RRIF planning should start early

The other day, a newspaper reporter called to interview me about an article she was writing on RRIFs. She’d already spoken to quite a few other people but wondered if I had anything to add.

My main point seemed to surprise her a little since no one else apparently mentioned it. It was this: start the conversion process early, at least three years before you intend to move from an RRSP to a RRIF.

Most people don’t even think about the basic difference between an RRSP and a RRIF until the time comes to make the switch. Big mistake! The two plans have fundamentally different goals. The objective of an RRSP should be long-term moderate growth at reasonable risk. The twin objectives of a RRIF are to generate cash flow while preserving assets. This means that a RRIF portfolio should look quite different from that of an RRSP by including more income securities and less in the way of stocks or equity mutual funds.

If you wait until conversion to transform the portfolio, you could end up buying your RRIF securities at exactly the wrong time. For example, suppose you are making the change-over this year. You’ll pay top dollar for any income trusts you want to buy. As foronds, you will have to stay short-term if you want to minimize interest rate risk, which means lower yields.

If you had started the conversion process three or, better still, five years ago, you could have gradually added quality income trusts at much more attractive prices and put a bond portfolio in place that would generate much better yields than you can find today.

So if there is a RRIF in your future, start planning now. Decide on a basic strategy and identify the types of securities you would like to own. Then gradually add them to the portfolio when the prices are within your target range. By the time the conversion takes place, your RRIF should be running on all cylinders.

This article originally appeared in the Internet Wealth Builder.