How to invest a RRIF

Sharon gets advice on how to effectively invest her $500,000 RRIF

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(JGI/Jamie Grill/Getty Images)

(JGI/Jamie Grill/Getty Images)

Q: Can you suggest a preferably low cost RRIF portfolio for a 74-year-old woman in decent health in an amount of about $500,000?—Sharon

A: I think what you really should be considering is a good value Registered Retirement Income Fund (RRIF) portfolio as opposed to a low cost RRIF portfolio, Sharon.

A low cost RRIF portfolio is easy. You can put it all in GICs and pay no fees. Or you can take the RRIF to an insurance company and buy an annuity that will pay a monthly payment for the rest of your life, meaning no more investment fees. Though both options have virtually no direct cost, they have indirect costs because you’re committing to low, albeit guaranteed returns.

Investing in stocks has a cost. There are costs that are direct as well as indirect and you need to assess what you’re getting for the price.

You can keep your direct costs down by buying exchange-traded funds (ETFs) through a discount broker. Questrade, iTrade, Qtrade Investor and Virtual Brokers offer no fee ETF purchases (you pay commissions on sale). The Vanguard FTSE Canada Index ETF, as an example, has an annual management expense ratio (MER) fee of 0.05%. A $500,000 investment will therefore result in $250 in annual fees. (Not that you should invest your entire RRIF in one investment.)

But your indirect cost in this case is that you’re not diversified. You can buy a U.S. ETF, an international ETF and a bond ETF in addition to the Canadian one and have reasonable diversification. But which ETFs should you buy specifically? How much do you invest in each ETF? Some people might be well equipped to figure this out on their own (many of whom are MoneySense readers), but my experience has been that most average investors wouldn’t know where to start. And there’s no right answer that I can give simply depending on your age. Dan Bortolotti’s Canadian Coach Potato model portfolios are a good starting point though.

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If you’re not prepared to be a DIY investor and you’re going to invest your RRIF money with an investment adviser, you have choices. Once again, I’d opt for good value over low cost. Value is in the eye of the beholder and depends on your investment style.

Robo-advisers like Nest Wealth can build, monitor and rebalance an ETF portfolio for you for a fee of $80 per month or $960 per year, which is only 0.19% on a $500,000 portfolio. But this is a portfolio for a passive, hands-off investor. Great for some, but not for everyone.

Companies like Steadyhand offer low cost mutual funds directly to investors and in addition to online tools for building your portfolio, they have real, live people you can speak with as well. Fees are about 25%-50% less than similar mutual funds, ranging from 0.65% to 1.78% annually.

If you want to be involved in an active investment decision-making process, you probably want an adviser who is licensed to sell stocks, bonds, mutual funds, ETFs and GICs. If you will have low turnover, opt for a commission or transaction fee payment method. If you will have high turnover or want price certainty, opt for an annual fee as a percentage of your investments. Fees might range from 1-2% annually.

If you want an actively managed portfolio that is discretionary and hands-off, where you’re not involved in the decision-making process, you’ll have lots of options with $500,000 to invest. I’d probably opt for a private, independent investment firm over a bank because—in my opinion—their size allows them to be more nimble and provide more value compared to the surprisingly index-like discretionary portfolios the banks often build. Expect fees in the 1-2% range.

Besides fees, I think in establishing how to invest your $500,000 RRIF you need to consider things like what other investments you may have, Sharon. If you have non-registered and tax-free savings account investments, this might impact which investments you hold in your RRIF account. I would probably lean towards holding interest-bearing investments and foreign stocks in your RRIF and Canadian stocks in your non-registered or TFSA accounts, for example. You should look at all of your investments as a single account when determining asset allocation, then choose the best accounts to hold which investments.

You also need to take into account your required withdrawals, because the minimum amount at 74 of 7.71% is likely to exceed your income and dig into your capital. A good strategy may be to have laddered or staggered bonds or GICs maturing each year equal to your expected annual withdrawal.

So I’m sad to say that there’s no perfect RRIF portfolio period and certainly not based solely on your age. I think you need to consider all factors and then decide how much you’re willing to pay for your RRIF and what you expect to get in return. Lower fees don’t always guarantee higher returns – though they help.
 

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever. 

3 comments on “How to invest a RRIF

  1. I found 5 year 3.10% fully insured CDIC and DICO GIC’s with a registered independent deposit, GIC broker. Sharon, just to give you an idea, at 3.10% GIC rates for your RRIF, you can take out $3,000 a month, you money will run out by around 92 years old.

    The first few years you will receive a few thousand dollars more $38,550 and $37,440, $36,298 because of the minimum mandatory CRA withdrawals but after that, you will continue to receive $3,000 a month until around your 92nd birthday.

    Most believe GIC rates will normalize over the next 5 years so you will probably get average 3.7% to 4.10% 5 year GIC rates which will probably add 1 to 2 more years of RRIF GIC income until your 93rd or 94th birthday which all your money will run out.

    Reply

    • Don’t forget to factor in inflation which will significantly affect returns, probably by about 4 yrs. You did mention rates may improve which will hopefully counter inflation.

      Reply

  2. I quote : « You also need to take into account your required withdrawals, because the minimum amount at 74 of 7.71% is likely to exceed your income and dig into your capital. A good strategy may be to have laddered or staggered bonds or GICs maturing each year equal to your expected annual withdrawal.

    Can’t see how laddered GIC or bonds with their actual 2 or 3% low yield can equal the expected annual withdrawal of 7.71%.

    Please illuninate mt lantern

    Reply

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