Allocating Your RRIF for Reliable Retirement Income

Investment asset allocation matters at every stage of life for Canadians. It is often the single biggest factor that determines whether one portfolio succeeds while another falters. Time horizon is crucial: younger investors generally have enough years to recover from market dips and can afford a larger share of growth-oriented equities. Retirees, however, may not have the luxury of recouping losses before they need money to cover daily expenses.

New rules for your asset mix

Traditional rules of thumb — like matching your fixed-income exposure to your age — are increasingly being questioned. One adviser suggests a modified approach that accounts for longevity. The formula multiplies your age by the decimal representation of your age (for example, age 60 would be 60 x 0.60) until you reach the RRIF conversion age of 71. This rule assumes the investor is not extremely risk-averse and that the portfolio remains suitable for their needs.

Applied directly, this method yields conservative fixed-income allocations at younger ages while still capping fixed income at around 50% once you reach or pass 71:

• Age 50: 50 x 0.50 = 25% fixed income;
• Age 60: 60 x 0.60 = 36% fixed income;
• Age 71: 71 x 0.71 ≈ 50% fixed income.

Beyond age 71, the adviser suggests maintaining roughly a 50/50 split between stocks and fixed income. He argues a 50/50 portfolio presents relatively low risk even into very advanced ages and still provides exposure to growth that helps protect purchasing power over time.

Another perspective from a senior investment adviser stresses that asset mix should be determined by an account’s goals and required returns rather than age alone. If you need growth or a yield higher than low-risk fixed-income products provide, you will likely need some equity exposure. Conversely, investors satisfied with modest returns from fixed income can remain conservative. In practice, advisors see clients in their 30s holding GICs and clients in their late 70s holding equities — individual circumstances and objectives matter most.

Investing in an age of uncertainty

With heightened geopolitical and trade tensions, many retirees worry about market risk. Financial commentators advise maintaining quality holdings while leaning slightly more defensive: utilities, telecoms, certain financials and precious metals can add stability. Retirees should not abandon the long-term case for equities, but they should address any genuine anxiety by discussing options with their advisor to ensure they can sleep at night.

Those with defined-benefit pensions and predictable government benefits effectively have a form of fixed income within their overall retirement finances. That security can allow more equity exposure elsewhere in the retirement portfolio. Even so, many advisers recommend shifting gradually toward more conservative allocations as health, income needs and personal circumstances change.

Should those without DB pensions annuitize?

For retirees who lack an employer-sponsored defined-benefit pension, annuities can be a way to convert a portion of RRSP/RRIF assets into guaranteed lifetime income. Past guidance from retirement experts suggested annuitizing 20% to 30% of a retirement account in some cases, but low long-term interest rates and the prospect of higher near-term inflation have made annuities less attractive lately.

Some advisers avoid annuities when rates are low, noting that returns can be similar to conservative cash alternatives. Others recognize annuities’ main benefit: reducing longevity risk. Annuities provide guaranteed monthly income and can help people who struggle with spending discipline by offering a structured payout that lasts for life.

Calculate hurdle rates before deciding on annuitizing

Before buying an annuity, perform a thorough analysis to determine the hurdle rate — the minimum acceptable return that makes annuitization worthwhile. The calculation depends on chosen annuity features (guarantee period, survivor benefits, inflation protection) and your life expectancy assumptions.

If the annuity’s implied return exceeds your hurdle rate, annuitization may be sensible. If your hurdle rate is low (for example, 3%), keeping assets in a RRIF invested conservatively may be preferable. If you require a much higher rate (for example, 8%), an annuity could look more attractive. For many retirees, a modest annuity allocation combined with other income sources strikes a balance between guaranteed income and upside potential.

Longevity is central: the longer you live, the more value an annuity typically provides. If you die earlier than expected, however, maintaining capital within a RRIF could leave more to heirs.

The problem with exiting the market

Pulling money out of equities during periods of volatility is rarely the best long-term move. A better approach is to reduce short-term withdrawal risk by funding regular RRIF payments from cash equivalents or fixed income while keeping stocks invested for future growth and inflation protection. If you structure withdrawals so that a portion of the portfolio is reserved to meet near-term needs, you can tolerate market swings without selling equities at depressed prices.

Financial planners commonly project client life expectancies into their 90s when setting long-term plans, which supports maintaining some equity exposure to preserve purchasing power over decades of retirement. The objective is to strike a balance between reducing current volatility and ensuring funds remain available for the long run.

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• How RRIF withdrawals work when you have multiple registered accounts
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