Canadians Are Not Withdrawing From RRSPs At An Alarming Rate

by Mike Holman

Mark from the Blunt Bean Counter (an excellent blog) recently wrote about RRSPs and his theory that Canadians consider RRSPs to be holy and try their best to never withdraw from them.

This article stemmed from an excellent TFSA vs RRSP report written by Jamie Golombek of CIBC. Mark recounted a conversation with Golombek where Golombek’s answer to his “holy RRSP” theory was:

You may be surprised to learn that that 80% of all RRSP withdrawals are made by individuals under age 60, generally pre-retirement! Not much of a holy grail!

In Jamie’s report, the full text of that statistic is as follows:

Yet, cash-strapped Canadians seem to be accessing
funds in their RRSPs pre-retirement at an alarming rate.
Recent data shows that of the 1.9 million Canadians
who withdrew $9.3 billion from their RRSPs in 2008 (the
most recent year for which statistics are available), over
80 per cent of such withdrawals were made by individuals
below age 60. This suggests that RRSP funds are being
used well before normal retirement age to supplement
income.

I agree with Mark – I think that most Canadian who have an RRSP, treat that money very seriously and will go to great lengths to avoid withdrawals. The idea that Canadians are withdrawing from their RRSPs at an “alarming rate“, presumably 80% – is quite surprising and one worthy of further analysis, because I don’t think it’s true.

According to Golombek- the statistic “80% of all RRSP withdrawals are made by people under 60 and not retired” is proof that investors do not consider RRSPs to be the savings holy grail and have no problem withdrawing from them, even when faced with large tax penalties.

Even if this is true, it’s not much of an argument for TFSAs. If an investor can’t keep their hands out of the RRSP jar, they most certainly won’t be able to keep it out of the TFSA jar either. The only difference being that you can recontribute TFSA withdrawals at a later date.

What kind of withdrawals are we talking about?

I’m surprised that the 80% figure (% of people who made RRSP withdrawals in 2008 and were under 60 vs. all people who made RRSP withdrawals) isn’t higher. Most people will convert their RRSPs to a RRIF or annuity before taking any money from their retirement savings, so I wouldn’t expect very many RRSP withdrawals at any age to be for retirement income.

Of course, there are a group of retired people (less than 72 years of age), who choose to keep all their money in RRSPs and still make withdrawals, but I don’t believe that is the norm. Most retired people don’t make withdrawals from their RRSPs. If they want to withdraw money, they will convert their RRSP to a RRIF and then make withdrawals.

In other words – very few retired people make RRSP withdrawals, so most RRSP withdrawals should be from people who are not retired. The fact that 80% of those withdrawals are by people under the age of 60 (vs all ages) is practically irrelevant for this discussion.

Golombek’s statement can easily be misconstrued as being “80% of all withdrawals from registered retirement savings (including RRIFs) are for non-retirement purposes“, which is obviously not the case. Withdrawals from RRIFs and other retirement vehicles are not counted as part of the total withdrawals.

What percent of assets are being withdrawn?

The number (1.9 million) of people who did an RRSP withdrawal in 2008, is high and that is a concern. If you assume 20 million Canadians have RRSP accounts (I’m guessing), that is a pretty high percentage (10%) of people dipping into their RRSP each year.

On the other hand – $9.3 billion withdrawn works out to just under $5,000 per person doing the withdrawals. This doesn’t sound all that significant to me and leads me to think that Mark’s theory about people withdrawing assets they shouldn’t have contributed in the first place, is probably correct.

I spent some time looking at the actual data which you can find here (line 17).

I’ve summarized the relevant 2008 data on a table:

Age groupNumber of people withdrawingTotal $ WithdrawnAvg withdrawal $
under 20930 $1,013,000 $1,089
20-24 29,270 $48,619,000 $1,661
25-29 89,630 $167,827,000 $1,872
30-34 205,570 $404,018,000 $1,965
35-39 264,540 $689,849,000 $2,608
40-44 260,920 $822,715,000 $3,153
45-49 256,870 $1,166,018,000 $4,539
50-54 213,440 $1,320,826,000 $6,188
55-59 201,860 $1,506,642,000 $7,464
Total = 1,523,030Total = $6,127,527,000$4,023

If you only consider the 0-59 crowd – 1.5 million Canadians made an RRSP withdrawal in 2008 and the total amount withdrawn was $6.1 billion. The average RRSP withdrawal for that age group was $4,000.  Please note these withdrawal amounts do not include RRSP home buyers plan withdrawals or RRSP Lifelong Learner plan withdrawals since they are not considered taxable income.

There was $631 billion of RRSP assets in 2008, which means that the $6.1 billion in withdrawals represents just under 1.0% of those assets. If you assume that half (just a guess) of the $631 billion in RRSP assets were owned by people 59 or younger ($315.5 billion), then $6.1 billion in withdrawals is only 2.0% of those assets.

If people under 60 are collectively withdrawing 2% of their RRSP assets each year – that is not great news, but it certainly isn’t “alarming“.

Keep in mind there are a lot of reasons for withdrawing from an RRSP which are legitimate (at least compared to withdrawing for a vacation):

  • Divorce
  • Death of spouse
  • Job loss

Conclusion

I agree with Mark that RRSPs do enjoy a psychological and tax “moat” which prevents people from dipping into their RRSP.  This moat might give RRSPs an advantage over TFSAs for some people, even if the math indicates otherwise.

While I think Golombek created a great report comparing TFSAs and RRSPs, he is incorrect when he says that RRSP accounts are not considered a holy grail by the average investor.

The numbers suggest that non-retirement RRSP withdrawals are not very significant in terms of assets (only 2% of assets are withdrawn each year) and the majority of RRSP investors do not dip into their RRSPs to fund their pre-retirement lifestyle.

When deciding between a TFSA or RRSP, it’s important to keep in mind the psychological factors as well. If you are in a situation where investing in a TFSA is preferable to a RRSP, obviously the TFSA is a better choice – but only if you can keep the money inside the TFSA and out of your lifestyle.

 

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{ 8 comments… read them below or add one }

1 steve

when you are in a position of losing your home or withdrawaing funds from your RSP and not losing your home (e.g. lost your job and worked through savings before getting another), you will do whatever is necessary, even if it means taking money out of the RSP..

2 Echo

RRSP’s definitely have a perception of being untouchable whereas the TFSA can be easily accessed (and re-contributed to later, mind you).

I made the mistake of investing in my RRSP when I was 19-20 and ended up withdrawing the funds later on when I needed them.

I also plan on melting down my RRSP between 55-64, so I guess I would be contributing to that statistic.

3 mark goodfield(The Blunt Bean Counter)

Mike, first of all, thank you for the kind words about my blog. When I wrote my blog, I wanted to try and delve into the psychological aspects of the RRSP vs. TFSA argument, based on my client experiences. However, I only had anecdotal evidence to attempt to argue people consider their RRSPs the Holy Grail. You just provided a tremendous complementary statistical argument with your detailed analysis of the data. I know how much work you would have had to put into this blog to compile the statistics and write the blog. I applaud you for the effort. Great job, bring on Jamie, we have him double teamed :)

4 Michel Solis

A self-employed middle-aged adult who has a stroke of bad luck (illness of him-her-self, severe illness in the family, business breaking down) or the good fortune to be able to take a sabbatical would probably be planning properly if, within a year with very low income, he-she withdraws some RRSP amounts as part of the money to be used that year (even if there are some non-registered savings available). He-she would then take advantage of withdrawing some RRSP money under a lower tax bracket.

5 Michael James

If you’re right that Golombek’s statistics are for RRSPs only and exclude withdrawals from RRIFs, these statistics are extremely misleading. I assumed that the 80% figure included RRIFs because it makes no sense to exclude them.

6 Chad Tennant

I wonder if RRSPs and the Holy Grail concept will lose popularity amongst a younger generation of account holders aged 20-35 in the face of the TFSA account. Even though I embrace the genius of the “and” and recommend both under different conditions, the TFSA with its timeless accessibility may favor a changing mindset.

7 Jamie Golombek

The statistics above specifically look at RRSP withdrawals – not RRIF withdrawals.

We expect individuals to RRIF their money to live on when they retire, which for most, starts around age 60 or so. If someone needs retirement funds at age 60, they generally would NOT RRIF the RRSP because then it establishes a MINIMUM annual withdrawal percentage which they may not wish to take out annually. Instead, they keep the RRSP intact until age 71.

Those who do RRIF early, may be advised to do so only at age 65 to obtain pension income credit and the ability to pension split with a spouse or partner.

We generally do NOT think people will access RRSP money prior to retirement – age 60. The fact that of all the individuals who withdrew funds in 2008, 80% of them were under 60 is “alarming” to me…It means individuals are indeed taking money from their RRSPs, even if validly (divorce, job loss, etc.) before retirement.

If they were retired, and needed money to live on, I would expect more RRSP withdrawals from age 60 to 71 as many would NOT be RRIFing this money early.

The point of this whole exercise was to counter the notion that many finanical advisors suggest that RRSPs are untouchable and that, regardless of my proving “mathematically” that a client would have been better off maximizing the TFSA first, we need to protect clients from themselves (a “behavioural finance” appraoch, which is not wrong, but in many cases, isn’t justified by the numbers).

Thanks for the debate as I think it’s important and healthy.

8 Mike Holman

@Echo – I did something like that myself when I started working.

@Mark – Thanks for inspiring the idea for this post.

@Michel – Yes, there are a number of scenarios where RRSP withdrawals might be necessary and something even a good idea.

@Michael – The line on the income tax form says “registered retirement savings plan income” which wouldn’t include RRIF withdrawals.

@Chad – I don’t know what will happen in the future regarding these two accounts. I have to say that it drives me nuts when I hear people say they prefer the TFSA “because you don’t have to pay tax on the withdrawals” and ignore the upfront tax they pay.

Regardless, the main thing is to save – if a person feels better about saving with a TFSA and saves more as a result, they are probably better off.

@Jamie – Thanks for commenting – keep those reports coming!

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