Did you ever wonder where the magic RRIF minimum withdrawal percentages came from? I may have figured it out by accident. I was creating a chart to show that these minimum withdrawals will deplete RRIFs over time and that yearly payments would very likely decrease over time. Then I came across an amazing coincidence.
I set out to find out how RRIF payments would change over time if the investments make a steady real return. “Real return” means the return above inflation. So, if the return is inflation+3% every year, what will your inflation-adjusted RRIF minimum withdrawals look like? I calculated this for real returns from 0% to 6%. The following chart shows the results. Keep in mind that the incomes are inflation adjusted. So, the chart shows how your purchasing power changes over time.
The first thing that jumped out at me was the 6% real return line. In this case, your minimum withdrawals almost exactly keep up with inflation from age 72 to 94 (and then fall like a stone). This can’t be a coincidence. It must have been a design goal for the percentages. Essentially, the RRIF minimum withdrawals are designed for a steady return of 6% over inflation.
Unfortunately, averaging such a high return over many years is not very likely. It could happen for an all-stock portfolio with no investment fees, but even then you shouldn’t count on it. For investors with a more balanced portfolio and who pay fees, inflation+2% is much more realistic. Unfortunately, if you look at the line on the chart for a 2% real return, the results don’t look too good; your purchasing power falls quickly and is cut in half in about 16 years.
It’s not too hard to see why retirees probably shouldn’t spend all of their RRIF minimum withdrawals in their early retirement years. It’s prudent to save some money for later years as their RRIF income falls.