This 76-year-old man gets $15,000 from his RRIF annually, but is worried he won’t have enough money

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By Julie Cazzin with Allan Norman

Q: I’m a 76-year-old, single male with $272,000 in a registered retirement income fund (RRIF) and it’s invested in a low-fee exchange-traded fund that is split 50-50 between equities and fixed income. My withdrawal is about $15,000 per year. Is this 50-50 split a good bet until I die? I will need this extra $15,000 — and maybe more if I go into long-term care indefinitely — and I’m afraid that a market downturn may mean I don’t have enough. How do I know if it’s time for my investments to get riskier, even at my age? — Thanks, Pascal

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FP Answers: There are too many variables to give a definitive answer, but with a little guidance, I bet you will be able to think this through on your own, Pascal, and conclude what is best for you.

The place to start is with your first comment — “a good bet until I die” because it is not just until you die that you should be considering, but also your health span. How many active years of living do you anticipate and what do you want to do in those years? Would it make sense spending more money in the early years, enjoying yourself by doing more things while you can, rather than having a steady income over your remaining lifetime?

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Pascal, your comment that “I’m afraid that I may not have enough” is a problem. Not knowing if you have enough can lead to underspending when you don’t have to, resulting in you not doing the stuff you want to do. Then, later in life, a tipping point comes and a realization that “I have enough, but little time or energy left,” which can lead to regrets.

Another thing that can happen when you don’t know if you have enough is when you go out to have fun, or buy something, you feel guilty because you are not sure you can afford it. Finding out if you have enough is an exercise in confidence building for retirement.

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The answer to your comment “So, how do I know if it’s time for my investments to get riskier?” is: not now. That is, not until you consider the comments above. What sort of life do you want to live in the time you have left on this planet, and do you have enough money? If you don’t have enough, what can you do that is within your control so that you will have enough?

Once you have explored those questions and identified the job your investments are required to do, that is the time to consider changes to your investment portfolio, and other planning and tax strategies.

You should be cautious in assuming that taking more risk leads to higher returns. It is true that the expected long-term return will be higher as the percentage of equities increases over fixed income. But, and it is a big but, that is over a long time frame and assumes a buy-and-hold portfolio. Pascal, you are making withdrawals and there are no guarantees.

Regarding guarantees, assuming you earn nothing on your investments and you have a marginal tax rate of 30 per cent, you can draw $22,000 per year before tax, about $15,000 after tax, for 12.3 years to age 88 before your $272,000 is gone. Do you really need to increase your investment returns?

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If you need the $15,000 per year after tax indefinitely, as you suggest, you could purchase a life annuity. With no guarantees or inflation protection, you will receive, pre-tax, $27,582 per year, or about $19,000 after tax, for life, at today’s rates.

The negative side of this annuity is it stops when you die, there is no inflation protection, you lose access to the money and your beneficiaries will receive nothing upon your death. On the positive side, it gives you the annual income you want, plus about an additional $4,000 after tax per year, so you can confidently spend more and do more without feeling guilty and worrying about running out of money.

Now, I am not suggesting you run out and purchase an annuity, but it is worth thinking about for someone with concerns about running out of money and needing a fixed amount of income indefinitely. It is an alternative solution to taking more investment risk by increasing your equity exposure.

You can do a rough annuity/no-annuity comparison using an online RRIF withdrawal calculator. It is not apples to apples when comparing the annuity to an investment portfolio. If you earn a steady five per cent return and draw $27,582 from your portfolio, your money will last until the end of your 89th year. Increase the return to six per cent and you get about halfway through your 91st year. The annuity pays that income for life with fewer worries.

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Pascal, additional equity exposure in your portfolio increases the volatility and probably your uneasiness, which will ultimately impact your willingness to consistently make steady withdrawals. You may be putting yourself at risk of underspending and not doing the things you want to do. Plus, from what you have described, I’m not sure you need the extra equity exposure. Consider talking to a planner before making a final decision.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca

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