Seven Ways To Own Bonds In Canada. One Question Sorts Them

0:00 Someone always asks, "How much bond percentage should they hold in retirement?" Let's break this down or take a step back first, so usually the wrong question. A lot of Canadians already own something that pays inflation indexed income for life, which is what a bond is supposed to do for you. You just don't see that number in your actual portfolio. So maximum Canadian pension plan at 65 is 1,500 a month. full old age security is just about 750 a month. Call it 2250 all in. And I'll say there's very good calculators out there to help you calculate yours. Now let's think about pricing that. A Canadian insurer this month single life registered escalating at 2% pays about $450 month per $100,000. that CPP or old age security costs roughly about almost $500,000 to buy two people in a house close to a million. Calculate yours for yourself.

1:04 I'm not telling you what yours is for you. Some people have a defined benefit pension plan, too, that could go into the mix if it's inflation indexed, but this stuff changes your allocation completely. Blanchett and Frink modeled this back in 2018. As guaranteed income goes from 5% of your wealth to 75%, the optimal equity allocation goes from 30% to 95%. Two people, identical portfolios and completely different right answers. The difference isn't the nerve that someone has, it's the floor underneath them of guaranteed income that shows up no matter what the market does. Two things can break this. First, it works because CPP and OAS are tied to actual inflation. Most Canadian private sector pensions aren't fully indexed, but if it is, good for you. A $60,000 pension with no indexing buys about a third less in 20 years. It's just something to factor in, but it protects you during your highest sequence or orders of return risk at early retirement. And as everyone knows, old age security starts getting clawed back once your income gets closer to 100K and above a certain point, it's gone entirely. If you have a lot of money and lower spend, you have a low withdrawal rate. Javier Estrada tested 30-year retirements back to 1900 and found anything from 40% stocks up ran out of money less than 3.5% of the time. Back to the researchers I quoted in an earlier video of this series, the All Equity Paper published this. 38 countries, a 65year-old couple accepting a 5% chance of running out of money can withdraw 2.31% a year. 4% rule does not always hold.

2:56 2.31 low withdrawal rates are harder to reach than the American numbers suggest. Before you pick a mix of what you buy, price that floor of guaranteed income you have, add up your CPP or OAS, maybe a pension, rental income, subtract what you actually spend in retirement. I have a separate video on that on the replacement rate. That gap is what the portfolio has to cover. That's the number the allocation question was always about. Most people have not worked out the math. Please take your time. Take care.