Our Views

Manage RRIF rules carefully – or you could run out of money

Planning for retirement can be challenging. Attempting to balance your need for current income against the risk of outliving your savings is hard enough and, as it turns out, the federal government is not making things any easier.

Back in 1992, the federal government was running a significant deficit and needed cash. To help rectify this problem, the Income Tax Act mandated that at age 71, Canadians must convert their registered retirement savings accounts into Registered Retirement Income Funds (RRIFs). Seniors had to begin drawing a minimum amount out of their RRIF every year, which was taxed upon receipt. This measure was implemented to help the federal government manage their cash levels and remove the deficit.

Fast forward to today and the RRIF rules have not changed, but the landscape certainly has. In a recent report by the CD Howe Institute, it was noted that today the average 71-year-old male can expect to live almost 30% longer than in 1992, whereas women can expect to live 15% longer.

Not only are we expected to live longer, but the investment yield environment is vastly different today than it was in 1992 when the average yield on government of Canada bonds stood between 7.2% and 8.5%. In 2014, this range has fallen drastically to between 1.1% and 3.1%.

Longer life expectancy is a good thing, but it means we must plan to spread our retirement savings over a longer time horizon.  If the minimum withdrawal schedule implemented in 1992 were to be updated to reflect today’s longer lifespans and lower interest rates, RRIF withdrawals would start at 2.68% at age 71 and rise to 3.76% at age 85.  Instead, the mandatory minimum withdrawal begins at 7.38% at age 71 and rises to 10.33% at age 85.  The odds of living long enough to see the real value of your RRIF depleted are much higher in today’s environment.

This can be problematic for seniors who use the minimum withdrawal rate as their annual spending budget. Too often people make the mistake of assuming that this rate is sustainable and will provide them with a lifetime of income. As a point of reference, in our retirement planning assumptions, we generally use a 6-7% annual withdrawal rate assuming retirement at age 65, otherwise one may risk depleting their capital. (Keep in mind that if one retires earlier, 4-5% may be a better rule of thumb to use as the maximum annual withdrawal amount.)

How can you avoid the potential downfalls of inflated RRIF minimum withdrawal rates?

  1. Seek professional help.
  2. Do not assume that RRSPs alone will adequately fund retirement.  Build savings elsewhere – such as in Tax-Free Savings Accounts (TFSA) and non-registered accounts.
  3. Plan for added tax payments on rising RRIF income.

Seniors, with the help of wealth management professionals, are advised to create their own retirement plan specific to their personal financial situation. The majority will likely use a portion of their minimum withdrawal from their RRIF to fund their lifestyle and transfer the remainder into a non-registered investment account to maintain savings for future spending.

There are roughly 200,000 Canadians who are over the age of 90. In 25 years that number is expected to triple. Canadians who are beginning to think about retirement should seek professional help so they can effectively manage their savings to provide security and peace of mind throughout their retirement years.