Many retirees face dramatic erosion of their savings due to outdated government rules, according to a report.
In the C.D. Howe Institute report Outliving Our Savings: Registered Retirement Income Funds Rules Need a Big Update, authors Alexandre Laurin and William Robson urge the government to revisit its rules requiring mandatory minimum withdrawals from registered retirement income funds (RRIFs) and similar accounts to protect Canadians from outliving their savings.
“The reality is that Canadians are living in a very different environment than they did in the 1990s when these rules were written,” says Robson. “The good news is, we’re living longer; the bad news is that we’re getting low returns on secure income-yielding investments.”
Life expectancy at age 71, when holders of all such accounts must start drawing them down, has risen by about three years since 1992. At the same time, real yields on a representative portfolio of Government of Canada bonds dropped to 0.25% in 2014, down from 5.7% in 1992.
Since 1992, the Income Tax Act has obliged holders of RRIFs and similar accounts to withdraw annual amounts, dictated by an age-related formula, that rise until holders must withdraw 20% each year.
But in 1992, the authors note that the federal government was deficit-ridden and hungry for cash. Now it is close to surplus, and the timing of receipt of those taxes matters less to the government.
To the RRIF holder, however, the minimums pose a threat. They oblige the holder to run tax-deferred assets down rapidly. The average 71-year-old man holding Government of Canada bonds faces a one in seven chance of seeing the real value of his tax-deferred assets fall by 90%. The average 71-year-old woman faces a one in four chance of the same alarming decline.
“Obviously, the government should make the minimum drawdowns from RRIFs and similar vehicles smaller, or even eliminate them entirely,” Laurin concludes. “Reforming the withdrawal rules for RRIFs and similar accounts would help retirees enjoy the post-retirement security they are striving to achieve.”
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