Martin’s budget ignores RRIF problem

Poor Paul Martin. Can’t do anything right. At least, that’s the way it sounds when you listen to the cacophony of criticism that erupted in the wake of his Monday budget speech.

Not enough money to the armed forces. No new money for everyone’s number one concern, health care. Dangerous flirtation with deficit financing. Not enough economic stimulus. No money for public transit. Nothing for the homeless. No badly needed GST relief for retailers. And on and on and on, depending on whose special interest was ignored.

Delivered the possible
To my mind, Mr. Martin did about as much as possible for a finance minister in a straitjacket and leg irons.

He delivered the budget everyone expected he would, beefing up security, focusing on border issues, walking the tightrope over the chasm of deficit financing, and shooting down many, if not all, of the more stupid ministerial hobby-horses like Brian Tobin’s national broadband scheme.

Still, I wish he had done a couple of things that wouldn’t have cost a lot and would have gone a long way towards making life a bit easier for certain segments of the population.

Neglected RRIFs&l;/TRONG>
Let me give you one example: There is nothing in the budget relating to retirement planning.

In one sense, that’s good. Constant tinkering with the RRSP rules over the years has created a lot of confusion in people’s minds.

Plus, any time Mr. Martin has looked at this issue, he has devised some new way of sticking it to seniors.

But there is one matter that badly needs addressing. It’s the formula that governs the minimum annual amounts to be withdrawn from registered retirement income funds (RRIFs) and their siblings, life income funds (LIFs) and life retirement income funds (LRIFs).

Next page: Problems with formula

Problems with formula
Currently, the formula for minimum withdrawal to age 70 is:

  • First, subtract your age on January 1st from 90
  • Then divide the market value of your plan on January 1 by that figure.

So for a 70-year-old, the minimum is 5 per cent of the plan’s value on that date.

From 71 on, the minimum is set as an escalating percentage of the value.

It is 7.38 per cent at 71, 7.85 per cent at 75, and so on.

Think about that. A 71-year old with a RRIF worth $100,000 must withdraw $7,380 that year. If the invested money does not earn at least that level of return, the retiree must dip into capital.

Low interest rates
With interest rates at their lowest levels in 50 years, it is impossible for a conservatively managed RRIF to generate such a return.

So the retiree faces two options:

  • Take more risk
  • Withdraw capital.

Taking undue risk at this stage in life is very unwise, as the stock markets have shown us over the past 18 months.

But withdrawing capital so soon could end up depleting the RRIF much earlier than expected and create a financial crisis down the road.

Wind up on welfare
A 71-year-old Canadian male can expect to live until 83. A female that age has a life expectancy of 87.  If a RRIF if the main source of retirement income, it must last for a long time.

If the assets of the RRIF are depleted too quickly, some of these people could end up on welfare in their old age.

Criticisms ignored
Organizations such as CARP, Canada’s Association for the Fifty-Plus, have drawn this issue to Martin’s attention. They have been brushed off – and that was when interest rates were much higher than today.

We’re storing up a problem for the future, and one that could be addressed at minimal cost by adopting a more flexible approach to minimum RRIF withdrawals. Perhaps base it on the average GIC five-year rate for the previous year.

Add that to the long list of budget criticisms. Maybe next year.

From the Dec. 17 edition of the Internet Wealth Builder.