In my practice, I see retirees concerned about the risk of taking too much out of savings and running out of money. At the same time, retirees are young and active and want to enjoy life while they can. How do you balance the risk with the need to have a fulfilling retirement?
Retirement planners recommend, as a rule of thumb, that annual withdrawal rates from retirement nest eggs should not exceed 4 per cent. By the time RRIF holders reach 71, however, the federal government’s age-related formula dictates they must withdraw a minimum of 7.38 per cent of their RRIF, with the mandatory minimum withdrawal rate increasing each year.
It may give some retirees the impression that they can take that much out and oblige the holder to run tax-deferred assets down rapidly. We feel that the minimum drawdown from RRIFs and similar vehicles should start later and be smaller or even disappear entirely. However, we have to follow the current rules.
What is the retiree to do to make sure they don’t deplete assets too fast? It is imperative to have a solid retirement cash flow analysis performed and reviewed annually to establish the maximum annual withdrawal rate you can afford. Experienced financial planners, such as us, are used to preparing these analyses making sense of what assumptions to use.
If the RRIF Minimum Annual Payment (MAP) exceeds your personal maximum withdrawal rate, the smart thing to do is to take the surplus that you don’t need and promptly put it into a tax-free savings account (TFSA). Your TFSA account can be invested similarly to your RRSP and achieve similar rates of return on a totally tax-free basis. That’s the most tax effective way of dealing with the excess RRIF payment. If you have already maximized your TFSA, reinvesting the excess RRIF MAP in a non-registered portfolio of tax efficient investment is the next step. Just make sure you have sufficient TFSA contribution room. There are hefty penalties if you over contribute.
The withdrawal rate is just one factor that must be accounted for in any retirement plan. Inflation taxation and the chance that out-of-pocket health-care costs might also drain savings must all be part of the plan. When planning for and during retirement, ensure that you review your cash flow analysis annually with a qualified Certified Financial Planner. This is your best bet for a worry-free, comfortable and fulfilling retirement!