MY "STOCKS-ONLY" RRSP/RRIF Connolly Report © April 1997 page 382
For a person in their fifties or sixties, an RRSP has to be safe and simple. In addition, it must easily lead to a RRIF (I eschew annuities) which will provide a consistent yet growing income.
SECURITY: The pot has to contain investments with a high degree of credit safety because, eventually, it must provide dependable retirement income. Once you get to the RRIF stage, security is paramount: you can't add money to the pot and it's devilishly hard to recoup losses.
SIMPLE: Ease of management is also important. Once the initial investments are made, you should be able to become a full-time hammock passenger...to be as passive as Warren Buffett. There is certainly no need for a broker. In fact, I believe a broker would be a disadvantage. They would want you to trade constantly, and they most likely would suggest inappropriate investments.
COMMON STOCKS: My self-directed RRSP and later my RRIF will be full of common stocks of quality companies in stable industries which have paid dividends for decades. Why? Simple: no other investment vehicle can provide a growing income, and equities traditionally fare better. The same common stocks can easily be consigned to my RRIF at age 69. Unlike fixed-income instruments, stocks are perpetual: there's no maturity date to create liquidity problems. If your investment objectives, tolerance for risk and time horizons are different, you can put whatever investments you want into your plan. The standard recommendation for persons nearing retirement is to pursue fixed income investing. Because of inflation and increased longevity, I believe such counsel is ill-advised. However, you alone must decide what you want to do with your retirement resources.
Ideally, one should go into retirement, and certainly into a RRIF at age 69, with quality common stocks purchased at value prices years before. The longer you own a common stock with an increasing dividend, the safer it becomes and the higher the yield on your original investment. I am aiming for a 7.38% yield by RRIF time so that with continued dividend growth I can stay ahead of the minimum RRIF pay-out and never have to consume capital. Growing capital, however, will be available for emergencies. If the common stocks are generating a good yield by the time the income is needed, I will not be forced to buy bonds or riskier investments for their higher initial income.
Inside a RRSP/RRIF, one can't benefit from the dividend tax credit. This is no reason to avoid the financial assets which usually perform best, however. Currently it's easy to find quality common stocks which yield as much as fixed income paper. Ask yourself if you'd rather pay tax on growing dividends and capital or pay tax on stagnant income and have your principal consumed by inflation.
A self-directed RRSP/RRIF strategy now has another advantage: if it's with a discount broker, there is no yearly fee. And, because I never buy mutual funds, I mentally add 2% to my returns: I save at least $1,000 ($50,000 x .02) a year without the absconding management expense. In my view, this easily makes up for the loss of the dividend tax credit.
Currently (April 1997) my own little RRSP contains $45,000 in cash and 300 shares of Quebec Telephone purchased in February of 1995 at $18. My next move, as discussed on the opposite page, is TransAlta. Then, slowly, as market conditions change and because I plan to hold these shares the rest of my life, I intend to carefully select two or three other choice common stocks. Because my pot contains only $50,000, I do not plan any foreign securities or other diversification. I don't need any. I've worked on these ideas for almost 20 years, tested them through October of 1987, and they work! (See also TCR Dec 95 p352 and TCR Equities in a RRIF Dec 93 p303)
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go to up date on this topic - February 2001 - RRSP with 100% common stock