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By William Hanley
National Post
FP Weekend
Saturday, February 23, 2008 |
It's an old joke, but one with special significance during RRSP season: I have enough money to last me for the rest of my life -- as long as I die by Tuesday.
Adrian Mastracci, “fee-only” portfolio manager at
KCM Wealth Management in Vancouver, says, "Whatever the strategy, whatever your age, aim for the most flexibility and the fewest surprises."
The evidence continues to grow that we are going to live longer and longer and longer, that we're not going to die by Tuesday or any time soon after that. A recent study went so far as to conclude that even those who are not in perfect health at age 70 might reach 100. And some gerontologists, believing that age is a disease, reckon we can "cure" ageing and live well beyond the century mark.
While some people overestimate the amount of money they'll need to live on each year in retirement, there's no doubt that the total amount of money -- savings and income -- could be far larger for some Boomers than they see themselves needing at, say, age 60.
Further, while I have observed that some people are loath to dip into their RRSPs and are still amassing assets well into their 70s, the issue for many people will be making sure their money lasts as long as they do. Being very old might not be a lot of fun. Being very old and poor would be no fun at all.
And while RRSPs are an essential part of retirement planning for the vast majority of people, Adrian Mastracci, portfolio manager at KCM Wealth Management Inc., notes that longer retirements mean that people should try not to have all their nest eggs in the RRSP/RRIF basket.
That's because the legally mandated minimum annual drawdowns are high for holders of registered retirement income funds who are in their 70s. In fact, they're so high that the retiree without other income could run out of funds in the RRIF well before they die.
"Having an RRSP account and a personal account is the way to go," Mastracci says on the phone from Vancouver. "That gives you the flexibility to use the RRSP/RRIF combination first and then use the personal account further down the road."
The funds in an RRSP must be converted into a RRIF by the end of the year the holder turns 71, meaning that the holder defers paying income tax on the sum. The problem, as Mastracci and others see it, is that by that age, the annual mandatory minimum payments are more than 7% and escalate each year. A person living a long life during periods when investment returns are low could run out of RRIF funds.
Mastracci notes, for instance, that with a nominal rate of return on the RRIF of 5%, 6% or 7%, minimum draws of 7% or 8% mean that the RRIF is depleting. "And in the higher years, lots of people tend to go conservative, so their investments tend to return less."
So, if you're 78 and the minimum RRIF draw is 8.37% and the annual return on investment is, say, only 4%, that 4.37% must come from your capital.
Mastracci says fee-based KCM talks to clients about "safe" draw levels from total capital. "You have to know how much capital you need to sustain your income stream for the rest of your life when you retire. We run 'what if' scenarios. I say to a client, 'You can probably go up to, say, 5%. If we take out more than 5%, we're probably going to run into some headwinds.' "
That might mean the retiree should have a combination of personal and RRSP or personal and RRIF draws for the best use of capital.
But Mastracci says that while there are some things that can be done if the RRIF is a large one, the retiree's hands are basically tied. (He doesn't hold out much hope that Ottawa will change the rules any time soon to make the drawdown rates recognize the reality of how much longer Canadians are living.)
He also concedes that some people simply don't have the option of having an RRSP and a personal portfolio. Many, if not most people, have had a tough time making their RRSP contributions, never mind building a personal portfolio outside the RRSP.
Boomers and even Gen-Xers, who must also be planning for older age, should now be developing retirement strategies that don't rely entirely on RRSPs for retirement income, even though they are a terrific incentive to save and a must for just about every Canadian.
What they might want to do--and this is my idea, not Mastracci's -- is contribute the maximum they can afford to their RRSP and then put the resulting income tax rebate in a personal account that can be built up outside the inevitable RRIF.
This long-term savings strategy is too late for me. And yet, at 62, I'm not too late in coming around to considering dipping into our RRSPs and hanging on to our other savings so as to avoid the RRIF-only conundrum 10 years from now.
Whatever the strategy, whatever your age, Adrian Mastracci has some simple words of advice: "Aim for the most flexibility and the fewest surprises."
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