raise money from places

When times are tough, people raise money from places they shouldn't, such as dipping into their RRSPs.

No one likes to admit they're taking money out of their RRSP. Stockbrokers and financial planners deny knowing anyone who is pulling money out. It would make them look bad for mismanaging their clients' money.

But as their portfolios shrink, many people are doing what they said they would never do: Pull cash out of their RRSPs.

"I've done it for the first time," says a woman we'll call Jane, who doesn't want to reveal her real name. She's in her mid-60s and has been living off her investments since her husband died about 15 years ago. Her plan was to leave her RRSP alone until the rules forced her to convert it to a RRIF in the year she turned 71.

"I never thought I would have to touch my RRSP. I was saving that until I had to use it. But my investments -- inside and outside the RRSP -- are down so much I have to do it," Jane says.

Sitting in a restaurant discussing her finances, she refuses to say how much she has lost. But she does admit being shocked by what the market downturn has done to her way of life. She is thinking of putting her house on the market and downsizing.

"I've had to change my vacation plans. And I'm embarrassed that I have to admit to pulling out money from my RRSP."

The Toronto stock market index was off by 33% in 2008. A lot of small investors keep their money in mutual funds, and the value of mutual funds dropped by 20.8% last year, according to the Investment Funds Institute (IFIC).

Approximately six out of every 10 families in Canada held savings in RRSPs and the median value of the plans was $25,000.

Though Jane may be embarrassed that she is forced to take money out of her nest egg, she is not alone. Approximately 40% of Canadians in higher tax brackets with an RRSP made at least one withdrawal over a seven-year period, according to a 2004 Stats-Can study. The average withdrawal was $1,600.

At the peak of the last recession, older taxpayers dipped in even more.

"That older individuals more commonly withdraw larger amounts may not seem surprising, given they would have accumulated more in their RRSP. What is striking for those 50 to 59 is the amounts being withdrawn. In 2001, close to one-third of those withdrawing funds removed at least $6,000," cites an earlier StatsCan report.

Jane has much more than $25,000 in her RRSP. Not only has it shrunk considerably thanks to the downward spiral in the markets, but falling interest rates have compounded the problem by lowering her returns.

"She was probably used to a return of 6% to 7%. Now that is down to 2% to 3%," says a Toronto broker whose firm does not allow him to be quoted.

Taking money out of an RRSP is heresy to advisors. "I realize a lot of people don't have a choice. This market has dealt them a bad hand," says Adrian Mastracci of HCM Wealth Management in Vancouver. "But taking money out early has long-term implications and reduces the money available later in life."

He suggests finding places to cut expenses to avoid withdrawing RRSP money. He even suggests borrowing short-term on a line of credit to tide things over until the market comes back.

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