Personal Finance

Taking the RRIF plunge

JOHN SCHOFIELD November 17 1997
Personal Finance

Taking the RRIF plunge

JOHN SCHOFIELD November 17 1997

Taking the RRIF plunge

Personal Finance

It ended almost as soon as it began, but for some investors last month’s stock market plunge could have

lasting consequences. Among them are the estimated 400,000 retired Canadians who, in the next few weeks, will be rushing to collapse their registered retirement savings plans in order to meet a year-end deadline imposed by Revenue Canada. As a result of Ottawa’s decision last year to lower the age limit for retirement tax shelters to 69 from 71, taxpayers who turn 69,70 or 71 this calendar year must wind up their RRSPs by cashing them in, buying annuities or converting to registered retirement income funds by Dec. 31. In deciding how to invest their money, many seniors may resolve to shun stocks entirely in favor of the apparent security offered by fixed-income investments, such as GICs. “I think they’ll say, ‘See, we were right— stocks are too risky,’ ” says David Tafler, a Toronto-based fi-

nancial adviser and author of a recent guidebook on RRIF investing. “When things go sour for a time, some people get scared.” And that’s a pity, most financial experts say, because GICs alone are unlikely to generate the income that today’s healthier seniors will require over their lifespans. On average, even a five-year GIC now pays only about 4.5 per cent interest annually. That may seem re-

spectable compared with today’s 1.6per-cent inflation rate, but it is less than half the long-term average annual gain reaped by stock market investors.

Starting next year, RRIF holders who are 69 will be required to draw down a minimum of 4.76 per cent of their savings as yearly income. The amount required to be withdrawn increases with the taxpayer’s age, to a maximum of 20 per cent at 94. How long a person’s savings last, therefore, depends to a large extent on the level of investment return he or she earns. Unfortunately, says Tafler, “many mature Canadian investors are far too conservative for their own good. A tremendous number of them have little or no securities.”

No responsible financial planner would counsel clients to put all of their

savings in the market. Tafler recommends that RRIF investors set aside money they will not need for five or 10 years and invest it in mutual funds that hold blue-chip stocks and bonds. The rest—money that is likely to be needed within three or four years—should go into GICs, term deposits or government bonds. Overall, Tafler says, between 30 and 50 per cent of a typical RRIF portfolio should


Like RRSPs, RRIFs come in a variety of basic types.

Savings: Similar to a bank savings deposit, these RRIFs offer low rates of interest but are normally covered by deposit insurance up to $60,000.

Git: The most popular choice for RRSP conversions, GlC-based RRIFs are insured and pay a higher fixed rate of interest than savings accounts, but the money is locked in until maturity.

Mutual fund: RRIFs based on mutual funds typically entail more risk than fixed-rate RRIFs but offer significantly more long-term growth potential.

Self-directed: These plans can hold a wide variety of investments, including GICs, bonds, stocks and mutual funds. The holder of the plan is responsible for deciding how the money is invested.

consist of equity mutual funds.

Others counsel a more cautious approach. Gordon Pape, a Toronto-based author of financial planning guides, tells seniors that no more than 30 per cent of their RRIF portfolios should be composed of stocks and stock-based funds. “You shouldn’t be going overboard as far as equities are concerned,” he says. “There should be proper balance in the portfolio.”

In Pape’s view, the ideal RRIF would be divided among a broad range of investments, including GICs, bond funds and income funds that invest in such instruments as royalty trusts. “Constructing a RRIF portfolio is a tightrope these I days,” says Pape. “There’s no

0 doubt about it.”

That’s why it is wise to seek

1 the advice of a good financial < planner. “Each and every indi* vidual getting involved in a “ RRIF is so different,” says

David Chilton, a Kitchener, Ont.-based financial consultant and author of The Wealthy Barber. “It’s the one time in your life when you have to have financial advice.”

One piece of advice that applies to almost any investor is to ignore today’s “hot” stocks and market rumors. Money should only be invested in equities if the RRIF holder is able and willing to hang in for at least five years, and preferably longer. ‘You should only pay attention to the long-term results, not the day-to-day results,” says John Parsons, a 69-year-old lumber broker from Ajax, Ont., who plans to convert his RRSP into a RRIF soon.

Rather than worrying about the short-term gyrations of the stock market, Canadians who turn 69 this year should focus first on meeting the Dec. 31 deadline for conversion. “I’m astonished at how many people don’t know about the deadline,” says Tafler. Those who fail to meet the requirement risk having the total amount in their RRSPs taxed as 1998 income—meaning that more than half could be lost to the tax man. A financial hit like that would make the stock market’s twists and turns seem tame by comparison.