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?
