1 – Pre RIFWeighted average distribution % 3.2

46. Model Portfolio 2– RIF and IncomeWeighted average distribution 4%

47. The KISS method of Self Directed Investing • Many mutual funds have a discounted fee “D” series for use in online accounts • If your MFs have a “D” series, open an online brokerage account • Transfer your existing mutual funds • Call the brokerage and ask that the MFs be converted to “D” series • Immediately save 45% on fees and hold exactly the same investments • Note: If your MFs do not offer a “D” series, you can convert to similar ones that do such as Mawer and avoid any taxes in a RSP, RIF, or TFSA.

48. How to implement this strategy • 1. Develop your personal Bucket Plan of investments and ETFs • 2. Open an Online Brokerage account • 3. Transfer funds or investments “In Kind” into your account • 4. Convert your Mutual Funds to “D” Series OR • 5. Use limit orders to gradually begin selling existing and buying your ETFs. Buy no more than half of each investment at one time. Take your time. • 6. Rebalance once a year • 7. Relax and ignore the stock markets

49. 7 Questions to ask your Broker/Adviser/Advisor • 1. What is the total amount of all fees in dollars and % that I am paying each year ? • 2. How much am I paying you in dollars and per cent ? • 3. How are each of my mutual funds performing compared to the relevant index ? • 4. In my taxable account, what are you doing to minimize my tax burden, taking into account my tax rate on various types of investments, and dividends in particular ? • 5. In my RIF, what are you doing to generate enough income to fund my mandatory withdrawals over the long term? • 6. What steps have you taken to insulate my investments from the next 30% + stock market decline ? • 7. What is the total average annual return after all fees in my account(s) ?

50. Check my website for weekly ideas & insight InvestingForRetirees.com