Time to Get Used to Higher Rates
This article explains how the Canadian banking system would deal with the banking turmoil that is currently affecting European and American banks. It’s timing is perfect; since I had two such discussions with clients just this week.
While I fully support clients who want to make sure that as much of their Canadian banking deposits are protected as possible, I don’t believe that CDIC insurance should be the primary driver in an investment strategy.
With respect to retirement assets, I would like to add two other issues that should be considered:
- The average Canadian has $144,600 in retirement assets according to a recent survey by BMO. Traditionally, people optimize the Canadian Deposit Insurance Corporation (CDIC) insurance by dividing accounts among various banks. This means that the average Canadian would have two or more RRIF or LIF accounts; each required to payout the mandatory minimum RRIF or LIF payment. This results in many smaller withdrawals and makes managing your retirement income more complex that it needs to be.
- It is actually unlawful for a RRIF or LIF to have a negative balance. Since RRIFs and LIFs must payout the mandatory minimum withdrawal each year and cannot have a negative cash balance, you must also hold a cash balance or other marketable securities in the account that can be liquidated to provide cash for the payout. This means that even less of the account would be covered by deposit insurance.
So, when considering deposit insurance, speak to your financial advisor or portfolio manager and consider doing so in accounts that are not required to payout annually.
