The 2015 federal budget’s reduction of the mandatory minimum withdrawals from RRIFs and similar tax-deferred accounts will reduce the risk that many Canadians will outlive their savings during retirement. Yet with yields on safe investments so low, and longevity continuing to increase, the risk is still material, according to a C.D. Howe Institute report.
The report’s authors, William B.P. Robson and Alexandre Laurin, says the government’s recent change to RRIF rules is a step in the right direction, but doesn’t go far enough.
“The old drawdown rules established in 1992 had become badly outdated,” states Robson. “The new rules are better. The challenge going forward, however, is to keep these rules better aligned with returns and longevity. If more regular adjustments are impractical, eliminating minimum withdrawals entirely may be the way to help retirees enjoy the lifelong security they are striving to achieve.”
According to the authors, the recent changes requiring smaller minimums still present a risk to retirees. If the 2015 Budget’s assumed real investment returns of 3% prove realistic, the projections suggest relatively constant minimum RRIF drawdowns up to age 94, and a lower risk of living to see a badly depleted RRIF account balance. However, real returns on safe investments are currently negative. Re-running the projections with zero real returns suggests that seniors, especially women, still face a material risk of outliving their tax-deferred savings.
Laurin concludes, “If real yields on the types of securities a prudent retiree should hold do not rebound considerably, and if life expectancy continues to rise, the risk of outliving tax-deferred savings will continue to be material. The 2015 changes should therefore be a down payment on further liberalization.”