Time to delay mandatory RRIF withdrawals? Or do retirees have other options to offset longevity risk?
As Canadians live longer and increasingly rely on personal savings to sustain them in old age, there’s more urgency than ever for innovation in retirement solutions. A new research paper suggests the key lies in a rethink of RRIF policy – but one seasoned advisor thinks otherwise.
In “Live Long and Prosper? Mandatory RRIF Drawdowns Raise the Risk of Outliving Tax-Deferred Saving,” policy experts at the CD Howe Institute suggested that given people’s longer lifespans and deteriorating investment returns, it’s time to reconsider the current rules around RRIF withdrawals.
“[T]he ages at which saving must stop and withdrawals begin should rise, and the minimum withdrawals should shrink again. Otherwise, too many seniors will live long enough to see the purchasing power of their tax-deferred savings dwindle to insignificance,” the research said.
As it stands, Canadians are required to convert their RRSPs to RRIFs at age 71, and then start taking out a certain percentage from their RRIFs based on their age. The mandatory withdrawals start at a rate of 5.4% at age 72, and max out at 20% at age 95.
The authors of the CD Howe research recommend changing that schedule so that mandatory withdrawals start later. But according to one advisor, it’s a solution in search of a problem.
“The fact that they have to [make RRIF withdrawals] isn’t generally a concern [for my clients]. Most of them have known that they’re going to receive that income, and it’s built into their financial plan,” says Rob McClelland, senior financial planning advisor at The McClelland Financial Group with Assante Capital Management Ltd. “For most clients, I’d say it represents around 30% of their income in retirement.”
At McClelland’s practice, which focuses on higher-net-worth Canadians at or near retirement, clients tend to be more concerned around what they don’t know about the RRSP-to-RRIF transition. Mandatory RRIF withdrawals mostly don’t cause much angst, except possibly for retirees who already receive a large income from their pensions.
“I can think of two teachers who both have healthy pensions that are indexed to inflation. They’ve been retired 20 years, and they’ve never had to spend more than their pension income all that time,” he says. “For those clients, taking additional money out of their RRIF account would impact their OAS benefits, so they’d prefer to delay it.”
The CD Howe report also suggests lowering the required minimum RRIF withdrawals so as to make people’s RRIFs last longer. But the current mandatory RRIF withdrawals, McClelland argues, benefit retirees by helping to reduce the tax they’d have to pay on their remaining RRIF balance when they die.
“In Ontario, you’d be taxed at 53.4% on that lump-sum withdrawal from your RRIF upon death. But if you have $1,000,000 in your RRIF, and you have to take out $50,000 a year, most clients would only be taxed between 20% and 30% on that extra income,” McClelland says.
Lowering the minimum requirement for RRIF withdrawals, McClelland adds, would reduce the amount of tax the government can collect from wealthy individuals year after year. From there, the likely upshot would be a federal effort to collect taxes from high-net-worth individuals in other ways.
Retirees who don’t have as much wealth to speak of aren’t likely to rail against the mandatory RRIF withdrawal minimums, he adds, since they’ll likely need that income anyway to pay for their ongoing expenses.
“Let’s say someone has $500,000 in their RRIF. They’ll have to take out $25,000, which they’ll probably need to live their life,” he says. “Someone with a $250,000 RRIF would need to take out $12,500, and they may even take out $15,000. … So the current structure is actually wall laid out.”
Under the current RRIF rules, Canadians have to take out 20% a year upon hitting age 90. While he has no issue with delaying that schedule of withdrawals to 92 or 93, McClelland notes that very few people actually live past age 90 and on to 95.
“Once people are in their 70s, their expenses start to slow down a little bit each year until they may need to get into a long-term care facility,” he adds. “So that can help preserve their nest egg a little bit.”
One strategy McClelland and his team use to help clients deal with longevity risk is to delay claiming OAS and CPP to age 70, which will increase the payments they’re entitled to. Because it’s guaranteed by the government and indexed to inflation, he adds, there’s not as much downside in delaying the payments compared to RRIF withdrawals.
“If you took the OAS and CPP payments earlier, you’d be relying more on your portfolio to do well for the rest of your retirement,” McClelland says. “We’ve found that when we delay CPP and OAS for our clients, the success rates of their retirement income plans go up.”
Clients with a healthy TFSA have another buffer against longevity risk. If they had a big lump-sum expense, they could withdraw what they need from the TFSA without having to pay any tax on it.
“I think it's great that someone's looking at the RRIF rules. But I think to delay the minimum RRIF withdrawals would be a mistake,” McClelland says. “There are so many reasons to keep that money flowing in, as opposed to delaying it.”
