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If you plan on managing your own investments in retirement, here’s a simple way to rebalance your portfolio.
Q. I’m 69 years old and my only savings—about $350,000—are in an RRSP* Couch Potato portfolio. I will be converting to a RRIF next year and will have to make minimum withdrawals annually. How can I manage these withdrawals while also rebalancing so that I maintain my asset allocation over the years? Is there an easy way of doing this?
–Enz
A. Managing a portfolio during the drawdown stage of life can be complicated, but it doesn’t need to be. Indeed, if you will be managing your own RRIF in retirement, it’s best to keep things as simple as possible.
Enzo, if you begin drawing down your RRIF next year, the first thing you’ll want to do is understand the approximate dollar amounts of your minimum withdrawals. These change annually, but in many cases, the dollar amounts will not be dramatically different. That’s because the required percentage goes up every year, but because you’re making withdrawals, the balance usually declines (unless the markets are very strong). So these two factors can balance each other out.
Here’s an example. The required minimum withdrawal is 5% at age 70. So if on January 1 next year you are 70 years old and your RRIF balance is $350,000, you’ll need to withdraw $17,500 by the end of that calendar year. That would leave $332,500, assuming no gains or losses in the investments. The following year, at age 71, the required minimum is 5.28% on that smaller balance, which works out to $17,556, almost identical to the previous year’s. Obviously, ups and downs in the markets will affect this, but you will usually find that annual withdrawals remain fairly similar over time.
Once you have a good estimate of the RRIF minimums, it’s often a good idea to set aside a few years’ worth of withdrawals in cash and GICs*. You might want to keep about $18,000 in cash, and purchase one-year and two-year GICs for the same amount. That way you can be sure that at least three years of withdrawals will be unaffected by any turmoil in the markets.
Now you can invest the rest of the account in stock and bond ETFs. I would recommend using no more than two funds: the Vanguard All-Equity ETF Portfolio (VEQT) provides a globally diversified stock portfolio with just a single holding. Combine this with a bond ETF and you have all the diversification you need.
As the GICs mature, you can use the proceeds to top up your cash holding for next year’s withdrawal. Then you can sell some shares of your equity and bond ETFs in order to buy a new two-year GIC and start the process all over. The tricky part will be maintaining a consistent asset allocation. If your overall target is 50% fixed income and 50% stocks, it’s easy enough to hold half of the account in your equity ETF, but the other half would be a combination of cash, GICs and the bond ETF. So you will need to do a little math to keep your portfolio close to its target.
Enzo, if you would like to maintain your RRIF without ever touching a spreadsheet, you might consider using the popular one-ETF portfolios offered by Vanguard, iShares and BMO. Check to see if one of these funds matches your target asset allocation: there are balanced versions available with 40% to 80% fixed income. You could then put all of your RRIF assets into one of these ETFs and simply sell the necessary number of shares just prior to making your minimum withdrawal. Your portfolio will always maintain a consistent asset allocation, with no rebalancing required.
Dan Bortolotti, CFP, CIM, is a portfolio manager and financial planner with PWL Capital in Toronto.
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