# The 4% Rule



## Karen (Jul 24, 2010)

I keep reading, in articles on retirement, that in order to ensure we don't outlive our money, we should not spend more than 4% of it in each year of retirement. It seems to be such common advice from financial planners that I am puzzled as to why the goverment requires that we withdraw considerably larger amounts from our RIFs each year. I don't expect to need to convert my RRSP to a RIF until the legally required age of 71, but I'm shocked that the amount of withdrawal will be 7.38% then, rising each year until it reaches 20% at age 94+.

There has been a lot of pressure on government recently to increase the contributions to CPP in order to increase maximum pensions, but I haven't read anything suggesting that pensioners' groups such as CARP are pushing to have these minimum withdrawals reduced.

Have I missed something?


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## Potato (Apr 3, 2009)

You're missing the disconnect between your money, and your tax sheltered money. 

The 4% rule-of-thumb is to roughly keep your nest egg intact indefinitely, i.e.: to die with money left over. 

But the government doesn't want you to die with the bulk of your money still tax-sheltered. Just because you have to withdraw it though, doesn't mean you have to spend it if you want to stick to the 4% guideline.


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## Karen (Jul 24, 2010)

Valid points, Potato, but I still think we should not be forced to withdraw from our RIFs at more than the 4% rate, if at all. Won't the government actually get more tax on that money if I die with a larger amount in my RIF, as my daughters will inherit it and my estate will have to pay tax on the whole thing, rather than my paying a lesser rate of tax on annual withdrawals?


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## MoneyGal (Apr 24, 2009)

The issue is the time value of money - in addition to what Potato said earlier, the government (all other things being equal) would rather have that money sooner than later. 

The issue of required minimum withdrawals is an interesting issue of academic study (and practical consequences, too, of course!). I have been working on (editing) a paper which looks at the rationale and practice of RMDs around the world - once it is complete I can post a summary of the practices. 

Long story short is that there are valid actuarial reasons for setting the withdrawal rates where they are - but yes, you are forced into a scheme which is based on the whole population, not your specific circumstances. 

The 4% rule is very widespread, but it is not necessarily rational or appropriate. If you are interested in reading about the 4% rule in more depth, you may want to look at this paper - a keynote paper at the Retirement Income Industry Association meeting earlier this year.


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## stardancer (Apr 26, 2009)

The feds gave us a break on taxes all those years we were contributing. Now it's time to pay the piper, hence the withdrawal schedule for a RIF.

Just because you take it out, doesn't mean you have to use it. My husband starts this year, and I start in another 4 years. According to my projections, we won't need either withdrawal, so they will be rolled over into the TFSA, to be used in case of dire emergency. At the end, the TFSA will save the estate taxes, and the taxable RIF balances will be minimal.


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## Four Pillars (Apr 5, 2009)

Ditto what Stardancer said.

RRSP accounts have to be converted into RRIFs or annuities (or both) by the end of the year you turn 71. 

A lot of people are surprised/annoyed/mad at the RRIF mandatory withdrawal rates, but those rules were in place when they made their RRSP contributions and they should have known about them (in theory).


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## steve41 (Apr 18, 2009)

Here's a somewhat contrived example, but it shows just how 'approximate' the 4% rule is. A 55 yrold with normal cpp/oas and $500K in his RRSP. The tax behaviour is erratic, but not overly so. 4% rule unmasked


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## kcowan (Jul 1, 2010)

Also google Firecalc for more on the 4% guideline. BTW the guideline was developed when financial markets behaved differently than at present. Many people think 3% is a better ROT for anyone retiring today.


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