The Great Pension Experiment: 2017 Update

Another year has passed, which means it is time to review The Great Pension Experiment to see how we are doing.

This will be my second year of results to review, and as such I’ve had some time to mull over exactly how we can measure performance, to see how the experiment is running. When I first discussed the experiment, I decided to undertake it because I thought I could do better than what my previous employer was offering me for a pension when I turned 65 years old. Based on my pension with that company, I would receive a monthly pension of $600, or an annualized pension of $7,200. I argued that I could take the lump sum that the company would give me if I cashed out my pension, and over time, end up with a portfolio that would pay me more than $600/month. To that end, there are a few key metrics to see how well we are doing.

First and foremost, I want to check my actual returns over the previous 12 months, and compare them to the annual returns of OPTrust. This is mainly a source of pride: I’d like to see if I, as a small time investor, can beat the performance of a pension fund with over $19 billion in assets, which pays money managers $45 million in investment administrative expenses (See Note 10b of their 2016 annual statements). As an aside, for the purposes of my own portfolio I use a October 31 year-end, since I started the portfolio in November 2015. OPTrust uses a calendar year-end — so I will be comparing my November 1 to October 31 results to their January 1 to December 31 results.

Second (and arguably the most important), we have to compare the monthly income my portfolio would give me, versus what my pension from the company would have given me. The best measure of this is to determine what the present value of the monthly pension from OPTrust would be, and compare that to the currently monthly income that my portfolio is giving me.

Finally, using Monte Carlo Analysis (MCA), we can run a model to see how well the current performance of my portfolio will project into the future. To do this, we will use actual returns up to the point of review (in this case, two years of actual returns), and then use MCA for the remaining years. For the experiment, the total duration (i.e. from when the portfolio started, to when I turn 65), is 26 years. Since we are two years into the portfolio, that means we have two years of actual returns, and will use  MCA for the remaining 24 years. From there, we can see if the probability of beating $600/month in income at age 65 (i.e. what my company pension would have been) is still favourable.

So, how did we do for 2017?

Portfolio Review

The returns will be discussed in a subsequent section. For 2017, I pretty much left the portfolio on auto-pilot. Using synthetic drips, my brokerage continued to purchase shares for me whenever a dividend/distribution was issued. The composition of the portfolio is now:

Ticker Weight Target Weight Over/Short
CASH 0.48% 0.48%
VCN.TO 26.05% 25.00% 1.05%
VXC.TO 52.12% 50.00% 2.12%
VAB.TO 21.34% 25.00% (3.66%)

All in, we picked up 12 shares of VCN.TO, 18 shares of VXC.TO, and 14 shares of VAB.TO. Because a synthetic drip cannot fully invest all proceeds, there has been a slow buildup of cash: in 2016 we had $106 in cash and we now have $370 in cash. When the cash account hits the $1,000 mark, I’ll redistribute it to one of the ETFs. There is little value in doing so right now with such a small amount: to do so would 2.7% going to transaction fees.

Total Returns

Period Ending Returns OPTrust Returns Beat (Miss) vs. OPTrust Assertive Couch Potato Returns Beat (Miss) vs. Couch Potato
2016-10-31 5.79% 6.00% (3.56%) 8.10% (28.57%)
2017-10-31 12.05% TBD TBD 10.60% 13.67%

Total returns for the period ending October 31, 2017, were 12.05%. This yields a 18.53% return since inception, or an 8.87% return compounded annually over the past two years. Since The Great Pension Experiment is based on the Assertive Couch Potato portfolio, it is useful to compare my results to the Assertive Couch Potato, since that is effectively my benchmark. Ignoring transaction fees, the return on the Assertive Couch Potato was 10.6%. All in, I have beat the benchmark by 13.67%. Unfortunately OPTrust hasn’t yet published its 2017 results, so I do not yet know if I have beat them, but I will publish an update once their results are in.

Monthly Income

Returns aside, the monthly income of the portfolio is the real “meat” of the investment: since this is what is supposed to support me in retirement. To that end, the following graph highlights the salient points:

Year Present Value of
OPTrust Annual Income
Annuity Income Real Income
2015 $4,297 $2,589 $0
2016 $4,383 $2,739 $1,429
2017 $4,471 $3,069 $1,590

For 2017, discounting back the OPTrust pension at 2%, the pension is worth $4,471/year or $373/month. The Great Pension Experiment is currently producing $1,590/year in real income (i.e. from dividends and/or distributions), or a hypothetical $3,069/year if we were to cash out the entire portfolio and buy a 4% annuity today. The real test of The Great Pension Experiment will be when one of the black lines crosses the red, since that will signal that The Great Pension Experiment is now generating income greater than the pension that OPTrust had offered me. It is much too soon to tell how well we are doing, but as long as the Real Income and/or Annuity Income are increasing over time, we should be okay.

Monte Carlo Analysis

Rerunning the Monte Carlo Analysis (MCA) using real returns for 2016 and 2017 still produces a favourable graph:

With the newest MCA completed, our probability of exceeding $600/month in income by 2041 is as follows:

Year Probability
2015 93.0%
2016 87.5%
2017 93.1%

So, while we had a dip last year, we’re back on track at a 93% probability of making our income targets.

Closing Remarks

All things considered, I would consider 2017 to be a good year for The Experiment. While I am still a far ways away from beating the pension that OPTrust would have given me (I’m about two-thirds there when using the Annuity Income projection, and about one-third there when using the Real Income value), I do have a very long time horizon: I still have in excess of 20 years to make this work! So for now, I will sit back and let the portfolio do its thing.

Onwards and upwards!



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