The Cash Wedge: An Income Delivery Process – PART 1

The “Cash Wedge” is what I call the income delivery process I developed in 1993 and have been using successfully ever since. It helps to address the issues that you cannot control by allowing you to focus on those aspects over which you do have some influence.

A series of 3 blog posts throughout the month of June will be discussing this process.

The process
The Cash Wedge is a withdrawal model that incorporates a number of income and investment concepts within it, and it is used for both registered and nonregistered investments.

Here are the steps that make it function effectively.

  1. The first thing that needs to be established is the asset allocation (equity-to-fixed-income mix) that is appropriate for you. That is a discussion for you and your advisor. You can also find online questionnaires that will help you determine what the most appropriate asset mix is, given your objectives, tolerances and timeline. In the figure above, I have shown a 60 per cent equity, 40 per cent fixed-income allocation. For this explanation, let’s assume this is your account.
  2. Within the fixed-income portion of the portfolio, create a cash position equal to the income needed for the first 12 months. You will draw your income from this cash position. This is the source for your income because cash does not fluctuate. Also acquire a one-year and a two-year GIC or bond in order to create the source of income for years two and three. As they mature, simply move the proceeds to the cash account to replenish it and continue your income withdrawals. At the outset, this provides three years of guaranteed income. It could also be set up for two or four years, depending on your situation and your preferences. On this portfolio size, an annual withdrawal rate of about 5 per cent provides withdrawals of $3,000 per month, or $36,000 for the year.
  3. The initial cash amount of $36,000 and the GICs/bonds are part of the 40 per cent of the portfolio allocated to a fixed-income mandate. The two other fixed-income segments in the pie chart round out the 40 per cent. The 60 per cent equity component is shown as three separate positions, which could be Canadian equity, U.S. equity and international equity. You still want to have some diversification within specific asset classes.

Check back on June 19 for the continuing story of the Cash Wedge!

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