Seniors are facing double threat of fallout from virus

The stock market rout sparked by the novel coronavirus pandemic is placing an additional stress on Canadian retirees who may face a double-digit hit to their retirement accounts on top of the health threats posed by the virus.

“Negative returns for investors in a period when withdrawals are being made from the underlying investments … increases the risk that they will run out of money during retirement,” said John Natale, head of tax, retirement and estate planning services at Manulife Investment Management.

“This is obviously a disastrous result.”

On Wednesday, the World Health Organization deemed the fast spreading COVID-19, which has proven particularly deadly for older victims, a global pandemic.

The same day, Canada’s main stock index, the S&P/TSX composite, crossed into bear market territory, meaning it had fallen 20 per cent from its recent high.

Then on Thursday, it fell an additional 12 per cent.

Unlike younger investors, who may have decades to recoup such losses, those who are retired and living off the capital and income from their investments have to either cut their living expenses or find other sources of income, if that’s even possible, Natale said.

For example, if a 75-year-old had $500,000 they were planning to live on for 10 years at a rate of $50,000, a 20-per-cent drop in capital would reduce that annual income by $10,000 to $40,000.

There are implications, too, for withdrawals from registered retirement income funds, or RRIFs, tax-deferral investment vehicles that have minimum annual withdrawals after age 71.

Minimum withdrawals are calculated at the beginning of January, in this case before markets began to tumble.

“This is a very large blip. It’s kind of unprecedented,” said Tara Benham, national tax leader at Grant Thornton LLP.

“When the markets decline substantially — like they have of late — the overall value of the retirement fund is hit much harder by those withdrawals.”

One concern is that the investments underlying a $40,000 withdrawal determined in January, triggering a $12,000 tax payment, would only be worth $30,000 today, which would have triggered tax of only $9,000.

“There’s essentially a pre-payment of that tax,” said Benham.

Retirees don’t have to pull the money out until the end of the year, and might choose to wait it out in hopes markets bounce back by then, she said.

“On the other hand, if that crystal ball were wrong and the markets declined further, then the retiree may find themselves wishing they had taken their withdrawal sooner,” said Benham.

She said there is potential for the federal government to step in, as it did once before in 2015 when it allow some re-contributions to RRIFs.

The federal government could opt to do the same this time, or to reduce the amount that seniors must withdraw.

“That is something they could announce in budget or something they do as part of what they’re doing now … as part of the pandemic relief,” Benham said.

“If the markets don’t recover by December, that could have a significant impact on somebody’s portfolio.”

Financial Post