The rules governing registered retirement income funds and similar retirement vehicles are stuck in the past and need revamping or removal, according to a new report by the C.D. Howe Institute.
With the current rules, the purchasing power of minimum RRIF withdrawals could fall to half their initial value by the time a retiree reaches age 94, noted the report, which also called for the elimination of age limits on saving and mandatory withdrawals — or, failing that, an increase in the age limit and a reduction in mandatory withdrawals.
The report noted the framework for RRIFs that was established in the 1978 federal budget required members to withdraw an amount each year equal to the value of the fund at the beginning of the year, divided by the number of years remaining before the plan member or their spouse reached age 90.
To prevent retirees from depleting their savings, the formula was changed in 1992 to require steadily increasing withdrawals until the member turned age 95, at which point the annual withdrawal became 20 per cent of the remaining value of the fund.
However, the report noted this change took place when life expectancies were shorter and assets were yielding returns much higher than inflation, giving RRIF holders a good chance of preserving the purchasing power of their withdrawals through their lifetimes.
“Since then, life expectancy at age 71 — the age at which savers in defined contribution pension plans and [registered retirement savings plans] must stop contributing to their plans — has risen and real returns on safe assets have fallen close to zero,” said the report. “But the RRIF framework has undergone only one lasting change — a modest reduction of mandatory minimum withdrawals in 2015 — since then.”