Blogs & Comment

More on tax harvesting and RRSPs (II)

I recently wrote about how difficult it to optimize investment portfolios and retirement savings when those activities are so bounded by government regulations and programs. In essence, ones investments and retirement savings can be seen as tied up in a mandatory partnership in which the partner, government bureaucrats and politicians, expects a cut and can change the rules whenever their acumen and rectitude deem suitable. For more details, seethe column Tax harvesting and RRSPsand blog post More on tax harvesting and RRSPs.
A reader left a comment at the end of the column. It highlighted another dimension of the problem: the failure of government to make the necessary adjustments to adapt to changing circumstances in the socio-economic environment. His complaint about government obstructionism involved the minimum withdrawal rates mandated on Registered Retirement Income Funds (RRIFs),which currently begin at 7.38% for 71 year olds and rise continuously for each year to 20% by the age of 94.
He complains these withdrawal rates are too high for todays low-interest rate economy. Current withdrawal rates were set when interest rates were much higher than today and when the growth of the remaining fund could keep up with the depletion rate to some extent. This is no longer true for risk-averse seniors who prefer fixed-income investments. They will find their nest egg clawed back into the taxable sphere must quicker than anticipated.
The C.D. Howe Institutes William Robson is on side. He has argued that its time to lower minimum withdrawal rates from RRIFs or even abolish them altogether. Life expectancy is up and real returns on investments are down, he argues.
In 1992, when current withdrawal rates were set, the average interest rate on long-term Government of Canada bonds was 8.7% and 3-month commercial paper was at 6.7%. Under those circumstances, the required RRIF drawdown rates may have made sense. But now long-term government bonds yield 4% and money-market rates are under 1%, with seniors expected to live longer. Does it make anysense?