Fred from Qualicum dropped by the other day to ask about the amount of risk in his portfolio.
Fred, age 73 is worried that his investments will not keep up with his monthly withdrawals. He was an aggressive investor right up until age 69 when he had to turn his RRSPs into RRIFs ( Registered Retirement Income Funds).
He knows that he has to take out approximately 7.5% from his RRIF annually. If his RRIF does not return 7.5% then he is withdrawing capital and could exhaust his RRIF and retirement income. He has about $300,000 inside his RRIF account.
Fred wants to minimize the ups and downs and reduce his risk from his investments, which are currently invested into equity funds.
Freds concern is that he does not want to rapidly reduce his capital if stock market conditions deteriorate. He will be withdrawing 7.5 % and worrying about stock market declines.
One alternative now is to take the excess income from the RRIF and reinvest it outside his RRIF to protect his capital.
Another alternative is to adjust his asset allocation for 80% or more in stocks to less than 33% in stocks.
First, we looked at taking a part of his RRIF and turn it into an annuity. The annuity income is guaranteed for as long as he lives and is also guaranteed ten years worth of payments to his estate. We took about one third of his RRIF and guaranteed Fred income for life.
Next, another third was invested into GICs ranging from one to five year terms. This gave him a fixed rate of return and the RRIF income came from the fixed income portion of his portfolio.
The final third was invested into a balanced portfolio to give him potentially higher returns but carried with it some risk.
He now has two thirds of his RRIF into fixed investments ( the GICs and Annuity) for safety and one third with some risk. Because of Freds age, the annuity payout helped the overall monthly income to be similar as he had before.
With a few adjustments on his asset allocation, he can now see what his lifetime income will be and has a lifetime asset allocation plan to give him the income he needs to be financially secure.