My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Tuesday, May 10, 2011

Accessing RRSPs before Retirement- the Holy Grail Revisited via life events

In searching the Internet for statistics on another matter, I recently stumbled upon a December, 2004 Statistics Canada Perspective document written by Philip Giles and Karen Maser on “Using RRSPs before retirement”.  Although this paper is now over six years old, is very apropos given my blog in March “The Kid in the Candy Store: Human Nature, RRSPs Free Cash and the Holy Grail.”. Mr. Giles and Ms. Maser examine the financial implications of seven life events and how these events might precipitate the removal of funds from an RRSP.

Before I move on with the details of the above noted paper, I want to reference the tremendous statistical effort by Mike Holman in his blog entitled Canadians Are Not Withdrawing From RRSPs At An Alarming Rate. Whereas I attempted to anecdotally reflect that RRSPs are the Holy Grail, Mike breaks down the statistics to reflect RRSP withdrawal rates are not as alarming as some purport.

Anyways, back to the 2004 document. I feel the statistics in this document speak in part to my conclusion that RRSPs are often accessed under financial duress in response to “life events”, and are not necessarily being used to supplement income or being used for discretionary purchases.

The authors listed the following as life events that could precipitate RRSP withdrawals and explored whether these life events did in fact contribute to RRSP withdrawals:

Death of a spouse: The paper concludes that the death of a spouse had the greatest effect on RRSP withdrawals. The authors note “The death of a spouse is a unique event in that it is generally unexpected and may often occur before adequate financial planning has taken place. In such a situation, RRSPs could provide a needed or useful source of funds.”

Separation or divorce: The impact of separation and divorce was smaller than for most of the other life events.

Involuntary job loss, starting a business: The authors surprisingly note that there was not an appreciable effect on RRSP withdrawals for those who lost their job, whereas starting a business was a factor. However, where these events resulted in an RRSP withdrawal, the withdrawal is large.

Birth of a child: This event has little effect.

Buying a house: Withdrawals under the Home Buyers Plan were excluded for purposes of the study. The purchase of a new house had only a slight effect on RRSP withdrawals, although, were money was withdrawn; it was of a more substantial nature.

Returning to school full time: For the major income earner, this event had little effect on RRSP withdrawal behaviour, except if a spouse was returning to school.

The reasons Canadians withdraw funds from their RRSP are varied; however, I am still convinced, most withdrawals are made from a position of need and this document reflects the life events that have the greatest effect upon RRSP withdrawals.


The Money Index

I would like to thank Tom Drake of the Canadian Finance Blog for including my blog on his Money Index listing. The Money Index was recently nominated for the Globe and Mail’s best Canadian investing blog, even though technically it is an updated directory of various blogs.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

6 comments:

  1. Isn't this topic dead yet? ;)

    Thanks for the mention. I agree with you (obviously).

    Bottom line is that not enough is known about exactly why people withdraw from their RRSPs. And as long as it isn't happening too much (which seems to be the case), it's probably not
    really worth another government study.

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  2. Mike, I now pronounce the topic officially dead. I just found the study and felt it wrapped up the topic. Now that tax season is over, I have a few other "philosophical" blogs to write, not sure you will find stats for them :)

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  3. Thanks for interesting top on withdrawing from RRSP's. In my Mom's case she is 68,divorced and living with my sibling for the last 8 years after selling her house. We are thinking about slowing taking money out of the RRSP for property that be her principle residence - otherwise she is not taking advantage of the cap. gains exemption. What do you think of this strategy ?

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  4. Hi Tony

    The strategy of withdrawing from the RRSP makes sense if you are "smoothing" your mom's income by lowering the tax paid each year by utlizing the lower marginal tax rates each year. In respect of the house, a house should be a home first and foremost and an investment secondary. If your mom would like her own house and you feel the real estate market is going to rise, than the idea may make sense. However, we have seen several articles lately saying the housing market over the next ten years will weaken as the boomers sell and there is not the same demand for houses. So there is no right or wrong answer as some think housing prices will increase and others say the opposite.

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  5. Hi Tony, Blogger had some issues this week and some posts and commments were not re-instated. In case you did not read my comments, I said something like this--It makes sense for your mom to remove monies from her RRSP if she is utilizing low rates of income tax and smoothing her income such that her income tax liability is less over combined years. In regard to the house, I consider a house a home first and foremost and an investment secondly. The principal residence exemption is only useful if your have a gain on the house. Thus, if you feel real estate will be a good long term investment your plan may make some sense. However, there are some that think housing prices may not continue to rise as in the past and the supply and demand ratio will change as more boomers sell and there are less buyers. There is no right answer.

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  6. I am surprised that there was no an appreciable effect on RRSP withdrawals for those who lost their job. I expect that they would withdraw the amount since they lost their jobs.

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