By Sheryl Smolkin
A recent policy paper from the C.D. Howe Institute[I] documents how the current mandatory minimum withdrawals from registered retirement income funds (RRIFs) and similar accounts have not kept pace with the increased life expectancies of Canadians – a problem for retired Canadians trying to balance their need for current income against the risk of outliving their savings.
Since 1992, the Income Tax Act has obliged holders of RRIFs and similar accounts to withdraw annual amounts, dictated by an age-related formula, that rise until holders must withdraw 20% each year. But in 1992, the federal government was in a deficit position and needed cash. Now it is close to surplus and the timing of the receipt of those taxes is less critical for the government.
To the RRIF holder, however, the minimums pose a threat. They oblige the holder to run tax-deferred assets down rapidly. Today, people can expect to live much longer after retirement, and real returns on investments that provide secure incomes are much lower. RRIF holders now face serious erosion in the purchasing power of tax-deferred savings in their later years.
Back in 1992, a 71-year-old man who withdrew the annual mandatory minimum from his RRIF could expect to deplete 25 per cent of his initial balance’s real value upon reaching his life expectancy, and had virtually no chance of seeing its real value drop more than 90%. Now, he can expect to live to see his initial balance drop about 70%, and faces a 1-in-7 chance of seeing its real value drop more than 90%.
In the same year, a 71-year-old woman making minimum RRIF withdrawals could expect to deplete about 40% of her initial balance’s real value upon reaching her life expectancy. Now, she can expect to deplete about 80% of it. And she faces a 1-in-4 chance of seeing its real value drop more than 90%.
The study authors William B.P. Robson and Alexandre Laurin admit these are stylized examples that will not apply to everyone. Some seniors, especially those who do not anticipate living long, will want to withdraw tax-deferred savings faster than the RRIF minimums. In the coming decades, more seniors, enjoying better health and working at less physically demanding jobs than their predecessors, will work longer and replenish their savings notwithstanding the disadvantage of losing tax deferrals after age 71.
Couples can delay the impact of the drawdown rules by gearing their withdrawals to the younger spouse’s age. High-income seniors whose incremental withdrawals do not trigger OAS and GIS clawbacks will find the burden of paying ordinary income taxes on them tolerable. As room to save in TFSAs grows, more seniors will be able to reinvest unspent withdrawals in them, avoiding repeated taxation.
For other seniors, however – even if they do have room to reinvest in TFSAs – these forced drawdowns make no sense. These seniors include those whose withdrawals – reinvested in TFSAs or not – trigger clawbacks and other income and asset tests; who find tax planning and investing outside RRIFs daunting; who cannot easily continue working; or, who anticipate sizeable late-in-life expenses such as long-term care.
Moreover, foreseeable demands on individual and public resources suggest we should be encouraging saving, rather than discouraging or at best complicating it. Roughly 203,300 Canadians are now age 90 and older; in about 25 years that number will roughly triple. To the extent future seniors have ample assets to finance their needs – especially those such as health and long-term care that rise with age – all Canadians will benefit.
Therefore, the authors of the paper argue minimum drawdowns from RRIFs and similar vehicles should start later and be smaller, or even disappear entirely.
They say that since tax is payable on RRIFs upon the death of the last to die of the account holder and his/her spouse, in a present-value sense, elimination of mandatory minimum withdrawals would have no significant fiscal impact for the government. Elimination would also have the additional benefit of removing the need for future updates as longevity, yields and possibly other circumstances change again.
Table 1 below illustrates how the RRIF minimum drawdown schedule could be modified to reflect both the increased longevity of Canadians in 2014 and revised interest rate assumptions.
[I] This blog contains excerpts from the C.D. Howe Institute report Outliving Our Savings: RRIF Rules Need a Big Update:
| Age | Current RRIF Prescribed Minimum Withdrawal | RRIF Minimum Withdrawals to Replicate 1992 Account Depletion Probabilities |
| 71 | 7.38 | 2.68 |
| 72 | 7.48 | 2.72 |
| 73 | 7.59 | 2.76 |
| 74 | 7.71 | 2.80 |
| 75 | 7.85 | 2.85 |
| 76 | 7.99 | 2.91 |
| 77 | 8.15 | 2.96 |
| 78 | 8.33 | 3.03 |
| 79 | 8.53 | 3.10 |
| 80 | 8.75 | 3.18 |
| 81 | 8.99 | 3.27 |
| 82 | 9.27 | 3.37 |
| 83 | 9.58 | 3.48 |
| 84 | 9.93 | 3.61 |
| 85 | 10.33 | 3.76 |
| 86 | 10.79 | 3.92 |
| 87 | 11.33 | 4.12 |
| 88 | 11.96 | 4.35 |
| 89 | 12.71 | 4.62 |
| 90 | 13.62 | 4.95 |
| 91 | 14.73 | 5.36 |
| 92 | 16.12 | 9.48 |
| 93 | 17.92 | 10.54 |
| 94+ | 20.00 | 11.76 |
Source: Outliving Our Savings: RRIF rules need a Big Update: C.D. Howe Institute
[1] This blog contains excerpts from the C.D. Howe Institute report Outliving Our Savings: RRIF Rules Need a Big Update:
