Father suffered big losses

My father is 75 years old. He has approximately $200,000 in mutual funds, which are in a RRIF. He makes withdrawals monthly. He lost over $40,000 when the market corrected a few years ago. He does really not want to go through that again!

Someone has suggested that we place this money in GICs, breaking it into two-year, three-year, and five-year terms, and that the interest earned would be enough to live on. I understand that the money won’t compound because he will be drawing on the interest earned. Can I get your thoughts on this? – D.G.

Gordon’s answer: Your dad lost all that money because he had far too much invested in equity funds, given his age. This is a mistake many older people made during the late ’90s (and some continue to do so). Let me repeat the rule again: the older you are, the less exposure to the stock market you should have. Period!

So what about the GIC idea? Well, let’s break it down. If you use the formula suggested, your dad would have $66,667 invested in each of the three terms. Let’s assume he invests the money through a major bank (he could use a smaller institution with better rates but since deposit insuranceoverage is limited to $60,000 he might not want to do that).

At the time of writing, Royal Bank was paying 2.1 per cent on two-year GICs, 2.55 per cent on three-year certificates, and 3.4 per cent for five years. So the total annual income generated under this plan would be $5,367? Is that enough?

There’s another problem. At age 75, the minimum annual withdrawal from a RRIF is 7.85 per cent of the plan’s value on Jan. 1. In your father’s case, that works out to $15,700. Where is the extra $10,000+ going to come from? Normally, it would have to be taken out of capital but if everything is locked into GICs that won’t be possible.

In short, the plan is seriously flawed. I suggest you think it through again. – G.P.