ER - take pension now or later?

[Cannot Wait!]

Conventional wisdom says to delay taking my pension till I'm 60, but what would MMM do?

I have the option to take a transfer payment of $231,235 before I'm 50 this year.
* Amount within tax limits. 92,918
* Amount in excess of tax limits. 137,783
* Taxable amount from the Retirement Compensation Arrangement 533

Or
I take my pension at 50 with a 50% penalty @ 591/mth
Or
I take it at 60 at 1182/mth
Those numbers include a bridge benefit till 65 when I can get CPP.
I worry about leaving money on the table if I die early, but I guess it is good insurance if I don't die early.  I also have  $500,000 to invest, options for PT work and a place to live.  Expenses were $1978/mth last year but could be $1533 bare bones.
Advice?  TIA!

[SmallTownDA]

I would cash it out.

Here's the way I would look at it. $231,000 gives you an additional $9240 a year, assuming a 4% safe withdrawal rate. That's already more than the $591/month pension would get you. Over the 10 years between 50 and 60, this money would earn you about $220,000 at 7% a year. Since delaying the pension until 60 is an option, I assume you would save/invest this money and wouldn't need it to live on. That means at 60 you would end up with $450,000, which nets you $1500 a month at a 4% withdrawal rate. Better than taking the pension at 60.

I'm not familiar with Canadian taxes, so the numbers may be different depending on what percentage you end up with of the $231,000. Unless you are losing a very large chunk of it, I think taking the transfer now is the right call. The equation is basically: Figure out what your net lump sum will be after taxes. Take the monthly income of the transfer payment would be at 4% and compare it to the pension at 50. Take the transfer amount and compound it for 10 years at your assumed interest rate, then find the monthly income of that amount at 4% and compare it to the pension at 60.

The other thing to consider is upside. The pension's advantage is security and stability, but it will never be worth more than $1182/month. The $231,000 could be worth significantly more than that, but carries the risk of being worth less. Given your low expenses and the fact that you already have $500,000 to invest, have housing, potential part time work, CPP in old age and government health care, you are already very secure.

Good luck and congratulations.

[Jeremy E.]

I would cash it out.

Here's the way I would look at it. $231,000 gives you an additional $9240 a year, assuming a 4% safe withdrawal rate. That's already more than the $591/month pension would get you. Over the 10 years between 50 and 60, this money would earn you about $220,000 at 7% a year. Since delaying the pension until 60 is an option, I assume you would save/invest this money and wouldn't need it to live on. That means at 60 you would end up with $450,000, which nets you $1500 a month at a 4% withdrawal rate. Better than taking the pension at 60.

I'm not familiar with Canadian taxes, so the numbers may be different depending on what percentage you end up with of the $231,000. Unless you are losing a very large chunk of it, I think taking the transfer now is the right call. The equation is basically: Figure out what your net lump sum will be after taxes. Take the monthly income of the transfer payment would be at 4% and compare it to the pension at 50. Take the transfer amount and compound it for 10 years at your assumed interest rate, then find the monthly income of that amount at 4% and compare it to the pension at 60.

The other thing to consider is upside. The pension's advantage is security and stability, but it will never be worth more than $1182/month. The $231,000 could be worth significantly more than that, but carries the risk of being worth less. Given your low expenses and the fact that you already have $500,000 to invest, have housing, potential part time work, CPP in old age and government health care, you are already very secure.

Good luck and congratulations.

Well said! I agree

[Cannot Wait!]

Thanks!

" The pension's advantage is security and stability, but it will never be worth more than $1182/month. "

It is indexed so will increase by COL.

The first $92,918 has to go into a LIRA  (locked in retirement account), the rest they take 30% tax at source.

[Jeremy E.]

Thanks!

" The pension's advantage is security and stability, but it will never be worth more than $1182/month. "

It is indexed so will increase by COL.

The first $92,918 has to go into a LIRA  (locked in retirement account), the rest they take 30% tax at source.

The 4% rule takes into account inflation adjusting every year, however this is in the US. I'm not sure what the inflation levels are in Canada. Another thing to add, the 4% rule is based on buying US Stocks and Bonds with a 50/50 asset allocation, which stocks/bonds/asset allocation you use could change your safe withdrawal rate.

[MDM]

" The pension's advantage is security and stability, but it will never be worth more than $1182/month. "
It is indexed so will increase by COL.
The first $92,918 has to go into a LIRA  (locked in retirement account), the rest they take 30% tax at source.

That makes a difference. 

You'll have to overlay any differences in tax code on the discussion that follows.  I assumed the lump sum is $189,366, from $92,918 + 0.7 * $137,783.  Also that growth of the lump sum is tax free, and withdrawals are taxed the same as monthly pension payments.

Here's an age 50 look.  The blue curve is based on withdrawing $591/mo from the lump sum and determining how long that will last as the return on the lump sum increases.  The orange curve increases the monthly amounts by 2.5%/yr.


Below is a look at waiting 10 years.  Same lump sum assumptions as above. 
At 5%, the lump sum will
 - generate $1300/mo forever, starting at age 60.  This is more than $1182/mo, and the lump sum is better.
 - generate $1574/mo for 35 years (at which time $0 will remain), starting at age 60.  This is higher still than $1182/mo, and the lump sum is better.
 - generate $1116/mo, increasing at 2.5%/yr, for 35 years (at which time $0 will remain), starting at age 60.  This is lower than $1182/mo, so the pension would be better.

One way to evaluate "pension now"  vs. "pension later"

Compare pension payment promised at the later time to either

- the "Interest generated by Future Value" (Future Value principal is not touched), or

- the "Constant withdrawal of FV over time L" (principal goes to zero), or

- "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)

Lump sum now	PV	$189366
Payment starting now	Pmt_now	0	$/payment
Interest rate	i	5.0%	/yr
number of years	n	10	yr
number of payments/year	freq	12	/yr
When payments are made for each n	type	0	0 = at end, 1 = at start
Future Value	FV	$311888
Interest generated by Future Value	FV(i,n,P) * i	1300	$/payment
Longevity of future pension	L	35	yr
Constant withdrawal of FV over time L	Pmt_future	1574	$/payment
Spending growth rate (e.g., CPI)	g	2.50%	/yr
First year Trinity-style withdrawal	W(FV,L,i,g)	13397	$/yr
		1116	$/pmt

But if one assumes 7% growth, the lump sum is better.  See the 'Misc. calcs' tab in the case study spreadsheet if you'd like to try different scenarios.

In short, the COLA makes it closer to a coin flip, but you can still tilt the scales by changing the assumptions.

[Metric Mouse]

Well that's pretty simple math. Lump it out and start enjoying it!

[Cannot Wait!]

 
" I assumed the lump sum is $189,366, from $92,918 + 0.7 * $137,783.  "

Can you spell this assumption out for me? 

And more info to prove my stupidity face punch worthiness :
I have room in my RRSP and TFSA for 98,500.  So of the 137, 783, I'd only have to pay 30% tax on 39,283 = 11,785 so the net lump sum becomes 219,450.  If I multiply that by 4%, I get $731/month.
Does that make sense (I don't find this simple at all!)

I really appreciate your help.

[RichMoose]

" I assumed the lump sum is $189,366, from $92,918 + 0.7 * $137,783.  "

Can you spell this assumption out for me? 

And more info to prove my stupidity face punch worthiness :
I have room in my RRSP and TFSA for 98,500.  So of the 137, 783, I'd only have to pay 30% tax on 39,283 = 11,785 so the net lump sum becomes 219,450.  If I multiply that by 4%, I get $731/month.
Does that make sense (I don't find this simple at all!)

I really appreciate your help.

What room do you have in your RRSP only?

For this purpose you should ignore the TFSA as contributions are not tax-deductible.

[MDM]

" I assumed the lump sum is $189,366, from $92,918 + 0.7 * $137,783.  "
Can you spell this assumption out for me?

It was based on

The first $92,918 has to go into a LIRA  (locked in retirement account), the rest they take 30% tax at source.

and

* Amount within tax limits. 92,918
* Amount in excess of tax limits. 137,783

My understanding of Canadian acronyms and tax law could easily be incorrect - not intending to claim otherwise. ;)

And more info to prove my stupidity face punch worthiness :
I have room in my RRSP and TFSA for 98,500.  So of the 137, 783, I'd only have to pay 30% tax on 39,283 = 11,785 so the net lump sum becomes 219,450.  If I multiply that by 4%, I get $731/month.
Does that make sense (I don't find this simple at all!)

RRSP (Canadian) = traditional (US), and TFSP (Canadian) = Roth (US), correct?

And I agree with you - with different tax treatment for different portions, it becomes more complex.

How would tax rates on the RRSP withdrawals compare with the tax rates on the pension payments?

Might be able to adjust the calculations in the spreadsheet mentioned earlier.  I was also thinking of www.i-orp.com, but that has US tax tables, so...?

[Cannot Wait!]

Tuxedo, RRSP room is 52,482.  So other than that, there is no other way to avoid the 30%? 
With a TFSA, it won't be taxed when I withdraw it?  Is that right?

MDM, I don't know which numbers and what you did with them to come up with $187,366. 
"$92,918 + 0.7 * $137,783" has me boarding the special bus.  If '+' means 'plus' and '*' means 'multiply' I'm confused.

And, gosh, I thought RRSP and pension payments would be taxed the same, no?



 

[MDM]

MDM, I don't know which numbers and what you did with them to come up with $187,366. 
"$92,918 + 0.7 * $137,783" has me boarding the special bus.  If '+' means 'plus' and '*' means 'multiply' I'm confused.

Does writing it as "0.7 * $137,783 + $92,918 = $189,366" make more sense?  See https://en.wikipedia.org/wiki/Order_of_operations.

And, gosh, I thought RRSP and pension payments would be taxed the same, no?

They very well may be.  Just checking to ensure there aren't any other "oh by the way..."s. ;)

[Cannot Wait!]

Haha, somehow I expect there will be many more "oh by the way"s in my future!

Ok, so I get the sequence now (ty), next, what is the .07 referring to?   The pension office said they take 30% tax at source.

So if I take 231,235-92,918=138,317 as my taxable portion minus the 52,482 I can put in an RRSP = 85,835 *30% tax = 25,750.  I take that away from the original 231,235 = 205,485 as my net lump sum after taxes. 

I found the Misc Calc. On the spreadsheet but it would only let me download a read only copy.  Neither of us will be surprised if that is a user error.  ;)

At any rate, my above calculation paints an even rosier picture giving me $684/month at 50.

[MDM]

what is the .07 referring to?   The pension office said they take 30% tax at source.

It's 0.7, not .07.  The 0.7 is 100% - 30% = 70%, or 0.7.  It's what is left after the 30% tax is paid.

I found the Misc Calc. On the spreadsheet but it would only let me download a read only copy.

You may have to open it, then save it under a different name.  Does that work?

[frugal_c]

Can you explain the bridge benefit until you get CPP?  I am trying to understand exactly how much you get and for how long.   Also, is the pension with a government agency or a private company?  Is it indexed to inflation?

If it's a government pension indexed to inflation I would be tempted to take the pension.   I'm not really sure when, 50 vs 60, but I wouldn't cash it in.  You are way more diversified with a government inflation adjusted pension even if the numbers appear better with it in a portfolio.  We just have no idea what equities are going to do so why take the risk if you don't need to.

[Cannot Wait!]

Thanks frugal_c.  It's a government pension that is indexed.
Of the $1182/month I would get if I wait till 60, $346 is a bridge benefit I receive until CPP and OAS (Old Age Security) kick in at 65.
Taking it at 50 yrs old, incurs a 50% penalty  (5%/yr for 10 yrs).  I can apply anytime during those 10 yrs to begin receiving it.
I could also buy into their health care plan for about $100/month when I start receiving it if I choose to.  That would cover dental, prescriptions, eye care, massage, physio, etc.

Why take the risk?  That's a good question.

Ah MDM, that little decimal point!  Got it.
And I did finally figure out that I have to save a copy first before trying to edit it... now if I can just translate it from Greek ....  Lol.  ;)

[MDM]

Of the $1182/month I would get if I wait till 60, $346 is a bridge benefit I receive until CPP and OAS (Old Age Security) kick in at 65.

Oh.  After 65, then, you receive only $1182 - $346 = $836 per month (or whatever the COLAed amount is) "instead of" the lump sum?  If true, that's going to improve the chances that the lump sum is better.

[Dee]

Hi Cannot Wait!

I'm following this tread. I'm also in the federal public service. I'm 41 now and will be looking at exactly this same question as time goes on. Does your department offer a retirement course? I took one a year or two ago, offered through work but delivered by a financial planning firm in Ottawa that specializes in public service pensions. Someone like that should be in a position to provide a comparative analysis of your options that takes into account all the attributes of the government pension. Of course, they may not be Mustachian about it, though I was pleasantly surprised with the retirement course not assuming that one should work as long as possible -- reduced pensions were discussed as a viable option. Transfer values are usually not discussed in these courses because they are difficult to project over the course of time (at least that's why I think they aren't discussed) but the financial planners should be in a position to assess them as an option when they are being considered in the near future.

I don't know if there are many such planners, but the one that delivered the training I attended
explains it has "PSSA Certified" - a certification required by PWGSC so that speakers can deliver pension information sessions to members of the Public Service Superannuation Act (PSSA) pension plan.

Of course, you may be aware of all this and be looking for Mustachian perspectives rather that PSSA-approved perspectives... in which case, all I have to offer by way of comment is that it seems wise to me to seek more perspectives.

[Dee]

Oh, also, there is a previous thread that might of some assistance:
http://forum.mrmoneymustache.com/investor-alley/to-commute-or-not-to-commute-(your-pension-value)/

[frugal_c]

The bridge changes it.  Based on that I would probably take the lump sum.  I think even with something like the great depression you would still do better with the payout.   The only other variables is what that $100 health/dental is worth.  I would figure out what that would cost on the open market, they might be giving you $200-400 per month right there.

[MDM]

And I did finally figure out that I have to save a copy first before trying to edit it... now if I can just translate it from Greek ....  Lol.  ;)

The more I see (e.g., in Dee's link), the less comfortable I am that the calculations in the case study spreadsheet (CSS), as they exist today, will be useful for this situation.

If there is an existing, validated, web site, using that might be easiest.

If there is a simple-enough spreadsheet snippet, I'd be happy to add it (either as a Misc. calc or as its own tab) in the CSS because this question seems to arise "often enough."  Unless of course someone has said spreadsheet snippet on a proprietary web site.  Not looking for the CSS to be a commercial product and compete with anyone.

[arebelspy]

This seems like a clear "take the lump sum" to me.  Even if you stuck the money in a mattress, the pension @ $14,184/yr would take 13 years (until you're 73) to catch up to the 189k you'd get (after 92k tax free and paying 30% on 138k).

Tax Free Lump Sum:   92,918
Taxed Part of Lump Sum:   137,783
Taxes:   41,335
Net Lump Sum:   189,366

Pension of 1182/mo x 12 mo = 14184/yr. x 13 years = 184,392.  Still less than the lump sum.

If you invested that lump sum starting at age 50 and got just 2% real return on it, the pension wouldn't catch up until you are age 87 (I'm using all real dollars, so that does account for the fact that you have a COLA inflation on the pension side of it).  3% real return and the pension doesn't catch up, ever.

Okay, so that's just the simple math.  Now let's look at history, because we all know markets fluctuate.

So let's say you took that $189,366 today, at 50, invested it for a decade until 60, then started taking the SAME $14,184 you'd get from your pension (and adjust it upward for inflation each year, just like your pension does), and look at what happens.

Historically, after a decade, sometimes your money invested would be worth less, sometimes the same often more.

If you had done that plan, historically (using a 75/25 portfolio), 90.52% of the time you would not have run out of money.  What that ("not run out of money") means in practical terms is you would have been able to supply yourself with that same inflation-adjusted pension you'd get anyways, starting at age 60, plus you'd have a big lump sum.  In fact, the average ending portfolio would be $437,685 (median $363,333).  The highest?  $1,285,336.  That's on top of taking out your pension every year, starting at age 60.

Of course, 10% of the time, you'd have had to cut back (or else ran out of money in that pension fund).

Whether or not that last 10% of stability is worth it is up to you, and depends on how conservative you are, but I personally would be looking at the fact that 90% of the time you can have your pension AND hundreds of thousands of dollars, and be going for that option.

[RichMoose]

Conventional wisdom says to delay taking my pension till I'm 60, but what would MMM do?

I have the option to take a transfer payment of $231,235 before I'm 50 this year.
* Amount within tax limits. 92,918
* Amount in excess of tax limits. 137,783
* Taxable amount from the Retirement Compensation Arrangement 533

Or
I take my pension at 50 with a 50% penalty @ 591/mth
Or
I take it at 60 at 1182/mth

Ok, so lets do the math here. RRSP/RRIF withdrawals are taxed the same as pensions (or other regular income). You're TFSA withdrawals will not be taxed and non-reg investments will provide you with the possibility of tax advantaged dividend income (if invested in Canadian equities) or capital gains.

So of the payout, here would be your account breakdown. For this purpose, and erring on the side of caution, lets assume you put all of the remaining lump-sum in a non-registered account, not a TFSA.

LIRA: $92,918
RRSP: $52,482
Non-reg: $59710 [$85301 x .7(amount after tax)]
Total: $205,110

LIRA and RRSP can provide you with $484/month of taxable income. This assumes a 4% withdrawal rate which is about 90% safe with a balanced portfolio.
Non-reg invested in Canadian equities will provide an additional $149/month of almost tax free dividend income assuming a 3% dividend which is the current yield for XIC.TO.
Non-reg can provide an additional $50/month of capital gains low tax income assuming you sell 1% of your portfolio each year for additional income to make a 4% withdrawal rate.
So assuming a 20% tax rate on regular income in retirement, on taking the payout and investing in a balanced portfolio you can immediately take an after tax income of $581 [$387(RRSP/LIRA)+$149(dividend)+$45(cap gains)]. This compares with after tax of $472 with the pension.

If you wait 10 years, lets assume a 5% real investment return. Your account balances will be as follows:
LIRA: $152,256
RRSP: $85,997
Non-reg: $97,841
Total: $336,094
Now assuming a still 20% tax rate on regular income in retirement, your after tax income on the payout will look like this. $1,111 [$794(RRSP/LIRA)+ $244(dividend)+ $73(cap gains)]. This compares to after tax of $945 with the pension.

Once CPP and OAS kick in, you will have an even higher income as clawbacks (bridge benefit reduction) do not apply to these amounts once you turn 65.

As you can see, taking the payout would be the better logical decision. However, these numbers could drastically be affected by you selling everything in a market crash, not maintaining a properly balanced low cost portfolio, becoming mentally ill with age and not being able to maintain adequate control over your money, and other considerations.

For me, I would take the lump-sum. If it was my financial less-responsible parents in this situation I would advise them to take the pension.

[elaine amj]

Interesting. Dh has a couple of smallish defined benefit pensions that are both well-funded. When we reviewed it and put together our retirement plans, we figured it would be best to take the monthly payments rather than lump sum simply as risk diversification. That way, there is a (small) inflation-adjusted guaranteed income coming in each month - no matter how our other investments are doing.

I'm going to have to try and digest everything in this thread to see if we should change our strategy.

[RichMoose]

Interesting. Dh has a couple of smallish defined benefit pensions that are both well-funded. When we reviewed it and put together our retirement plans, we figured it would be best to take the monthly payments rather than lump sum simply as risk diversification. That way, there is a (small) inflation-adjusted guaranteed income coming in each month - no matter how our other investments are doing.

I'm going to have to try and digest everything in this thread to see if we should change our strategy.

This is another good point. Psychologically it can be much more reassuring to have a pension check coming in every month without seeing account balances going up and down with market movements.

If you are Canadian and have worked for most of your adult life, you should have a fairly reasonable check coming in every month from the Feds too. CPP and OAS are currently well-funded and are not likely to get into financial difficulty in your lifetime and with some minor tweaks my lifetime.

[elaine amj]

Interesting. Dh has a couple of smallish defined benefit pensions that are both well-funded. When we reviewed it and put together our retirement plans, we figured it would be best to take the monthly payments rather than lump sum simply as risk diversification. That way, there is a (small) inflation-adjusted guaranteed income coming in each month - no matter how our other investments are doing.

I'm going to have to try and digest everything in this thread to see if we should change our strategy.

This is another good point. Psychologically it can be much more reassuring to have a pension check coming in every month without seeing account balances going up and down with market movements.

If you are Canadian and have worked for most of your adult life, you should have a fairly reasonable check coming in every month from the Feds too. CPP and OAS are currently well-funded and are not likely to get into financial difficulty in your lifetime and with some minor tweaks my lifetime.

I agree - I feel comfortable relying on CPP and OAS for our retirement and use those amounts in my projected numbers. That said, neither DH or I are likely to get large cheques from the Feds as neither of us will have a long working history in Canada. The pensions are likely to be smallish too. That said, all combined together, it does give some peace of mind to have some reasonably guaranteed income that comes in regularly. Defined benefit plans are so rare these days, I'd have a hard time giving up that security blanket. Still, I suppose it matters just how much of your nest egg is in your pension plan. Ours is a smaller amount so the lump sum advantage is smaller.

[Cannot Wait!]

The retirement planning that was offered was just general info mostly about forms and not by a FP, just someone from the pension office who basically recommended that we go talk to a FP.
I've been reading through the other tread (thanks Dee), at least I'm not alone in having questions about the right direction to go in.
I really appreciate everyone here taking the time to comment on my situation.
I really just want to set something up, then let it flow (with yearly rebalancing). 
Another thing is that my kids would be better off if I take the lump sump I think.

[arebelspy]

Another thing is that my kids would be better off if I take the lump sump I think.

Historically 90% of the time they would, yes.  :)

[MonkeyJenga]

Another thing is that my kids would be better off if I take the lump sump I think.

Historically 90% of the time they would, yes.  :)

That depends on whether you think it benefits children to inherit large sums of money.

[arebelspy]

Another thing is that my kids would be better off if I take the lump sump I think.

Historically 90% of the time they would, yes.  :)

That depends on whether you think it benefits children to inherit large sums of money.

I was assuming that's what he meant, based on context.

In all reality, if you've done it right, by the time they'd even stand to inherent, they'd be long FI themselves, and you could give it all to charity, as I've argued for elsewhere on the forums.

[Cannot Wait!]

Hah, MJ good point! 
I still have teens though so not anywhere close to FI for them for a while...
If I do live long enough that I think the money would spoil them, I could change my will to redirect it.  😊

[ghatko]

Something that I'm surprised no one mentioned, is that the 30% tax that will be taken off the lump sum (after registered contributions) is simply a withholding amount. That means that you will pay tax on this additional income at your marginal tax rate, and could pay more or less tax once you do your tax return. If you take the lump sum later in a year with regular salary income, you could be paying a much higher rate (say 43-53% at 2016 rates in ON http://www.taxtips.ca/taxrates/on.htm ). Now, if you plan carefully, you could take the lump sum early in a year with little other income, and reduce the tax hit.

I am in a similar situation, but I have no available registered room ( I'm maxed out), so I am assuming that I will take a very big tax hit if I cashed out my pension. This thread has prompted me to make sure I do the calculations, and not just make that assumption :)

I do also consider it a form of diversification, since my spouse does not have a defined benefit plan, so all of his money, and a good amount of mine will already be invested ourselves.

[Cannot Wait!]

Thanks ghatko.
I'll phone them on Monday to see if I can take it next year. Apparently I have to decide before I turn 50 (this Sept) and that I have 1 year after I retire (officially this month).  I'll have to see if I can decide before 50 but take it before May next year. 

Loose math (yes I know that's an oxymoron)  says my pay from Jan - May, plus the $137,000=164,000 and provincial and federal tax  would be 41%=$67,000.   164,000-67,000 = 97,000 plus the 92,000 in an RRSP = roughly 190,000 invested after tax.  If I take 4% SWR of that,  I get $630/month - still more than the $591 pension amount at 50.

The chart I looked at had 12.6% provincial and 29% federal tax. 

[ghatko]

Good luck!

[Cannot Wait!]

Thanks ghatko.
The pension office told me that I could put off taking my lump sum until the new year so that saves a lot of tax.
I've been reading lots of older posts about this issue on this forum.   So many opinions to consider!
Nords really appreciates his pension...
Re: Stop worrying about the 4% rule

« Reply #83 on: July 09, 2015, 12:56:24 PM »


Whether your SWR is 4% or 6% or 5.03899875%, you're still going to have to insure against portfolio failure and longevity.  "Wal-Mart greeter" is not insurance, and even at age 54 my body is starting to grumble about physical labor.  Going without some sort of FI insurance (an annuity) is like going without medical insurance.

When I was working, I didn't appreciate the significance of a military pension.  Now that I'm retired, every year I'm more appreciative of its value as insurance against portfolio failure.

If you're confident that a 6% SWR is an acceptable risk of portfolio failure, then I'd still annuitize a bare-bones income as part of your asset allocation.  Maybe you'll depend on Social Security (yeah, I understand that plan has potential flaws) or maybe you'll buy a single-premium insured annuity.  (Yeah, I understand those flaws too.)  You'd also have to devote some thought to long-term care, because the SWR analyses do not account for end-of-life medical expenses.  (More flaws.  Right.  Let's get back to the main point.)  All of these concepts have drawbacks, but the drawbacks are less catastrophic than the prospect of running out of money in your late 70s.

If you're reluctant to annuitize a portion of your investments, then perhaps it's better to "self insure" by working an extra year or two in your 40s than to go back to work for five years in your 70s.

As for "lowering expenses", you should pick a number now and then try surviving on it for a few months.  I'm talking a Jacob Lund Fisker class of low expenses, not just cutting back on the entertainment spending.  It's better to have the extreme frugality experience now (when it's "optional") rather than later (when it's mandatory).  

My parents-in-law are just starting their 80s.  Their investments are 100% CDs & Treasuries (don't get me started on their logic) and they're receiving Social Security.  However inflation has ravaged their portfolio to the point where they're cutting back on utilities and even groceries, not just entertainment and transportation.  They've gone way past their Depression-era frugality and they're deep into deprivation, but the options of "part-time work" and "side businesses" are off the table.  By the way, all four of their parents were Ashkenazi centenarians so my PILs may be living like this for another two decades... with or without their cognition.

Yes, many retirees are surviving on their Social Security income today.  (That's their portfolio & longevity insurance.)  Yes, there may be other types of assistance-- we have supported some of my PIL's expenses.  My brother-in-law is a tax CPA (who just FIREd) and he's doing a great job of keeping an eye on their finances, but we expect "the call" for more support any year now.  Don't get me started on that issue either.  

However it's worth considering whether your portfolio failure might transfer your living expenses to your family or relatives.  Would you rather work an extra year in your 40s to avoid this potential imposition in your 70s?

I'm not against a 6% SWR.  I'm just suggesting that it's better to test-drive these blithely-stated failure contingencies right now, while you're still earning a paycheck, and appreciating the implications.  After the test drive you may decide that it's better to work a little longer for the insurance (or the extra margin of assets) after all.

[RichMoose]

I would not over think it too much CW. It all boils down to this: if you can maintain a low-cost balanced portfolio through the best and worst years, thick and thin, there's a 95% chance that you would be significantly better off taking a payout. If you have not tested out your response to adverse market conditions, if you are a worrier, if you think you might panic when you portfolio drops 40%, then stick with the pension. All it takes is one really bad decision (selling off and moving into term deposits in a market crash) and you would have been much better to take the pension.

[Ishmael]

I'm another federal public servant and it's my plan to take the lump sum within 5 years, so I vote yes. One big reason for me is that mf I die, my wife is only entitled to 50% of my pension. But, if it's in my RRSP, she gets it all. That's a big f'n deal, IMO.

One point that supports the side of the people who disagree though is this: the risk associated with Cdn Federal Pensions are nearly zero. They are overfunded to the point that the Feds look to them periodically to grab money back to put into general revenues, so political interference is a greater risk than anything else, but even that is minute - they have to go through the courts to do it, and I don't believe the courts would let them create an underfunded situation.

Also FYI, CPP (our version of Social Security, I think) has been analyzed in detail by both public and private actuaries and has been rated to easily handle the retiring baby boomers. Where it differs from SS is that it's a separate, independent fund that is funded by a combination of employer and employee contributions, and professionally managed at arms length from the gov't, so it is not subject to gov't political interference. It's as solid as it gets. My understanding of SS is that it comes out of general tax revenues, so it's a program that is at the whims of the US political leadership of the day, and is therefore not as reliable. We also have 2 programs like that, Old Age Security (OAS) and for low-income seniors, the Guaranteed Income Supplement (GIS), both of which are scaled back as income rises.

For Cdns, my personal opinion is to include CPP into retirement calculations, but leave OAS/GIS as a future income safety layer.

However, the original reason I posted was to ask OP a question: at what point in the process is the Transfer Value amount locked in?

I know one has the option of waiting up to 1 year to receive it - that makes it a great option for tax deferral - but I've noticed the TV fluctuates wildly month to month. I track mine the first day of the month as part of my retirement planning, and I've seen it go down more than 10% in a month. From Jan 1 2013 - Jan 1 2014, it actually dropped by 2% over the year (this especially sucked considering we put in 9+% of our paycheque, and the feds supposedly match that).

So does one have the option of locking the value in when you elect to retire? Or by the time you decide to retire, and actually receive the money, is it possible the value will be wildly different (one way or the other)?

[Cannot Wait!]

Hi Ishmael ,
Thanks for contributing. It's great to hear everyone's take on it.
Strange as it seeems, they will let you lock in the date anytime within the year after your last day.  The pension office said I could call each month and they would tell me what the new value is.  She said the way to actually do that if you want to lock in at today's (or any month's ) rate but cross over to the next calendar year, is to not submit all the forms until the date that you want the lump sum!  She is going to send me a package and hopefully it will be clear which forms I will have to submit and when.
Talk about trying to time the market.   My transfer value went down $3000 even since starting this thread!
She gave me a link  to the Canadian Institute of Actuaries FAQ for information on how transfer values are calculated: http://www.cia-ica.ca/about-us/actuaries/ask-an-actuary/faq---pensions. 

 

[The Fake Cheap]

I'm also going to vote for going the lump sum route.  I also plan to take the same action in about 9 years time, depending on market factors. 

One thing that has somewhat been mentioned in that the PSSA is well funded, and has zero risk, etc.  But what has not been mentioned is what happens if the Feds change your benefit after you retire.  They could very well cut the COLA clause, or change the plan from a defined benefit to a shared risk model.  Don't think this would happen?  Look at the Province of New Brunswick retirees who are facing this very situation, or the City of Detroit retirees to name a few.

[merula]

Also FYI, CPP (our version of Social Security, I think) has been analyzed in detail by both public and private actuaries and has been rated to easily handle the retiring baby boomers. Where it differs from SS is that it's a separate, independent fund that is funded by a combination of employer and employee contributions, and professionally managed at arms length from the gov't, so it is not subject to gov't political interference. It's as solid as it gets. My understanding of SS is that it comes out of general tax revenues, so it's a program that is at the whims of the US political leadership of the day, and is therefore not as reliable. We also have 2 programs like that, Old Age Security (OAS) and for low-income seniors, the Guaranteed Income Supplement (GIS), both of which are scaled back as income rises.

Just for the record, Social Security in the US is funded by a combination of employer and employee contributions and is not part of general tax revenues. The uncertainty about Social Security is because government predictions indicate that payments at current benefits levels will exceed revenues at current tax levels within the next 10 years, and at some point in the next 40 years, that excess will exhaust the surpluses that have been building for decades. The way to rectify this is to either reduce benefits or increase revenues. Neither is politically tenable, so the situation has been stagnant for about 20 years.

[Nords]

Thanks ghatko.
The pension office told me that I could put off taking my lump sum until the new year so that saves a lot of tax.
I've been reading lots of older posts about this issue on this forum.   So many opinions to consider!
Nords really appreciates his pension...
Re: Stop worrying about the 4% rule

« Reply #83 on: July 09, 2015, 12:56:24 PM »

Thanks for the quote, CW.  It looks like everyone here can do math and you're getting good advice, so I have nothing to add there.

A year later, my opinion is still the same.  What I appreciate the most is having an inflation-adjusted annuity from the world's most reliable source.  Corporate pensions (and even other govt pensions) might be a bit less reliable. 

In my case, though, I regret staying in on active duty for 20 years to get the immediate pension.  I would've done just as well if I had left active duty at the 12-year point (when the fun stopped), moved to the Reserves and started a civilian bridge career, and qualified for a Reserve pension at age 60.  I would still have ended up with an inflation-adjusted annuity and I would've covered the years in between with our own savings.  You're probably seeing the same effect when you analyze your payout options.

[Cannot Wait!]

Clear as mud Nords! Lol.  First you say that everyone can do the math and I'm getting good advice (overwhelmingly take the lump sum), then you say your opinion hasn't changed (fed govt pensions are an inflation adjusted annuity and they should be as much a part of your plan as medical insurance).
Did you do the math when you retired yet not decide to take the lump sum for peace of mind?  Or was your math different?

[Nords]

Clear as mud Nords! Lol.  First you say that everyone can do the math and I'm getting good advice (overwhelmingly take the lump sum), then you say your opinion hasn't changed (fed govt pensions are an inflation adjusted annuity and they should be as much a part of your plan as medical insurance).
Did you do the math when you retired yet not decide to take the lump sum for peace of mind?  Or was your math different?

Yeah, sorry, I see that I contributed to the confusion by presenting a different perspective.

I don't appreciate the amount of my pension.  I could have earned a bigger pension if I had stayed longer, but it wasn't worth the price.  I don't appreciate having an immediate pension at a younger age.  I should have left my U.S. military active duty sooner, gone into the Reserves, and earned a smaller pension at a later date.

What I appreciate about my pension is its inflation protection and its funding by a government with taxing authority. 

In general, corporate (and government) lump-sum offers have stacked the deck in their favor.  However if the corporation/government hasn't funded their pension plan very well, then their lump-sum offer might be better than the risk of losing the pension.  That's especially the case if the pension-insurance fund can only support about half of the former pension payment or if it can't be funded by taxes. 

I don't know anything about your pension.  If it's backed by government tax revenue and has an inflation adjustment then you'd have to do a lot of financial analysis before choosing the lump sum.  It seems as though you're getting good advice there. 

But if you think the deck is stacked, or if the pension is not backed by taxes, or if you think that you'll die before the actuarial life expectancy... then it might make sense to take the lump sum and run with it.

The U.S. military currently offers a sort-of lump-sum pension called REDUX.  When the new blended retirement system takes effect in 2018 there'll be a lump-sum option on that pension, too.  We've already done the REDUX math many times to show that its "Career Status Bonus" sucks for the servicemember.  It saves the Dept of Defense (and the federal government) hundreds of thousands of dollars over the military retiree's life.  We don't have any hard data on the lump-sum offer of the new retirement system yet, but based on DoD's current frantic squirming and whining I suspect that the lump-sum offer will also be heavily in favor of the DoD.

The whole point of my post (that you quoted up there) was to endorse the idea of annuitizing some of a retirement income no matter what withdrawal rate you plan to use.  It's longevity insurance.  People agonize over an investment portfolio's 80% or 90% success rate because it implies a 10%-20% failure rate, and then we start arguing that a lower withdrawal rate must be "better" because the success rate is higher.  However that approach misses the solution afforded by the longevity insurance of an annuity.  Bernstein's "Calculator From Hell" post also points out that anything greater than an 80% chance of success is statistically meaningless.

Even if you choose the lump sum it might make sense to spend part of it to buy an annuity.  Or maybe you'll have plenty of annuitized income from your equivalent of Social Security. 

Now you have the details of what I like about pensions.  You just have to make sure that your lump sum does a better job for you.

[Cannot Wait!]

OK, so I've been reading and thinking lots about all this.
I'm not near as smart as most people on this forum so I really appreciate the help!
I've been comparing best and worst case scenarios.
 
Worst case scenario if I take the pension is
I leave some $ on the table, especially if I die early.

Worst case scenario if I take the lump sum is
I have a bad sequence of returns in the first decade,
I screw up because I don't know what I'm doing,
I become disabled,
I need health insurance and don't qualify,
I'm too old to go back to work.

Best case if I take the pension is
if I'm disabled I would have a health insurance option
an immediate disability pension,
I'm covered if I live really long,
diversification. 
My pension is an indexed gov't of Canada pension so a pretty safe bet.

Best case if I take the lump sum is that I have more $ than I need.

What about if I use the pension (which is about a third of the money I have to live off of) as the 'bond' portion of my investments?
So instead of a lump sum of just over $200,000, I keep the pension and access it at 60 (or earlier if needed), and the other $500,000 all goes into indexed stocks.  How does that sound?  Best of both worlds?  A kind of 70/30 AA with the perks of longevity insurance, health insurance and diversity thrown in.  Nords suggests I use part of the lump sum to buy an annuity, but wouldn't keeping the pension be the same thing?

I read a quote in the newspaper today that said, "the whole auto industry will change more in the next 10 years than it has in the last 100 years."  It was talking about the the effects of self-driving vehicles but I think a lot of industries will be changing in ways that we can't even imagine today.  What if the way the stock markets are run changes drastically?

[Nords]

My pension is an indexed gov't of Canada pension so a pretty safe bet.
What about if I use the pension (which is about a third of the money I have to live off of) as the 'bond' portion of my investments?
So instead of a lump sum of just over $200,000, I keep the pension and access it at 60 (or earlier if needed), and the other $500,000 all goes into indexed stocks.  How does that sound?  Best of both worlds?  A kind of 70/30 AA with the perks of longevity insurance, health insurance and diversity thrown in.  Nords suggests I use part of the lump sum to buy an annuity, but wouldn't keeping the pension be the same thing?

Yep.  If you take the Canadian govt pension and invest your portfolio in equities (ETFs or mutual funds with low expense ratios) then you have the best of both.

[c-kat]

However, the original reason I posted was to ask OP a question: at what point in the process is the Transfer Value amount locked in?

I know one has the option of waiting up to 1 year to receive it - that makes it a great option for tax deferral - but I've noticed the TV fluctuates wildly month to month. I track mine the first day of the month as part of my retirement planning, and I've seen it go down more than 10% in a month. From Jan 1 2013 - Jan 1 2014, it actually dropped by 2% over the year (this especially sucked considering we put in 9+% of our paycheque, and the feds supposedly match that).

So does one have the option of locking the value in when you elect to retire? Or by the time you decide to retire, and actually receive the money, is it possible the value will be wildly different (one way or the other)?

This is a very important question, as it is my understanding that when interest rates rise, the transfer value will go down significantly.