Take the lump sum or the pension?

[Patty]

This my first time asking for help from this community and based on what I've seen so far I am confident I can get good advice! I am hoping the info below is clear and sufficient to do the calculations, without having to show all of our family finances as in a full case study. Please let me know if additional info is required.
Here's the scenario: I am a (Canadian) teacher who has taught for 8 years, but as of this year am age 54.I am married to another teacher who still has a few years more to go and whose pension will be far better than mine. We have 2 kids in post secondary, and one still in school. No debts, own our home. $50,00 in RRSPs. Education fund set up for kids.
 If I want, I can retire when I am 55 next year. Because I have only taught 8 years, my pension amount will be quite small (approx. $600-700 per month, depending on whether I actually teach next year; very possible I will not. If not I can expect a pension of approx.$650).
 Because I am not yet 55, I have the choice to take a lump sum (of approx.$150,000) which has the following criteria attached: a certain amount must go into a LIRA (approx. 90,000) and the rest is paid out in cash ($60,000 taxable at 30%). Half of the LIRA can subsequently be put into an RRSP. The other half is kept in a retirement vehicle which can't be touched. I am free to invest the cash portion (minus taxes) however I wish, in or out of a retirement vehicle.
If I do not work next year, and go ahead with receiving the lump sum, I will get the tax back that is withheld, the following year.
 I am thinking that it may be better for me to take the lump sum and invest it so that it grows to a greater amount than what it would be even if I live until I am 80 or more. Because it isn't a huge amount that I would receive per month, it is not as if I am gambling with our life savings. I plan to still work here and there to ensure I have an income of sorts, but want to get out of my very stressful job and pursue some other things before I am too old.
The question is whether taking the lump sum has a reasonable expectation of doing better than the monthly amount I would be guaranteed for life if I went the conventional route. I know it is the "safer" route, but I have learned a great deal from this site and others and know that what seems safer is not always the best way to go.
I am very interested in what other more financially savvy readers would have to say about this.
The critical point is whether I would lose a chunk of the cash portion to taxes. If so then I think it would be best to take the monthly pension. If I don't work next year however (likely) then I would get the taxes back.
Thank you in advance for any help offered!

 

[Spudd]

Your pension will be indexed to inflation, and that's worth something. Will the pension amount increase if you defer taking it for a few years, or will it be the same regardless of when you take it?

The other question is whether your spouse's pension will be sufficient to support your desired lifestyle in retirement. If yes, then it doesn't really matter if you blow your lump sum at the dog track, so if you feel you can do better investing it yourself - then go for it. If the combination of your 2 pensions will be needed to support your lifestyle, then I would keep the pension. It's a base, and you can invest your RRSP for extra money.

Finally, I would say that if the big question is whether you'll have to pay taxes on the money, only you can really answer whether you expect to get a job that year or not.

[foobar]

Take the pension. I assume it is backed by the government and has zero risk of default.  Then since you have this fixed income, you can be a lot more aggressive in your other accounts by upping your stock ratio a lot. Heck just funnel those pension payments into vanguard total market until you retire:). You will probably end up with slightly  less money than doing the lump sum but you will also have drastically reduced your risk profile.

[Patty]

Thanks for the replies!
I have been told by a few that you should never mess with your pension, that it's guaranteed and you just never know how long you might live. Although I would agree with that for the most part, I feel in my case with such a small amount, that it might be worth the risk of investing the money, but I certainly don't have the financial confidence to take a risk just yet.

[Cassie]

I would take the pension. You may live to be very old & glad you did!

[SnackDog]

The lump calculation assumes a conservative investment appreciation rate.  You can almost certainly do better on your own, over the long term.  So by taking the lump sum, you will come out ahead.  You can do the math, however, to compare the two scenarios and see which delivers the larger NPV.  The lump sum will be based on an actuarial estimate of your life expectancy.  If you have good information to refine that estimate, for example four grandparents who lived to be 100 and parents in their 90s, you may wish to adjust it.  In addition, the lump sum gives you flexibilty if you need the money now, or if you consider if you die in 5 years your survivors may need the cash.

The downsides to the lump sum are that 1) you may invest it unwisely and lose some and 2) it could be lost in a legal judgement against you. Since you live in Canada you are more safe than an American would be against a frivolous or frivolous lawsuit (you crash your car and maim an investment banker who sues for his lifetime lost earnings).

[Weedy Acres]

I vote for taking the lump sum and investing it.  $650 a month x 12 = $7800/year.  If you invest $150,000, you only need to get a 5% return to match that.  That should not be hard at all.

PLUS, you'll still retain the principal to pass on to your kids or donate to a nice charity when you die.

[MorningCoffee]

I think you need more information. Your pension payment is most likely being penalized if you take it at 55 since you don't have your 85 factor. You should have the option to take it at 65 with no penalty. It may not be the better option, but you would know what all of your options are.

Another point to consider is the indexing of your pension. Some teacher's pension plans have the option of only partially indexing years (since 2009 I believe), so you would want to know if and how that affects your future pension payments.

Also find out if you have any buyback opportunities. You can have the pension board run numbers with and without the buyback, which can make a huge difference on both your CV value or your monthly pension payment.

If you need the money now, I would vote for keeping the pension. If you won't touch it for 10-20 years, the CV may be more tempting.

[Patty]

Thanks so much all for the feedback and suggestions. I also appreciate the links and the suggestion that I need more info.
I checked into buying back and it is far too expensive, hardly worth even considering (but a good suggestion nontheless).
The pension is indexed to inflation.
Whether or not the pension is being penalized because I am taking it at 55 rather than 65 is a good question. I will check into that.
I will not get the full $150,000 to invest as I please, unfortunately. I will get 60,000 in cash, minus 30% taxes (which I am assuming I will get back if I am not working that year;but there is always the risk that any employment income that year will nullify a possible refund of those taxes.) and then I can commute half of the $90,000 to an RRSP of my choosing. The other half of the 90,000 must stay in a LIRA.
I have also considered just investing the $650 each month, but we may need that money for living.
On the surface it does seem that simply investing the amount I do have to play with would yield me at least 5%, which would be better than just taking the pension. But I haven't run the numbers on this (not my strong suit) to do a reasonable comparison of both.
Thanks again and I do appreciate any further suggestions!

[SunshineGirl]

I'd take the pension, and if you don't need the money right now on a monthly basis, then invest it.

[Prairie Stash]

You could get the pension payout and put it into an RRSP, which means getting all the tax back.  However if you're not working next year I'd flip a bunch into a TFSA and pay a low amount of taxes now.

From what I understand the TFSA aren't subject to withdrawal rules like an RRSP or LIRA (which penalize long lived people).  This means greater flexibility later on for you (and your family), at a very low cost now.

[MorningCoffee]

I will not get the full $150,000 to invest as I please, unfortunately. I will get 60,000 in cash, minus 30% taxes (which I am assuming I will get back if I am not working that year;but there is always the risk that any employment income that year will nullify a possible refund of those taxes.) and then I can commute half of the $90,000 to an RRSP of my choosing. The other half of the 90,000 must stay in a LIRA.

Are you referring to the money that will stay locked in your LIRA when you say you can't invest it as you please? You actually control how your LIRA $ is invested. I opened mine with a discount brokerage and I'm invested in ETFs. So you should be able to invest your entire CV as you wish.

As for taxes, do you have any room left in your RRSPs? If so, contributing some of payout would lower your taxes. You would have to decide though if that makes sense going forward - if you will be in a lower tax bracket when you need to take it out.

TFSA is an excellent suggestion too. It may be a good idea to see a professional to see what your best course of action is.