Canadian retirees who invest in the Registered Retirement Income Fund (RRIF) must withdraw a minimum amount each year beginning at age 72.
TORONTO, April 25, 2023 /CNW/ – Whether or not they care about their day-to-day living expenses or their wealth, retirees want to make the most of their future finances. Many believe that withdrawing more from RRIF each year, and doing so early, will help achieve this goal.
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The truth is more complicated. When helping retirees choose an appropriate exit strategy, financial her planners must consider the full complexity of their situation.
FP Canada Research Foundation™ and Doug Chandler discuss RRIF’s exit strategy
The FP Canada Research Foundation funded a study evaluating the value of overdrafting from RRIF early on. It was conducted by his Doug Chandler, an actuary specializing in retirement research and an Associate His Fellow at the National Institute on Aging.
Joan Yudelson, executive director of the FP Canada Research Foundation, said: “With Doug Chandler’s expertise, we have discovered insights that help planners help retirees make more informed decisions.”
This study is particularly important given the larger debate on RRIF withdrawal strategies. Some articles in the media highlight opportunities to take advantage of tax differences, for example.
In particular, financial planners we recently surveyed found that withdrawing higher levels of RRIF assets, up to the threshold of a client’s current tax allowance, was the best option for increasing client income in the most tax-effective manner. I said yes.
Simply put, some planners may rely on heuristics and oversimplify a complex set of situations. This can be a problem for clients. Because research shows that predictions based on only one potential future scenario are unreliable and misleading.
Accelerated RRIF exit strategies are not always as valuable as expected
While it may be helpful for some, the study concludes that the value of withdrawing from RRIF more than necessary and before age 72 may be exaggerated. As an example, perceived benefits often disappear when the return on investment differs from the average expected return.
Financial planners considering a client’s RRIF strategy should consider factors such as the client’s potential longevity and future return on investment. However, keep in mind that forecasting based on a single age and set of returns may create undue risk.
“Helping a client decide when and how to exit RRIF is a complex task with many unknowns,” said Doug Chandler. “This study shows the importance of looking at the big picture. That means taking into account current and future tax rates, income split opportunities, investment risks and returns, and more.”
In short, there is no one-size-fits-all approach to creating an RRIF exit strategy. Financial planners must continue to rely on a combination of professional judgment and financial models.
visit FP Canada Research Foundation website View research papers and executive summaries. There are also practice notes designed to help financial planners apply the insights from their research.
Watch a video featuring Doug Chandler and representatives from two financial planning software companies. This video goes into more detail about research and its implications for practice.
About FP Canada Research Foundation™
The FP Canada Research Foundation is an independently registered charity dedicated to funding, promoting and disseminating financial planning research to improve the well-being of all Canadians. The Foundation undertakes technical research that examines and challenges current practices in financial planning, behavioral research that examines the impact of human behavior on effective financial planning, and research that examines the benefits of financial planning for society as a whole. .
Source FP Canada
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