Creating the perfect RRIF portfolio

Most people don’t understand how to set up a RRIF properly. They tend to think of it as just an extension of the RRSPs they’ve held over many years. Nothing could be further from the truth. The main goal of an RRSP is to build capital. The main goal of a RRIF is to provide income.

That doesn’t mean there is no room for capital growth in a RRIF. A balanced, middle-of-the-road RRIF portfolio should have a solid equity component. The accompanying table shows a model of a solid, balanced RRIF portfolio — but please remember that this is just a general guideline. You should have your own personal investment mix, in which the appropriate percentage for each investment category is based on your risk tolerance. Rely on your independent professional advisor to help you build your plan, review it at least once a year, and adjust it if circumstances warrant.

Keep interest-bearing securities in your mix. Despite the fact that rates are low and are likely to stay that way for some time, GICs and bonds represent a core part of your RRIF. They provide income and relative safety.

The bond portion of a RRIF portfolio might range all the way from 30% to 60% (it is at2% in the model portfolio). The portion varies depending on your age, your risk tolerance, and market conditions. An investor’s expected returns have been higher over the years with a solid bond fund component. The diversification benefits make this approach worthwhile. The point is that, if equity markets crash, bonds will likely bail you out.

Never go too far seeking growth. A portfolio made up strictly of equity holdings is potential trouble. You have absolutely no control over what market conditions will be when you retire. For instance, if you retired at the end of 2000 with only equity investments in your newly-created RRIF portfolio, you would have been in a difficult situation. Again, diversification and balance produce both performance and protection.

If you are unsure of how to set up your asset mix, a “balanced” mutual fund can be a good place to start. Such funds typically invest in a combination of blue-chip stocks, bonds, and cash. The professional manager decides what proportion of each will make up the fund by considering economic conditions.

Here is a sample RRIF portfolio:

Investment Category (asset class) Weighting (% of holdings)
Cash or Equivalent
GICs, money market funds, etc. 17%
Total cash or equivalent 17%

Fixed Income
Long-term deposits/mortgage fund 19%
Bonds or bond fund(s) 19%
International bonds/fund(s) 4%
Total fixed income 42%

Canadian blue-chip fund(s) 15%
Canadian dividend fund(s) 7%
Canadian growth fund(s) 9%
U.S. blue-chip fund 4%
International funds (e.g., Europe, Asia) 6%

Total equity 41%

Total Portfolio 100%

GICs should be selected to ensure steady income, and maturities should be staggered for maximum flexibility. Other good RRIF investments for generating cash flow are bonds and bond funds, mortgage funds, money market funds, mortgage-backed securities, Canada Savings Bonds, provincial savings bonds, and Treasury bills. Be aware that some of these securities can only be held in a self-directed RRIF.

The equity segment of your portfolio should hold core mutual funds that are well managed and have consistent performance.

You will notice that the cash portion of the sample portfolio is on the high side, at 17%. This is in part because the money in your RRIF must be invested so that it will generate the necessary cash flow for withdrawals.

We have not included any royalty income trusts in this mix because of the higher risk involved. However, if you need the additional yield they offer, you may wish to talk to your financial advisor about adding them.

From Gordon Pape’s 2001 Buyer’s Guide to RRIFs and LIFs, published by Prentice Hall Canada.