Author Topic: Pension: Defer or Transfer (Commuted) Value  (Read 4577 times)

Ottawa

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Pension: Defer or Transfer (Commuted) Value
« on: October 26, 2016, 07:16:18 AM »
I revisit this consideration from time to time and generally end up deciding that the deferral route is less complicated and safer.  However, I would like to more seriously analyze this decision as FIRE draws closer. 

My SO and I each have contributed to a DB pension for what will be a relatively short period of time at FIRE.  Retirement will likely be at 46.  Under the deferred option, you can take full pension at age 60.  This amount is based on a formula involving years of service and highest (5 years consecutive) salary.  The benefits of this pension are that it is indexed to CPI (COLA) and would act as a 'bond component' to our portfolio.  Also, it is paid to the primary for life.  In the event of the primary's death, 50% of the ongoing payment transfers to the surviving spouse. 

Under the transfer option there is a formula that sees about 1/3 of the lump some tax sheltered and 2/3 taxed.  The benefit here is that the money is now fully under your control and passed into the estate should you die.

The Numbers: 

Under Defer from age 46- each pension will be worth around 23K in today's dollars at age 60 (i.e. 46K total for both pensions). 

Under Transfer at age 46- for each pension, around 100K would be tax sheltered and 200K would be taxed.  Some optimizing could be conducted in order to lessen tax impact (retirement staggered by one year so that pay out wouldn't be all in one year).  Even with this, the average tax rate would be around 35% on the 200K.  This would leave 130K after tax.  Thus, only about 230K would be net from a 300K gross. To compare with the deferred pension, one could estimate (based on the 4% rule) that 230K would generate $9,200 annually in today's dollars.  (i.e. $18,400 total for both pensions)

Once age 50 is attained, one is no longer permitted to elect for the transfer option. 

Our investment portfolio should generate (from FIRE at 46) 65K based on the 4% SWR.  Our base spending is around 35K, not including anticipated travel of 10K.  So, we don't need the pension income.  It is more of a safety net. 

Thoughts on how best to manage the DB pension decision to optimize? 

Thanks!!





NoStacheOhio

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #1 on: October 26, 2016, 07:22:01 AM »
Do you have the option for a qualified rollover to a tIRA?

ender

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #2 on: October 26, 2016, 07:23:00 AM »
How reliable is the pension?

Why will you be retiring at 46 with a 2.8% SWR while you have a pension at age 60?


Ottawa

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #3 on: October 26, 2016, 07:38:55 AM »
Do you have the option for a qualified rollover to a tIRA?

Only the 100K can go into what we can here in Canada a LIRA.  I'll let Jim Yih at retire happy provide the many rules surrounding access to the LIRA
https://retirehappy.ca/unlocking-pension-money-getting-money

Ottawa

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #4 on: October 26, 2016, 07:40:47 AM »
How reliable is the pension?
Very.  It is the Canadian Federal Government...


Why will you be retiring at 46 with a 2.8% SWR while you have a pension at age 60?

Are you suggesting I should retire earlier?  :-)
Yes, I am weak.  Way to many safety nets.  Actually, target retirement is only a year away...

ender

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #5 on: October 26, 2016, 08:25:51 AM »
Are you suggesting I should retire earlier?  :-)
Yes, I am weak.  Way to many safety nets.  Actually, target retirement is only a year away...

Keep the pension.

If you are worried enough to delay to this point, you probably will gain a TON of security knowing you have a meaningful pension in ~14 years after retiring.



It's probably not optimal financially. But it sounds totally optimal emotionally.

Ottawa

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #6 on: October 26, 2016, 08:43:48 AM »
It's probably not optimal financially. But it sounds totally optimal emotionally.

This is more what I'm wrestling with.  The financial optimization.  Everything we have done has been about optimizing, but yes, that should be balanced against emotional optimization.  Part of our retirement plan has been that our numbers did not rely on future potential income.  We wanted to be safe in the knowledge that our portfolio would sustain retirement regardless.  Having said that our portfolio has been tailored more towards 100% equities (although we hold around 10% preferred shares) - and we treated our future pension as the bond portion...

NoStacheOhio

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #7 on: October 26, 2016, 09:12:56 AM »
It's probably not optimal financially. But it sounds totally optimal emotionally.

This is more what I'm wrestling with.  The financial optimization.  Everything we have done has been about optimizing, but yes, that should be balanced against emotional optimization.  Part of our retirement plan has been that our numbers did not rely on future potential income.  We wanted to be safe in the knowledge that our portfolio would sustain retirement regardless.  Having said that our portfolio has been tailored more towards 100% equities (although we hold around 10% preferred shares) - and we treated our future pension as the bond portion...

It sounds like you're in a strong position, and making reasonable, conservative assumptions. You've already won.

RichMoose

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #8 on: October 26, 2016, 03:00:47 PM »
I believe this issue is best to consider in depth when you are literally months away from pulling the plug. You can get a pension statement done by your provider which will tell you exactly what the Locked-in portion is worth, the taxable amount, and your future estimated benefit (at age 60). Also, you can estimate your CPP clawback at 65 on your own. A couple years from now the payout could look very different if interest rates change.

You can keep your options open in the mean time by building up some RRSP room that you can use in the event of a payout. If you retire in January, you can contribute to RRSP and use it to offset a large payout in the new tax year. If you decide to defer the pension you can still contribute to RRSP up to the end of February and use it to offset your higher income in the last tax year.

If you are currently treating your pension as the stable "bond-like" portion of your portfolio, you may need to change your assumptions on valuing that payout. Is 4% WR safe enough to compare to a bond, or should a government pension be instead valued at a 3% WR?

Goldielocks

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #9 on: October 26, 2016, 08:07:38 PM »
I gather that you can not roll it into an RRSP, and that you do not have much RRSP room for the $200k?

I was able to put my 1/3 into a LIRA, and the other rolled into an RRSP without taxes or impact on my contribution room.  It was a corporate pension, though, not a federal pension.


Here is a great thread for you..
http://forum.mrmoneymustache.com/investor-alley/to-commute-or-not-to-commute-(your-pension-value)/msg0/?topicseen#new
« Last Edit: October 26, 2016, 08:09:20 PM by goldielocks »

ender

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #10 on: October 26, 2016, 08:21:09 PM »
It's probably not optimal financially. But it sounds totally optimal emotionally.

This is more what I'm wrestling with.  The financial optimization.  Everything we have done has been about optimizing, but yes, that should be balanced against emotional optimization.  Part of our retirement plan has been that our numbers did not rely on future potential income.  We wanted to be safe in the knowledge that our portfolio would sustain retirement regardless.  Having said that our portfolio has been tailored more towards 100% equities (although we hold around 10% preferred shares) - and we treated our future pension as the bond portion...

I see this happening.

Age 46, you retire and roll all your pensions into stocks.

At age 52, the market drops 30%. Now you start freaking out. What if? What if? What if?

You sound like a "what if?" person who will let that dominate your thinking. You've got plenty of money now and having those pensions at age 60 gives your inner "what if?" a "worst case we have plenty of money at 60" response.

human

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #11 on: November 04, 2016, 12:17:29 PM »
I was just looking over my options for this (cdn civil servant here as well)!

Quick question to OP, how many years in does the transfer option stop? I'm in my late 30s and when I plug in values on the pension calculator for leaving at 45 it does not show a transfer option (I would be between 20-25 years in).

EDIT: going to answer myself - calculator only shows transfer value for leaving today. If I read the definition correctly you can transfer before hitting 50 (the original post mentions this). A colleague had told me previously that a pay out would not be possible after a certain amount of years in the civil service.

It's pathetic how little I know about my own pension.

On topic again, I know I can definitely leave at 50 with 25 years in, but 45 seems really tempting if I can keep savings up.
« Last Edit: November 20, 2016, 06:27:24 AM by human »

Ottawa

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #12 on: November 04, 2016, 12:30:03 PM »
I was just looking over my options for this (cdn civil servant here as well)!

Quick question to OP, how many years in does the transfer option stop? I'm in my late 30s and when I plug in values on the pension calculator for leaving at 45 it does not show a transfer option (I would be between 20-25 years in).

I think that it can no longer be taken at age 50.  Also, you can't plug in a future value of more than a short period (I think around a month) in order to see the transfer option.  The transfer option amount is highly dependent on interest rates and other factors - probably why they don't give you an actionable estimate for the future. 


human

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #13 on: November 04, 2016, 12:34:21 PM »
Thanks Ottawa, I edited my post as you were replying. I'm going to take a real hard look at this when I hit 44.

GreatLaker

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #14 on: November 04, 2016, 01:06:01 PM »
An indexed pension backed by the Canadian federal government. These days most people can only dream about retirement security like that. Unless you have enough investments that you cannot foresee ever running out of funds in retirement why would you ever walk away from the pension?!

Consider some past economic conditions that could recur during the rest of your hopefully long life. Stocks peaked in the mid 1960s, crashed in the early 1970s and did not recover to the same levels until the early 1980s. 16 years. And during the 1970s in addition to stocks crashing, inflation spiked up, robbing purchasing power and high interest rates killed bond returns. The tech crash of 2000 impacted investment returns for years. Not to be a downer, but think it cannot happen again? How much longer do you think you might live and what economic conditions could occur?

I recently took the commuted value of a DB plan, but my employer was bought out by a dodgy US company that does not look like it wants to invest much in Canada and easily close up and go home, leaving the pension with no guarantor if it gets under-funded. In my case based on a 4% return the break-even point is 90 years old. If I live past 90 the pension will be better, if I can get >4% return the commuted is worth more.

Two good books I recommend:

The Pension Puzzle: Your Complete Guide to Government Benefits, RRSPs, and Employer Plans
https://www.amazon.ca/Pension-Puzzle-Complete-Government-Benefits/dp/0470839538
Really detailed book on private and government pensions and retirement plans. You might be able to borrow from the library.

The Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen
https://www.amazon.ca/Real-Retirement-Could-Better-Happen/dp/111849864X
Co-authored by a guy named Bill Morneau. His name might be familiar from the news lately :)
It's a more broadly based book on pension and retirement funding strategies.


human

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #15 on: November 04, 2016, 01:17:28 PM »
Oh another question for Ottawa, I assume if we leave before 25 years in we lose out on the health care plan and dental plan until the pension kicks in at 60. I'm not sure how far off 45 is for you but do you have any supplemental plans in mind until 60?

Thanks.

Ottawa

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #16 on: November 07, 2016, 06:10:20 AM »
Oh another question for Ottawa, I assume if we leave before 25 years in we lose out on the health care plan and dental plan until the pension kicks in at 60. I'm not sure how far off 45 is for you but do you have any supplemental plans in mind until 60?

Thanks.

You are correct.  We don't get back in on the health care plan until 60.  Good question - I've been looking into the possibility of whether or not supplemental makes sense.  In general, most things are covered under OHIP.  Apart from prescriptions and the other benefits under the pshcp such as vision, physiotherapy etc.  At this time we don't really have any prescriptions, apart from the odd penicillin. We do utilize the vision, sometimes physiotherapy.

Just looking at the math, based on what we use now:
Vision benefit = $275 each every two years (i.e. $275 annually)
Various physio/massage/etc benefit = Maybe $400 per year - mostly due to work stress! 
Prescriptions = ???

Attached below are a table of eligible expenses that we sometimes use and a table of total benefit areas. I would estimate that we wouldn't use more than $1000 worth of medical-related benefits.  Based on current health only of course.  The big wild card is if you have some time of illness that requires high cost prescription drugs etc.  So, you have to ask yourself what is the likelihood of this based on personal history, family history and current health? 

Our dental coverage provides for (I think) checkup every 9 months (we would extend to once per year between 45 and 60).  Just the standard checkups for 2 adults/child would cost something like $500 per year.  Obviously things can get more expensive with issues like root canals/cavities etc.  I personally haven't had any issues since the wisdom teeth came out at 18.  But, my wife has had some fairly hefty bills of $1,000 to $2,000 a couple of times!  Also, it is possible that our child would require orthodontics.  So, orthodontics could be a $7,000 hit.  I see this as the biggest area of uncertainty wrt financial outlay.  Our current dental plan pays most of these costs.

At this time I haven't done too much investigation into coverage for either health or dental.  However, I think premiums for a family may be in the $400 monthly range.  At that rate, it wouldn't make sense to pay $5,000 every year to maybe recoup $2,000.  At this time we are tending towards paying out of pocket.  There is some ability to claim on expenses: http://www.cra-arc.gc.ca/medical/.  The amount you get back in tax credit depends on net income. 

so....this is probably worth a whole topic for Canadian early retirees...there are quite a few out there that have probably done some extensive research that would be willing to fill in this knowledge gap!! 



PharmaStache

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #17 on: November 07, 2016, 06:37:51 AM »
Ottawa- regarding prescriptions, you need to find out what your province offers in terms of coverage.  Every province is different so I am not sure what ON offers, but you could try asking your pharmacist to explain, or see what you can find online.  I'm thinking more in terms of "catastrophic" coverage, not just an antibiotic or blood pressure med that you could easily work into your budget.  What happens if you need a drug that costs 10k/month? 

Ottawa

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #18 on: November 07, 2016, 08:32:44 AM »
Ottawa- regarding prescriptions, you need to find out what your province offers in terms of coverage.  Every province is different so I am not sure what ON offers, but you could try asking your pharmacist to explain, or see what you can find online.  I'm thinking more in terms of "catastrophic" coverage, not just an antibiotic or blood pressure med that you could easily work into your budget.  What happens if you need a drug that costs 10k/month?

Exactly.  The big cost cancer drugs are what I have in mind as worst case scenario.
In Ontario, there are many programs that once can apply to that have various thresholds to entitlement.  These are separate from OHIP (Ontario Health Insurance Plan).

Before age 60, we can access the Trillium Drug Program: https://www.ontario.ca/page/get-help-high-prescription-drug-costs.  The deductible is based on your net income.  You would want to make sure any potential drugs are on the formulary: https://www.formulary.health.gov.on.ca/formulary/

powersuitrecall

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #19 on: November 08, 2016, 08:29:13 AM »
Interesting discussion!  We are in a similar situation and have been leaning heavily towards cashing out our pension in the next couple of years.  I'll have about 10 years of service and from the calculations I've done, taking the cash now is a clear winner:

Journal link: http://forum.mrmoneymustache.com/journals/a-nice-dream/msg1092014/#msg1092014

We might end up cashing one pension (mine) and keeping DWs (she wants to work a bit longer and is quite a bit younger than I).

...
Two good books I recommend:

The Pension Puzzle: Your Complete Guide to Government Benefits, RRSPs, and Employer Plans
https://www.amazon.ca/Pension-Puzzle-Complete-Government-Benefits/dp/0470839538
Really detailed book on private and government pensions and retirement plans. You might be able to borrow from the library.

The Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen
https://www.amazon.ca/Real-Retirement-Could-Better-Happen/dp/111849864X
Co-authored by a guy named Bill Morneau. His name might be familiar from the news lately :)
It's a more broadly based book on pension and retirement funding strategies.


Thanks for these links GreatLaker.  I'll check them out.

powersuitrecall

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #20 on: November 08, 2016, 09:01:18 AM »
Ottawa, I just re-read your initial post stating that you are projecting $65K yearly using the 4% rule without the pension, which is $30K more than your current expenses.  You have safety nets on your safety net.  I have to echo other's opinion that you should probably keep the pension.  It's a very enviable position :)  Congrats!

As an aside - have you thought about retiring sooner?  You probably could!

human

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Re: Pension: Defer or Transfer (Commuted) Value
« Reply #21 on: November 20, 2016, 06:33:31 AM »
Thanks Ottawa for the detailed look at extra coverage. I somehow missed these last few posts. Cancer drugs are exactly what I had in mind, someone close to me had cancer. The supplemental drugs they took were not considered essential but were still covered by our plan, they would have cost a fortune without the plan.