Grandma Olga is a new retiree that just hit 60. Her expense run around $2000 a month. She recently had $204,000 in the bank. Her municipal pension comes in at $700 a month and at age 65 her government pension will kick in for a total pension and benefits of about $1300 a month.
My original introduction post of Grandma Olga
This post is about me constucting an all ETF income producing portfolio for my mother In-law which I call Grandma Olga. After sending her to two financial advisers and giving her many options on what she could do with her retirement nest egg she wanted me to construct her an income generating portfolio. Its been a learning process as I have put in countless hours number crunching, researching and learning the ins and outs of creating a globally balanced, income producing, bond/equity balanced portfolio. This has been a tremendous burden on me in terms of time and stress. I am not compensated for this other than some bartered baby sitting work. In this process it has given me more perspective upon my own portfolio and goals.
I am no finance professional and I don't claim to be. Do I think I can beat the market? NO! Can I do better than a financial adviser charging 1% of assets and as well directing towards funds with 1-2% Fees? Maybe! What I can do is make an individual income specific portfolio that should keep up with the market.
So finally after endless meeting with Grandma Olga we have come to a decision. She wanted to originally gamble her chances by going with a 100% equity portfolio. But after carefully consideration and advice by me we are going into a more conservative but still aggressive approach to suit her needs.
She worries she will die broke and penniless upon her death and we are working hard to prevent such a thing.
The Plan:
A sustainable portfolio she can draw upon via dividends and interest with hopefully never cashing out her initial investment. With this said we are going an all ETF route that provides us ease of manageability (especially for me) and a vast amount of products in different categories ( ie. bonds , preferred shares and common broad equities) . We are aiming for a primarily monthly payout paying portfolio that will yield over the average of 4% with slight capital appreciation per year. Re-balancing will probably take place twice a year.
At 4% many consider this the max you can pull out of your retirement savings without touching your main principal. We are trying to replicate that as well as some gains in capital appreciation by adding on some higher risk holdings.
The Allocation:
Fixed Income: 46%
- Bonds 34% : Investment grade corporate 1-5 year laddered Fund
- Preferred Shares 12% : Canada and American high quality holdings Fund
Equity Income 54%
- Reits 12% : Canadian Income Real Estate Investment Trusts Fund
- Canada 12.5% : High dividend paying stock fund
- American 12.5% : High dividend paying stock fund
- Covered Calls 7.5% : Covered calls of select North American stock fund
- World 12% : High yielding mainly Europe/Asia Fund
Total cash in savings and checking account $12,000
Thoughts on allocation:
In this allocation we have relative safety in the fixed income portion being close to 50% and chance for some capital appreciation in the equity portion. Preferred shares are considered fixed income due to there limited share price fluctuations and higher set dividend rates. Many also consider Reits a hybrid between fixed income and equity with their high steady dividend payouts so in essence one could say this portfolio is high as 58% fixed income. To get the higher yield we wanted we stuck with investment grade Canadian corporations where there main holdings are rock solid Canadian Financials like TD Bank and Royal Bank. To hedge against rising interest rates we stuck to short term 1-5 year laddered bonds to weather any potential but incoming interest rate storm.
For the Equity income portion we went after a globally diversified portfolio that provided mainly of dividend appreciating and high dividend funds. To further extend our income we went with a few covered call funds. Most would say leveraged funds are quite risky but the covered call limits your downside as well as upside but you generate higher income from writing the options plus the dividends obtained.
We have opted to put $12,000 aside for cash on hand to pay for whatever difference their will between pensions,dividends on monthly expenses. At $2000 a month expenses and projected pension and dividends/interest coming in of around $1350 total there will be a $650 a month shortfall in which she will use her cash account for. If she uses the full $650 per month subsidy from her $12,000 cash the amount will last her 18 months. I am hoping she further cuts her expenses by $200 which she can easily do a month so that cash will last her 26 months. At the point when she depletes her cash we can hopefully cash in on some of the capital appreciation of her portfolio. She also has an ongoing insurance claim which will more than likely provide her with a windfall in the coming years. I will analyze this cash amount every year and adjust her portfolio to have at least a years expenses cash on hand fund.
Now the list of the individual funds!
Bonds
- CBO - iShares 1-5 year laddered corporate bond. .28% Mer 4.18% Yield
- ZCS - BMO Short Corp Bond Index .34% Mer 3.16% Yield
Preferred Shares
- XPF - iShares Preferred Stock North America .47% Mer 5.21% Yield
- XRE - iShares S/P TSX Cap Reit .60% Mer 4.96% Yield
Canada Equity
- XEI - iShares Equity Income .61% Mer 4.21% Yield
- ZWU - BMO Covered Call Utilities .71% Mer 5.60% Yield
- ZWB - BMO Covered Call Financials .74% Mer 4.80% Yield
America and World Equites
- ZWH - BMO US High Div Covered Calls .65% Mer 6.07% Yield
- XHD - iShares US High Div Index .33% Mer 2.62% Yield
- CYH - iShares Global Monthly Dividend Index .34% Mer 3.59% Yield
- VEF - Vanguard Developed excluding NA .34% Mer 3.50% Yield
This selected portfolio is currently yielding 4.11%
or about $7,891 a year or $657 a month average
With a 4.11% yield we are in range of her goals of 4% with a little bit of wiggle room. Even if interest rates hit hard and the market has a downturn we still will have a decent yield over 3% which is more than current offered cash deposit GICS where there 5 year rates are between 2-3%.
Selection Notes
Mers - In Canada our Management Expense Ratios (Mers) are higher than the US. Vanguard has recently come to Canada and with their lower rates it has made the market more competitive. Since then BMO and iShares have stepped up their game to offer lower Mers on select funds. Hopefully this competition will trickle down to my income fund selections. in the future.
Monthly payers - All but one of these funds pay out every month where the Vanguard offering pays quarterly. This will provide a steady income stream to Grandma Olga.
Canadian Hedged- Most of the chosen funds are Canadian hedged so currency fluctuations will not affect the holdings.
Canadian Picks - We went with all Canadian based ETF,s for ease of use for Grandma Olga. All the funds have Canadian dollar payouts so it will be easy to transfer dividends into her checking acount without the worry of currency exchange. If this were my own portfolio I would definitely be more geared toward US listed ETFs in the American and world markets as selection and lower Mers are vastly improved.
Fund selections - I am primarily with Blackrock iShares because of their vast selection as they own 80% of the Canadian ETF market. Vanguard a new addition in Canada is rapidly gaining market share but does not offer many monthly payers and their overall initial selection is very limited. Once they add more funds I may swap some of my current selections out with theirs. In many cases BMO funds could be interchangeable as they were neck in neck with iShares in many categories as well.
First Asset ETFs deserve honorable mention as they have many interesting niche high income products. The problem with them is that their funds have a embarrassing total assets which will no doubt affect the liquidity which is concerning. They are worth a look once they get more money in their funds. I had a struggle picking good paying International high income funds and it is a category that needs definite improvement. I went back and forth with a couple Vanguard offerings but they had lower yields and also payed quarterly.
Going Forward-
I plan to make a monthly post updating Olgas portfolio performance with interest and dividends received, her monthly expenses , Net worth and any other important updates. Hopefully others can gain some perspective on Grandmas Olgas situation and take away something into their own portfolio or their loved ones.
I am also encouraging Grandma Olga to learn more about investing so in the future one day she can manage her own portfolio.
Other Notes. I have joined the Yakezie challenge at http://yakezie.com/
Good Day and Grind On Everybody!
