The Target Distribution Strategy. Daryl Diamond CFP CLU CHFC Diamond Retirement Planning Ltd.

Transcription

1

2 The Target Distribution Strategy Daryl Diamond CFP CLU CHFC Diamond Retirement Planning Ltd.

3 Retirement Income Components 1 Competent planning 2 Aligning Investments 3 Efficient Execution 3

4 4 A portfolio is not a plan

5 Step-By-Step Income Process 1. Assessing current lifestage 2. Determine lifestyle and time objectives 3. Financial goals and priorities? 4. Create income needed through layering 5. Aligning Investments with the Blueprint 6. Assess impact on net worth 5

6 Step 5 Aligning Investments with The Blueprint This is different from the accumulation years game change Investments need to be aligned with The Blueprint, not the other way around 6

7 7 A Change from Accumulation to Income

8 Step 5 Aligning Investments with The Blueprint This is different from the accumulation years game change Investments need to be aligned with The Blueprint, not the other way around There are Investment Managers who truly add value in negative markets 8

9 Step 5 Aligning Investments with The Blueprint This is different from the accumulation years game change Investments need to be aligned with The Blueprint, not the other way around There are Investment Managers who truly add value in negative markets There are different tools and strategies unique to efficiently creating retirement income 9

10 Retiree Investment Mindset Create the income I need by Growing the value of my portfolio 2. Selling assets as they grow 3. Keep the capital intact But what if a market downturn does not allow them to grow? or even worse, sees them drop in value? 10

11 11

12 12 Bull & Bear Markets

13 Recent Bull and Bear Markets Average Decline = 44% 13

14 Market Declines Expressed as a $ Amount $1,600,000 Portfolio with $80,000 annual withdrawal (5%) Average Market Decline 28% 50% 50% Asset Mix 14% Decline in Value $225,000 Resulting Portfolio Value $1,375,000 Withdraw for Income $80,000 Balance $1,295,000 Revised Withdrawal Rate 6.17% 14

15 Market Declines Expressed as a $ Amount $1,600,000 Portfolio with $80,000 annual withdrawal (5%) Average Market Decline 28% 44% 50% 50% Asset Mix 14% 22% Decline in Value $225,000 $352,000 Resulting Portfolio Value $1,375,000 $1,248,000 Withdraw for Income $80,000 $80,000 Balance $1,295,000 $1,168,000 Revised Withdrawal Rate 6.17% 6.84% 15

16 16

17 17 What strategy is in place for creating your income when markets (and the value of your accounts) are down?"

18 18

19 Factors in Successful Investing Retirement Income LESS IMPORTANT FEES TAXES (income, benefits, estate) 19 MORE IMPORTANT INCOME STRATEGY ASSET ALLOCATION INVESTOR BEHAVIOR

20 20 "History teaches us that investors behave wisely...once they have exhausted all other alternatives."...steve Leuthold

21 The Three Things Advisors Say When Markets Drop 1. It s a great buying opportunity 2. Don t sell anything 3. Be patient 21

22 The Target Distribution Strategy A Comfortable and effective delivery of Income 22

23 Distinguish between... The Income-Producing Asset And The Income produced by that asset 23

24 Assets and Income RENTAL INCOME 24

25 25

26 26

27 Royal Bank of Canada December 1999 June Source: Bloomberg

28 Income Generated From Bonds / REIT s Stocks Real estate Infrastructure Private Equity Options Return of Capital The Distribution is primarily created from the income generated by the asset

29 Target Distribution Mechanics Capital to Invest $1,000,000 Unit value of fund (NAV) Units purchased 100,000 Cents / unit / month Monthly income $ ($50,004 / year) Effective yield 5.0% 29

30 Target Distribution Mechanics Payout is set, based on The estimation of expected inflows of income from underlying investments and An anticipation of an increase in asset values over time. 30

31 Target Distribution Mechanics Cash flow is based on cents per unit, and the number of units you own not on the market value of your assets. Fund fee calculated into the unit value (NAV). So, payment is not reduced by management fee 31

32 Where is the Fit? Must have the amount of capital necessary to the create income / cash flow needed at the target distribution rate. 32

33 The Key Concept Have your investments create your income, WITHOUT selling securities to do it 33

34 Strategic Yield 5.1% $280,000 34

35 That s It!! I m Done With Market Volatility! $1,000,000 in GIC / Bond ladder Laddered Yield 2.5% Income needed = $50,000 Year Return Income Year End Value 2010 $24,334 $50,000 $974, $23,691 $50,000 $948, $23,035 $50,000 $921, $22,360 $50,000 $893, $21,649 $50,000 $865,089 35

36 36 Okay, if this is such a great idea

37 Equity Income 5.0% $360,000 37

38 Dividend Income 4.0% $245,000 38

39 RIIA Withdrawal Ratios Withdrawal rates in relation to asset value Excess funding 3.6% Constrained >3.5% < 7.1% Underfunded > 7% 39

40 Sustainability Level of payout compared to prevailing market yields Confidence in managers How have managers fared historically Payout yields fall into sustainable withdrawal rates of 4.5% - 5.5% Not like deciding on a GIC rate 5% vs. 8% 40

41 Points to Communicate The distribution is not guaranteed May be lowered by managers May be additional annual distribution Invested capital is not guaranteed This strategy does not prevent portfolio values from going down when market declines Expect some Return of Capital in this managed income process Any ROC will reduce the Adjusted Cost Base 41

42 The Four Most Common Questions 1. Does this strategy have merit if the client has not started taking income? 2. How does this strategy deal with inflation? 3. How do you deal with the minimum withdrawal of 5.28% (and rising) after age 71? 4. How does this compare to other income solutions? 42

43 1. Does The Strategy Have Merit if the Client Has Not Started Taking Income? Conservative, balanced portfolio prior to retirement Allows you to position RRIF, LIF, RLIF accounts for eventual payout Reinvesting distributions in volatile markets buys more units prior to the time they take income. 43

44 2. Dealing with Inflation Blend of pay-out and reinvest 44

45 2. Dealing with Inflation Additional, Annual Distributions 45 As of July 31, 2015

46 3. RRIF Minimum Withdrawal Issues The change at age 71 from 7.38% to 5.28% is a huge help Proper planning and execution can usually reduce the impact of this May have to sell securities (move in-kind) out of RRIF account to meet withdrawal requirements. 46

47 4. How Does This Strategy Compare Segregated Funds GMWB Plans Private Investment Counsel Brokerage Offerings (In-House SMA s) SWP s Comparable ETF offerings 47

48 48

49 49 The Lowest Investment Management Fee

50 Prefer lower-cost ETFs to mutual funds? There are a few diversified monthly pay funds to consider, including the BMO Monthly Income ETF (ZMI) and the ishares Diversified Monthly Income Fund (XTR) 50

51 Comparative Pricing - ETF and F-series Dynamic Funds Aug Investment Alloc Yield MER 1 Year 3 Year 5 Year BMO Monthly Income ETF 60/ %.55% Ishares Diversified Mthly Inc ETF 40/ %.56% Ishares Bal Core Inc Port ETF 40/ %.72% Horizons Active Diversified Inc ETF 60/ %.70% 51 Strategic Yield 50/ % 1.11% Alternative Yield % 1.22% U.S. Monthly Income 60/ % 1.22% Premium Yield % 1.21% Dividend Income 50/ % 1.13% Equity Income 90/ % 1.08% Real Estate and Infrastructure % Blue Chip Balanced T5 60/ % 1.29%

52 Comparative Returns - ETF and F-series Dynamic Funds Aug Investment Alloc Yield MER 1 Year 3 Year 5 Year BMO Monthly Income ETF 60/ %.55% -2.69% 4.19% n/a Ishares Diversified Mthly Inc ETF 40/ %.56% -4.79% 2.38% 5.14% Ishares Bal Core Inc Port ETF 40/ %.72% -0.84% 5.30% 6.16% Horizons Active Diversified Inc ETF 60/ %.70% -4.87% 4.32% 4.19% Strategic Yield 50/ % 1.11% 2.45% 8.55% 8.86% Alternative Yield % 1.22% 13.84% 12.56% - U.S. Monthly Income 60/ % 1.22% 19.12% - - Premium Yield % 1.21% 17.29% - - Dividend Income 50/ % 1.13% 1.42% 8.27% 8.08% Equity Income 90/ % 1.08% -1.77% 7.85% 10.17% Real Estate and Infrastructure % 1.37% 4.52% 9.73% 14.32% 52 Blue Chip Balanced T5 60/ % 1.29% 14.99% 12.71% 9.41%

53 Cost efficient is only one factor involved in OUTCOME EFFICIENT 53

54 54 IN SUMMARY

55 The Target Distribution Strategy The delivery of income is managed The investments are managed The asset mix in managed Altitude program also offers auto-rebalance 55

56 Dynamic Strategic Yield Fund Managing the asset mix Quarterly Asset Mix March 1, 2009 July 31, 2015 Alternative Investments* Equities Bonds Cash 56 * Reporting of alternative investments commenced as of March 31, 2012

57 Dynamic Alternative Yield Fund Managing the asset mix Asset Mix March 1, 2012 July 31, 2015 Cash Mortgage Investments High Yielding Equities Closed-End Funds Options 57 Excludes holdings in Foreign Bonds & Debentures

58 Dynamic Premium Yield Fund Managing the asset mix Asset Mix November 1, 2013 July 31, 2015 Cash Covered Puts Long Equities Long Equities + Covered Calls 58 Excludes holdings in Convertible Debentures All values have been rounded

59 The Cash Wedge Equity C $120,000 Equity B $120,000 Initial Value $708,000 Equity A $123,000 Money Market $36, Fixed Income D $120,000 1 Yr Bond / GIC $35,000 Fixed Income E 2 Yr Bond / GIC $120,000 $34,000

60 Self Perpetuating Cash Wedge Assume investment mix with a target distribution of 5.0% Non-registered accounts pay out directly Registered accounts Distribution Money Market Payment 60

61 Meeting the Need for Income 61 DISTRIBUTION YIELD 1.0% 1.4% 1.7% 2.6% Dynamic Small Business Fund Dynamic Global Infrastructure Fund 3.4% Dynamic Dividend Fund 3.6% 4.4% 5.2% 5.6% Dynamic Alternative Yield Fund Dynamic Real Estate & Infrastructure Income Fund Dynamic Premium Yield Fund Dynamic Strategic Yield Fund 4.7% Dynamic Dividend Income Fund Dynamic Global Real Estate Fund 4.7% Dynamic Equity Income Fund Dynamic Income Opportunities Fund Core Balanced Funds Core Equity Funds Alternative Funds Data as of July 31, 2015 A-Series

62 The Private Pools 62 At August 31, 2015 Private Pool Yield Active Core Bond 2.99% Active Credit Strategies 6.06% Global Yield 3.71% Conservative Yield 4.04% North American Dividend 3.92% International Dividend 3.99% Tactical Bond 3.50%

63 Benefits to the Client A strategy they can easily understand and buy into Historically, reliable and sustainable way to receive income Yield falls into the ideal withdrawal rate of 4.5% to 5.5% Comfortable in that income is not based on the market value of the income producing assets ( is NOT grow and sell ) 63

64 They are Spending the income, not Selling the asset 64

65 Benefits to the Advisor A strategy to help address lingering fears of 08 and 09 Replenishes the cash wedge perpetuates it Allows for more uniform and uncomplicated portfolios within your book Much easier to service at client review Asset mix managed in each fund Auto-rebalance for multiple funds Protects advisor s book when GIC / bond yields rise 65

66 Retirement Income Components 1 Competent Planning 1. Tailoring to client 2. Tax-efficiency 3. Proven strategies 4. Course of action 2 Aligning Investments 1. Investment Mgmt 2. Layering income 3. Generate Income 4. Asset management 3 Efficient Execution Service / Processes 2. Applying acumen 3. Experience and insight 4. Making it all work

67 Disclaimer and Copyright While every attempt has been made to assure the accuracy of content, the author assumes no liability for any errors or omissions. The author also assumes no liability for subsequent use of this information by advisors or consumers. The contents and information contained is copyright as indicated below and may not be reproduced in any manner without written consent from the author. Charts and illustrations may have been provided by third parties and are believed to be accurate, though no warranty is provided and is subject to separate copyright. Content and opinions are those of the author and may or may not reflect advice, recommendations, explanations or practices. Content provided by and copyright of: Daryl Diamond Diamond Retirement Planning Ltd. 67

68 The Target Distribution Strategy Daryl Diamond CFP CLU CHFC Diamond Retirement Planning Ltd.