Change RRIF drawdown rules, C.D. Howe says

Strict rules no longer make sense and changes are needed so seniors don’t run out of money, the think tank argues.

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OTTAWA – The C.D. Howe Institute says it no longer makes sense to have strict rules that force retirees to draw down their registered income funds as they age and says changes are needed so seniors don’t run out of money.

With the federal government under pressure to reform Canada’s pension system so that retiring baby boomers and future generations don’t fall into poverty, the paper by the think-tank’s chief economist William Robson and Alexandre Laurin offers one way to ease the challenge facing seniors at little cost to Ottawa.

Under the Income Tax Act, seniors must withdraw annual minimum amounts from RRIFs and similar accounts in increasing increments that rise to 20 per cent at age 94. The idea is to have retirees receive a dependable annual source of income, and also for governments to “get back” tax revenue on tax-deferred savings vehicles such as RRSPs.

But while mandatory minimum drawdowns might have made sense when they were instituted in 1992, circumstances have changed, the report says.

Canadians now expect to live much longer and rates of returns on investments are not what they used to be.

“Longer lives are a good thing. Lower yields … may not be good but they are a reality,” the authors say.

“Good or bad, when combined with out-dated drawdown rules, modern longevity and investment returns spell trouble for holders of RRIFs (registered retired income funds) and similar accounts.”

The paper points out that when the rules were first drawn up, a 71-year-old man was expected to live another 11.2 years and a woman of the same age another 14.6 years. Today, an average 71-year-old man is expected to survive and need a steady income for another 14.4 years, and woman another 16.9 years.

Yields are also critical to the calculation. In 1992, the average yield on long-term Canada bonds was 8.5 per cent, whereas at the beginning of 2014 the yield was 3.1 per cent.

The result is that retirees who transfer their tax-deferred savings into an income fund at 71 today will see their nest-egg cut in half by age 80 and will be down to 10 per cent by age 94, when life expectancy tables say they will live an additional four years on average.

The report notes that there are roughly 203,300 Canadians in their 90s and that number is expected to triple in about 25 years. They could be running out of savings just when they need them most to pay for health care and long-term care facilities.

The solution, the authors argue, is for Ottawa to raise the age at which withdrawals become mandatory, or make mandatory minimums smaller so that savings last longer.

Or the government could dispense altogether with mandatory minimum withdrawals, said Laurin, the think-tank’s associate director of research, and let individuals make their own choices of how much and when to withdraw.

He says the policy made more sense when Ottawa faced massive deficits, but now with the government approaching a balanced budget, it could afford to defer the tax grab to later years. In fact, Ottawa could realize more tax revenue by waiting since the accounts will have longer to grow.

“For tax revenue reasons, receiving the tax revenue sooner makes much less sense than it used to,” he said. “There’s no clear-cut case that it’s to the advantage of the government (to have mandatory withdrawals), it seems to be pretty neutral.”

For individuals however, timing matters a lot. “The key difference is that retirees are mortal, but governments are not,” the report notes. “For an individual…it is better to pay taxes later than earlier.”

9 comments on “Change RRIF drawdown rules, C.D. Howe says

  1. what can be done now to pressure the government to lower the minimum withdrawals or raise the age when rrsp money should be transferred to a rrif

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    • Seniors need to contact their MP and ask that the rules be changed. If you are a member of CARP or other retiree organizations, you need to inform the executive you would like them to become politically active in changing the rules. There are some MP’s that have been trying to get the rules changed, but they have been unsuccessful, in part because Seniors have not “pushed” for change.

      Reply

  2. Would love to see this change happen!!!. I agree that given the greater longevity, age 71 is too early to force seniors to begin drawing down their RRSP as a RRIF. I also think that seniors should be permitted to continue contributing to an RRSP to at least age 75. Many seniors continue to work much longer than was anticipated years ago – often out of necessity, and only later in life can begin to save for retirement.

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  3. I recall study by CD Howe that compared RRIF to 401k indicating Canadian drawdown was 2X US. What is it today?

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  4. Having been a retirement planner for more than 30 years, I believe the expectations that people 85 and 90 need more money is actually flawed. They actually need less than when they were 65 adjusted for inflation. Try and buy a birthday present for an 80 yr. old. With the reduced resources of illness care rather than health care, I believe the life expectancy of mid to late baby boomers will actually decrease due to unavailable resources and the right to die with dignity. Those boomers born from 1955 to 1963 are always having the finishing line moved out further with CPP and OAS. The front end boomers have had the good times. Our parent’s cohort group which is clogging up hospitals because we have not focused on illness care will spill over to the baby boomers and even more so on the mid to late baby boomers. The goverment will definitely get there tax revenue sooner than later.

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  5. I agree that we should be able to take out money from our RIFF when ever & at whatever amount we want. I was caught in the last RRIF changes(so have less than I hoped) as I was in the RRSP changes too. A comment below got me, I am 81 & my peers(like me)don’t have that much that we don’t appreciate gifts, maybe not what may seem conventional, but welcome, Some – a needed new stove, a paid holiday, some lamb, an eReader, etc., One just has to be more inventive or attuned to a senior’s needs.

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    • The US. IRA the equivalent of our RRIF is much less greedy from 5% to a max. 6.5%,i disagree as you aging an important ammount goes to personal health care since the public system slowly begin withdrawn from the service,when elderly, run out of money they will be left in charge of our Wise government,not a smart move,not to mention the stealth (official) data on inflation wich apply for cats food only,as the demand for health care services like anything sales tax apply.

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  6. I am 67 and mostly retired. My only pension income other than CPP will be my RIF. When I convert my RSP into a RIF and begin the current mandatory withdrawal, I will have the best earnings year of my life: much more than I need. However, by the time I am 80 my mandatory RIF income will be below my estimated income requirements. A flat 5%, or even better 4% during the RIF holder’s life makes much more sense. I could budget better and eliminate the risk of running out of money. The 4% number is generally regarded as the appropriate withdrawal rate for anyone estimating retirement income with a very high probability that the money will not run out during one’s lifetime.

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  7. Great article .. Change RRIF rules is long over due ..The most effective way to get it update..is to find out the group in charge and ask for the acquirements..
    file:///C:/Users/aur/Desktop/TD%20Canada%20Trust%20-%20Retirement%20Income%20Options%20-%20Annual%20Minimum%20Payment%20Schedule.html

    Reply

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