Advertisement
Canada markets close in 5 hours 37 minutes
  • S&P/TSX

    21,855.10
    +146.66 (+0.68%)
     
  • S&P 500

    4,998.93
    -12.19 (-0.24%)
     
  • DOW

    37,917.12
    +141.74 (+0.38%)
     
  • CAD/USD

    0.7279
    +0.0015 (+0.21%)
     
  • CRUDE OIL

    82.90
    +0.17 (+0.21%)
     
  • Bitcoin CAD

    88,727.45
    +1,339.80 (+1.53%)
     
  • CMC Crypto 200

    1,380.65
    +68.02 (+5.47%)
     
  • GOLD FUTURES

    2,398.90
    +0.90 (+0.04%)
     
  • RUSSELL 2000

    1,955.79
    +12.83 (+0.66%)
     
  • 10-Yr Bond

    4.6190
    -0.0280 (-0.60%)
     
  • NASDAQ

    15,466.68
    -134.82 (-0.86%)
     
  • VOLATILITY

    18.35
    +0.35 (+1.94%)
     
  • FTSE

    7,865.90
    -11.15 (-0.14%)
     
  • NIKKEI 225

    37,068.35
    -1,011.35 (-2.66%)
     
  • CAD/EUR

    0.6821
    0.0000 (0.00%)
     

Forget the 4% Rule: Here’s What You Should Really Be Looking at During Retirement

retirees and finances
Image source: Getty Images

Written by Tony Dong, MSc, CETF® at The Motley Fool Canada

The 4% rule has long guided retirees on how much they can safely withdraw from their portfolio without running out of money. It suggests taking out 4% of your savings in the first year of retirement and then adjusting that amount for inflation each year after. This rule aims to make savings last for about 30 years.

But following this rule has led some people to focus too much on finding investments that pay high returns, like certain ETFs or stocks that offer more than 5% in dividends. This approach, known as yield chasing, can be risky. It might seem like a good way to ensure you have enough income, but it can actually lead to bigger problems, like losing money if those high-paying investments don’t perform well.

ADVERTISEMENT

Chasing after high yields just to stick to the 4% rule isn’t the best idea. It’s better to consider your entire investment’s growth, not just the cash it pays out. I’ll explain why focusing only on high yields can be a mistake and what you should do instead to manage your retirement savings wisely.

A historical example – the assumptions

Let’s get straight to the point: focusing on yield alone can actually set you back in your investment journey, especially when adhering strictly to the 4% rule for retirement withdrawals.

It might seem logical to aim for investments that offer a 5% yield to cover your 4% withdrawal needs comfortably, but this strategy could mean missing out on greater financial growth.

Imagine two investors, both retiring in 2011 with $1 million each. The first investor decides to put their money into the iShares Canadian Financial Monthly Income ETF (TSX:FIE), attracted by its financial sector stocks, preferred shares, and corporate bonds that generate a high 6.95% yield as of February 9.

The second investor opts for a mix, choosing 60% in the iShares MSCI World Index ETF (TSX:XWD) and 40% in the iShares Core Canadian Universe Bond Index ETF (TSX:XBB). The yield from these ETFs doesn’t quite reach 4%, necessitating the occasional sale of shares to fund withdrawals.

A historical example – the results

Fast forward to the present, and let’s assess the results under the assumption of a 4% annual withdrawal:

  • Investor 1, who leaned heavily into the high-yield FIE, would have seen an annualized return of 2.83%, ending up with $1,441,269. This shows that they managed to grow their initial investment while withdrawing 4% yearly.

  • Investor 2, despite having to sell shares periodically due to a lower yield, would have experienced a compound annual growth rate of 3.74%, resulting in a portfolio worth $1,616,561. This outcome surpasses that of Investor 1 by a significant margin.

This example underscores that it’s the total return, combining both price appreciation and dividends, that truly matters in the long run. A high dividend yield might seem appealing as it appears to offer “free money,” but it doesn’t guarantee the best overall financial growth.

Total return should be the focus, ensuring that both the income generated and potential for capital appreciation are considered in your investment strategy.

The post Forget the 4% Rule: Here’s What You Should Really Be Looking at During Retirement appeared first on The Motley Fool Canada.

Should you invest $1,000 in Ishares Canadian Financial Monthly Income Etf right now?

Before you buy stock in Ishares Canadian Financial Monthly Income Etf, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Ishares Canadian Financial Monthly Income Etf wasn’t one of them. The 10 stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $17,988!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 35 percentage points since 2013*.

See the 10 stocks * Returns as of 1/24/24

More reading

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2024