GIC rate decrease coming tomorrow September 25 | Hubert Financial | Discussion forum

Having listened to an interview with the finance minister yesterday, following the throne speech, I think it's fair to predict that we will not see higher interest rates for a very long time, if ever. I don't think it will happen in my lifetime. For me, at least, the penny has dropped.

Future finance ministers may have somewhat different ideas but it's clear that they will all be dependent on low interest rates.

Anyone who is dependent on interest income to live should be very busy investigating alternatives. Fortunately for me, I am not in this position but am open to securing some discretionary income.

If anyone has reason to disagree, I'd be interested in your reasoning. I can see that "when" the economy perks up or "if" the economy perks up, significantly, that interest rates might tentatively creep up. But at the moment they are still falling and it looks like they will continue to do so, so it would take a lot of "up" to compensate - if and when.

Vatox said
Yes Loonie, I too just use interest as bonus money. Not very concerned about lower interest going forward. I just like to get higher rates because it feels good!  

I think a lot of us on this forum are in a similar position. I would not feel good accepting less if I don't have to. It becomes a bit of a contest, playing against myself, to see how well I can do. Sure beats the games that cost us money!

Loonie said
Anyone who is dependent on interest income to live should be very busy investigating alternatives. Fortunately for me, I am not in this position but am open to securing some discretionary income.

If anyone has reason to disagree, I'd be interested in your reasoning. I can see that "when" the economy perks up or "if" the economy perks up, significantly, that interest rates might tentatively creep up. But at the moment they are still falling and it looks like they will continue to do so, so it would take a lot of "up" to compensate - if and when.  

I've posted about this elsewhere but those that are going to really "need" additional income to maintain their standard of living will have to take some risk to boost returns. That could be in the corporate bond market, or the high yield junk bond market, but both of those froze up in the March market debacle and in my opinion, current yields are not attractive enough over that of GICs to make that a clear alternative. Not something I would do. Government bonds are a total loss given their returns are less than that of GICs.

Preferred shares have been talked about in another thread but they are a minefield for those that don't understand them well.

It may well be that investors will need to consider some sort of 'balanced' income fund, either of the mutual fund variety or the ETF variety. The issue here is MER costs must be kept low and one won't get that from the asset management arms of the big banks, e.g. the financial advisors in the big banks. Unless MER is under 1%, too much of the return is going to the middleman. Some possibles include Leith Wheeler, Beutal Goodman, Steadyhand and Mawer but most of those need to be bought through DIY discount brokerages.

Steadyhand is a key exception where one can invest directly with them with relative small sums. Folks may want to take a look at them, and especially their Income fund that has 80% fixed income and 20% income stocks.
https://www.steadyhand.com/funds/income/performance

Alternatives to the mutual fund business are the new Asset Allocation ETFs issued by Vanguard, Blackrock and BMO, and especially the lower equity ones such as, in the case of Vanguard, VCIP or VCNS https://www.vanguardcanada.ca/individual/etfs/about-our-asset-allocation-etfs.htm

VCIP ETF has a similar 80/20 fixed income/equity allocation as the Steadyhand Income Fund with a much lower MER....but one has to have a discount brokerage account to buy/sell it.

There is no free lunch in terms of boosting fixed income yield without taking some risk. The question is how much risk does one need to take on.

pooreva said

canadian.100 said
These will be rough years for retirees who depend on GIC interest to live.

Living on interest is interesting option.
Lets say you have a million and in 2019 you were getting about 25k in interest. That was enough to live frugal assuming you have no debt of any kind.
Next year, if lucky, interest will bring about 10-15k/year. Definitely not enough to cover property tax, utilities and food.
But you still have that million, correct? If you are taking 50K/year it should last you 20 years (plus miserable interest). If you are 65+, you get OAS. If you ever worked there will be some CPP. If you were lucky, little bit of company pension, not to mention RRSP.
Am I wrong when thinking this is the way to survive and live decent life until 85/90?  

The RRSP portion, as well as TFSA, would be part of that $1milion portfolio, would it not? A portfolio is a portfolio in aggregate.

Regardless, one cannot take that $1M and simply divide by 20 because the interest income would keep dropping as well over the years. Classic SWR withdrawal methodology would be 4% of the portfolio per year but that is based on a classic 60/40 equity/fixed income portfolio. One would have to take a smaller SWR percentage with a 100% fixed income portfolio... perhaps 3% per year or less....which in a 1-1.5% interest environment, means depleting capital by $15-20k per year to get $30k (3%) from that $1M portfolio. Certainly doable for a 30 year retirement.

There is nothing wrong in depleting capital over a 30 year retirement. After all, that is what one worked for in the first place. It is just that it cannot be depleted too aggressively.

Agree one has to have a sufficient capital reserve to handle the 'what ifs' at late stages of life. Depletion of capital towards zero at age 90 or 95 is a dangerous roll of the dice. As Loonie advocates, financial plans will have to undergo numerous adjustments throughout life, even circa age 90 or so.

But it is always a matter of degree too... a balance depending on resources at hand. Retirees tend to spend more in their early 'go' years when they still have desire and ability, then a lot less in the middle 'no go' years circa 75-85 give or take, and then more again as health issues multiply. There is no way I want to have regrets at age 85 wishing I would have done X or Y, or X and Y, when I was able to (and could financially) do so in earlier years of retirement.

pwr1019 said
That's an opinion, since I'm male the chance of me seeing 95 or even 90 is at best pretty slim. Statscan says about 14.5% of Canadian males survive to 90.
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1310013501&pickMembers%5B0%5D=2.1

I worked hard for my savings and I have no desire to be the richest guy in the graveyard. I think spending it all by 90 is a fine plan since 6 out of 7 guys won't see 90 anyway. If I'm the 7th guy I'll deal with it then   

So if you are one of the 14.5% that get there, or the 5?% that get to 95, are you willing to be a ward of the state? I sure don't care much about a legacy either, but I want to have coverage to 95. Variable Percentage Withdrawal (VPW) is a good way to die broke at age 100 (see the table). The table provides me with my guideposts...based on similar principles to RRIF withdrawal minimums.