A very persistent myth is that retirees are forced to overspend their retirement nest eggs because forced RRIF withdrawals are so high. I get numerous comments to this effect on my articles, and other writers call on the government to reduce forced RRIF withdrawals. There is a simple remedy:
Don’t spend all the RRIF withdrawal that lands in your chequing account.
This story begins with the 4% rule of thumb that many people use for retirement income. The idea is that when you enter retirement, you calculate 4% of your starting savings amount as a withdrawal for the first year. Then you increase this withdrawal by inflation every year. So the 4% amount applies only to your level of savings on day one of your retirement.
There are a number of problems with the 4% rule as I explained in a post on a retirement income strategy. One serious problem is that the original research that led to the 4% rule assumes that you pay no investment fees. I showed that the safe withdrawal rate drops quickly as fees rise.
But whatever spending percentage you settle on as safe for your situation, it’s certainly going to be less than the forced RRIF withdrawal percentages. One thing to keep in mind is that the RRIF withdrawal percentages are based on your portfolio size in the year of the withdrawal. In contrast, the 4% rule is based on your starting portfolio value. However, even taking this into account, the forced RRIF withdrawal percentages will have you drawing down your RRIF faster than the 4% rule would in the vast majority of cases.
It’s at this point that so many people seem to throw their hands up and say the government forces people to draw down their savings too fast leaving them destitute in later life. This is nonsense. Just because money leaves your RRIF doesn’t mean you have to spend it. For example, you could put some of it in your TFSA to spend in a later year when your RRIF payments have shrunk.
It’s unfortunate that the default RRIF percentages are too high for a sustainable retirement income. No doubt many people just spend their RRIF withdrawals without much thought. So, it’s true that the current RRIF withdrawal rules will lead to many people overspending early in retirement. But that doesn’t have to be your fate. Thoughtful retirees can choose their own safe spending levels and save any excess RRIF withdrawals.
All the moaning about high forced RRIF withdrawals would be easier to take if the writers were to point out that people don’t have to spend all the money. It’s sensible enough to call for smaller minimum withdrawals to protect the unwary, but we should also try to educate retirees about how to protect themselves until the government acts.