Case Study: When all your assets are in a RRIF
For many Canadians, a Registered Retirement Income Fund
(RRIF) is a primary source of retirement cash flow. In this
type of situation, optimizing your retirement portfolio means
structuring your RRIF so that it can provide the growth necessary
to overcome longevity
risk and inflation
risk, while still
generating the cash flow you need to meet minimum RRIF withdrawals
and your everyday living expenses. As a result, maintaining
growth-oriented investments in the first few years is an
important component of your strategy.
Let’s look at Mr. Higgins, whose RRIF is a primary
source of retirement cash flow. His RRIF is invested in a
laddered portfolio of Guaranteed Investment Certificates
(GICs) that has an expected rate of return of 4%.
The GIC
portfolio may be an appropriate solution for Mr. Higgins
if he has a low tolerance for risk, and the RRIF will generate
sufficient income to meet his cash flow needs. In the example
below, using this approach, Mr. Higgins’s RRIF will
be worth $60,000 after 10 years, assuming he draws the minimum
payment each year.
However, Mr. Higgins has indicated that he has a moderate
risk tolerance and would like to maintain the value of his
RRIF as long as possible. The GIC portfolio is a secure source
of cash flow, but the minimum withdrawal from his RRIF will
exceed his rate of return and result in a decline in the
value of the RRIF.
To reduce the rate of decline, Mr. Higgins
could look at converting maturing GICs to more growth-oriented
investments, such as a conservative mutual fund.
As the example below shows, a RRIF with a higher return
will not go down in value as quickly, while at the same time,
it may generate additional cash flow to meet his everyday
living expenses.
The Importance of Growth-Oriented Investments in Your RRIF
Consider a $100,000 RRIF holding investments expected to
earn 4% annually. Assuming you withdraw the minimum amount
set out by the Canada Revenue Agency (CRA), your RRIF will
be worth just over $60,000 after 10 years.
Now consider another $100,000 RRIF with an allocation to
more growth-oriented investments expected to earn 6.5%* annually.
Like the previous example, assume you withdraw the minimum
amount each year set out by the CRA. After 10 years, the
higher expected growth of this RRIF would result in a portfolio
value of over $80,000. That’s a $20,000 difference.
Although every RRIF will inevitably decline over time, holding
a portion of your assets in investments with growth potential
may reduce the rate at which your RRIF decreases in value
and help maximize your cash flow in retirement.
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*Used to illustrate the effect of a higher rate of return,
not to reflect returns on investment from any mutual fund
investment.
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To learn how this strategy could help you create an investment
portfolio that meets your retirement income needs, speak
with an RBC financial advisor.
Please stop by your nearest branch and ask us to review
your retirement income plan with you, or contact us
at 1-866-365-2123. RBC has a lineup of retirement cash
flow solutions to help you make your assets last so you
can retire with confidence.
Important information about our financial planning services can be found at the bottom of our
homepage.
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