"Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese."
— Gene Perret, American humorist and comedy writer.

Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Every investor, near or at retirement, should be aware of the "safe" draw rate ballpark for the nest egg. Getting this right is an important step."

Vancouver, BC (March 04, 2008): One most frequently asked question is whether investors have enough money to outlast retirement. It could become a problem for some.

Adrian Mastracci, “fee-only” portfolio manager at Vancouver based KCM Wealth Management says, “Ensuring that the nest egg outlives retirement is a skillful task. Investors can encounter many worries. Like living too long, market declines, high inflation and prolonged low return environments.”

Planning for retirement, especially the RRSP/RRIF combination, should be high priority. It’s wise to start this exercise well before age 60.

I draw attention to the RRIF minimum schedule. These RRIF rates are not optional.

Minimum RRIF Draws

Every investor, near or at retirement, should be aware of the "safe" draw rate ballpark for the nest egg. Getting this right is an important step. A rule of thumb is that annual draw rates above 4% may mean that the money runs out too soon. Particularly, in today’s low investment return environment.

However, RRIF minimum rates do not conform to safe guidelines. Draw rates jump visibly after age 70, exceeding 7%. Plus, they keep on climbing steadily! So, depleting the RRIF can be easy.

Inflation concerns are also real. Increasing the rate by 1% makes for nasty numbers. Here is an example of the inflation affect on each $10,000 of income required today (figures rounded):

Finding the safe zone

As the saying goes "evaluate each case on its own merits". This exercise requires a few calculations.

Some retirement planning tips to consider:

• The "safe" draw rate ballpark is averaged between personal and registered accounts. Ideally, investors should refrain from drawing more than their safe amount for long periods. This may force some to use the personal accounts later as they have no choice on the RRIF minimums. Unless there is a younger spouse, where the minimum RRIF draws are set at the lower age rate.
• Accumulating part of the nest egg outside the RRSP is wise. Investors whose portfolio is heavily skewed to RRIFs will have fewer options. They are forced to withdraw from the RRIF, pay income tax and personally reinvest the remainder. Thus, they run higher risks of depleting funds quickly.
• Withdrawing funds from the RRSP before age 72 may be required for some. These investors should not convert to a RRIF. Perhaps, only the part required for the $2,000 pension exemption.
• Families who split qualifying pension income may pay less tax. This helps in drawing less out the portfolio. Although, some age credits and OAS clawback may be affected.
• Spousal RRSP deposits can assist in spreading retirement income between spouses. Especially, if the receiving spouse owns fewer assets. In addition, family saving capacity may be more beneficial when accumulated in the hands of the lower tax rate spouse.
• Investors now aged 70 or 71 may benefit from delaying RRIF payments until age 72. Some may also be able to make additional RRSP deposits for up to two years.
• Once the conversion is made to a RRIF, there is less flexibility as to what can be done beyond that point. Some decisions are not reversible. Hence, defer RRSP conversion until necessary.

Knowing the safe draw rate ballpark keeps retirement prospects on track for the long run.

A few "what if" scenarios will assist the planning. Aim for the most flexibility and fewest surprises.

I welcome your comments.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.