How Much Should I Withdraw from My RRIF?
J U L Y 9, 2 0 1 9
At some point, whether by personal need, or legislated requirement, everyone will convert their Registered Retirement Savings Plan (RRSP) to an income producing vehicle like a Registered Retirement Income Fund (RRIF) or an annuity. In Canada, the latest that a person is allowed to make that conversion is in the year that they turn 71 and they must begin taking an income in the following year.
Today our article will be specifically focusing on the Registered Retirement Income Fund, which for the remainder of the article we will refer to as a RRIF.
The question many clients have for us here at LGK Wealth Management is “when should I convert my RRSP to a RRIF and how much should I take out?” It’s a great question and like most things related personal wealth, there’s not one right answer. Let’s start by looking at a sample client.
Jennifer turned 65 this year and retired. She has $350,000 saved up in her RRSP which she would like to begin taking an income from and she has applied for CPP and OAS. She converts her RRSP to a RRIF and decides to take the RRIF minimum.
Note on RRIF minimum: When a RRIF is established, an individual is allowed to take out as much as they want. They can withdraw (or deregister) the entire amount if they wish. For people, who want to minimize their RRIF payments because they don’t need the cash flow or because they have other sources of income, the Income Tax Act has legislated minimum payments that are required each year based on an individual’s age.
For example, the RRIF minimums at age 65 are 4%, at age 71, 5.28%, at age 80, 6.82%, at age 90, 11.92% and at age 95 and beyond they are 20%.
Again, we’re going to assume in our example, let’s call it scenario 1, that Jennifer takes out her RRIF minimum starting at age 65. We’re also going to need to make an assumption about her expected rate of return and her expected tax rate. Let’s start by assuming she has a financial advisor and is invested in a balanced investment strategy. As a result, we will assume a rate of return net of fees of 3.74%. We’ll also assume a tax rate of 15%.
The results are quite interesting. In her first year, she will be required to take out $14,000 ($350,000*4% RRIF minimum). After tax of 15% she will receive $11,900. The portfolio will grow by 3.74% so that in the second year when she’s 66, she’ll take out $14,545 ($349,090*4.17% RRIF minimum) and receive $12,363 after tax. This will continue on like this until she dies. If she lives a long life and dies at age 95, she will have taken out a total of approximately $571,000 from her RRIF over that period and received $485,000 after tax. She’ll also have about $61,000 that will be left over to transfer to her RRIF beneficiary or beneficiaries once final taxes are paid on it. This means she will have either received or passed on to her heirs a total, after tax of $546,000. Pretty impressive right considering she started at 65 with $350,000?
But what if she decides that $14,000 or so a year isn’t quite going to be enough for her to live on? Let’s say that an additional $1,000 a month would really make a difference to her lifestyle. Note: with this assumption, we will raise her tax rate to 17%. So, if she took the RRIF minimum plus the additional
$12,000 a year, she would receive $26,000 ($350,000*4% + $12,000) before tax resulting in $21,580 in after tax cash flow. In the following year that after-tax amount would be $21,618. As the RRIF minimum percentages continue to rise every year, the additional $12,000 begins to take a toll on the portfolio and by the time she turns 72, her cash flow will begin to drop as the size of her RRIF begins to deplete faster than it did in scenario 1. By the time she reaches 88 years old, the portfolio is almost fully depleted. In the end, assuming she lives to age 95, she will have received or passed on to her beneficiaries an after-tax amount of approximately $423,000.
Let’s consider one final scenario. Instead of taking the RRIF minimum plus $12,000, let’s assume she looks at her first year’s pre-tax income from scenario 1 which was $26,000 ($14,000
+ $12,000) and determines that this is what she’d like to get every year to maintain her lifestyle. If we assume all other variables remain the same, she will run out of money by the time she reaches age 84, and she will have received over that period an after-tax amount of approximately $412,000.
So which approach should she choose?
On the surface, scenario 1 provides her with the highest potential to receive the most value and income from her wealth. On the other hand, to achieve that high level of cash flow over time requires her to make income sacrifices while she is still young and assumingly healthy.
Taking the additional cash flow now as in scenarios 2 or 3 may allow her to enjoy some of the more discretionary aspects of life like eating at nice restaurants or taking a trip or two a year while she’s still healthy and fit. On the other hand, if she remains healthy into her 80s and lives a long life, running out of money in old age can be a very concerning, sometimes scary predicament – and it is one that many Canadians are living through right now. So, what should you do?
Everyone is different.
- Your RRSP or RRIF size,
- Other sources of income you or your spouse or partner have,
- Your anticipated life expectancy (i.e. do you have longevity in your family or a history of illness?),
- The effect of additional withdrawals on government benefits such as Old Age Security (i.e. will it be clawed back?),
Consider speaking to us at LGK Wealth Management where we can assist you in your decision making process and help you design the best strategy for you to maximize your income now, without putting you at risk of running out of money later.
Should you have any questions about this article, or if you’d like to do an analysis on yourself to see where
you stand, we urge you to call us at (780) 426-2400, or e-mail us at LGKWealth@manulifesecurities.ca.
- https://www.fpcanada.ca/docs/default-source/standards/2019-projection- assumption- guidelines.pdf, page 14.
Your LGK Wealth Management Team,
Gary M. Koss | Senior Mutual Funds Advisor
Manulife Securities Investment Services Inc.
Life Insurance Agent | LGK Wealth Management Inc.
Phone: 780-426-2400 | Fax: 780-423-0311