Shape up your RRIF fitness

Just like physical and mental fitness, financial fitness is increasingly important to older Canadians. We all want to maintain a certain lifestyle in retirement and also avoid becoming a burden on our children.

For many people, one of the most important elements in lifelong financial fitness is a well-constructed RRIF (registered retirement income fund). Unfortunately, it’s not an easy goal to achieve in the current period of low interest rates and volatile stock markets.

RRSP becomes RRIF
A RRIF is simply the end use of an RRSP. For decades, you put money away with the intention of drawing on it when you stop working. If you don’t have an employer pension plan, the RRSP may be your number 1 method of retirement planning.

If you’re coming up to the conversion stage (an RRSP must be wound up no later than Dec. 31 of the year in which you turn 69), you need to think carefully about how you want to invest the money.

(As well as rolling over RRSP holdings to a RRIF, a mature RRSP may be used to purchase a life annuity but, these days, most people choose a RRIF because of the flexibility it offers.)

Cover minimum widrawals
In the past, most people put their RRIF assets into low-risk securities such as GICs, government bonds and mortgage-backed securities. But with interest rates so low, the income generated by these assets is unlikely to produce enough income to cover the annual minimum RRIF withdrawal required by the government.

At age 71, for example, you’re required to withdraw 7.38 per cent of the plan’s value on January 1, and the required withdrawal increases in subsequent years.

As a result, many retirees are seeking alternatives and taking more risk as a result.

Check popular choices
Some popular choices include royalty trusts, income trusts, REITs and high-yield bonds. Some of these investments have worked out, but others have suffered significant losses.

So what should you do? I recommend a portfolio that combines some higher-income securities with the safety of more traditional investments, plus some low-risk equity funds.

However, you should recognize that this involves assuming additional risk. There is simply no alternative if you want to achieve higher cash flow.

Model RRIF portfolio
In The Complete Guide to RRIFs and LIFs, which I co-authored with 50Plus publisher David Tafler, we recommend a model RRIF portfolio that looks like this:

• Canadian money market funds              5-10%
• U.S. money market funds                     5-10%
• Short-term bonds/mortgage funds         10-20%
• Mid-term bonds/regular bond funds       10-20%
• U.S. bond funds/foreign bond funds       10-20%
• Preferred shares/dividend funds             10-15%
• Royalty trusts/income trusts funds         5-15%
• Blue-chip Canadian stocks/value funds  10-15%
• International value-oriented funds            5-10%

This portfolio allocation offers good diversification, currency hedging, above-average income and some capital gains potential, with a modest level of risk.

Next page: Royalty trusts potential

Mackenzie’s Ivy group is an excellent choice for this purpose.

Ivy Canadian, Ivy Foreign Equity and Ivy Growth & Income funds have never lost money in a calendar year, which makes them top candidates for a low-risk portfolio.

Choose dividends carefully
If you decide to add a dividend fund, choose carefully. Some funds in this category are really large-cap equity funds at the core and make minimal distributions.

Select a dividend fund that holds a high percentage of preferred shares and has a history of steady monthly payments. Guardian Monthly Dividend Fund is an example.

No junk bonds
There are no high-yield bonds (also called junk bonds) on the list because of the risk involved in this type of investment.

If you want some exposure, you may want to consider Trimark Advantage Bond Fund. It specializes in high-yield bonds, which provide above-average income flow, but also holds about a quarter of its assets in government bonds for safety.

It pays a monthly distribution and, like the Ivy funds, has never suffered a losing calendar year.

Finding the optimum balance between safety and cash flow isn’t easy, but it is achievable. Discuss these options with your financial adviser.