Saturday, November 21, 2015

Withdrawing money in-kind from a RIF

I've settled on my plan for withdrawing money from my RIF in retirement. Every January I'm going to withdraw the minimum amount as an in-kind transfer to my tax-free savings account (TFSA). Each January the government determines the minimum amount one must withdraw. You have no choice. This money must be withdrawn but on the plus side there is no withholding tax on the minimum withdrawal amount. But it is income and you will pay tax on this in the year following the withdrawal.

To calculate the minimum withdrawal, the government takes the total value of one's RIF at the end of the year and multiplies this end-of-December amount by the percentage withdrawal demanded by the age one has attained as of January 1st. If your spouse is younger than you, you are allowed to use you spouse's age rather than your own for determining the withdrawal rate. Whatever you decide, think carefully, the decision is permanent.

The advantage of using a younger spouse's age when calculating the withdrawal is that the amount withdrawn is less when using the younger spouses age. At age 65 one must withdraw four percent but at 66 one must withdraw 4.17 percent.  I let my wife's age determine my withdrawal rate but now that I am making in-kind withdrawals, I'm not sure that using the younger spouse's age is the best approach. I'll leave that for you to decide.

When one reaches the age of 70, one must remove fully five percent of one's total RIF. This is a lot and it only gets worse with each passing year. Investing For Me has posted a table showing percentage withdrawals increasing with each passing year.

Why do I see five percent as a lot to withdraw? Simple. The safe withdrawal rate is usually said to be no more than four percent. Withdrawing more than four percent annually runs the risk of depleting your RIF. Of course, this is the government's goal. They want you to deplete your RIF in retirement. In 2015 the federal Conservatives backed off a little on this forced depletion but it is still occurring but at a reduced rate. Whether these new, reduced rates will be retained by the new Liberal government is yet to be determined.

My solution to this forced depletion of my registered retirement portfolio is to make in-kind transfers from my RIF to my TFSA. I will continue these transfers as long as there is ample headroom in my TFSA. Eventually, I'll run out of TFSA headroom. At that point I'll open an unregistered self-directed account and move dividend paying Canadian stock into that account.

The in-kind transfers satisfy the government demand for a minimum withdrawal but keeps the money still invested. There is no withholding tax when the transfer is made as long as only the minimum withdrawal is transferred. Be aware that this transfer of stock, bonds or mutual funds is income and tax must be paid when the year's income tax is due. Depending upon when you make the withdrawal and when you pay your taxes, you may have up to about fifteen months to accumulate dividends to put towards paying the tax.

Say you made an in-kind withdrawal of $10,000 or 555 shares of Dream Office REIT from your self-directed RIF. By the time the tax was due you would have accumulated $1554 in dividends plus a small amount of interest. If, like many retirees, you pay a tax rate of about 15 percent, the dividends will cover the income tax to be paid. Talk about boot-strapping.

Because the dividends accumulated in a TFSA, there is no tax owing and the withdrawal will give you much needed increased headroom in the year following the withdrawal.

Unfortunately, this transferring of investments has not helped us pay our immediate bills. For this we return to our RIF and remove exactly one year's worth of accumulated dividends. With any luck this will be at least four percent of your RIF. There is a withholding tax on this withdrawal. If the withdrawal is $15,000 or more, expect to see the government withhold 30 percent. It is a lot but with a little luck you will get a big chunk of it back as a tax refund the following year.

Look at what you have achieved with this approach:

  1. This approach satisfies the RIF minimal withdrawal rule without removing the investment from your overall portfolio.
  2. This removes an amount to cover day to day expenses but does so in a less restrictive manner than simply removing the minimum amount demanded from your RIF and using it to live.
  3. As you transfer investments from your RIF to your TFSA, a larger and larger share of the dividends used to pay day to day expenses will be tax free. A welcome bonus.
  4. Each year your RIF will shrink by an amount equal to your minimal withdrawal plus your cash withdrawal. This is good. As your minimum withdrawal percentage increases annually, the amount on which the withdrawal is calculated shrinks. If it doesn't shrink, it is because your investments are doing awfully well. Don't complain.
  5. The dividends removed to live will increase the headroom in your TFSA in the following year. You can put this increased headroom to good use when transferring dividend paying stocks over to your TFSA from your RIF.
  6. When you run out of headroom in your TFSA, as you most certainly will, open an unregistered self-directed account. The dividends will be taxable but as long as they are appropriate dividends from a Canadian corporation, this income will be taxed at a rate much lower than your usual rate.

There is one glitch in the above. If some of your pension savings is in a LIF rather than a RIF, there is not only a minimum withdrawal that must be made, there is a withdrawal ceiling, a maximum withdrawal rate. For instance, in Ontario at 70 years-of-age one can only withdraw 3.22 percent over the minimum withdrawal demanded. This ceiling only exists for LIFs. It does not apply to RIFs.

If you do not have all your retirement investments in a LIF, you should be alright. And there is no reason to to be caught in such a predicament. When you create your LIF from your Locked-in RRSP, you are allowed a one time only unlocking of up to 50 percent of your locked-in plan. The result is half your retirement money in your SDLIF (self-directed LIF) and half in your SDRIF.

I found financial advisers did not want to discuss the in-kind transfer of funds from RIFs and LIFs to TFSAs and unregistered accounts.I even found banks that did not want to admit that such in-kind transfers were even allowed. I have found TD Waterhouse to be quite knowledgeable. Originally, I had my retirement investments spread evenly between two banks. The TD was a delight and the other was a pain. I cancelled my accounts at the one bank and the TD covered the transfer costs of about $300 for two accounts.

I'm sure some of you are wondering how it is possible to earn more than four percent in this present low-interest rate environment. Some years ago a reporter at the local paper, The London Free Press, warned that retirees may find themselves eating pet food because of the low interest being paid on savings. So far, since I retired in 2009, I have found this fear to be groundless. Some of my investments and the associated yields:

  • Dream Office REIT: 12.31 percent
  • Norbord Inc. : 1.45 percent (but it is up 14.24 percent since I bought it)
  • Royal Bank of Canada: 4.15 percent
  • Sun Life Financial Inc.: 3.50 percent (and it is up 110.31 percent since purchase)
  • CIBC Monthly Income fund: 6.05 percent (sounds good but I don't advise buying)

The above is just a sample of the mix of stuff into which I have shoved my retirement funds. I find diversity gives me confidence and confidence allows me to sleep at night. I'm not greedy. I just want to pay my bills. So far, six years into my retirement, I see no problem keeping my budget balanced leaving the pet food for the pets.

I wondered how much the reporter who wrote the piece about being unable to save for retirement has done in the intervening five years. I do know this reporter makes enough to save at least $5000 a year toward retirement. If only $5000 had been set aside five years ago and another $5000 saved annually, today there could easily be $45,750 saved.

Don't believe me? Check the info below. Click on the image to enlarge. I put half the reporter's savings into the TD Monthly Income fund and the other half into the TD U.S. Index e-Fund. These are very conservative investments. I have both of these in my retirement portfolio. And adviser at the TD warned me to never go without expose to the American market. He was right. The reporter not so right.

Thursday, November 19, 2015

Buying early during a pullback not always bad

My recent purchase of Dream Office REIT has now descended into the red. Will the stock price continue to deflate? I would not be surprised. CIBC is rating the stock under perform and has set a target of $18.

There is a lot of worry concerning the REIT's Calgary and Edmonton rental space which makes up a a nice chunk of the REIT's holdings. I'm not sure of the exact percentage but I understand that 25 precent or more is held in the Western province whose economy has been crippled by the falling price of oil.

Desjardins and TD Securities are still rating D.UN a buy and at least one analyst has set a target price of $27. But even in that case the analyst's target has seen some large reductions in recent months. Should I have jumped ship and sold. Clearly, yes. I'd have more options today if I'd have followed that course. That said I need income and even with a possible cut in the dividend I will enjoy a nice, steady income flow form Dream Office.

This not the first time that I have bought a stock in mid-descent. A lot of my bank stock was not bought at the absolute bottom of the2008-2009 crash. I invested in XRE well before it bottomed during that same crash. I bought both XIC and XMD in mid fall. The thing is the market goes up and down. If you haven't paid way too much, if you bought at a discount but a smaller one than the eventual fire sale price, you will do just fine.

And you will enjoy a nice income while waiting for the recovery.

One last note: Earlier this year I started investing the monthly D.UN dividend in the TD U.S. Index Fund-e (TDB902). Fully 7.5 percent of  our one TFSA is now invested in TDB902. It has enjoyed almost a five percent gain since we started acquiring the units.

Monday, November 16, 2015

Did I catch a falling knife?

The green line represents the wild ride my TFSA has taken me on this year.

My investments have take quite the battering lately. Today my investment in Dream Office REIT took a dramatic tumble falling more than a dollar at one point. I could not believe the retreat the stock price was making. It was quite the surprise. D.UN is more than just office space in Calgary and Toronto but you'd never know it from the market reaction today.

D.UN is a big, core holding in my TFSA. Its fall has a huge negative effect on my entire tax free portfolio.Yet, I am doing better than a simple index investment in the TSX and so not all is dire. With luck, I may even hit my goal of a seven percent gain.

I had to ask myself if I was wrong to have faith that the market was undervaluing this REIT. My answer was yes; the units are undervalued. (But then what do I know. These units just keeping tanking.) I took action and bought another 100 shares and this time I got them for just pennies above $18.

Thanks to the tax free nature of this portfolio, the withdrawals that I must make beginning next year will pay for the better part of my wife and my shortfall in income for two months of 2016. I understand the double digit dividend is safe until at least 2017. I'm going to spend my income, keep my fingers crossed and hope that falling knife doesn't get those exposed, optimistic fingers.

Thursday, October 29, 2015

I switched from TD Monthly Income to TD Monthly Income

So far, the TD Monthly Income has been a better option than annuities for me.
Although some of the sparkle has dimmed when it comes the the TD Monthly Income fund (TDB622), it is still a fair place for a retiree to park a chunk of portfolio money. (See the above screen grab.) Combine TDB622 with a lesser amount of the TD U.S. Index Fund-e (TDB902) and one has the beginnings of a fine portfolio with very good allocation and no great amount of investment knowledge necessary.

This approach has gotten even better. TD is now offering D-series funds to investors with TD self-directed accounts. These funds have lower than usual management fees because the trailing commissions are restricted to .25%. Do-it-yourself investors shouldn't be paying big trailer fees for advice they neither need nor receive. One could argue that even at just a quarter of a percent, this charge is still a little steep. These funds are only available to investors with TD self-directed accounts.

Yesterday I switched from I-series TDB622 to D-series TDB3085. One call to TD Waterhouse is all it took. There was no charge. All quite simple. I understand I will now spend about 30 percent less in management fees. The old TDB622 was not all that expensive with a MER of about 1.48 percent but the new D-series TDB3085 shaves a little off that. I may pay about one percent when all is said and done.

I have owned TDB622 for many years and it has been a good, solid performer. There are funds that have done better but not many are as dependable and in retirement dependable is important. In the recent past I have been taking my own advice and adding some TDB902 to the mix. So far this is proving very satisfying and very profitable as the U.S. market is on a roll.

Wednesday, October 28, 2015

I buy and hold but I don't always hold the same stuff

Awhile back I bought some Chartwell Retirement Residences (CSH.UN) It paid a nice dividend, it is still paying about 4.36% today, and it climbed in value nicely. Today I sold my Chartwell holdings for a tidy profit of well into the four figures.

But I cannot get buy without income. This is a given. I cannot sit on the sidelines with too much cash for too long. I'm retired and forgoing too much income is not an option. I reinvested my funds in H&R REIT (HR.UN). This well respected REIT is yielding about 6.34% at the moment.

And I reinvested a touch more than I originally had invested in Chartwell. My income has taken a small bump into the black. The icing on the cake is that I believe H&R has more upside potential than Chartwell. Over the coming year I hope to make more holding H&R than Chartwell. I did well with Chartwell and I believe it was time to head for the exit.

Now, I may add a hundred shares to my D.UN holdings. Dream Office has not preformed as I had hoped. It is well off its highs and no one sees it hitting the targets that had been once been bandied about for this holding. A new purchase will bring my average price paid down considerably and make it possible to sell for a profit in the near future. Most claim the dividend is safe but whenever a yield climbs above ten percent, I get concerned. Still I will enjoy the dividend while I can and hope to make a profit in the end.

My bid for D.UN has not been attracted any sellers. The going price has climbed a couple of cents above my bid. Oh well, D.UN rarely makes a clean climb. I'll wait and hope to make my purchase on a small dip.

Tuesday, October 27, 2015

Buying more on any big dips

I'm watching for another dip in the Dream Office REIT share price. I may pick up another 100 shares. This would mean a monthly payment of about $112 as long as the dividend isn't cut. I'm betting it is safe in the short term.

D.UN is a long term hold for me. Even with a dividend cut, this REIT rewards me for my patience. I need cash flow and this holding answers some of that pressing need. Retirees cannot live on promised capital gains. Dividends are wonderful.

Saturday, October 24, 2015

Corrections are your friend

Despite the fear mongering in the media, corrections are normal and beneficial.

Recently the market had a correction. In fact, it still has not fully recovered. The media, as usual, reported this correction as a horror story. A number of reports said retirees who were heavily invested in the market lost millions. It was a disaster on a massive scale, according to these media fear mongers.

All not true, unless one was forced to liquidate at exactly the moment when the correction maxed out.

I was lucky. I had some cash on hand. Cash during a crash is nice. I bought some battered stocks and sat back and waited. I was confident I had bought some good stocks at fire sale prices. As you can see from the green line in the graph, my hunches were good and so far I am coming out on top.

I believe one should always keep a little cash on hand to take advantages of brief corrections.

Of course, not all corrections are short. Sometimes the market grows too fast, it becomes frothy, unstable, and tumbles from its greed-driven heights. If you bought a lot of stock during the feeding frenzy period, your pain may be a long time healing. But, even in this case the correction is your friend. It represents a return to sanity. A return to fair, even slightly conservative pricing of equities. Search out the good companies, the good stocks, and buy for the long term at these times. Over time the almost certain steady growth in value of your portfolio will reward you.

I have been in and out of the market all my life and in retrospect I would have done better if I had stayed the course and stayed fully invested at all times. I learned too late that corrections are opportunities not to be missed.