How to handle a severance payment

Zoomer | January 1st, 2006

Q – Here’s a scenario: Let’s say your $13,000 severance amount is transferred directly to an RRSP account. Worst case scenario: you need to live off it for about a year, withdrawing $1,000/month. Additional data: you don’t need to make withdrawals for the first three months. What would you do? – M.B.

A – I would be very careful with the money. You can’t risk a loss in this situation, since you’re relying on the funds for living expenses. So capital preservation becomes paramount. Therefore, you should not invest the money in stocks or equity funds – we don’t know where markets are going from here. Although money market funds are paying very low returns, they are probably the best choice in the circumstances. They provide liquidity, so you can get at the cash as you need it. Try to find a fund with no sales commissions and a low MER. Those offered by the major banks would fit the bill. – G.P.