Author Topic: Canadian federal govt employees - severance payout  (Read 5775 times)

Heather in Ottawa

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Canadian federal govt employees - severance payout
« on: January 31, 2015, 08:27:09 AM »
If you work for the federal government, over the last several months, maybe your coworkers have been all abuzz about the severance options. I decided to post in the wall of shame and comedy not so much because of irresponsible spending of this money (though there was a rash of new car buying), but more because of all the smart and responsible people I work with floundering rather badly at what seems to be a pretty straightforward financial decision. How is your workplace handling it?

Severance was, among other things, intended for employees who will immediately go on to collect a pension. You'd get one week's pay for each (continuous) year worked, paid out at your current rate at retirement. Early retirees or those who moved to a different employer before retirement would get nothing. Definitely a link in the "golden handcuffs". In the last round of bargaining, it was agreed that all severance would cease to accumulate, but everyone would be paid out what they'd accumulated. You could take it now at your current rate, or at some point in the future, at your future rate of pay. Of course, you have all the usual options to shelter it from taxation, as with any other income.

People around me are freaking out, because it's an "enormous" windfall. We're a young-ish workforce, and typically, I'd guess people are getting about 5-8 week's pay... say, $5000-$8000 net, more if tax sheltered in an RRSP? Yes, a good chunk of change, but, damn, my husband and I stash about that much every month). People are also stymied by the whole tax-sheltering vs. pay off debt conundrum.

I have not heard of a single other person (besides myself) who is just going to let it ride. This is what blows me away. Maybe I'm wrong, but, unless you're going to use the money to pay off credit card debt, waiting seems like the best guaranteed return on your money. By waiting until my retirement year, that money is going to be taxed at a much lower rate in that year (because I don't intend to work the full tax year). Also, I'd hope to get at least one promotion before I retire... a promotion would represent about a 10% bump in pay. Then, for each year on the job, I can expect an annual increment of about 4% for about 7 more years until I hit the top of the pay grid for my current position (above inflation... there's another annual increase that roughly matches inflation). Anyways, to me that all looks like a solid choice. Maybe I could do better than a 4% return (beyond inflation) if I put the money in the markets, but I like to take my sure things when I can. I've explained my rationale to many co-workers (leaving out that I intend to retire sooner than anyone would ever believe), but so far, not one person has indicated that it would be the option they'd choose. Is it group-think? It's even making me doubt my own choice a bit. I even heard from one person who is taking the payout now at his "substantive" rate, even though he's currently acting one level higher, and there's paperwork underway to get him moved into that job as his substantive (so, he basically decided to leave that 10% promotion on the table in favour of getting money a few weeks or months sooner).

Our employer has organized a "financial fair" in which the big banks are going to send someone to talk about paying down debt, RRSPs and TFSAs, and then have information booths for each bank. I'm expecting many of my co-workers are going to sign up for some high-MER funds in an RRSP, or open a TFSA savings account and earn 0.5% interest, or do the classic "buy an RRSP and then pay off your mortgage with the tax refund" move that the banks love to sound so smart and caring by recommending. Argh. I guess I'm also bothered by the idea of taking financial advice from the people who are going to profit from getting their hands on your money... so I don't think "if you're a newer employee on a rapidly-growing salary trajectory, just leave it for a while" is going to get a mention.   

So Canadian government employees who are getting severance, want to share what strategy you went with, and why? What did your co-workers decide?

PEIslander

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Re: Canadian federal govt employees - severance payout
« Reply #1 on: January 31, 2015, 08:51:51 AM »
Are you saying that if you and your co-workers take the pay-out now, you keep working and in the future you'll still get another pay-out but that one won't be based on all the years you've worked - just for the years since this current buy-out? In other words, the current pay-out if accepted allows the gov't to reset the clock.

Heather in Ottawa

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Re: Canadian federal govt employees - severance payout
« Reply #2 on: January 31, 2015, 08:57:51 AM »
No, it's all over... you're frozen with however many weeks of severance credit you've accumulated. No more will ever accrue. You can have it paid out now, or in the future. The only thing that will change is whether those weeks are paid at your current rate of pay, or at your future rate of pay.

PEIslander

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Re: Canadian federal govt employees - severance payout
« Reply #3 on: January 31, 2015, 09:14:37 AM »
Thanks Heather. Let's say you do wait (as I would likely do to if promotions seemed inevitable and I already had a number of years under my belt). What would happen if you die before collecting the severance. Would your estate get that money or would the gov't not need to pay it out?
« Last Edit: January 31, 2015, 12:57:27 PM by PEIslander »

Self-employed-swami

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Re: Canadian federal govt employees - severance payout
« Reply #4 on: January 31, 2015, 09:15:06 AM »
Honestly, I'd take the cash sooner, just because I wouldn't trust the government to not cancel it all together in the next round of negotiations.  Nothing is guaranteed, especially when it comes to the government.

ms

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Re: Canadian federal govt employees - severance payout
« Reply #5 on: January 31, 2015, 10:23:04 AM »
Is there something wrong with using the refund to pay down the mortgage?

(sorry for messing with the quote - my browser is wonky)

I'm expecting many of my co-workers are going to sign up for some high-MER funds in an RRSP, or open a TFSA savings account and earn 0.5% interest, or do the classic "buy an RRSP and then pay off your mortgage with the tax refund" move that the banks love to sound so smart and caring by recommending. Argh.
So Canadian government employees who are getting severance, want to share what strategy you went with, and why? What did your co-workers decide?

scottish

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Re: Canadian federal govt employees - severance payout
« Reply #6 on: January 31, 2015, 11:33:54 AM »
Hmmm, not six years ago I remember a large number of laid off Nortel employees here in Ottawa waiting for their severance cheques, or taking a monthly severance payment when the company declared bankruptcy.

Under Canadian law the former employees were unsecured creditors, and wound up with only a small fraction of their severance.

Now I don't expect the government to go bankrupt, the lesson here is that there's a certain amount of risk attached to deferring this type of payment.    I can sympathize with the 'take the money and run' approach.

BTW, is this about a change in the collective agreement?   I remember hearing about some odd agreement where federal govt employees would get a severance payment if they decided to leave their jobs, unlike the conventional case where you get severance when you lose your job.

Canadian Nicole

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Re: Canadian federal govt employees - severance payout
« Reply #7 on: January 31, 2015, 11:37:07 AM »
I'm also with the fed govt.   I chose to take the severance last year rather than wait.   It was mainly a psychological decision because I've been somewhat obsessed with paying off our mortgage asap (see mr frugal toque's post from last week).    Also I still feel like I'm a ways from retirement and didn't want to wait that long.  Admittedly from a purely financial and logical point of view it may have been better to wait, but I don't regret taking it when I did and I loved the feeling of getting that much closer to no mortgage.     I know someone who plans to retire within a couple years and she opted to delay taking it but most other people I know took it now.

Self-employed-swami

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Re: Canadian federal govt employees - severance payout
« Reply #8 on: January 31, 2015, 01:11:39 PM »
Honestly, I'd take the cash sooner, just because I wouldn't trust the government to not cancel it all together in the next round of negotiations.  Nothing is guaranteed, especially when it comes to the government.

This sounds like the correct analysis to me and is the same reason I'm not anywhere near as gung-ho about government sponsored retirement accounts as most members of these forums.

I'm not worried that somehow the government is going to take my RRSP account funds, just that they might change tax laws, such that they are taxed at a higher rate when I need to withdraw from them (or cancel pension splitting).

robotclown

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Re: Canadian federal govt employees - severance payout
« Reply #9 on: January 31, 2015, 01:21:06 PM »
Honestly, I'd take the cash sooner, just because I wouldn't trust the government to not cancel it all together in the next round of negotiations.  Nothing is guaranteed, especially when it comes to the government.

This times infinity.  Anytime the government, any government, offers you the choice between money now and money eventually, take it right now.  Otherwise they'll give it to somebody else, and maybe they'll have something to pay you when it's your turn.

Posthumane

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Re: Canadian federal govt employees - severance payout
« Reply #10 on: January 31, 2015, 01:36:51 PM »
I took the public service severance payout in 2013 when it was offered (so kind of surprised that it's only coming to light now in your department). I also took same option when the military went the same route. The reasoning behind my decision was that my investment portfolio has generally been returning a higher rate than my pay increases, and it looks like that will continue to be the case for the foreseeable future. I may or may not get a promotion before leaving the public service, since I may be leaving within a few years. The pay increases are not guaranteed at a stated rate since collective agreements are renegotiated every few years.

ontario74

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Re: Canadian federal govt employees - severance payout
« Reply #11 on: February 07, 2015, 07:06:33 PM »
A few people I know left the severance amount with the employer, but I decided to put it into my RRSP. No regrets.

In 2007 I got a pay equity amount (5K) and bought back two years of service from when I was a student (mid-90s).

Finally, when I left the public service last year I also opted to transfer the value of my pension and invest it 3 ways and now have a true emergency fund.

Each of these steps helped me to go from -24K net worth 3 years ago to $450K this year.

Dee

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Re: Canadian federal govt employees - severance payout
« Reply #12 on: February 07, 2015, 10:27:00 PM »
Heather, I sounded out these forums last year when I had to make the call on my severance pay out: http://forum.mrmoneymustache.com/ask-a-mustachian/severance-pay-take-pay-out-now-or-pay-on-(early)-retirement/msg105214/#msg105214.

Ultimately, I decided on the half now, half on retirement approach.

Part of my thinking was considering that there is a real possibility that I might want to down shift within the public service before I retire, and take a part-time position (if such a thing exists) or an administrative position, at a much lower rate of pay than my current substantive level.

I think pretty much everyone I know took the severance now, including people who normally procrastinate or avoid filling out forms.

Glad to hear your thinking on it. To me, it was a choice where the best outcome was not clear, mostly because it required knowing one's income on leaving the public service -- something that can't actually be known but only guessed at based on probabilities.

Heather in Ottawa

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Re: Canadian federal govt employees - severance payout
« Reply #13 on: February 09, 2015, 06:50:00 PM »
You'll have to update in a few years and let us know which half did better!

I'm still amazed that not one other person I work with is taking the pay-me-later approach, but I guess I can understand the appeal of money in hand. Thankfully, most of the talk about what to do with the money has died down, so I can stop biting my tongue several times a day when I overhear of financial misconceptions, bad purchase decisions, or sad tales of large debts to be paid down.

going2ER

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Re: Canadian federal govt employees - severance payout
« Reply #14 on: February 10, 2015, 01:08:12 PM »
I work for the province and we are expecting the same thing to happen to us. However, I did not hear anything about the Feds being able to leave it there and be impacted by future pay increases, why would anyone chose that option? LOL.

My coworkers wife works for the Feds and they got her payout and spent it since she will have a pension and you never know what will happen in the future!

Dee

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Re: Canadian federal govt employees - severance payout
« Reply #15 on: February 10, 2015, 05:37:57 PM »
I will have to report back in a while. So far I've done well on both portions of my severance -- my pay has gone up so the part I left behind for when I leave the public service would be worth more if I left now than if I had taken it when it was offered. As far the part I did take, I've invested it within my RRSP, converting it to US dollars and buying shares in Vanguard's S&P 500 ETF (VOO).

I like to think it was win-win.

ontario74

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Re: Canadian federal govt employees - severance payout
« Reply #16 on: February 15, 2015, 06:36:18 AM »
Each of these steps helped me to go from -24K net worth 3 years ago to $450K this year.

Damn, that is a pretty impressive net worth growth in 3 years by any metric.

Yeah I know, sounds nuts. I was surprised when my financial advisor told me as well. I put 225K away just this year, so that's a big part of it, plus my pay went up 10K over that time and paid off car and chunk of the mortgage. Guess that accounts for it. Mind you, the net worth calculation counts the whole value of my house, including the part I haven't paid off yet.

NotJustDreaming

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Re: Canadian federal govt employees - severance payout
« Reply #17 on: February 17, 2015, 09:23:05 AM »
...
I have not heard of a single other person (besides myself) who is just going to let it ride. This is what blows me away. Maybe I'm wrong, but, unless you're going to use the money to pay off credit card debt, waiting seems like the best guaranteed return on your money. By waiting until my retirement year, that money is going to be taxed at a much lower rate in that year (because I don't intend to work the full tax year). Also, I'd hope to get at least one promotion before I retire... a promotion would represent about a 10% bump in pay. Then, for each year on the job, I can expect an annual increment of about 4% for about 7 more years until I hit the top of the pay grid for my current position (above inflation... there's another annual increase that roughly matches inflation). Anyways, to me that all looks like a solid choice. Maybe I could do better than a 4% return (beyond inflation) if I put the money in the markets, but I like to take my sure things when I can. I've explained my rationale to many co-workers (leaving out that I intend to retire sooner than anyone would ever believe), but so far, not one person has indicated that it would be the option they'd choose. Is it group-think? It's even making me doubt my own choice a bit. I even heard from one person who is taking the payout now at his "substantive" rate, even though he's currently acting one level higher, and there's paperwork underway to get him moved into that job as his substantive (so, he basically decided to leave that 10% promotion on the table in favour of getting money a few weeks or months sooner).

Our employer has organized a "financial fair" in which the big banks are going to send someone to talk about paying down debt, RRSPs and TFSAs, and then have information booths for each bank. I'm expecting many of my co-workers are going to sign up for some high-MER funds in an RRSP, or open a TFSA savings account and earn 0.5% interest, or do the classic "buy an RRSP and then pay off your mortgage with the tax refund" move that the banks love to sound so smart and caring by recommending. Argh. I guess I'm also bothered by the idea of taking financial advice from the people who are going to profit from getting their hands on your money... so I don't think "if you're a newer employee on a rapidly-growing salary trajectory, just leave it for a while" is going to get a mention.   
...

I'm the CFO in our family. My husband is in the military which follows the Federal Public Service decisions and I guess we had to elect a couple of years ago. For us, it was a pretty easy decision to keep the severance in place.

I'm with Heather on this and like to take the sure thing. Our RRSPs are maxed so we would have had a huge tax hit if we took it immediately. He will retire early in the new year of 2017 so that severance will be a large portion of his total gross income that year so we'll get to keep more of it. DH locked in 27 years service (joined when he was 16) and although we weren't 100% sure that he would be promoted again before retirement, it was a strong possibility. As it is, he was, and now he will go up one incentive pay category each year for the next few years at his new rank. So a guaranteed pay raise right there. Not to mention whatever pay increases are bargained for in the next public service contract.

Despite pension envy and reform, I'll gamble that the severance will still be frozen when DH leaves work, but if I thought it would be bargained away, I'd take the money and run too. I think the majority of DH's friends took it right away and they're not thinking of pension reform issues. Boggles my mind.

Now if we had the RRSP room or hair on fire, or a house reno (kidding), it may have been a tougher choice and I would have run some numbers.

I get fatigued at work when people talk about cashing out RRSPs to buy a fireplace or what they did with a pension cash out, let alone being completely uninterested in big financial decisions. It makes me sad that the management at Heather's work set up a financial session with the banks and FAs. Well intended I'm sure but...

powersuitrecall

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Re: Canadian federal govt employees - severance payout
« Reply #18 on: February 17, 2015, 01:00:46 PM »
Both myself and DW work in the PS.  We both took the severance payout now, as cash.  I was one of those Nortel guys who was burned HARD, so I'm squeamish when it comes to trusting my employer with my money.  It went right into the mortgage (no more room in the RRSPs).  No regrets.

I'd say about half of my co-workers put it towards something useful. Almost no one chose to wait.  I think I know one person --- but now I know 2 :)

Guses

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Re: Canadian federal govt employees - severance payout
« Reply #19 on: February 17, 2015, 02:44:55 PM »
It depends on your specific circumstances.

I opted to take it all now since I had a bit of room in my RRSP, am at the top of the pay scale already (unless I make director or something as ridiculous) and anticipate making less in the future (part time). The cost of living adjustment is also fairly poor at 1.25-1.75% the last several years. I make way way more than that investing.

Since you anticipate receiving a promotion and already max your RRSP, it might make sense to wait in your situation.

I will echo the previous posters when I say that a hen in the hand is better than two in the bush.