Some retirees may have seen their portfolios dwindle during the Covid-19 pandemic. The government-approved change in the minimum withdrawal rate of Registered Retirement Income Funds (RRIFs) is a welcome relief.
What is a RRIF and what does the government announcement mean to owners of such retirement investments?
In essence, a RRIF is a mature registered retirement savings plan (RRSP). The RRIF is an account registered with the federal government. It provides holders with a steady income in their retirement. Before a RRIF matures, owners channel savings into their RRSP to maximize tax breaks and grow retirement savings. Upon maturity, these same RRIF owners start withdrawing money to use as retirement income. Once RRIF owners hit 71 they have to convert their RRPS and must follow the government’s withdrawal schedule.
In response to COVID-19, the Government of Canada said in March that it would be giving RRIF owners relief. They approved the change of minimum RRIF withdrawals, giving the choice to withdraw 25% less than mandated annual minimums.
To address market correction, people who have RIFF investments try not to withdraw it at a loss. The government system now supports people with RIFF investments by allowing a 25% reduction in the RIFF withdrawal schedule. So, if you want to withdraw a 5% minimum, that number is now 1.25% lower. In other words, if you have $100,000 in your account, you’d withdraw $5,000 minimum. Now the government is allowing you to take out $1,250 less.
Why is this an important announcement for retirees who were planning to live off their retirement savings? It has everything to do with financial flexibility and ensuring the money lasts through retirement.
Retirees are often taking money out of the RRIF only because they have to. Reducing the amount of dollars retirees have to withdraw can have some powerful financial planning implications for retirees.
For example, retirees must convert their RRSPs into RRIFs before the end of the calendar year they turn 71. In recent years, required withdrawals sat somewhere between 5.3 and 5.8% annually. Required withdrawals would increase to a full 20% by the time seniors hit age 95. The goal was to ensure all plans are at zero by the time a retiree is 100 years old. These withdrawals are fully taxable. A concern that RRIF owners and their financial planners may have is that this rate will reduce capital faster than the low returns paid on a fixed income can replenish, especially given the market. This concern is now lessened by the government-approved change in the minimum withdrawal rate of Registered Retirement Income Funds (RRIFs).
To find out more about RRIFs and new withdrawal schedule implications, contact Devine & Associates Financial Services Inc. at 519-780-1730.
