# The 4% rule of withdrawal vs the RRIF required withdrawal rate



## Tostig (Nov 18, 2020)

I'm sure all of you have heard of the 4% rule of withdrawing from your retirement funds that could hypothetically make your retirement funds last forever.

However, I don't think this could apply for Canadians with an RRIF. The required RRIF withdrawal rate starts at 4% when you are 65 years old and progressively increases each year to 20% when you're 95.

Am I missing something here? Why are there Canadian websites and videos that describe the 4% rule when it shouldn't apply to us?


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## agent99 (Sep 11, 2013)

1. You dont need to spend everything you withdraw.
2. Few have all their money in a rrif
3. The 4% safe withdrawal is just a planning tool to be used with caution. The number may be too high these days. Or maybe not.


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## afulldeck (Mar 28, 2012)

Tostig said:


> I'm sure all of you have heard of the 4% rule of withdrawing from your retirement funds that could hypothetically make your retirement funds last forever.
> 
> However, I don't think this could apply for Canadians with an RRIF. The required RRIF withdrawal rate starts at 4% when you are 65 years old and progressively increases each year to 20% when you're 95.
> 
> Am I missing something here? Why are there Canadian websites and videos that describe the 4% rule when it shouldn't apply to us?


Canada wants its taxes before you forget where you put your monies 
The RRIF rules are just paternalistic crap that some government official believe is in your best interest because at 71, you no longer can be trusted to look after yourself.


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## AltaRed (Jun 8, 2009)

Nonsense.... RRIF rules were established after a lot of federal and provincial actuarial work to determine relatively conservative rules on the depletion of a balanced 60/40 retirement portfolio by age 100? (or 95?) based on historical financial market criteria. The concept was to reasonably provide a retiree with an income stream that would not prematurely run out while at the same time reimbursing the taxpayer (us collectively) for the loans granted from 40-50 years of contributions. The taxpayer (us collectively) is simply recovering their contribution and the investment gains made on that taxpayer loan. Any other depiction of RRSPs/RRIFs is nothing more than malicious disinformation. The RRIF withdrawal rules were relaxed in 2015(?) I believe due to longer actuarial longevity of individuals.

The 4% SWR is a planning tool that is completely inflexible as to asset allocation and to market volatility. In some cases, skilled investors can actually increase their portfolios despite 4% SWR withdrawals, some will flame out due to poor investment skills or bad luck due to 'sequence of returns' risk, or overly conservative asset allocations.

Variable Percentage Withdrawal methodology is a similar concept to RRIF withdrawal rates and is entirely responsive to asset allocation selection and to market performance. It was originally constructed for US use and adapted and back tested for Canadians. It allows the retiree to spend more in early years while protecting against going broke.

Just like RRIF percentage tables, it does require one to be flexible in their withdrawals to accommodate bad equity years. For example, back in 2008-2009, the amount that could have been withdrawn in 2009 would have been less than the amount withdrawn in 2008 simply because one's portfolio would have been less on Jan 1 2009 than it was on Jan 1 2008. That is the key to success.

RRIF and VPW percentages simply tell one how much they can safely withdrawal. It does not say one has to spend that amount, just as Agent99 articulated. Anyone denigrating the RRIF withdrawal percentages has no idea what they are talking about.


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## Tostig (Nov 18, 2020)

Thanks, everybody. When the time comes, I'll see if I'm able to spend just 4% and then stash away the rest (after taxes, of course) in my TFSA and taxable investment accounts.


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## afulldeck (Mar 28, 2012)

AltaRed said:


> Nonsense.... RRIF rules were established after a lot of federal and provincial actuarial work to determine relatively conservative rules on the depletion of a balanced 60/40 retirement portfolio by age 100? (or 95?) based on historical financial market criteria. The concept was to reasonably provide a retiree with an income stream that would not prematurely run out while at the same time reimbursing the taxpayer (us collectively) for the loans granted from 40-50 years of contributions. The taxpayer (us collectively) is simply recovering their contribution and the investment gains made on that taxpayer loan. Any other depiction of RRSPs/RRIFs is nothing more than malicious disinformation. The RRIF withdrawal rules were relaxed in 2015(?) I believe due to longer actuarial longevity of individuals.


It is not nonsense its' nuanced. And my views on the structure of RRSP/RRIFs are not "malicious disinformation" they are consider opinions (gallows humour aside.) 

To wit, I agree with what you are saying, that the RRIF rules were established by federal and provincial actuarial work along the line that you suggested. I take no issue on the quality or the outcome of their work. But I assume we disagree on the whether it is "paternalistic" or not. I say it is. I do not need someone else telling me how to deplete and when. If these depletion rules didn't exist --- the taxpayer will still get its due and "more" at the time of death, or at the time any withdraws occur. My issue is I don't need anyone telling me how to unwind my life and at what rate. 

That said, I've come to the conclusion that RRSP have many problems due to a history of bureaucratic decisions that, although not intended, turn out to be unfair to the individuals including but not limited to; PAs equivalency problems, company failures, and tax bracket consolidation. RRSPs are rather rigid tool and do not adjust well to disasters individual face in the work environment or to the new dynamic working environment most new worker enter. RRSP are not "fair" when compared to DB Plans because of these issues. I would vote to have RRSPs retired in favour of enhance TFSA for those without DB Pensions--which I come to believe is most of the private working population.


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## AltaRed (Jun 8, 2009)

No one has to avail themselves of the RRSP tax deferment mechanism if they can't agree with RRIF withdrawal rules. For those that participate however the taxpayer, wants a fairness mechanism with respect to when it gets its loan to you back. It really is more than fair given actuarial death rates.

If you don't like the RRIF withdrawal table, one still has the option to purchase an annuity instead at RRSP conversion time and it will be just like a DB pension. Nothing more, nothing less. Indeed, that is the only way the contents of an RRSP could be converted at one time. No whining on now having the added flexibility of "mostly" personally controlled withdrawals.

Added: DB (RPP) pensions have the same issues with respect to marginal tax rates in that contributions attract a deduction the same way that RRSP contributions do. Then upon retirement, a DB pension is then taxed fully on then applicable tax rates. Same as an annuity or RRIF withdrawals. I can't comment on PA equivalency issues. As for company failures, that issue is more pronounced with a DB pension. At least with an individual or group RRSP, it is always fully funded and it is always separate from and under the individual's control.


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## afulldeck (Mar 28, 2012)

AltaRed said:


> No one has to avail themselves of the RRSP tax deferment mechanism if they can't agree with RRIF withdrawal rules. For those that participate however, the taxpayer, however, wants a fairness mechanism with respect to when it gets its loan to you back. If you don't like the RRIF withdrawal table, then purchase an annuity instead at RRSP conversion time and it will be just like a DB pension. Nothing more, nothing less. Indeed, that is the only way the contents of an RRSP could be converted at one time. No whining on now having the added flexibility of "mostly" personally controlled withdrawals.


That's just skirting the "unfairness" question. Rather than to comment on it directly. I'm the taxpayer and user and I want fairness for both. It's still paternalistic in the worst sense of that word. The rules have changed many time, and have not been favourable after the fact. Forcing an annuity is not a equal to the DB pension plan especially after the "unfairness" has occurred. Even the government realized how skewed the equation was when they eliminated the annuity requirement because low and behold it wasn't working well for the citizens. 

Your statement defining the taxpayer is a misdirection, your defending the government's bad implementation record. Fairness must work for everyone otherwise it isn't really fair is it?


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## AltaRed (Jun 8, 2009)

You will have to do better on 'government's bad implementation record'. There is nothing in any study I've seen to suggest the methodology is anything but fair to the holder. The ONLY gripe is the minority situation where the marginal tax rate on withdrawal is higher than the rate on which the tax credit was taken during contribution years. That affects a small minority of retirees and affects those receiving DB pensions just the same.


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## afulldeck (Mar 28, 2012)

AltaRed said:


> You will have to do better on 'government's bad implementation record'. There is nothing in any study I've seen to suggest the methodology is anything but fair to the holder. The ONLY gripe is the minority situation where the marginal tax rate on withdrawal is higher than the rate on which the tax credit was taken during contribution years. That affects a small minority of retirees and affects those receiving DB pensions just the same.


I believe in fairness for all. Not just for a chosen few. 

Pension Adjustment for non-government DB plans were inherently lopsided due to the fact PA was set to be equal to the DB plans Government employee have. They were and are not----Sears and Nortel are prime examples. 

But to your question of fairness and commentary: 








Why it's time to rethink the 'outdated, unfair' RRSP contribution limit


The 'majority of Canadians who save for retirement in (RRSPs are) at a major disadvantage,' says a new report from the C.D. Howe Institute




financialpost.com


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## AltaRed (Jun 8, 2009)

At least some of the CD Howe analysis is flawed. Here are 2 specific examples:


> Furthermore, RRSP savers and defined-contribution plan members cannot pool longevity risk across other retirement savers like defined benefit plan participants can and often incur both higher risks and higher costs than defined-benefit plan members.
> 
> In the event of a market correction or downturn, RRSP and defined-contribution plan savers aren’t able to contribute any extra funds to cover market losses. Contrast this with defined-benefit plans in which losses must be offset by their plan sponsors. These factors alone would justify more generous tax treatment of retirement saving in these plan, well beyond the outdated Factor of Nine.


In the first instance, it obviously depends on whether one dies before or after actuarial death date. One cannot pick or choose. Die too early with a DB pension....too bad, sorry. OTOH, live to be an old toad and win... One can do the same with an annuity upon RRSP conversion.

In the second instance, DB plans can be over funded or under funded. If an employer cannot top up a deficiency due to solvency....too bad, sorry. The employee/pensioner has no control over that. It is a good reason, employers are running from DB plans.

You have to take CD Howe with a shaker of salt, just as one would with the Fraser Institute or CCPA. They all have vested interests in THEIR ideology. There will be no 100% equivalence with DB pensions in all conditions because they can't be. Not without RRSP participants funding their own shortfalls as an example. Much of the post is just not apples and apples.

Now I will grant you perhaps the Factor of 9 needs to be re-visited, but that simply means that only the contributors to RRSPs who have the financial means to do so could contribute more. As it is, the accumulated unused RRSP contribution room that has accrued suggests few can fund 18%, never mind 20% or 30% as CD Howe suggests. It is mostly an academic exercise given the wide gap between potential and actual usage.

Added: Apologies for taking this off-topic but couldn't let the defamation of RRSPs/RRIFs stand unchallenged.


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## afulldeck (Mar 28, 2012)

Still haven't won me over. I don't expect RRSP/RRIF to be perfect in "fairness", but I do as a Canadian, expect constant improvement towards that goal. Governments of all stripes have let the people of Canada down. I know too many real people who have been hurt by the smugness, lack of action, and double speak of politician with respect to these issues. It's a travesty that should not exist. So yes, I don't think of this as an academic exercise I think of it as progression towards something better. Its fairness for all Canadians, not just a few.


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## AltaRed (Jun 8, 2009)

I know you are dug in so I have no fantasy about winning you over. Couldn't let your position go unchallenged though.


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## cainvest (May 1, 2013)

AltaRed said:


> The ONLY gripe is the minority situation where the marginal tax rate on withdrawal is higher than the rate on which the tax credit was taken during contribution years. That affects a small minority of retirees and affects those receiving DB pensions just the same.


Is this really an RRSP problem or a people not knowing how to invest problem. Also, doesn't the TFSA help in this regard, as in, people in lower marginal brackets can save without higher taxes later?


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## james4beach (Nov 15, 2012)

Among my friends (in their 30s and 40s) I know of only a couple people who have DBs and they are all quite nervous about their employer's solvency and the health of the DB pension.

afulldeck: I don't agree with your complaints. You insist on comparing the self funded RRSP vs DB pensions.

They are not equivalent things and various actuarial approximations were made to achieve some equivalence, but they can't easily be compared.

When comparing these two for "fairness" you can't pick and choose qualities only when they work out against you. For example you're complaining about unfair pension adjustment for Nortel/Sears, where the individual couldn't add their own funds into their RRSP because of existing DB contributions. But this is a very selective complaint only relevant to a failed DB.

You can't simultaneously complain about the pension adjustment relating to _failed DBs_, while also complaining that _successful DBs_ end up being a better deal than an RRSP fully funded by oneself. This in itself demonstrates how different these things are... and it can work out *in favour of either* the RRSP or the DB pension.

One of my friends complains to me that his company has a shaky DB, and due to pension adjustments, he is unable to add to his own RRSP. But how will this play out? It can go either way:

Future 1: his pension is fine, and then I will complain that my RRSP was unfair compared to his DB
Future 2: his pension blows up, and then HE will complain that his DB was unfair compared to my RRSP
Does the system put me, or him, at a disadvantage? Currently, he's jealous of me (because my RRSP has no company risk) and I'm jealous of him (he has a DB which will be a sweet deal if it remains solvent).

They are different things.


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## afulldeck (Mar 28, 2012)

james4beach said:


> afulldeck: I don't agree with your complaints. You insist on comparing the self funded RRSP vs DB pensions.
> They are not equivalent things and various actuarial approximations were made to achieve some equivalence, but they can't easily be compared.


You misread my argument (or I'm a terrible writer or both.) I'm not insisting to compare the self funded RRSP to a DB Pension. The government did. They made the equivalence by bring in the Pension Adjustment Rule (Factor 9). I just pointed out that it's unfair to some groups of people. 

My argument to be precise, is that RRIF rules are paternalistic because I'm told when and how much, just as a parent would tell a child. I suggest, that as an adult I can decide exactly when and how much---better than any arbitrary rule. No one has countered that position. BTW, the withdraw rates have changed because actuaries are realizing the mistake....

Altared stated that the gov"...wants a fairness mechanism with respect to when it gets its loan to you back..". My counterpoint is they get their monies back when I withdraw or at the final withdraw. No where is the government or the taxpayer treated unfairly. So again, as an adult, I don't need to be told how or when. 



james4beach said:


> When comparing these two for "fairness" you can't pick and choose qualities only when they work out against you. For example you're complaining about unfair pension adjustment for Nortel/Sears, where the individual couldn't add their own funds into their RRSP because of existing DB contributions. But this is a very selective complaint only relevant to a failed DB.


It's not a selective. You made a distinction where I didn't. The DB outcome was not my prime consideration, it's the structural equivalency given to us by the government. The government pulled a "9" out of a hat and magically treated all DB pensions the same. They objectively are not. Taxpayer backed public DB's are qualitatively and quantitatively different from an employer DB funded plan. How some government bureaucrats equated the two I will never understand. 



james4beach said:


> You can't simultaneously complain about the pension adjustment relating to _failed DBs_, while also complaining that _successful DBs_ end up being a better deal than an RRSP fully funded by oneself. This in itself demonstrates how different these things are... and it can work out *in favour of either* the RRSP or the DB pension.
> 
> One of my friends complains to me that his company has a shaky DB, and due to pension adjustments, he is unable to add to his own RRSP. But how will this play out? It can go either way:
> 
> ...


Your example is focused on the outcome, rather than the "fairness" of the rules. Antithetical to your outcomes could also be constructed. It's the rules that need be examine closely, not by just a chosen few but by all. 

In anycase, although this is a fascinating discussion I didn't really intend to go down this rabbit hole.


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## kcowan (Jul 1, 2010)

On the DB side, I worked for a company for 25 years and they eliminated COLA and foreign health care coverage just before I retired. During all those years, I was severely limited in RRSP deposits. I would have preferred full RRSP contributions during that 25 years.

I think the WD rates are based on them wanting their tax money before we die. Nothing I can say in this forum will change that.


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## fireseeker (Jul 24, 2017)

kcowan said:


> I think the WD rates are based on them wanting their tax money before we die. Nothing I can say in this forum will change that.


It's unusual that a borrower (which is what an RRSP depositor is, assuming you claim the tax break) feels they can dictate the terms of repayment.
Try telling your bank that you plan to repay the mortgage only when you feel like it -- and maybe not till death.

If you don't like the terms, don't use the RRSP. Problem solved.


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## afulldeck (Mar 28, 2012)

fireseeker said:


> It's unusual that a borrower (which is what an RRSP depositor is, assuming you claim the tax break) feels they can dictate the terms of repayment.
> Try telling your bank that you plan to repay the mortgage only when you feel like it -- and maybe not till death.
> 
> If you don't like the terms, don't use the RRSP. Problem solved.


False equivalence (to mortgage) and an Hobson's choice in the Canadian Context.


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## mmlucki99 (Aug 25, 2020)

kcowan said:


> On the DB side, I worked for a company for 25 years and they eliminated COLA and foreign health care coverage just before I retired. During all those years, I was severely limited in RRSP deposits. I would have preferred full RRSP contributions during that 25 years.


This is very bad ! was it a private company or crown corporation ? with no COLA, it is not worth it , I did not know if the can do this , was there any compensation or at least with the part that you contributed before they change rule ? Make me worry thinking about it.


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## Beaver101 (Nov 14, 2011)

^ Has to be a private company and they, the employer, can make whatever changes they want to their pension plan (particularly a DB one) as they see fit (aka most cost effective to the point of penny-pinching) since they own and sponsors it. I.e. the employer doesn't care whether you, the employee, thinks it's a bad idea, not worth your while staying there or worry until you get warts working there.


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## mmlucki99 (Aug 25, 2020)

Beaver101 said:


> ^ Has to be a private company and they, the employer, can make whatever changes they want to their pension plan (particularly a DB one) as they see fit (aka most cost effective to the point of penny-pinching) since they own and sponsors it. I.e. the employer doesn't care whether you, the employee, thinks it's a bad idea, not worth your while staying there or worry until you get warts working there.


 Thank you. 
For a not-for-profit company, has 2 plans, old plan has index, the new plan for someone got hired later days does not have index. With the current economy, I just hope the old plan will not be effected.


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## Beaver101 (Nov 14, 2011)

mmlucki99 said:


> Thank you.
> For a not-for-profit company, has 2 plans, old plan has index, the new plan for someone got hired later days does not have index. With the current economy, I just hope the old plan will not be effected.


 ... since you're aware of this "change", then I presume you would have a plan document telling you so in which case you don't need to hope on this provisional grandfathering. 

All changes to a pension plan has to go through the pension authority of which it has registered with (Provincial for private companies and not for profit I believe, Crown goes to the Fed).


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## kcowan (Jul 1, 2010)

Yes the company was private non-union, and the changes were made just before a major downsizing. Existing retirees were grandfathered. Subsequently, they offered the option of converting to DC.


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## Gator13 (Jan 5, 2020)

On the topic of DB pensions, does anyone know what happens if a private company cannot afford to continue funding an IPP or the business is sold? (With the IPP being for a single member)


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## kcowan (Jul 1, 2010)

The pension recipients get in line behind other creditors to settle for cents on the dollar. I think Nortel got 70 cents.


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