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Are you approaching retirement age?
If so, you have some important money moves you need to make. You probably know the decisions you face about when to take CPP, when to formally retire and whether to take your employer-sponsored pension as a lump sum or a recurring payout. These decisions are well known.
There is another major decision you face in retirement that isn’t so well publicized. Although you don’t need to make this decision until age 72, many people choose to make it earlier. In this article, I will explore this all-important retirement decision and what it means for you.
Converting your RRSP to an RRIF
A Registered Retirement Income Fund (RRIF) is an annuity that pays out a portion of your Registered Retirement Savings Plan (RRSP) assets each and every year. You need to convert your RRSP to an RRIF, at minimum, by age 72. Once your RRSP is converted to a RRIF, you have to withdraw a certain amount of your funds every single year. At age 72, for example, the percentage is 4%. It increases over time.
Why it can be a challenge
The decision to convert your RRSP to an RRIF is challenging in several ways. Key considerations include the following:
- At what age do you start withdrawing? You can transfer your RRSP assets to an RRIF at any age. However, once you do so, the decision is irrevocable. The earlier you start withdrawing, the faster your assets will have to be paid out. So, the decision about when to convert to an RRIF is a serious one.
- What kinds of investments should I hold? There are different kinds of investments you can hold in an RRSP. Bonds and dividend stocks pay out cash income; for this reason, they supply cash that can fund your withdrawals. If you hold high-growth tech stocks, however, you have to fund the withdrawals by selling stock. Retiring in the midst of a market crash could be very risky if that’s what you invest in.
What kinds of investments work best?
In general, index funds and diversified portfolios of dividend stocks tend to work well for RRSPs. Both index funds and dividend stocks pay dividends/distribution, which provide cash that you can use to pay for your withdrawals. Index funds are safer than individual dividend stocks, but dividend stocks often have higher yields than index funds.
Consider Toronto-Dominion Bank (TSX:TD) stock. At today’s prices, it has a 4.45% dividend yield, which is much higher than the TSX Index as a whole (about 2.9%). TD has grown its dividend by 9% CAGR over the last 10 years (CAGR is compound annual growth rate). If you bought TD during the March 2020 COVID market crash, you’d be enjoying about a 7% yield on the shares you purchased back then! The yield today on shares bought today is still well above average.
Is TD a good company, apart from its dividend?
I would say that yes, it is. It enjoys a 30% profit margin. Its revenue and earnings have both grown by about 7% per year over the last five years. It earns about 40% of its profit in the U.S., a market where it has much room to grow. It recently expanded its U.S. presence by buying the investment bank Cowen. All of this growth in the U.S. bodes well for TD over the long term. At the same time, the bank practices sound risk management and scores high on liquidity. It’s probably one of the safer Canadian banks out there.
