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The banks are getting Ottawa's help to weather the financial crisis of 2008, so why not seniors?

The federal government has been asked to relax rules that force seniors to annually withdraw a set amount from their registered retirement income funds, or RRIFs. The concern is that in selling investments to pay for withdrawals made now or in the near future, seniors will lock in losses that could otherwise ease substantially over a couple of years.

Seniors must convert their registered retirement savings plans into RRIFs at age 71, which puts them in line for required annual RRIF withdrawals. A report in yesterday's Globe said that delaying this mandatory conversion by two years to age 73 would cost the government up to $135-million annually. True, Ottawa needs to be especially careful with its money with the global economy in its worst shape in ages. But protecting seniors as a government is good policy, not to mention good politics.

A two-year delay on converting RRSPs into RRIFs was proposed by some provincial premiers before a meeting this week with Prime Minister Stephen Harper. CARP, a seniors group, has taken a different approach by asking for a two-year moratorium on all mandatory RRIF withdrawals.

Everyone's worried about stock market declines and seniors seem most vulnerable because so many of them rely on their investments for income. But seniors do have some manoeuvring room in managing their RRIFs. Relaxing the withdrawal requirements would be helpful, but there are other steps that can be taken to work around the stock market decline.

The minimum amount that must be withdrawn from a RRIF is set according to a fixed percentage of an individual's account holdings at the first of the year. The percentage ranges from 7.38 per cent to 20 per cent at age 94 and older.

The RRIF withdrawal requirements have been criticized in the past for a couple of reasons, one being that it's nearly impossible to grow a portfolio at anything close to 7.38 per cent using the conservative interest-paying investments that many seniors prefer. Also, with people increasingly living into their 90s, they need the flexibility to conserve their savings and take out less each year if they choose.

That said, withdrawing money from a RRIF doesn't automatically mean you've depleted your financial resources. "There's always the sense that you have to spend what you withdraw from a RRIF," said David Stewart of Stewart & Kett Financial Advisors. "But it doesn't have to be that way. People can always resave it."

It happens that on Jan. 1, the federal government's new tax-free savings account, or TFSA, will make its debut. TFSAs are a place where people aged 18 and up can invest up to $5,000 a year and earn tax-exempt gains. If you make a RRIF withdrawal that exceeds your actual needs, consider putting the surplus in a TFSA. "The tax-free accounts are very useful for that purpose," Mr. Stewart said.

The concern right now about RRIF withdrawals is that people will hurt their retirement savings by selling hard-hit stocks and equity funds that might otherwise recover at least some of their recent losses. But there are ways around this.

"Theoretically, people should have some cash and bonds in a RRIF," Mr. Stewart said. "If you're reasonably balanced, it's not just a matter of selling stocks."

At his firm, a client who relies on his or her RRIF for retirement income would have a portfolio that looks something like 50 per cent stocks, and 50 per cent bonds or guaranteed investment certificates plus cash.

Under normal circumstances, an annual RRIF withdrawal would include a bit of each type of holding so as to keep the 50-50 asset breakdown intact. But with stocks and equity funds down sharply this year, some RRIFs have suddenly skewed more toward bonds.

In this light, Mr. Stewart said, it could make sense to draw a RRIF withdrawal exclusively from bonds or GICs and cash. You'll rebalance your portfolio that way, and protect your hard-hit stock market investments.

Patricia Lovett-Reid, senior vice-president at TD Waterhouse, said seniors would be in a position to weather the market downturn in the RRIFs if they followed a simple piece of advice: "People need to have three to five years' worth of living expenses in cash and cash equivalents within a plan."

Cash typically means money market funds, Treasury bills and other safe, liquid investments, but Ms. Lovett-Reid said high-quality bond funds and GICs also qualify. The common theme is that these investments can be relied upon to cover RRIF withdrawals if it's not the right time to sell your stocks.

Yesterday, Finance Minister Jim Flaherty announced the latest instalment of the federal government's efforts to help banks survive the global financial crisis. Helping seniors out, too, is the right thing to do, but let's not forget something. By prudently managing their RRIFs, seniors can help themselves.

Ripped RRIFs

Registered retirement income funds with investments in the stock market may be well down in value. Nevertheless, RRIF holders are required to withdraw a set amount every year. Here's a hypothetical example of how you could be negatively affected by having to withdraw money from a depleted RRIF account.

Your age 75
Your RRIF portfolio 50%: XYZ Canadian Equity Fund
50%: XYZ Canadian Bond Fund
Your RRIF account balance on Jan.1, 2008 $200,000
(your 2008 RRIF withdrawal is based on this)
Your minimum required RRIF withdrawal $15,700.00
for 2008 (based on a rate of 7.85%)
Now, assume you made your required minimum 2008 RRIF withdrawal on Nov .12, after the big stock market plunge.
Your RRIF account balance at withdrawal time $177,000
Your RRIF balance after the withdrawal $161,300
Now, assume your RRIF portfolio rises 10% in the next 12 months
Your 2009 RRIF balance one year from now $177,430
(before withdrawals)
Your 2009 RRIF balance if you were allowed $194,700
to skip that $15,700 withdrawal in 2008
Net benefit of skipping the 2008 withdrawal $1,570
(10% gain on the $15,700 you didn't withdraw)


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