People are living longer and guaranteed returns after inflation are lower than they were years ago when the RRIF withdrawal percentages were set. By leaving the withdrawal percentages too high, the government is encouraging people to overspend in retirement and risk being left with too little to live on in their old age.
Milevsky looked at the other side of this debate as well:
“Of course, defenders of the status quo (and certainly those interested in maximizing tax revenue) might argue that [Required Minimum Distributions] are “red herrings” since retirees are not required to consume the withdrawn funds (but merely to withdraw them from the tax-protected shelter of the registered account).”It’s true that this argument does not give a good reason to leave withdrawal rates as they are. Too many people do spend their entire RRIF withdrawals not understanding the risks they take. This is a good enough reason to reduce the mandatory percentages.
However, what should individual retirees do if the government won’t act? The answer is that they should determine for themselves their safe spending rate and save any RRIF withdrawals that are above this safe spending level. The fact that retirees can protect themselves in this way does not mean the government shouldn’t act. It just means that in a situation that isn’t ideal, retirees are left to protect themselves by spending less than their entire mandatory RRIF withdrawals.
It’s possible for both sides to be wrong in a debate. The government can be wrong for not reducing forced RRIF withdrawals, and retirees who know better but just throw up their hands and spend their entire withdrawals can be wrong as well. It’s the retirees who don’t understand the risks they are taking who concern me the most.