How Does Jon Invest In His Rrif So He Has Enough Cash When He Must Start Withdrawing?

Q. I am in my 70s and must withdraw a minimum amount from my registered retirement income fund ( RRIF ) each year. The question is, how do I invest my RRIF assets so that I have enough cash in my account when the withdrawals are timed to come out? At the same time, how can I preserve capital as much as possible? It was much easier to invest during the accumulation phase. I want to make sure that my RRIF proceeds last as long as I do but am faced with having to withdraw a greater amount each year, now exceeding the annual interest and dividends. Are you aware of any model portfolios that have this in mind? —Thanks, Jon

FP Answers: There are several ways to invest your RRIF to maximize cash flow and simplify rebalancing, Jon. At age 71, registered retirement savings plan ( RRSP ) accounts are required to be transferred to RRIF accounts (or used to purchase annuities) by Dec. 31 in order to maintain the tax-deferred status. Starting at age 72, a minimum withdrawal is required from your RRIF account that is a percentage based on your age and the balance of your account on Dec. 31 of the previous year.

You can convert your RRSP to a RRIF at any age prior to age 71 and minimum payments will be required starting the following year. The current minimum payments are four per cent at age 65, five per cent at age 70, and increasing by roughly inflation every year until it caps out at 20 per cent annual withdrawals at age 95. The withdrawal is based on your balance at the start of the year. This minimum is applied on an account-by-account basis, not aggregate. Similar rules apply for life income fund (LIF) accounts that come from locked-in RRSPs.

RRIF payments are flexible and most banks and brokerages offer monthly, quarterly or annual payment options. For RRIF account holders who do not require cash flow from their accounts for spending, they can choose to receive their annual payment in December. The RRIF withdrawal can even be reinvested in taxable non-registered accounts. Another feature of RRIFs is that they commonly do not attract withdrawal fees that would apply to an RRSP withdrawal. The minimum required withdrawals are free of withholding tax but are still taxable when you file your tax return.

To address your question, Jon, you need cash to be available in your account on the day the payment is scheduled to be processed. Otherwise, the withdrawal will be processed and could put your account into an overdraft position, with interest payable on the negative cash balance. If you have your investments at a brokerage, they may also reserve the right to sell securities if you are in a debit position. If you own mutual funds in your RRIF, your brokerage may allow for systematic withdrawals on a scheduled basis to coincide with your payment schedule. If you have an investment professional who manages your investments, they can ensure cash is available as needed. Some may create a “cash wedge” by having a certain percentage of your RRIFs (and other accounts) held in cash for withdrawal purposes.

Other strategies could include pooling cash by removing the dividend reinvestment plan (DRIP) on your RRIF accounts. If you invest in guaranteed investment certificates ( GICs ) or bonds , a ladder strategy with different maturities each year, or even throughout each year, could be another source of cash. Time-based rebalancing could be an easy way to know what assets to sell in order to facilitate your payments. You simply sell the appropriate amount of each asset class to achieve the optimal post-withdrawal asset allocation. If stocks are up, you would be selling more stocks than bonds. If stocks are down, you would be selling more bonds than stocks.

Another option could be to transfer securities in-kind from your RRIF to a non-registered account if you do not need the cash. Some brokerages offer this option at no additional cost based on your service level. The fair market value of the investments transferred will make up your withdrawal.

It bears mentioning the minimum withdrawal is just the amount you have to take out. In some cases, it can make sense to consider larger withdrawals to use up low tax brackets, maintain tax-free savings accounts ( TFSAs ) or maximize your future estate value. Some refer to this as “melting down” a RRIF.

This last point is important, Jon. You mention preserving RRIF capital. As financial planners, we usually try to maximize overall capital, which sometimes can include taking withdrawals beyond RRIF minimums.

Preserving capital may seem comforting but you saved this money in large part to spend it. The rising minimum withdrawals make it virtually impossible to preserve your RRIF balance as you age.

You ask about model portfolios. There is no “right” way to invest, Jon. For one person, it is GICs. For others, a low-cost exchange-traded fund portfolio with a single all-in-one asset allocation ETF . And yet others will hold a mix of stocks and bonds, either indirectly through pooled funds, or directly by owning the securities. It may sound like a cop out, but it really depends.

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I agree that managing the decumulation of your wealth is much more challenging than it is when saving. In retirement , you may have to consider pensions, both private and government, each with their own considerations. You may also have non-registered income in the form of interest, dividends, and capital gains . Then you need to consider the various rules and considerations for RRSP and RRIF accounts. It can be complex, but you do not have to do it on your own. Seek input from your investment and tax professionals.

Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at adobson@objectivecfp.com.

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