I would cash it out.Well said! I agree
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.
Thanks!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.
" 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 pension's advantage is security and stability, but it will never be worth more than $1182/month. "That makes a difference.
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.
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 |
" 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 mystupidityface 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.
" I assumed the lump sum is $189,366, from $92,918 + 0.7 * $137,783. "
Can you spell this assumption out for me?
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. 92,918My understanding of Canadian acronyms and tax law could easily be incorrect - not intending to claim otherwise. ;)
* Amount in excess of tax limits. 137,783
And more info to prove myRRSP (Canadian) = traditional (US), and TFSP (Canadian) = Roth (US), correct?stupidityface 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!)
MDM, I don't know which numbers and what you did with them to come up with $187,366.Does writing it as "0.7 * $137,783 + $92,918 = $189,366" make more sense? See https://en.wikipedia.org/wiki/Order_of_operations.
"$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?They very well may be. Just checking to ensure there aren't any other "oh by the way..."s. ;)
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?
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.
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.
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
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.
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.
Another thing is that my kids would be better off if I take the lump sump I think.
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. :)
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.
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.
Thanks ghatko.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.
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 »
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).Yeah, sorry, I see that I contributed to the confusion by presenting a different perspective.
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?
My pension is an indexed gov't of Canada pension so a pretty safe bet.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.
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?
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)?