As if you didn’t already worry more than enough about retirement, now is probably a good time to worry about having too much money.
The problem won’t be that you’ll have saved too much, so you can stop that thought in its tracks right now. No, the real problem is that by leaving your retirement income withdrawal strategy in the hands of the government, you, like many normal, everyday (read: not rolling in money) Canadians are likely to find yourself required to take more money out of your RRIF at age 72 than you’d planned, exposing more of your savings to tax earlier than you’d like, and potentially jeopardizing the sustainability of your retirement income forever.
You see, like the Terminator, and unlike withdrawals from RRSP accounts, RRIF withdrawals never, ever stop. (Not until you do, at any rate.) You can’t turn withdrawals on one year and turn them off the next, and there’s a minimum amount that you must withdraw, depending on your age. If you wait until age 71 to convert your account, the minimum withdrawal amount the following year is 7.48% of your RRIF balance.
Still don’t see the problem? Let’s use a real scenario:
You and your spouse have worked reasonably hard all of your lives until age 65, and have saved $400,000 in RRSPs for your retirement. Neither of you has a pension, you’ll both receive slightly more than the average CPP entitlement, and you’ll both be fully eligible for OAS.
You’ve always lived a pretty modest lifestyle, your house is paid for, and you have neither debt, nor plans to travel the world, nor children you care to leave a big inheritance to.
You figure you’ll be able to live comfortably on $45,000 per year (of which only about $15,000 will have to come from investments), which should leave you some wriggle room in case you need to pay for long term care somewhere down the road. You’ve done the math, factored in inflation, and are feeling cautiously optimistic that you’ve planned well for your retirement.
And then you run into the RRIF problem. If you leave your withdrawal strategy in the hands of the government and delay it until the last possible year, you’ll find yourself at age 72 with a minimum withdrawal somewhere in the neighbourhood of $30,000 for both spouses, almost double what you need (or want, if you’re hoping that your investments will last just as long as you will.) If you convert your savings to a RRIF and start withdrawing at 66, your minimum withdrawal hovers in the $16-$18,000 neighbourhood until age 71, when it jumps to $27,000.
I have to assume that someone, somewhere in the bowels of the government has their eye on mortality rates, savings rates, and safe(r) withdrawal rates, and that a crack team of experts is working on the problem. While we wait, there are a few things you can do, depending on how close you are to retirement:
If you’re years from retiring:
Keep your eye firmly on your current tax rates and your expected income in retirement. There’s very little point in transferring part of your tax burden into the future through RRSPs if your income then will be the same or more than it is now, but even if you expect lower income once you retire the spectre of minimum RRIF withdrawals shouldn’t deter you from sheltering your long-term investment income from tax.
If you’re within ten or fifteen years from retirement:
Now’s the time calculate how your government entitlements, pension benefits, and own savings will fit together as precisely as you can to use the RRSP and TFSA rules to your maximum benefit.
If you’re only a few years away from retirement:
Planning is your friend, but with the proximity of retirement comes the benefit of more precise planning, and your calculations are going to be more accurate than at any other time.
You might start strategically withdrawing from your RRSPs in-kind before converting to a RRIF, to reduce your minimum withdrawals. You might start eyeing your growing TFSA contribution room as a better place to invest for long-term growth than your RRSP.
You might convert only part of your RRSP to a RRIF, and use the other part to buy an annuity with a constant regular payout instead of a minimum withdrawal. You might even take your minimum RRIF withdrawal in-kind, and leave the investment in a non-registered account to keep growing.
The one thing you won’t (or shouldn’t) do is shake your fist at the government, yell into the wind that you’re being penalized for saving, and then opt out of the retirement savings system altogether. It just isn’t one of the options.
Sandi Martin is an ex-banker who left the dark side to start Spring Personal Finance, a one woman fee only financial planning practice based in Gravenhurst, Ontario. She and her husband have three kids under five, none of whom are learning the words to “Fidelity Fiduciary Bank” quickly enough. She takes her clients seriously, but not much else.