Category Archives: Finances

With 15 Years Till Retirement, How Much Annual Return Growth Can I Expect for XIC the Canadian TSX Stock Market ETF?

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Our retirement date is a moving target in part because we expect to get “retired” rather than to choose when to retire. This year alone, an entire tier of management, basically anyone 60 or older, has been offered a package to retire. (Those who don’t choose to accept the package are taking a risk that they may be simply “right sized” without any retirement bridge perks.) Who knows how bad it’s going to get? Still, I was looking at my XIC holdings the other day and began wondering roughly how much we could expect them to grow between now and retirement if that was, say, 15 years away.

XIC Is a Low-Fee ETF That Mirrors Most of the Toronto Stock Exchange (TSX) S&P Composite Index

XIC is a Blackrock iShares ETF. You buy units of the ETF on the stock market, just like shares of Bell or Enbridge. Unlike a mutual fund, the value of these units goes up and down throughout the day based on the value of the underlying stocks. Like a mutual fund, there is a management fee for these units: it’s low though at 0.05-0.06% a year.

I bought a bunch of XIC every month one year when I couldn’t spot any dividend paying stocks that I wanted to own forever offered at good prices. I figured I would be over-paying for some of the component stocks in the index fund, but under-paying for others so it should be overall beneficial.

Does XIC Pay a Dividend or Distribution? Can I Get Income from It?

XIC does pay distributions quarterly based on the underlying stocks. It yields about 2-3% a year although it’s not something you can actually estimate with any particular accuracy.

If you look under Performance, then Distributions, then Table, then Calendar Year, you can see the total annual distribution per unit for tax purposes. For the full years the unit has been offered, it’s varied from about 22 cents per unit to a high of 1.25 per unit. During those years, the price per unit has varied from about $10 to about $25.

What Capital Gain or Growth Can I Expect Over the “Long Term” For My XIC Investment?

I’ve been reading books and newspaper articles about planning for retirement and they use a wide variety of values for how much you can expect your long-term investments to grow.

I see things like “expect to grow 3% above inflation” and even “5% after inflation.” I’m always a bit skeptical of those numbers because I’ve been investing so long I’ve seen many market setbacks.

So knowing I bought my XIC units when the TSX was in the 15000 range and that it is still well below that this year (2016), I wondered whether “past performance could be used to predict future performance.” OK, I know it can’t. But I still wondered how XIC has actually performed over the long term.

First, I did a quick and dirty check looking at the values 15 years ago and today on the BMO InvestorLine website. That suggested a return of a bit less than 4.5% per year, not including the distributions. That suggested to me a return of 6-7% or so if you included the distributions.

So then, wanting a more accurate evaluation, I went onto the Blackrock website to look for the data.

They conveniently report the Total Return as an Average Annual return including distributions and changes to the NAV.

The total average annual return since inception, February 16 2001, is 6.02%. So my estimate was pretty accurate.

How Does the Total Average Annual Return for the Past 15+ Years Compare With the Rate of Inflation?

So if the return was 6.02%, how much of that was eaten up by inflation?

I went to the Bank of Canada website to see what they report the “average annual rate of inflation (%) / Decline in the Value of Money” was from 2001 to 2016.

They say that over 15 years, the rate of inflation was 1.83%.

(Anyone who actually owns and runs a home knows that the CPI tends to understate the actual rate of inflation for goods and services you actually need to survive, but it’s as good as I can get easily.

So What Can I Expect from My XIC for Long-Term Return After Inflation?

Ok, if I’m doing this correctly, that means that should future performance mirror past performance, which is very unlikely, then

6.02 % – 1.83 % = 4.19%

I really, really don’t think the data is accurate to two decimal places, so I’ll say “about 4%.”
In other words, I can expect my investment in XIC to grow about 4% a year for the next 15 years.

How Soon Will My Money Invested in XIC Double In Amount?

There’s an old estimating rule for how quickly your money will double in amount (not necessarily in value, as inflation plays a role in that.) You take 72 and divide it by the % that the money is growing each year.

So at 4%, my investment in XIC will double in amount in 18 years.

Sigh.

I guess I’d better hope they don’t retire me any day soon!

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No Easy Answers to Saving in The Retirement Catch-Up Guide

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Like most library patrons, I keep an eye on the books sitting on display shelves and happily pick up any that sound interesting: after all, if the book isn’t good it didn’t cost me anything to try it. (I prefer to only buy books that I will read more than once, like Terry Pratchett novels.) The Retirement Catch-Up Guide seemed like a catchy title, so I snagged it looking for any easy answers to increasing our savings or improving our pensions.

Check the Country of Origin of Retirement Books

When I opened the book at home the first thing I noticed was the annoying phrases “Uncle Sam”, “IRAs, and Roth IRAs”  and “401(k)” littering the Introduction’s starting page. I had made the classic mistake of not checking the country of origin of the book. Fortunately, I hadn’t bought the book. I decided to read it anyway, in case there were ideas that could cross the border successfully. Sections on avoiding taxes and so on, however, were irritatingly common.

For example, in the USA State taxes can vary greatly depending on what services, or lack of services, the state provides. If you look at an income tax calculator for Canadian taxes, though, like the one that Ernst and Young provides, you’ll find there isn’t a huge difference in provincial taxes. That’s because our provinces all offer a fairly similar level of service . So the book’s advice to consider moving to another State to significantly lower your taxes isn’t particularly useful to Canadians intending to stay in Canada.

Some of the advice about minimizing taxes and mortgages is also not relevant in Canada. Generally speaking, we can’t deduct mortgage interest costs from our income taxes.

Check the Date of Original Publication of Retirement Books

The copy of the book I borrowed had been acquired by the library in 2006. But it was first published in 2000. That means it was likely written in 1998 or 1999. It had been revised in 2003 but not as much as you might expect given the dot-com stock market bubble popped.

The book is based on “real” examples of situations people found themselves in while approaching or in retirement. That means that the amounts of dollars that they were saving or receiving were the real amounts in the late 1990s when the book’s data was collected. With inflation, though, these numbers now seem ridiculously small. It’s jarring to read.

Similarly, the numbers quoted for “average” rates of return seem ridiculously high. Here’s an example, “She will sell an investment property that she’s been renting out, and re-invest the proceeds—hopefully at a 15 percent rate of return per year.” I wish!

What’s Good about The Retirement Catch-Up Guide

  • The book does have some good advice and some good points, though.
  • It leads the reader through the basic steps required to plan for retirement, although without a great deal of detail. For example, the reader should
  • Check all of the possible sources of income for retirement. The book gives examples of some that people might have overlooked.
  • Plan what retirement looks like. Someone who plans to travel the world playing the top golf course in each country will need more retirement funds than someone who plans to downsize to a rented apartment in a small town where their children live and provide childcare for their grandchildren in return for meals.
  • Estimate what retirement costs will need to be paid.
  • Look for creative ways to increase retirement savings or income. Some examples include people selling real estate and investing the proceeds or buying real estate as an investment or as a rental income option. Many people upgraded their skills and looked for jobs that paid more for their last 15 working years. Others planned to work part-time in retirement, often for themselves, and acquired the skills they would need to make that happen while still working.
  • Consider whether you can maximize your retirement living while minimizing your costs by re-locating. The book describes how some retirees moved out of the country and within the country to reduce their costs of living.

What’s Bad About the Retirement Catch-Up Guide

  • It’s outdated. This really shows up in the expected rates of return for investing and costs of living.
  • It’s fairly shallow. You can’t describe well how to invest in 10 pages including the stock market, real estate and a personal business.
  • It’s country-specific to the USA.

Recommendation for the Retirement Catch-Up Guide

If you have this book freely available, for example at your library, it may be worth a quick read through, especially if you live in the US. Generally, though, I’d skip this one and look for a more recent book written for the country you live in.

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