What is the 90-Age Formula
The 90-age formula is an equation that Canadian retirees use to calculate how much money to withdraw each year from their Registered Retirement Income Funds (RRIFs), a type of tax-advantaged individual retirement plan. Retirees must withdraw a minimum amount from the plan each year and can calculate the amount to withdraw using one of two formulas: the 90-age formula or the 90-percentage schedule.
Breaking Down 90-Age Formula
The 90-age formula is used by Canadian retirees to determine their minimum annual withdrawals from their tax-advantaged retirement accounts, starting at age 65. The 90-age formula is not typically used in the United States or elsewhere in the world.
The 90-age formula assumes that the retiree will live to be 90 years old. It calculates the annual withdrawal amount by multiplying the book value of the RRIF at the beginning of the calendar year by (1/ (90 – planholder’s or spouse’s age)). The morbidity calculation allows the RRIF to act as a lifetime annuity. The money withdrawn from the RRIF is taxable at the retiree's marginal tax rate.
The minimum withdrawal is calculated differently for RRIF accounts opened before 1993.
The 90-age formula can also be calculated using either the planholder’s age or the planholder’s spouse’s age. This can be an advantage for retirees who are seeking more flexibility in their retirement income. That's because they can use their spouse’s age in the formula, and, if the spouse is younger, they will have a lower minimum withdrawal than if they used their own age.
The planholder’s or spouse’s age on the first day of the year is the figure used in the calculation. For example, in 2018 a retiree born on April 2, 1949 would perform the calculation using the age 68, because that was his age on the first day of the year.
Example of 90-Age Formula
The 90-age formula is a fairly simple calculation. For example, at age 65 a retiree would perform the following calculation to determine a withdrawal rate:
1 / (90 – 65) = 4 percent
Assuming a RRIF book value of $100,000 as of December 31, the 65-year-old retiree would have a minimum withdrawal of 4 percent of that book value, or $4,000.
The following year, when the retiree is 66, the withdrawal rate would be slightly higher:
1 / (90 – 66) = 4.17 percent
Again assuming a RRIF book value of $100,000, the 66-year-old’s minimum withdrawal would be $4,170.
Because of this formula, every year, the minimum withdrawal increases by a slight amount.