Tuesday 10 June 2014

Constructing a monthly income $200k ETF portfolio for a new retiree

                                                        Plan Grandma Olga

So I have been given the task of investing my mother in laws money. She is 60 years old single and ready to mingle. She likes romance novels, wine and a bit of dancing.For now we will call her Grandma Olga . She has recently sold her townhouse and has $205,000 sitting in the bank. She is very worried the money will not last and she will be broke and penniless before she dies. She is unable to work due to a couple medical conditions and she has a long running claim with an insurance company in which she feels she will receive a payout but unsure of its size within the next couple years. She has a municipal pension in which she just applied for that will pay her $700 a month until age 65 and at 65 it drops to $500 a month. She can apply for early government pension that would pay her $365 a month now or she can wait until 65 to receive a higher payments of around $515 a month. Also at age 65 will receive old age pension at around $500 a month.

So right now she thinks she needs about $2000 a month to survive.

Her Expenses per month

- $950 a month rent with utilities included- She is renting an apartment close to us which is alright, nothing fancy but not run down, About 750 sqft in a nice area but decent building. I told her it would be best to get a cheaper place but not much available under that. She could get a 2 bedroom place for $1300 and get a room mate to split the costs but she hates living with others.

- $400 Bills - Medical, Car Insurance, Gas, Phone, Cable , Internet, Gym. She could trim a few things down here by a bit but mostly they are pretty fixed costs

- $400 Food - I am just estimating here. $100 a week. This would include eating out twice a week and a couple of coffees. This number could be as low as $300 I think as she doesn't seem to shop or eat much.

- $250 Entertainment, gifts and clothes. This number will fluctuate as certain holidays spending will be increased. She does not go out and spend much money but she likes to shop for her grandkids. She is pretty frugal in these regards. I expect spending will fall in the range of $150 towards $350 a month so $250 is a safe bet overall

$2000 Total
- Overall its not bad but I feel she could trim that number down especially if she lived in cheaper housing which is a stubborn topic for her. The rest of her costs I think she could trim $100-200 from pretty easily taking her down to about 1800-1900. Also she helps babysit for us one night a week for date night. With that I pay some of her bills for her. So I cover her about 100-200$ a month effectively bringing her total down towards the 1800-1900 level

Grandma Olga age 60 Income right now

$700 a month- municipal pension
$170 a month - from interest of $205,000 sitting in a high interest savings account at 1%
$870 Total

When she reaches 65

500$ municipal pension which drops from 700
513$ fedreal goverment pension
$500 old age security
1513 Total a month

So whats a woman to do?
Have her $205,000 sit in cash deposit gics in the bank earning what max 2.5%? That would net her $5125 a year or about 427 a month. Certainly this would be the safest route but her nest egg will slowly evaporate as she would require more capital to get by till she reaches 65. In theory she would lose close to $60,000 in that 5 year term leading up to 65. That a big chunk!

She said she is willing to take on more risk as she knows fixed cash deposit gic,s will not yield her the return she needs.

That is where I come in. First off I find this a very daunting task. I take it very seriously and even more serious than my finances.  I have sent her to two financial advisers and they did not come up with very good plans for her. One of course was pushing their company funds on her with high fees and the other one she did not trust him as he came across a salesman. I am worried if I send her to a fee based adviser that their 1% a year asset managing would gobble up her returns and she would have to take on unnecessary risk to offset the fee.

The Plan
I am no financial planner or wizard by any means which I made clear to her and yet she has faith in me. I am thinking of a plan that can get her dividend returns of a bout 4-5% a year without depreciated her nest egg. At 4.5% annual return that would provid her with $8775 return a year or $731 monthly if we were to invest 195k with about 10k in cash reserves. That way she would have about $731 from dividends and $700 from her pension for a total of $1400 a month and then she can draw from her 10k cash cushion to make up the difference in her monthly expenses. I like this method cause it will force her to conserve her cash cushion and hopefully she will cut down her monthly expenses in those regards. If she were to use the full cash cushion of $10,000 to cover the extra $600 in monthly expenses she would deplete the total in 16 months. At that point she would have to start pulling equity out of her holdings.

Portfolio Holdings Plan
So I have been racking my brain trying to come up with a safe plan for her where she can receive monthly income with a rate above 4% and enjoy some mild growth. Initially I picked out a long list of stocks to achieve this plan but over the course of a couple of weeks I am thinking of going towards the ETF route instead. This ETF plan affords me with some breathing room in management of the portfolio and it fits my goals of asset allocation.

- ETFs benefits
   * Allows me to capture much more of the markets without making an extreme number of individual trades so its cost effective
   * It allows me some breathing room as I dont have to personally have to manage its holdings
   * It allows me to capture American and International stocks hedged to Canadian dollars so we don't have to worry about currency converting transactions
   * It allows us more access to CAN and US preferred stock holdings with higher dividend payouts
   * Allows us access to great laddered bond funds diversifying single held bond risk
   * Low management fees, most of the ETFs I am looking at have their fees at .5% or lower

With that said I have chosen an ETF asset allocation mix of

 23% in Bonds - Mainly Canadian corporate investment grade bonds with yields over 4%

 - CBO - iShares 1-5 Year Laddered Corporate Bond Index ETF 
 - XHB - iShares Canadian HYBrid Corporate Bond Index ETF

23% in Preferred Stock- A mix of US and Canada preferred stock with yields above 5% 

 -XPF - iShares  S&P/TSX North American Preferred Stock Index ETF (CAD-Hedged)

36% in Stocks - A mix of Canadian and US stocks with a small international section with yields above 2.5% for US and International and 3.5% for Canadian.

 -XHD - iShares U.S. High Dividend Equity Index ETF (CAD-Hedged) 

 -XEI - iShares S&P/TSX Equity Income Index ETF 

 -CYH - iShares Global Monthly Dividend Index ETF (CAD-Hedged)

 16% in Reits - I am thinking good large Canadian Reits with good a good history of yield payouts over 5%. Since Canadian ETF Reits are not paying out over 5% I will skip ETF,s and get 5-6 individual Reit stocks.

- REI.UN   - RioCanREIT
- HR.UN    - H&R REIT
- DRG.UN - Dream Global REIT
- AX.UN    - Artis REIT
- CWT.UN - Calloway Reit

This allocation is not set in stone as I am constantly tinkering with it. With this plan I think it will generate solid predictable income as all the ETF,s and Reits I am looking at pay monthly. The funds I have currently selected payout avg 4.4% yield monthly. I do expect some mild capital growth from the Stock ETF,s

Right now I have chosen Ishare Etf,s as they have met most of my criteria however I am not partial to them. I have been investigating offerings from Vangaurd, BMO and TD ETF,s but so far I tend to like iShares in my early findings due to their yields. When I find a certain different company fund to replace any of my initial findings I will do so.

Once the plan goes forward I am thinking of tracking her progress and updates on this blog as well. What you guys think?

Taking on this challenge of managing someone else,s portfolio I find it a good learning experience as I had to figure out their goals, estimate their expenses and construct a plan for a long term sustainability. Personally I would stay away from ETF,s but they do have some great advantages. Take for example bonds as it is not easy to assemble a good yielding corporate ladder that has open offerings. Also Preferred shares are not easy to obtain as they are generally reserved for institutional buyers. Not to mention International stock offerings as many good quality dividend stocks are not available on the US and Canadian markets and you dont have to worry about currency conversions. I may even look into acquiring a couple international or emerging markets ETF,s to bolster my international holdings in the future.

Other News
As my parents health dwindle I will eventually have to handle their estate. Right now they have no will or plan which I have been strongly urging them to do over the last few years. They have a large unprotected net worth in the multiple millions range and its quite concerning. They want to leave everything to me and their grandkids but they cannot agree with each other on many of the key points. I am looking to try and get them to start a trust fund where I can be the executor. I would choose the investments and make sure their wishes are put into action but its a slow process with them as they are putting up great resistance. I personally don't expect anything from them from their will but I don't want their estate being squandered from predator unscrupulous extended family either. This of course could be many years down the road but it is time I start preparing for it.

Also my blog has officially reached a month old. In that time I have developed it from scratch and built up a few regular readers while amassing over 7000 page views. I don't know if that is good or not but I am happy with it. I never knew how much time goes into writing and maintaining a blog and I have a new found respect for bloggers for the time they dedicate. I anticipate updating my net worth this Friday or Saturday as I think mid month tally's are a good time as I will reserve end of months for monthly review and dividend totals.

So what you guys think of the Plan Olga?
Any good Canadian dollar ETF fund recommendations?
Will my mother in law survive?
Will she be able to sustain her nest egg with this plan?
Will she ever find a boyfriend?
Any suggestions on asset allocation for Olga?


  1. That's an interesting challenge Grinder. My mother-in-law isn't all that fond of me, though she's slowly warming, but I wouldn't be wild about investing her money. It's good you have that sort of relationship with yours! I think in general the plan makes sense. If it was me, I would up the cash portion of the portfolio.....but I am addicted to cash right now. Why the way, where are you earning 2.5% in a savings account? A long term CD, sure, but who wants that risk

    1. Surfer thank god I get along with her. More so my own mom. I bigger cash cushion may be an option but I like it at about 5% so she focuses more on saving and getting her expenses lower. As far as 2.5% in a saving account I was more so referring to term deposit gics. A 3 year term at an online bank will net you 2.5%. Here is a list of Canadian term deposit bank rates http://www.financialpost.com/personal-finance/rates/gic-annual.html

      Thanks for droppin by and Grind On!

  2. I love this post! I will definitely be interested in following your MIL's investments! I'm preparing for retirement in 5 - 7 years - I'm 54 now so this is right up my ally. She will still be short of her $2000 until she reaches 65, though right? But you figure the 10K in cash will cover the shortfall?

    BTW $950 for a 1 bedroom utilities included seems not bad, although obviously prices are different across the country. My Dad pays about $1600 + parking + utilities for a 2 bedroom. He uses the second bedroom for his den. He's 89 and otherwise frugal. I'm not gonna suggest he move at this point as he likes it there and he's close to us. You can't take it with you and for me it's more important that he is comfortable and happy.

    7000 views is 1 month is awesome dude! I'm only 5600 in 3 months! What's your secret to reach your audience?

    Grinding on.... debs

    1. Thanks for droppin by Debs yet again. We are all at different financial paths and its good to hit up others perspectives. Yes she will be short of her $2000 a month goal till 65. I have predicted the $10,000 in cash will last her 16 months only if she uses up an extra $600 a month. But if she cuts down her expenses and subsidizes her income by a total of lets say $300 a month that $10,000 in cash will last her 33 months in total which I am hoping will happen. Also she has a good chance of an insurance company claim payout in the next couple years which will add to her cash reserves. That total could be 0 or it could be 100k. Time will tell.

      As far as my blog success goes. I dont know what to say. I think people like juicy details being portfolio holdings,shares owned, recent buys,dividends coming in, sells and the ultimate juicy detail NET WORTH. These topics generally are taboo with friends and family so its a joy for me to gauge what other people are doing with there money and where they are at in their own financial journeys.

      With that I am just trying to come up with a regular schedule for those topics on my blog. Give my perspective on things and be open about it. People want to see ones failures as well as successes I believe so why not just put it all out there.

      Debs your website is looking great, Much better looking and polished than my blog! No doubt it will grow at your current rate.

      Good Day and Grind On!

    2. Thanks, AG! I'm a put it all out there type of person as well. As someone who's moving towards managing my own portfolio, I will be reading with great interest! I'm so nervous about this but I gotta start doing it!

    3. Debs if you need some advice on certain investments dont be scared to ask us fellow bloggers. I would be happy to give you my suggestions any time.

  3. Great plan for her as she will make almost 8% from the numbers you stated. One thing to consider is the price you are paying for the funds, they might be at all time highs. I think she should be fine because anyone can adjust spending to a lower level based off income. A boyfriend can be found in a near by nursing home, he might be a bit older, but he might leave her his inheritance as well. Good Luck.

    1. Thanks for droppin by EL . Grandma Olga like younger men so I think she is just happy playing the field lol. Yes I am concerned for an entry point of the funds. I dont have a strategy yet on when to purchase them. Perhaps on a couple overall market down days within the month I am thinking. I dont think I will try and market time the purchases too much as I want to get that dividend stream going.

  4. AG,

    The good news is if you lose all her money, there is always plan B: Move her in with you! :-) Now that's real motivation. LOL


    1. If that was the case I would pay for a $300 a room rent for her in somebodies grungy basement lol.

  5. Curious -- why are you so heavily into iShares instead of Vanguard Canada? I feel like Vanguard Canada had slightly lower MERs...

    1. My initial choice was vanguard but after closer inspection the yields are lower than iShares offerings. looks like Vangaurd Canada is retaining a percentage of the dividend yields in order to boost share price. I am not partial to any ETF provider as I will switch selections when a better one is presented. If you got any spefic funds to switch out to higher yielding or better quality let me know.

      Thanks for droppin by SSS. Grind On!

    2. Interesting. I will have to take a closer look at this because I was just looking at MERs for the moment.

      Actually, I had also read an article saying something about how MERs are also the #1 indicator of whether or not your wealth will grow, which is why I was so heavily focused on MERs and not so much on yield.

      I wonder if the portfolios are the same between iShares and Vanguard. Maybe the lower yield balances out the lower MER as well.

      The Vanguard ones I currently buy are VFV.TO (S&P 500), VSC.TO (Short-Term Bonds), VCE.TO (Vanguard FTSE Canada).

      I also own a few iShares, namely XEF.TO (EAFE index)

      Lastly, as I had a lot of USD, I put it into VTI (S&P 500) which I think its equivalent is VFV.TO.

  6. Thanks for the list, I will check them out. I based my research from head to head yields mostly as the Mers are quite comparable within .20 unlike the yields differences of 1% so naturally I went with the larger yield. Vanguard had recently just pushed their fees lower for most of their funds to try and snag up iShares 80% Canadian Market share. I expect iShares to counter Vangaurd by lowering their mers. BMO and TD have also entered the realm with aggressive pricing worth noting. So much too choose from!!!!!!

    1. The more competition the better, I say. I used to pay through the nose with TD Waterhouse before I discovered e-Series.. and then ETFs.

      There's a post idea for you, compare yields and MERs between Vanguard and iShares :) *nudge nudge*

  7. Looks you already covered it lol! Great blog. I will visit often and follow u on twitter

  8. I kind of did it but only for MERs not for yields as well.

    1. I just went through the entire Vanguard lineup. Ishares Etf,s provide me a greater range on what I am looking for with far better yields. Vangaurds selection is a little bit lacking right especially for income based monthly funds. there is a couple that seem pretty good that I may switch out of iShares for. Particularly Vanguard FTSE Canadian High Dividend Yield Index ETF TSX:VDY . This one I think may slightly edge out the ishares comparable of XEI. Once Vangaurd greatly increases their offerings they will continue to eat away at Ishares strangle hold of the ETF market up here.

  9. A lot of interest rate risk is baked into this portfolio - REITs and prefs plus the bond funds, HYBRID bonds more than the laddered ETF.
    1% for a financial advisor could be a good deal if you choose the right advisor.
    Here are some other ideas. This a portfolio I developed for income for a family member. Income not as high as you want, but more diversified and I think a bit less risky. The Omega international mutual fund is for growth, but an ETF in the same space could be used.

    Canadian Stock
    BMO Low Volatility Cdn Eqty ETF ZLB 10
    iShares S&P/TSX Cdn Dividend Aristocrats Index ETF CDZ 10
    BMO Covered Call Utilities ETF ZWU 5
    Real Estate/Infrastructure
    BMO Equal Weight REITs Index ZRE 5
    BMO Global Infrastructure Index ETF ZGI 5
    BMO US Dividend ETF ZDY 10
    BMO US High Dividend Covered Call ETF ZWH 10
    Omega Consensus International Eq Mutual Fund NBC491 5
    Fixed Income
    BMO Discount Bond Index ETF ZDB 5
    Horizons Fltg. Rate Bond ETF HFR 5
    BMO High Yield US Corporate Bond Hdgd CAD Index ETF ZHY 5
    BMO S&P/TSX Laddered Preferred Share Index ETF ZPR 10

    Gail Bebee

  10. Gail Bebee thanks for visiting and for your informative insight by an experienced teacher, investor and finance writer. I really do appreciate your informative post end sample portfolio as it exactly the type of response I was looking for. I overlooked the interest rate risk and will adjust accordingly to an extent. Good list of primarily BMO funds and I will give their funds a very hard look and most definitely will be inserting a couple of them. As for bonds I will balance more short term laddered bonds into the mix.

    - Thoughts on financial adviser for 1%. Its not a bad rate but I am worried that their 1% on top of trading costs and mers will eat away at yield. Even tougher to find a good adviser that have an unbiased approach. Even if their recommendations beat a well balanced portfolio by .5% it will not cover their costs. However I am not against this idea of an adviser as my life would be simpler but from my preliminary search I don't see anyone locally that is fitting.

    Covered Call ETFs- I have been reading a few articles like ones in recent globe and mails case against covered calls and it has be a bit worried. Leveraged funds in general carry greater risk but covered calls seem to be a safer option in that market. Yield goes up but capital gain goes down especially in bull markets because of your calls strking and you would have to rebuy at a higher price. They do seem like a hedge against a market downturn and rising interest rates. That all said I have re-examined my portfolio and I will be adding a small portion of covered call Etfs and reducing my preferred stock share. I will also reduce my reit weighting and increase my equity portion.

    Article from Globe and Mail-

    So right now my Olga Portfolio Plan Allocation is at

    Reits - 10%
    Bonds - 25%
    Preferred Stock - 15%
    Stock - 37%
    Covered Call stock - 13%

    With this mix I am basically 50% stock and 50% fixed income. Still lots of tinkering left for me to do before plan actually gets put in place. I would like to have a finalized plan within 2 weeks and start purchasing.

    What you think of the revised allocation Gail? Thanks for dropping by yet again!

  11. I think you are missing a piece that could help your MIL sleep well at night - a SPIA or its cousin a Longevity Annuity. Before you start screaming "fees" a SPIA or the Longevity annuity are a bit different - they are NOT variable annuities. A SPIA would provide her with an annual or monthly income starting next month - running a quick quote $100K would provide almost $500 a month for the rest of her life regardless of the market. A Longevity Annuity would start sometime after 1 year...

    I think you'd be doing a disservice if you didn't at least get some quotes

    1. Great point Evan which I didn't address in my post. We did have a discussion about annuities when first formulating a plan. She didn't like the idea of them just yet. She wants to one day pass down whatever is remaining to her kids and an annuity would hinder that for her. Its definatly an option as she ages and her views change but for right now she rather take the risk to retain her nest egg with investments.

      Thanks for droppin by!

  12. Nice of you to take this on.
    QUESTION: You say she can't work but you pay her to watch her own grandkids? Why isn't she working as a daytime childcare provider in other people's homes? She could work 3 or 4 days a week taking care of kids and make up the cash shortfall.
    Isn't that a much better plan than looking for a man to come save her (except you, apparently)??
    I'm looking to help women avoid this problem by learning to save and invest for themselves.
    My latest post covers the basics:
    Your readers might appreciate it or pass it on to their MILs before they end up in your shoes!
    good luck mixing family and money!
    Leah, the MoneyDiva.com

    1. Great Question Leah. The money we pay her is in form of a barter. I pay for a few of her bills. She has very light duty when watchin the kids as her medical condition prevents her from doing much with them. Mainly they stay within the house or backyard and they do non strenuous activities as opposed to active play. She has a hard time even doing this one night a week so for her to push it to make it a full or even regular part time profession would be too much for her.

      Appreciate u droppin by and I will come visit your blog!

  13. I prefer stocks as there is no 12-1b fee or other expense to pay yearly. But, you bring up a great point. What if you are handling someone else's money. Whew, that is a lot of pressure. I hope it works out well for all involved.

    It also points out two other problems so many parents have. No retirement planning and (I am reading into this) only one spouse aware of money and finance so the other becomes dependent at that spouses death.

    Actually, there is a third typical issue discussed. Your parents not having a will and wanting to pass money along after they are gone. Too bad, they would enjoy sharing some now and "dying broke" is a great book that discusses that. Ending with zero is a good goal. But, if the means are plentiful, having an estate plan is the best way to say "I love you".

    good luck!

    1. Dealing with my parents is pulling teeth. They are very old school and not with the times. My dad has had a lifelong drinking problem and his health is catching up to him and my mom is in a severe suicidal depression. They are both ticking time bombs waiting to implode. Very very tough to have a remotely logical conversation with them. Talk about frustrating. Oh Well.....