The question is whether retirees can stretch their RRIF income beyond age 94 with a better decumulation strategy.Sean Kilpatrick/The Canadian Press
For many years, retirees have claimed that the minimum withdrawal rates from RRIFs are too high. At age 72, the first year that a withdrawal from an RRIF is mandatory, you must withdraw 5.40 per cent of your assets. The minimum rate rises each year after that until it hits 20 per cent at age 95. Do retirees have valid reasons to be concerned?
To investigate, consider a retiree named Mary who is 64 with $700,000 in her RRSP. She is also entitled to $1,200 a month of CPP pension. Mary voluntarily withdraws $28,000 from her RRSP at age 64 and slightly higher amounts each year until age 71. She then transfers her remaining RRSP funds into an RRIF and withdraws the minimum amounts from age 72 and on.
As the chart shows, Mary does not run out of money, even if she lives until 94 and averages a net investment return of just 3 per cent a year. She does even better if she can achieve a better return. Why 94? It’s a good five years older than the average 64-year-old woman can expect to live.
On the other hand, my wife has an aunt who is about to turn 95. And there is no guarantee that Aunt Rita or any other retiree will earn 3 per cent a year in investment income. Consequently, there is some merit to the argument that the minimum RRIF withdrawals are too high.
Since it is unlikely the RRIF rules will be changed any time soon, the question is whether retirees like Mary can stretch their RRIF income beyond age 94 with a better decumulation strategy. This will be the subject of my next chart.
Frederick Vettese is a former chief actuary of Morneau Shepell and the author of the PERC retirement calculator (perc-pro.ca)
Editor’s note: A previous version of this article incorrectly stated the minimum withdrawal from a RRIF at age 72 is 5.42 per cent of assets. It is 5.40 per cent. This version has been updated.