Amidst the economic fall out of the Covid-19 pandemic, the Canadian government announced a 25% reduction in RRIF minimums as part of a multi-billion dollar relief package.
We have rapidly descended into a bear market which concerns many investors, however a drastic reduction in equity markets is particularly distressing for retirees drawing an income from their RRIF.
Once a Canadian RRSP (Registered Retirement Savings Plan) holder turns 71 they must convert their RRSP savings into a RRIF (Registered Retirement Income Fund). The RRIF holder is mandated to withdraw a minimum amount from their RRIF each year as laid out in a schedule of RRIF minimums set out by the government. The annual RRIF payment is reported as taxable income to the taxpayer each year.
Minimum withdrawals are calculated using a percentage of the market value of your RRIF assets at the beginning of the year, multiplied by the mandated percentage based on your age at the beginning of the year.
The 25% reduction would mean for example, that a 71 year old RRIF holder who normally would have had to withdraw 5.28%, now only has to withdraw 3.96%.
Why does this matter? Why would this be included as part of the economic relief package?
The reduction was announced by the government “in recognition of volatile market conditions and their impact on many seniors’ retirement savings.”
When you are in a RRIF, you are mandated to withdraw the minimum amount required by law each year. In this scenario, when the market drops drastically the RRIF payment you receive equates to you selling that portion of your portfolio at a low.
We have all heard the timeless advice; buy low, sell high. This saying reminds investors that selling when your investments are low is not a good idea. A market drop is traditionally the time to hang on and give your investments some time to increase before selling. Although there are many variables to consider which are beyond the scope of this column, for simplicity and to illustrate this point; to recover your investments when they have dropped significantly is to ride it out until they rise again. The investment loss becomes concrete when they are sold at a market low.
This poses a challenge for RRIF investors. For seniors, time is not on their side and RRIF minimums make it even more challenging. When you are in a RRIF, you are mandated to withdraw the minimum amount required by law each year. In this scenario, when the market drops drastically the RRIF payment you receive equates to you selling that portion of your portfolio at a low. There is no mechanism to stop the RRIF payments from being required to be withdrawn based on market values.
This is why an adjustment to RRIF minimums have been included in the relief package in an effort to give Canadian seniors a bit more flexibility to reduce the amounts they are mandated to withdraw. This allows Canadians to keep that extra 25% in their portfolios to give it some time, and a fighting chance to rebound. This initiative is helpful primarily for Canadians whose minimum payments are currently higher than their liquidity needs.
What if I don’t need any of my RRIF payment to cover my current living expenses?
What if you don’t need any of your RRIF payment for your current living expenses and would rather your money stay invested in the market and have it poised for rebound? The minimum RRIF withdrawals are mandated so there is nothing you can do to reduce it further, however you can use a complimentary investment strategy to help offset the risk of market losses due to minimum RRIF payment requirements.
To keep your money invested in preparation for a market rebound you would take your minimum RRIF payments required and invest directly back into the market. As the payment comes out of your RRIF, you can invest it again right away. Ideally, you would invest it in a TFSA (if you have room) or in a non-registered investment similar to the one you redeemed from. Although the funds are no longer part of your RRIF portfolio, by investing it right back into the market in another form allows your money to stay in your overall investment portfolio and positioned for rebound.
Again, this only works if you do not need your full RRIF payment for living expenses.
What if I’m currently using all, or most of my RRIF payment for living expenses?
If you are currently using all or the majority of your RRIF payments for living expenses now would be a good time to revisit your budget and other income sources. If there is any way you think you can manage your lifestyle and reduce your RRIF payment for the short term it would do you well to consider this now.
While markets have had great drops, this would be the time to leave as much money in your portfolio as you can by reducing as much of the RRIF payment as possible. This is the best way to ensure your RRIF is in the best position given the situation we are in. Remember that throughout history, a market decline has always been followed by a market recovery.
Each senior has their own unique retirement income situation. Taking these new RRIF minimums into consideration, along with strategies for budgeting, considering other income sources and investment options could be quite beneficial during this time.
Stephanie Farrow, BA., CFP., Stephanie has over 26 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010. Stephanie and her husband own Farrow Financial Services Inc. About our Farrow Financial Team.