It’s not easy for retirees to convert their RRSP to a RRIF. Rather suddenly, someone who has spent his or her life gathering assets becomes a “decumulator,” and it’s a difficult transition. It’s made harder by critics in the financial industry and the media who continue to insist that mandatory RRIF withdrawals are putting seniors at risk of running out of money.
A little background is in order. Since William Bengen’s pioneering research in the 1990s, financial planners typically consider the sustainable withdrawal rate from a balanced retirementTDAM portfolio to be about 4%. The mandated RRIF withdrawal rates, however, begin at 7.48% in the year you turn 72, with that number rising to 9.27% by age 82 and topping out at 20% at age 94.
Noting that apparent discrepancy, one financial planner has declared that RRIF withdrawals result in “people digging into the capital at a much higher rate than would be prudent.” A popular retirement author goes further, arguing that “this means the average person in this age group will see most of their savings depleted before they die.”
This is nonsense. But chances are your clients are reading this stuff, and maybe even bringing it up at your periodic reviews, so it’s helpful to have your response prepared. Here are three arguments that will silence the critics.
The starting point is different. Bengen’s 4% figure assumed a retirement portfolio should be expected to last a minimum of 30 years, with drawdowns beginning between the ages of 60 and 65. But mandatory RRIF withdrawals don’t begin until age 72, which means the portfolio benefits from an extra seven to 12 years of compounding before the first withdrawal. Assuming a return of 5.8%, a portfolio will double in 12 years.
And, of course, delaying withdrawals until 72 also means the portfolio needs to last a lot less than 30 years: Canadians who are 72 today have a life expectancy of 13 to 15 years.
The withdrawal rates are calculated differently. The RRIF withdrawal rate is based on the value of the portfolio on January 1 of the year in question, so it’s a moving target. However, Bengen’s 4% figure is anchored on the original value of the portfolio on the investor’s retirement date, before the drawdowns begin. It’s also adjusted for inflation every year.
This is hugely important, because if markets perform poorly in the early years of retirement, the dollar amount of the forced RRIF withdrawal goes down. But in Bengen’s model, the withdrawal amount goes up every year, even if the value of the portfolio plummets. RRIF investors can therefore take out less money when markets are down and more when they’re up: those following the 4% rule don’t have that luxury.
You don’t have to spend the RRIF withdrawals. Bengen’s withdrawal rate estimates what percentage of the portfolio retirees can afford to spend each year. But there’s no law requiring seniors to spend the money that comes out of their RRIF. Indeed, they don’t even have to sell the investments: they can simply move them in-kind to a non-registered account.
The RRIF regulations are there so the government can finally collect some of the tax that investors have been deferring for decades—and that’s entirely reasonable. RRSPs were created to encourage Canadians to save by offering an immediate tax refund and the ability to defer taxes on their investment growth until retirement, when rates are usually much lower. They were never intended to be lifelong tax-avoidance schemes.
It’s also worth reminding your clients that if they’re paying high taxes on RRIF withdrawals in their 70s and 80s, it’s because they’re alive and earning a lot of income. Most people would consider that the best possible retirement outcome.
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