In my previous chart, I concluded that minimum withdrawal rates for RRIFs are a little too high. In the case of Mary, a retiree with $700,000 in her RRSP at age 64, her remaining RRIF assets were falling to a dangerously low level by age 94, at least in the case of low investment returns.
This week’s chart reinforces the narrative, this time focusing on income amounts rather than remaining RRIF assets. Once again, we will consider the situation for Mary.
The chart shows Mary’s RRIF income under three scenarios: (a) the minimum required withdrawal if her annual investment return is 3 per cent, net of fees; (b) the minimum if her return is 4 per cent; and (c) the income curve that Mary would like to see, what I call the “optimal income curve.”
Ideally, her income would rise with inflation until her mid-70s, then rise more slowly until 90, after which it would again rise with inflation until age 100. This pattern is based on various studies that show that retirees’ income needs slow down in their middle retirement years – the “slow-go” years – and then rise more quickly at a very advanced age – the “no-go” phase.
Under the two minimum withdrawal scenarios, Mary’s income plunges at age 95 and never recovers. That is because her RRIF assets are seriously depleted by then. This presents a serious problem for Canadians like Mary who live beyond age 95 and achieve low returns on their RRIF because of an understandable aversion to risk.
At present, there are nearly 100,000 Canadians aged 95 and older, a number that will continue to grow in the years to come. The solution is to reduce the minimum withdrawal rates under an RRIF in a way that pushes the inflection point out to age 100.
As a final thought, perhaps the Canadian government should guarantee a certain amount of income for any Canadian who lives beyond 100.
[Please note that while the chart shows income from age 64, Mary had some choice in how much she chose to withdraw before age 72. If she chose to withdraw a little less, however, it would not have had a material effect on the income curves in the chart.]
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca).
