By Jason Heath on May 5, 2015

How to drain a RRIF

By Jason Heath on May 5, 2015

There's nothing wrong with planning to spend every last penny you've saved

How to deplete a RRIF — (Chad Springer/Getty Images)

Q: If one does not care to leave any RRIF capital for their heirs, one could spend and enjoy the RRIF returns and some capital every year until the capital is almost depleted by the expected age of 90. Is there anything wrong with this retirement plan? My heirs will still have the debt-free property to inherit.

—Ray

A: If nothing else, Ray, retirement plans are personalized. Your retirement plan might be to draw your investments to zero. Some people aim to maintain their capital. Others factor in a home downsize or sale. There’s no right or wrong way in my opinion–perhaps just better and worse. I suggest that you start with what’s right for you.

Just for argument’s sake, Ray, I wanted to help you figure out what your target withdrawal could be from your RRIF each year to draw it down to zero at age 90. I want to give you a notional annual withdrawal you could take in year No. 1 and increase by 2% inflation each year–building yourself a notional indexed pension.

If you had $100,000 in your RRSP at the end of your age 71 and started your RRIF withdrawals at age 72, you could take $6,747 per year from your RRIF, indexed at 2% inflation, to draw your RRIF to 0 by age 90. That’s about 6.75% of your initial account value, indexed to inflation. This assumes a 5% rate of return. Under the old rules, you would have been required to take a minimum of 7.38% from your RRIF at 72, but the recent federal budget requires only 5.28%.

If you earned 3% on your RRIF, the notional “drawdown to zero” amount would be $5,738 per year, indexed at 2%. So that’s 5.74% of your initial account value.

And assuming a 7% rate of return, you could target $7,825 per year, indexed at 2%. That’s 7.83% of your initial account value.

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So there you have some hard facts. Now I’ll give you some non-numerical analysis to consider.

I don’t think parents should go out of their way to preserve some sort of notional inheritance for children out of obligation. You sound as though you feel guilty about planning to draw down your retirement savings. You saved that money for your retirement! You’re retired. Spend it, Ray.

If you have a house that you think you can leave to your kids as an inheritance, that will likely amount to hundreds of thousands, if not millions, of dollars. That’s nothing to feel guilty about, especially if you have helped provide for your children financially during their adult years by paying for post-secondary education or weddings or home down payments.

I might go so far as to say you should at least consider how the eventual sale of your house or at least a downsize might help you fund your retirement if you think your savings and government pensions might cause you to be a bit tight, Ray. What’s wrong with considering using a bit of home equity eventually and drawing your RRIF to zero at age 85? Who knows–you might not make it to 90.

You do need to take into account the potential for long-term care costs in your later years, but I don’t think maintaining your RRIF or ensuring a large estate should be at the top of your priority list when planning your retirement.

I’d be more inclined to plan how you’d like to live in retirement, plan for contingencies like new cars, home repairs and medical costs, then consider how to optimize your estate for your kids–but not at the expense of, say, eating organic food, golfing in Florida or spoiling your grandkids, if those things are important to you. Your retirement savings is yours and yours alone until it turns into an inheritance.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.