How to make sure you have enough money to fund your RRIF withdrawals

What should you do with your RRIF?

The latter is the most popular action. In a recent TSI Wealth Network blog, investment analyst Patrick McKeough said he prefers RRIFs to annuitizing or cashing out. 

Converting your RRSP to a RRIF is clearly one of the best of three alternatives at age 71, he says. “That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal, which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income. Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert,” McKeough explains: you just transfer them to your RRIF.

As I’ve discovered since I started up my own RRIF this past January, the sweetness of the RRSP tax deduction over the decades is offset by the sourness of having to pay tax on withdrawals on your new RRIF. I am a DIY investor who uses one of the big-bank discount brokers to self-manage the taxable distributions and the remaining investments, most of them carryovers from my RRSP.

Selling from a RRIF is a different mindset than accumulating in an RRSP

While accumulating funds in an RRSP was a matter of making annual contributions and reinvesting dividends and interest, you need to think about the RRIF a bit differently. RRSPs are a long-term wealth-building exercise while RRIFs deal with current (and taxable!) cash flow. Suddenly, regular selling is necessary. The RRIF rules mean that in the first year you’ll have to withdraw something like 5.28% of what your balance was at the start of the year (rising to 5.4% at age 72 and ever upwards with each passing year). 

If you choose to receive monthly payments, as I did, that means every month you must have 1/12th of the required annual distribution in the form of ready cash to be whooshed out on whatever date you specified. Like most Canadian retirees, I receive other pensions near the end of the month, so I chose mid-month for the RRIF distribution. 

You also need to choose the percentage of tax you wish to pay to the Canada Revenue Agency (CRA). I picked 30%, which automatically leaves my account each month. The remaining 70% transfers into our family’s main chequing account. Ideally, you’d do that at the same financial institution where the RRIF is held—it’s easier this way. 

For example: if you take out $1,000 a month from your RRIF, $300 goes to the CRA and $700 goes to your bank account automatically. The moment that happens, it’s up to you to make sure you’ll have another liquid $1,000 ready for the following month. This will often mean you have to sell something in the RRIF to raise the cash. 

Even if you have laddered guaranteed investment certificates (GICs), I doubt most retirees in Canada will have the necessary amounts coming due every month from locked-in GICs. A GIC ladder involves staggering GICs based on their maturity dates, but this takes careful advance planning. More likely, you’ll have to sell some bond ETFs or units in those much-beloved asset allocation ETFs, or individual stocks or bonds. 

Try to maintain your preferred asset allocation in the RRIF

Once you enter the decumulation phase of retirement, you have to consider the asset allocation of the RRIF account, says Matthew Ardrey, senior financial planner for Toronto-based TriDelta Private Wealth. 

“This way, there are other available asset classes to draw upon during periods of market volatility, without having to hold an excessive amount in cash for future payments,” says Ardrey.

In my example above, if the preferred asset allocation is 50/50 equities to fixed income, then ideally you will raise $500 each month from selling equities and another $500 from selling fixed-income investments or other securities, like gold exchange-traded funds (ETFs). 

I’ve been selling a fair amount of gold in my early months of RRIFing, as gold has been on a tear of late (it recently passed USD$3,000 per ounce), and it feels better selling partial positive positions.

Conversely, selling underwater stock positions is less pleasant.

If, on the other hand, you have big unrealized gains in things like the Magnificent 7 tech stocks, as with gold you may be able to build your required RRIF cash cushion by deploying your net gains. That way you can avoid experiencing the pain of wiping out positions in stocks you’d rather keep for the long haul, like dividend-paying U.S. stocks. It’s nice to keep collecting the latter, especially with a sinking Canadian dollar, so my first choice is to sell non-dividend-paying stocks or Canadian stocks that you also hold in taxable accounts.

For now, given the volatile global equity markets under Trump’s Tariff 2.0 regime, I’m aiming to have the next three months of required cash in liquid form. 

True, you could hold the last two months in a short-term bond ETF that will pay at least minimal interest. After all, the cash in the brokerage account you have ready for the RRIF payment and tax payment tends to pay $0 or next to it. 

However, Allan Small, senior investment advisor with the Allan Small Financial Group, has a different view. 

“Obviously [you] have to make sure that there’s enough money in the portfolio that’s liquid to make the payment,” says Small. “I don’t believe in setting aside a bunch of money, which has to sit there so you can take the RRIF payments from it. I believe in investing as much as possible to take advantage of the market’s upswing—especially [those] over the last few years. I liquidate investments as necessary to pay investors the money they need as a RRIF payment. Owning dividend payers can really help and make it easier to pay out the investor as well. Thus, I design portfolios that always have dividends or interest coming into the account.”

Another consideration, mentioned by Ardrey, is to set up systematic withdrawal payments (SWPs) from investments. Much like contributing automatic savings, this automatically withdraws a set amount from an investment, allowing for a Canadian retiree to be able to “set it and forget it.” But, he cautions, if only drawing from one asset class, a periodic review of asset allocation is needed. 

“De-risking” RRIFs under Trump 2.0?

While pondering the asset allocation is appropriate for this stage of your life, you may want to focus on selling the riskier securities, while preserving quality high-yielding dividend stocks and fixed income. 

Financial planner John De Goey, a portfolio manager at Toronto-based Designed Wealth Management, recently wrote a blog suggesting that while Donald Trump remains president, conservative retirees may want to “de-risk” their portfolios. It’s time to stop being complacent and recognize that “traditional financial assets (especially stocks) are severely threatened.”

That doesn’t necessarily mean retreating to bonds and cash, though. De Goey is keen on alternative assets, like real estate, metals, resources and bullion, infrastructure and alternative assets that offer a strong cash flow. Small, on the other hand, isn’t making major changes to his clients’ portfolios, but says he has “begun to buy into this market again.” 

Small continues: “I have been buying investment ideas on the cheap. Many stocks as an example are 15% to 20% on sale … I believe I can see a path forward through all this tariff talk.” 

Once the reciprocal tariffs were introduced in early April, he adds, “I think this market can and will move higher (perhaps after a short down period when tariffs are announced) based on the certainty factor.”

Main issues in RRIF are falling markets and liquidity for withdrawals

Anita Bruinsma, investment coach with Clarity Personal Finance, sees two issues involving RRIF withdrawals: 

1. Declining stock markets 
2. and having sufficient liquidity for the mandatory (and taxable!) withdrawals.

For the first one, she says time horizons can be long, so retirees in their 70s should not shy away from stocks. But if markets decline three years in a row (like the S&P 500 during the early 2000s), it’s helpful to have a cash wedge, which is the allocation of a retiree’s portfolio dedicated to low-risk, liquid investments—meaning money market funds and high-interest savings accounts (HISAs). 

Have one to two years’ worth of withdrawals in cash: a money market fund or HISA ETF or an investment savings account. Bruinsma says Canadian retirees can also generate dividends to help reduce market risk.

Having enough liquidity for the regular withdrawals will depend, in part, on the frequency of RRIF withdrawals, says Bruinsma. Annual payments can be the easiest to manage and can be as simple as having a GIC ladder with GICs maturing in January of each year to fund your annual withdrawal, Bruinsma says. A GIC ladder also avoids the problem of selling equities in a down year. A three-year ladder with each GIC being enough to fund one year of withdrawals means you won’t need a cash wedge.

Asset allocation ETFs can make RRIFs easier to manage

Monthly RRIF withdrawals may be more problematic, although that’s the route I personally chose. 

Bruinsma poses this question to retirees: Do you really want to be thinking about RRIF withdrawals if you’re on a cruise? 

Bruinsma says all-in-one asset allocation ETFs make things easier. “You only have to place one trade to fund your annual withdrawal. Or four trades for quarterly, 12 for monthly. This is easier than if you have stocks or several ETFs. All-in-one ETFs also ensure you are always balanced. You don’t have to think about what ETFs/stocks to sell.” 

Finally, there may be changes afoot for RRSPs, RRIFs and tax-free savings accounts (TFSAs), says Bruinsma, if Conservative leader Pierre Poilievre wins the federal election or he motivates Liberal leader Mark Carney to emulate proposed changes to registered accounts. 

Among other tweaks, Bruinsma adds, it’s been proposed that the RRSP-to-RRIF conversion age be pushed back two years to age 73 and that employed seniors may be able to earn more money tax-free. The Conservatives have even proposed a $5,000 top-up to the TFSA if the extra amount is invested in designated Canadian securities. 

To the extent RRIF payments aren’t all allocated to monthly spending needs, many RRIF payments are destined for TFSAs. These can generate future tax-free income in advanced old age, unlike the RRIF, says Bruinsma. 

Read more about RRIFs:

• When and how should I start drawing on my retirement savings?
• What is a RRIF?
• How RRIF withdrawals work when you have multiple registered accounts
• Downloadable RRIF withdrawal rates chart

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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