RRIF season

If you turned 69 this year, you have until December 31 to make one of the most important financial decisions of your life. You’ve reached the point when you must wind up your RRSP, either by cashing it in, buying an annuity, or converting to a RRIF.

For most people, a RRIF (registered retirement income fund) is the logical answer. You can move your RRSP assets directly into a RRIF by simply signing a few papers and giving appropriate instructions to the plan administrator, such as when to make the payments that will be required starting in 2006.

It seems routine. Actually, it’s not. A RRIF is a totally different animal from an RRSP. In the later case, long-term growth is the main objective. With a RRIF, the priorities shift to safety and income. This often means a complete portfolio overhaul.

Actually, the time to begin that process is about five years before the actual conversion date. Leaving it to the last minute can result in poor investment decisions. For example, anyone who started to add income trusts funds to an RRSP five years ago in anticipation of conversion was able to buy them cheaply. Today, they are very expensive.

Many of our readers alrdy have RRIFs while others are only a few years away. Here are some funds from my Mutual Funds Update Recommended List that I believe are appropriate for registered income plans, meeting both my safety and income criteria. All performance figures are to October 31.

BMO Monthly Income Fund. This was added to the Mutual Funds Update Recommended List in November. It’s not the top-performing fund in its category by a long shot, but it offers good cash flow (6c a unit monthly) and has an excellent safety record plus a well-diversified portfolio.

CIBC Monthly Income Fund. This one also pays 6c a unit each month but the cash yield is less because the NAV is higher. Total return is much better than that of the BMO fund, however. Risk is somewhat higher although the fund has never had a losing year.

Dynamic Focus+ Diversified Income Trust Fund. This fund invests almost exclusively in income trusts. It has a very good performance record and pays a monthly distribution of 8c a unit. However, there’s more risk here than in a diversified portfolio.

Phillips, Hager & North Bond Fund. This is one of the best bond funds in the country and every RRIF of any size should have a place for it or the companion PH&N Total Return Bond Fund. Returns are consistently above average, the fund is no-load, and the MER is an attractive 0.59 per cent. Quarterly distributions have been running at 10c per unit. 

RBC Monthly Income Fund. The monthly payout is less than that offered by the BMO and CIBC funds at 4.25c per unit but total return is well above average for the category and risk is low.

Bottom line: If you are converting to a RRIF this month and haven’t started to restructure your portfolio to meet the new priorities, don’t try to do it all at once. Proceed with the conversion but allow about six months for a full portfolio change-over.

Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information: http://www.buildingwealth.ca/promotion/50plusproducts.htm