The Longevity Portfolio

How to handle an RRIF

If they handed out Oscars for the toughest investment decisions, my vote would be to give it to everyone who has a RRIF.

If you’re in that position or about to be, you know what I mean. Choosing the right securities for a Registered Retirement Income Fund is extremely difficult in the current financial environment. But it’s also so important you need to protect your money to make it last as long as you live.

One of the cardinal rules of RRIF investing is not to lose capital, which means choosing conservative low-risk securities. If that were the only thing you had to worry about, managing a RRIF would be relatively easy. Just put all the money into GICs and sit back and relax.

The problem is that these days you’ll be lucky to earn 2.5 per cent interest on a five-year guaranteed investment certificate. Meanwhile, the government insists you withdraw 7.38 per cent of the value of the plan at age 71, and the percentage increases every year after that.

There is nowhere safe where you can earn 7.38 per cent these days or anything approaching that. Ottawa has created an impossible dilemma for RRIF owners: how to avoid seeing your savings erode each year through the mandatory withdrawals while at the same time protecting capital.

RELATED: Claiming the Pension Credit

I wish there was an easy answer. There isn’t. The best I can suggest is to accept a little more risk than you might like by creating a balanced RRIF portfolio. It should combine very conservative securities with some that offer better returns but have stock market exposure. You may not earn 7.38 per cent but you should average a lot better than 2.5 per cent annually.

I created just such a portfolio in early 2013 for my Income Investor newsletter readers. About one-quarter of the money went into a five-year GIC from a small Manitoba-based financial institution. I chose it because small companies offer better rates than the big banks. Another 10 per cent went into a short-term bond fund, which is less vulnerable to loss if interest rates rise. So about one-third of the RRIF portfolio is in very low risk securities.

Next, I added two balanced funds with a good history of capital preservation: CI Signature Dividend Fund and CI Signature High Income Fund. Exposure to the U.S. was provided with the Sentry U.S. Growth and Income Fund, which focuses on large-cap stocks. Each mutual fund was given a weighting of about 10 per cent.

Finally, I included three high-yielding stocks: BCE Inc., Inter Pipeline and Davis + Henderson, plus a Bermuda-based limited partnership called Brookfield Infrastructure.
This portfolio struggled in the first half of 2013 because all the securities except the GIC were negatively impacted by concerns over rising interest rates. But once the jitters faded, it recovered well and posted a one-year gain of slightly more than 10 per cent.

I would not expect that high a return every year – my target is six per cent to eight per cent on average. Keep your investment expectations at a realistic level, and you won’t be disappointed.

RELATED: RRIF Withdrawals

This portfolio is not for everyone, but it gives you an idea of how to approach a RRIF. If you want to be more conservative, increase the percentage of assets in the GIC and the short-term bond fund and reduce stock market exposure accordingly. A very conservative plan would be to invest 80 per cent in GICs and bond funds and only 20 per cent in growth securities. But if you go that route, reduce your return expectations accordingly.

Ottawa could do a lot to ease the pressure on RRIF owners by reducing the minimum withdrawal rates. But despite representations from CARP and other organizations, that hasn’t happened. So the impossible dilemma remains, and we have no choice but to deal with it.

Gordon Pape’s latest book is RRSPs: The Ultimate Wealth Builder. It is available in all bookstores as well as in electronic formats.

Zoomer magazine, June 2014