Seniors contemplating a withdrawal from their registered retirement income fund in early 2023 have tough choices to make after the double-barrelled decline of stocks and bonds last year.
What do you sell to free up money for your mandatory annual RRIF withdrawal? Bonds were hit harder than stocks but offer rebound potential. Stocks wobbled badly in late 2022 and could be vulnerable if a recession takes shape this year.
Prefer to leave both stocks and bonds alone to heal? It’s doable if you followed the basic crash-proofing strategy of keeping two or three years’ worth of annual RRIF withdrawals safe in cash or cash equivalents. At times like this, with balanced portfolios in the red after a hard year, this cash can be tapped to fund a RRIF withdrawal.
It’s a particularly good time to set up a RRIF safety net because interest rates remain at elevated levels compared with previous years. Cash sitting in a RRIF or any other type of investment account very likely earns you zero interest. But a variety of cash parking spots offering good rates are available, including guaranteed investment certificates and high interest savings account mutual funds and exchange-traded funds.
One option is a three-year GIC ladder. GICs offered through online brokerages this week offered rates of 4.5 to 5 per cent for terms of one through three years. Prefer cashable GICs so you can access your money before the maturity date? Rates of 3.35 to 3.5 per cent were available.
HISA mutual funds offered yields of 3.65 to 3.80 per cent, with the benefit of excellent liquidity. You can withdraw money from these funds like a mutual fund. HISA ETFs, also called cash-equivalent ETFs, offered yields in the 4.6-per-cent range. They’re bought and sold like stocks, which means clients of some online brokerage firms must pay commissions of $5 to $10 to buy and sell them.
A cash reserve for RRIFs has been a retirement investment staple since forever, but there was good reason to ignore this strategy when interest rates on savings products were at near-zero.
Today, you can add an element of safety to a RRIF and earn a somewhat decent return at the same time. You could say this is the best time in ages to crashproof your RRIF.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.