Retirement income conversion shouldn't mean course change for financial plan

OTTAWA -- If you turned 71 this year, the Dec. 31 deadline to convert your RRSP is fast approaching.

But financial planners say that converting an RRSP to a RRIF shouldn't mean a big course change for your financial plan.

Just because the type of account is changing, doesn't mean you should reinvent your investment strategy, says Sylvain Brisebois, a managing director and portfolio manager at BMO Nesbitt Burns.

He says your portfolio will look different than it did when you were in the 40-to-50 age bracket, but the switch from RRSP to RRIF alone shouldn't be a dramatic adjustment.

"The important part to remember is that you've got to make a withdrawal every year, so maturities or cash flow are a little bit more important in those years, but you can certainly keep a good proportion of the assets in equities if you so desire," he said.

You don't have to convert it to a RRIF - you can take it in cash or use it to buy an annuity - but Brisebois says to take it in cash will trigger a substantial tax hit, and low interest rates have reduced the attractiveness of annuities.

In addition, you don't have to sell the assets to withdraw them from the account but, if you transfer them in-kind into another investment account, you will need to have some cash on hand to pay the tax when it comes time to file your return.

And if your withdrawal exceeds the minimum required amount, you will be subject to withholding tax.

You are required to convert your RRSP by the end of the year that you turn 71, but many investors make the switch well ahead of the deadline.

With a RRIF, Canada Revenue Agency sets a minimum amount that you will be required to withdraw based on your age. As you get older, the percentage you are required to take out increases.

"If you are happy deferring as much of your income as possible, then you are wise to take the minimum. If you need to supplement your pension with a little bit more, you can certainly take out a little bit more," Brisebois said.

Bernie Clermont, manager of financial planning at RBC Financial Planning, it is important to look at the conversion and your RRIF in the context of your entire financial plan.

"It is a good time to take a look at the big picture," he said.

Clermont suggested that, for most people, the change will mean taking a little less risk but he noted some investors make the mistake of leaving no room for growth in their portfolio.

"They think at age 71 or 72 they have to convert everything to cash or to very secure investments like GICs or bonds. In fact, if you have a married couple together at age 71, the life expectancy of the longest living spouse is 87 or 88 so, in most cases, this isn't a five-year plan, this is potentially a 20-year plan," he said.

Clermont said it is important for investors to take a careful look at their budget when deciding how much and how soon to spend their retirement savings.

"It is a good idea in this phase of life to sit back and say: What do we really need from this point on until whatever the future holds?," he said.

"We usually plan to age 90, so it takes care of the life expectancy for most people, but I think it is a really good idea to set a budget."