Wednesday, December 17, 2008

RRIF’s and Current Bear Market

Why would anyone call the current government’s changes for RRIF’s withdrawals this year as too little to late? You should never be in a position with your RRIF that you are required to sell investments into a Bear Market. Even if you held money in bonds, you are not safe from having to sell at an inopportune time. Most people do not realize that the bond market is much more volatile than the stock market.

What you need to do is insure that you have cash, or near cash, in your current RRIF to meet your withdrawals for the next 3 to 5 years. What I mean by near cash is things like a Money Market Fund (MMF). Say you have a variety of dividend paying stocks in your account and you expect to earn $100 in dividends this year (and I am using a $100 amount just to make this simple). If your stocks are like mine and increase their dividends, you can count on your total dividends increasing at about 5% per year. So this year you will earn $100 dividend income, next year $105, year 3 $110.25, year 4 $115.76 and year 5 $121.55. This gives you some $552.56 dividends over the next 5 years. ($100.00 times 1.05 = $105.00, $150.00 times 1.05 = $110.25, $110.25 times 1.05 = $115.73, $115.73 times 1.05 = $121.55)

Further, say you need to withdraw $120 from this account every year and you use an inflation rate of 3% (which is our general background inflation rate). That means you need to withdraw from the account $120 this year, next year you will need to take out $123.60, in year 3 $127.31, in year 4 $131.13 and in year 5 $135.06. This is a total withdrawal of $637.10 and it is more than you earned by $84.53. This means that you should have an extra $84.53 in cash in your account at the beginning of this 5 year period. ($120.00 times 1.05 = $123.60, $123.60 times 1.05 = $127.31, $127.31 times 1.05 = $131.13, $131.13 times 1.05 = $137.06).

Our government is very bad on making information easy to find on what you have to withdraw in connection with RRIFs. I found a site called that gives a RRIF calculator and also gives the factors used to determine what you have to withdraw from your account. Use the factor times the value in your account to determine the minimum required withdrawal. Say, you are 76 years old and the factor is .0799, this means that you have to take out 7.99% from your account based on the year end figures of the previous year. If you account held $200,000, you would need to take out $15,980 from your RRIF account.

The government site information on RRIF withdrawals is There is also information on RRSP and RRIFs at Canadian Tax Strategies at

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at for a list of the stocks for which I have put up spreadsheets on my web site.

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