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My wife is currently drawing $24,000 per year from her RRIF, which has a balance of $510,000. She is also receiving OAS, CPP and a work pension of $22,000. She is 67. Minimum RRIF withdrawals? My question is if it would be prudent to start making larger withdrawals to try and reduce the tax that the estate will pay. I know the RRIF would come to me if something were to happen (God forbid), but it would still present the same problem.
She is under the threshold for any OAS clawback, and we split pension income as my pension and CPP is $84,000.
I know that any larger withdrawals will impact her OAS but I’m concerned with the large RRIF.
—Randall
How to draw down from a spouse’s RRIF
Hi, Randall. You are asking a question best answered by a collaborative planner using computer simulation. Yours is a hyper-complex problem. And for you to confidently decide what to do based on my advice, you need some experience and knowledge about the variables involved. Without knowledge and experience, you’re putting a lot of trust in the person giving advice.
Fortunately, when working collaboratively and using computer simulation, planners share their knowledge and interpret the results of computer simulation for you. At the same time, computer simulation gives you experience and learning in a short period of time.
Having said that, you’re not sitting with me, so without seeing the results of 27 different scenarios, you’re going to have to trust me on this.
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Explore different scenarios from a planner for RRIFs
In running the scenarios, I assumed a few things:
- You and your wife are both 67
- Her total indexed income with Canada Pension Plan (CPP), Old Age Security (OAS), registered retirement income fund (RRIF) and pension total $68,500 a year
- Your income with OAS is $96,500
- You each have $150,000 in tax-free savings accounts (TFSAs)
- You are maximizing your TFSAs each year.
- After tax and TFSA contributions, you’re spending $120,000 a year, indexed for life to age 90 for you and 91 for your wife.
Also, to make things interesting, I assumed 2% inflation and ran scenarios with investment returns of 3%, 5% and 7%.
For each scenario, I assumed different life expectancies for both you and your wife, including 90/91, 95/96, 99/100 and 90/75.
Finally, I allotted for no change in spending throughout your life. This is not realistic but it makes comparisons interesting and easy to do. Plus, I didn’t have your thoughts on how you think your spending may change over time.
Each scenario assumes minimum RRIF withdrawals. So, to answer your question of whether you should withdraw early from your RRIF, I ran scenarios increasing RRIF withdrawals to $45,000 and $70,000, and one that depletes the RRIF by your wife’s life expectancy. I would have loved it if you were sitting next to me seeing the different simulations and contributing your thoughts and questions. There were some interesting and unexpected results.
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How to interpret planner simulations
The first thing I noticed was that the final tax and probate (for Ontario) on the different return scenarios (3%, 5% and 7%) is 4.8%, 10.4%, and 10.9%, respectively, on your total estate, if you both live a normal healthy retirement to ages 90 and 91. Not much to worry about there. If the taxable amount seems small, it is because by age 90/91 the bulk of your investments will be in TFSAs.
In the scenario where you’re living to 99 and 100, the tax and probate on the final estate drops to the 3% to 4% range, again the TFSA is larger and the RRIF is smaller. Drawing the extra $45,000 and $70,000 early from the RRIF resulted in less final tax but also a smaller estate.
What marginally worked was drawing enough to deplete the RRIF by age 90. There was no difference with the 3% return scenario, but the 7% scenario had a $31,000 advantage.
In the age 99-and-100 scenario, there’s still no difference with the 3% return solution, but, interestingly, the 7% return solution now has a disadvantage of $65,000 when life expectancy extends. It appears it would be better to stick with minimum RRIF withdrawals, should your wife to 100.
To me, the more interesting results are in the scenario for ages 90 and 75. Say, if you both live to 90 and 91, earning a 5% return, your final estate is worth about $2,172,000. If your wife passes at 75, and you continue spending $120,000 per year indexed, the final estate when you’re 90 is $695,000, about $1,477,000 less than if you and you wife die at 90 and 91. That is almost unbelievable.
What happened?!
It wasn’t tax that cut the value of your estate; it was the loss of CPP and OAS. Lifetime CPP and OAS dropped by $511,800, forcing you to draw more from your investments to make up the difference, leaving less money to grow and compound tax-free.
When does depleting a RRIF make sense?
There’s a clear advantage to drawing money from your RRIF early, when you know your wife could pass at 75. But here lies the question: Do you plan for a shortened life expectancy or a longer-than-expected lifespan? My suggestion is to plan for an extended life expectancy and make the minimum RRIF withdrawals, if that is all you need to live an enjoyable retirement. If you pass in the near future from a terminal health issue comes up or you’re in your late 80s or 90s, it may make sense to begin drawing larger amounts from your RRIF.
Read more about retirement planning:
- How to allocate a RRIF for secure income in retirement
- Is real estate the best investment for a Canadian retiree?
- What to do if you outlive your retirement savings
- How to make sure you have enough money to fund your RRIF withdrawals
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