Author Topic: To commute or not to commute (your pension value)?  (Read 35751 times)

Joan-eh?

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To commute or not to commute (your pension value)?
« on: December 28, 2014, 07:04:19 AM »
I would be interested in hearing about how people have made decisions to commute (or not) their pension values.  I am in canada, and we sure do have unusual rules.

I have been humming over this question for 11 years, but must decide in 5 months.

What I know:

Total value/ lump sum: 350,000
200,000 goes to a LIRA (50% can be unlocked and moved to RRSP) eventually what is left has to be turned into annuity.
150,000 is taxed at 30% at least
We have full TFSA room for 70,000 of the 100,000 CASH. The remainder makes us almost mortgage free.  Hubby has fully funded RRSP in 30 years work.
I have another pension at my current work, which will be lucrative.

Reasons to keep the pension?  It is fully indexed to inflation. I'm healthy- so far. No worries.
reasons to commute the value? Somewhat more flexibility for withdrawal (or not).  A move toward losing most of the principal amount at death. (Which will be the case in my other pension)

I'm not sure I can "beat" the pension payouts with my own investing because of inflation (boy, it's killer!)

How to make this decision? What was/is your experience?
« Last Edit: December 30, 2014, 09:23:47 PM by Joan-eh? »

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #1 on: December 28, 2014, 07:11:46 AM »
One of my worries is that younger members of the industry are paying in more than I have and will receive less in benefits at the end.  I wouldn't blame them at all for advocating reduction in benefits for those already retired. 

Also, I have no spouse, so once I kick it, the money is gone.

So, I am taking my commuted value. 

Mine is worth about what yours is.  :)

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #2 on: December 28, 2014, 08:07:18 AM »
Quote: "the same amount of monthly income.  For e.g., if I took my commuted value, I would have only chosen to take 3.5% as income, and the pension worked out to ~ 6% of the same CV"

Reason it's higher?? Do you think this includes the principal amount? Drawdown so to speak?
Could one do the same thing on ones own?

I agree with you that the multiple streams is key to the decision. I have another pension and spouses RRSP....along with CPP and OAS.  I'm thinking taking the commuted value will help with flexibility to stay under the 71,000 OAS limit.

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #3 on: December 28, 2014, 10:42:45 AM »
Yes, managing the funds as one ages is a huge part of the decision.

Cons to commuting the pension value.

My first consideration:
I don't love the task. I don't love keeping up to date on world financials. Ironically, I'd rather work at my work!

My second consideration:
Your comment about having the capacity as I get older. Very concerning.

Just nice to receive the cheque, I bet.

Cassie

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Re: To commute or not to commute (your pension value)?
« Reply #4 on: December 28, 2014, 03:53:14 PM »
My hubby & I took our pensions but we can leave them to one another with a reduction for doing so which is nice.

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #5 on: December 28, 2014, 04:00:35 PM »
hi Cassie,
Did you consider taking the commuted value? How did you make your decision?
Thx! J

gonkman

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Re: To commute or not to commute (your pension value)?
« Reply #6 on: December 30, 2014, 10:41:22 AM »

I am in a similar boat but not for another 5-8 years. My wife will get a full pension at 55 with medical benefits that include me.   

I am retiring before 50 to take the commuted value for several reasons.

1. If I go past 50 it is locked in and I will take a huge hit on pension value if I leave when wife retires at 55.  She is 3.5 years older than me.
2. I will have over 100K RRSP room to take the unsheltered portion directly into RRSP with no tax.  I estimate the remainder at approx 70K.
3. With me having no pension and a boatload of RRSPs to draw on from 49 to 71 we can "adjust" our income and do pension splitting to lower our taxes.
4. My wife will have a full DB pension with Medical to cover us both so I don't need mine.
5. We are loading our TFSA to the max until 55-60 age and then can draw on that Tax free till the cows come home.  :)
6. I calculated what my pension would pay if I left at 50, 55 and 55 and deferred it until 60.  I can get more out of it then it will pay with Reduction Amount unless I live to 100!
7. We just paid off our mortgage so that is a BIG chunk of expense gone now until we retire.

It all depends on your situation...  But I had some major factors to make it easier. 

Every person is different and it depends on your situation..




Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #7 on: December 30, 2014, 11:38:10 AM »
I made the decision to take the commuted value in May, and retired at the end of July.

Factors in the consideration:
1.CV is >$750k, substantially more than expected - due to the historically low discount rates applied by the CIA in calculating the CV. (I dug out the actuarial standard for calculating commuted values and re-performed the calculation myself, because I didn't really believe the amount that the pension administrator provided, ended up within ~$2k :) ). Half goes to a LIRA, half I get to pay taxes on (so tax bill ~$130k next year).

2. We have other savings in RRSPs, maxed TFSAs and taxable brokerage accounts.

3. DW will receive an unreduced, fully-indexed Federal pension @ age 55, and retain the Federal health plan into retirement. This will fund 80% of expected retirement expenses. (her choice to continue working the next 3.5 years)

4. We'll receive two CPPs (both at about 75%) and two OASs. Trying to decide whether to start CPP @ 60 or wait. We won't really need the CPP @ 60, but hey, we can invest the excess.

5. I did a lot of modeling of our incomes and expenses out to age 100. Model included conservative assumption of 2% real return over this time span; tax estimates, including pension splitting; travel budget to escape winter.... Everything looked good. In fact, we are likely to pass a rather substantial legacy on to our children. The model can't deal with sequence of return risk, so:

6. Crosschecked 5. with cFIREsim - we had a 0% failure rate.

7. There will be some "family money" coming our way some day. We don't need it, but it will be another buffer in our later years. Most likely we will do what the past two generations did - invest it and pass along an increased amount to the next generation.

8. Due to a recently diagnosed heart condition, I have a substantially increased risk of stroke. I feel my wife is better protected by having the CV in our possession, and conservatively invested, than by the survivor benefit she would have received from my pension plan. (Listed last, but not the least important consideration.)

Al

Cassie

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Re: To commute or not to commute (your pension value)?
« Reply #8 on: December 30, 2014, 02:40:29 PM »
Joan, my hubby ran the numbers & we did what made the most financial sense.

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #9 on: December 30, 2014, 09:08:38 PM »
BNGarden - I've been looking for professional advice. I went to the bank a few weeks ago, and I knew more about LIRAs than the financial manager.  I'll check this out. THANK YOU so much!

Would you mind please explaining more about the CPP best date to start withdrawal? What do we need to consider?

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #10 on: December 30, 2014, 09:10:39 PM »
Al and Gonkman,
Thank you so much for your lists. These are so very helpful. For sure everyone's scenario is different, but I find hearing about people's rationale and criteria and considerations so very helpful!! MERCI BEAUCOUP! 

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #11 on: December 30, 2014, 09:18:18 PM »
Al - I'm thinking the same thing about the artificially inflated cv right now.

My concern is inflation. I'm not sure I can beat it.  The pension that I am considering to "commute" is entirely indexed to inflation. The pension that I am now contributing to is not.

If the real return is 2% if considering taxes and inflation. So if I have 300,000 at 2% - not so much- the pension payout is better,

But if for some reason the return were to be 5%, the bank of Joan-eh wins.

I've just been reading about dividend growth investing.(DGI)  Interesting was of "avoiding" taxes - which would be a plus for committing the money. If I took the money and did DGI, paid no tax, then maybe I could beat the pension performance on 4%.

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #12 on: December 30, 2014, 09:34:08 PM »
4. We'll receive two CPPs (both at about 75%) and two OASs. Trying to decide whether to start CPP @ 60 or wait. We won't really need the CPP @ 60, but hey, we can invest the excess.

I used DRPensions Consulting (http://drpensions.ca/) to verify that if I take CPP early it is better for me, as waiting five additional NON-working years just reduces the figure unnecessarily. (and even working longer at part-time has such a marginal impact that I won't be doing that for only CPP reasons...)

As Squawkfox notes, it is necessary to do the 'mathy-math', and I don't have the patience for this (although I built the spreadsheet, Doug Runchey came up with slightly different figures, esp re different leaving date scenarios).  I am more confident in his knowledge of this gov't benefit than in mine.

:)

I've done the "mathy-math" - I'm a CA who likes data analysis and financial modeling, so this is "fun" for me.

I used the methodology information that Doug posted on the "Retire Happy" website ( http://retirehappy.ca/how-to-calculate-your-cpp-retirement-pension/ )  to calculate my CPP benefits. DW will actually receive slightly more CPP than the 75% calculated for me, as she will work a couple of years longer than I did. Given all the uncertainties in these kinds of estimates, I didn't feel the need to be any more precise.

Interestingly, DW will receive "bridging" with her federal pension from age 55 until age 65 - the bridging is supposed to be equivalent to the unreduced CPP benefit she would receive at age 65. She has the opportunity to collect both the bridging and the reduced CPP from age 60 to age 65. Double dipping like this holds a certain appeal.

The decision on when to take CPP is mostly a bet on longevity.  Because of other income streams, the scenarios I've run don't reveal a material impact to our future portfolio balance whichever way we go on this decision, it will probably come down to whether we want to lower our withdrawal rate at 60, versus waiting and obtaining a slightly lower withdrawal rate at 65, or even 70.

We have ~7/9 years before we need to make up our minds, but I'm leaning towards the earliest date.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #13 on: December 30, 2014, 09:49:06 PM »
Al - I'm thinking the same thing about the artificially inflated cv right now.

My concern is inflation. I'm not sure I can beat it.  The pension that I am considering to "commute" is entirely indexed to inflation. The pension that I am now contributing to is not.

If the real return is 2% if considering taxes and inflation. So if I have 300,000 at 2% - not so much- the pension payout is better,

But if for some reason the return were to be 5%, the bank of Joan-eh wins.

I've just been reading about dividend growth investing.(DGI)  Interesting was of "avoiding" taxes - which would be a plus for committing the money. If I took the money and did DGI, paid no tax, then maybe I could beat the pension performance on 4%.

Valid concern regarding inflation. I still remember the late 70's and early 80's.

One thing you should be aware of is that the CV calculation takes inflation indexing into account. The CIA standard applies lower discount rates to indexed pensions - substantially increasing the CV payout. Realistically, this adjustment accounts for 2 to 2.25 % inflation over the life expectancy used for the calculation. Pretty much what the pension plan board estimates for it's funding estimates.

You (we) might be out of luck if we get back to inflation in the teens again, but I'm always expecting at least a small real return over the long run.

Then again, DWs pension, CPP and OAS are all indexed to CPI, so I have a somewhat lower risk that hyperinflation will wipe us out.

Al


Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #14 on: January 02, 2015, 12:40:53 PM »
Al - I'm thinking the same thing about the artificially inflated cv right now.

My concern is inflation. I'm not sure I can beat it.  The pension that I am considering to "commute" is entirely indexed to inflation. The pension that I am now contributing to is not.

If the real return is 2% if considering taxes and inflation. So if I have 300,000 at 2% - not so much- the pension payout is better,

But if for some reason the return were to be 5%, the bank of Joan-eh wins.

I've just been reading about dividend growth investing.(DGI)  Interesting was of "avoiding" taxes - which would be a plus for committing the money. If I took the money and did DGI, paid no tax, then maybe I could beat the pension performance on 4%.

Valid concern regarding inflation. I still remember the late 70's and early 80's.


Then again, DWs pension, CPP and OAS are all indexed to CPI, so I have a somewhat lower risk that hyperinflation will wipe us out.

Al

Yeah, maybe when you've lived inflation, it is always on the mind. My grandfather's stash was obliterated in this way. Very tough  when you have "long genes" 
« Last Edit: January 02, 2015, 12:43:17 PM by Joan-eh? »

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #15 on: January 03, 2015, 07:08:28 AM »
I just read about a new study saying cancer is more bad luck (random mutation) than environmental or genetic issues.  Maybe I will commute the value of my pension! 

I've always been an optimist, and assumed long life. The prevalence of randomness is unnerving.


Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #16 on: January 03, 2015, 09:00:31 AM »
My pension is as solid as any pension, I think.  I do think about The issue of survivor benefits: I can choose a range -- less payout and  100% to DH up to full payout and 50%. There are about 5 choices.  And if he goes soon after me or at same time- poof! Nothing to estate.

I'm not sure if the best approach is to think optimistically and deal with what comes, or think pessimistically and be well prepared.

Cassie

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Re: To commute or not to commute (your pension value)?
« Reply #17 on: January 03, 2015, 01:12:34 PM »
I would do the second choice.

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #18 on: January 03, 2015, 01:22:05 PM »
I think that's the smart thing too, Cassie

Cassie

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Re: To commute or not to commute (your pension value)?
« Reply #19 on: January 03, 2015, 01:32:17 PM »
I tend to be a worrier Joan.  also our pensions are very solid government pensions where the state has them well funded so we were not worried.

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #20 on: January 10, 2015, 07:29:56 AM »
How would you prioritize the criteria of your decision to commute or not to commute?

A) bottom line: does commuting or not commuting the pension's value give a better bottom line/earnings over lifetime?
B) strategic withdrawal: or do I prioritize flexibility of access over lifetime: if commuted, we could access money now, if not, access begins age 65' or next year age 50 at just under half the amount, but highly taxed cuz I'm still workin'
C) security: or do I prioritize the security of the fully indexed to inflation aspect (it's the only source that is fully indexed (it's also very secure pension)- so leave it as the most stable part?
D) diversity:  I have another very pension to which I am currently contributing,
E)  diversity:  this  is a part of a layered strategy:  so this is currently 1/4 of the hubby&wife's registered accounts - but not including CPP/OAS.  It becomes a smaller percentage the other accounts grow. This account is static.
F) age: should I decide differently if I will have an inheritance in the next 10-15 years that doubles my 'tache.
G) others: consider the money left on the table if I die early in a freakish helli-skiing accident ;-)

Which top three criteria would you prioritize in your decision making?
Or which not to consider?


Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #21 on: January 10, 2015, 10:23:39 AM »
Joan-eh?

A) is important. Do you think it will be possible for you to outperform, or at least match, the investment managers of your pension plan? How did the OTPP do in comparison to its stated benchmarks? This should be somewhere in its annual report.

B) You'll most likely be paying a big chunk of tax if you take the commuted value. You can only transfer about half to a LIRA (formula set by legislation), the rest can go into an RRSP only if you have the contribution room. If not, then it's just a taxable payout. At your marginal rate. OUCH.

I think that your options D) and E) are just different aspects of C). It sounds like indexing is important to you, but this pension is less than 25% of your anticipated retirement income. How much inflation protection does this really provide?

Have you run any scenarios with different inflation rates? cFIREsim allows you to pick different inflation rates, or to re-characterize this income as either pension or part of your portfolio. How do various scenarios impact your success rate?

New:
Control. If you take the CV, then you are in control of investment policy, withdrawal strategy, and the cash is there for your spouse should you get run over by a bus. If you take the pension, then you are at the mercy of the Gov't and the Pension Plan Board.

Risk of Plan Amendments. Here in Alberta, the Government tabled legislation last year that, among other things, removed the existing (60% of CPI) indexing for service after a specified date, and substituted a "target" of 50% of CPI indexing - but only in years that the plan could "afford" to index (criteria not defined). The government was pressuring the Alberta Teachers' Pension Plan to follow suit. The legislation died when the legislature was prorogued, but could come back at any time. Could plan amendments like this happen in cash-strapped Ontario too?

The total package of proposed amendments to my pension plan (basically gutting the benefit) was an important consideration in my decision to take the CV.

Al

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #22 on: January 11, 2015, 06:27:26 PM »
yup, thinking control might be a  priority. :-)

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #23 on: January 13, 2015, 08:24:53 AM »
And don't forget that the pension is clawed back at 65 when they assume you'll start taking CPP.

Joan-eh?

A) is important. Do you think it will be possible for you to outperform, or at least match, the investment managers of your pension plan? How did the OTPP do in comparison to its stated benchmarks? This should be somewhere in its annual report.

B) You'll most likely be paying a big chunk of tax if you take the commuted value. You can only transfer about half to a LIRA (formula set by legislation), the rest can go into an RRSP only if you have the contribution room. If not, then it's just a taxable payout. At your marginal rate. OUCH.

I think that your options D) and E) are just different aspects of C). It sounds like indexing is important to you, but this pension is less than 25% of your anticipated retirement income. How much inflation protection does this really provide?

Have you run any scenarios with different inflation rates? cFIREsim allows you to pick different inflation rates, or to re-characterize this income as either pension or part of your portfolio. How do various scenarios impact your success rate?

New:
Control. If you take the CV, then you are in control of investment policy, withdrawal strategy, and the cash is there for your spouse should you get run over by a bus. If you take the pension, then you are at the mercy of the Gov't and the Pension Plan Board.

Risk of Plan Amendments. Here in Alberta, the Government tabled legislation last year that, among other things, removed the existing (60% of CPI) indexing for service after a specified date, and substituted a "target" of 50% of CPI indexing - but only in years that the plan could "afford" to index (criteria not defined). The government was pressuring the Alberta Teachers' Pension Plan to follow suit. The legislation died when the legislature was prorogued, but could come back at any time. Could plan amendments like this happen in cash-strapped Ontario too?

The total package of proposed amendments to my pension plan (basically gutting the benefit) was an important consideration in my decision to take the CV.

Al


OTPP has done similar to the Alberta plan outlined here. What worries me most is that it was retroactive.  It didn't affect current retirees, only those still paying into the plan, but frankly, there is only so much stripping of their own benefits that working teachers will take before the retirees get thrown under the bus. 

All we need is a PC government, and I'm betting my pension that they will gut our pension plan in the name of austerity. 

I plan to RE in January so as to minimize the tax hit. 

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #24 on: January 13, 2015, 10:48:09 AM »
I'll just leave this here:

http://www.theglobeandmail.com/report-on-business/pension-fund-managers-protest-being-brought-under-powerful-new-regulator/article22421564/

It's unclear to me whether the ~$230 billion managed by the CPPIB also falls under this proposed legislation.

....

Harper would like to thank all the useless public sector scum you for giving up your pension funds/retirement income to provide the capital his appointees will squander bailing out his banker friends and manipulating the Canadian stock market.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #25 on: January 13, 2015, 03:58:48 PM »
I'll just leave this here:

http://www.theglobeandmail.com/report-on-business/pension-fund-managers-protest-being-brought-under-powerful-new-regulator/article22421564/

It's unclear to me whether the ~$230 billion managed by the CPPIB also falls under this proposed legislation.

....

Harper would like to thank all the useless public sector scum you for giving up your pension funds/retirement income to provide the capital his appointees will squander bailing out his banker friends and manipulating the Canadian stock market.

Al

ha!  Just got back from a union meeting where this was brought up.  I turned to my partner (who is also a teacher and a union rep) and said, "Well, that just about settles my escape plan."

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #26 on: January 13, 2015, 05:45:01 PM »
yes, just read that too, in the paper.  I wonder what effect it will have in grandfathered pensions.
I haven't contributed to my pension in 10-11 years...its terms have not been (so far) by changes. ie) still fully indexed.

Should this affect my decision? and why?

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #27 on: January 13, 2015, 06:43:06 PM »
Pension plan assets exist to provide the cash required to settle pension obligations as they come due. It's up to the plan's management to invest those assets in a way that maximizes return (within the stated investment policy) for the plan members and beneficiaries.

This proposed legislation would allow the government to force pension plans to use/invest, not invest their assets for other purposes - i.e. to be used at the direction of government to "manage" risks in capital markets (bailing out banks/insurance companies when the housing bubble bursts?), not for ensuring that the pension plan can satisfy its own obligations.

If enacted, and then used, this could affect all plan members - those currently receiving a pension as well as those who expect to collect one in the future. Will the plan have the liquidity to meet its obligations when assets are tied up by a regulator? How much will future contribution rates increase (for those who are still active plan members) to compensate for any losses/foregone gains resulting from the use of this legislation?

I'm not terribly in favour of the government effectively giving itself the right to appropriate pension assets. YMMV.

Al

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #28 on: January 14, 2015, 03:24:44 AM »
I'm not sure if you were following this story a couple years back: http://www.nytimes.com/2013/12/04/us/detroit-bankruptcy-ruling.html?pagewanted=all&_r=0  It's a bit extreme, but I've had this example in the back of my mind.

Also, I live in Hamilton and have seen what has happened to the retired members of USW Local 1005:  http://www.cbc.ca/news/canada/stelco-pensioners-fear-for-their-financial-future-1.465552 

http://www.theglobeandmail.com/report-on-business/stelco-may-trigger-pension-rule-change/article994631/

The Globe and Mail article is particularly concerning for OTPP because Sorbara and the Ontario Liberals were teacher-friendly at that point.  The Libs certainly aren't now and a PC government would be far worse for us.  Certainly, Harper won't be kind.

The public seems to forget that pensions are delayed wages and that we pay a good deal into the plans ourselves.  We were told by OTPP about a year and a half ago that we would have to face a choice in the future: have benefits cut or fund more of it ourselves without government matching.  As it is, partial indexing applies to payments made into the plan after 2010. 

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Re: To commute or not to commute (your pension value)?
« Reply #29 on: January 17, 2015, 02:25:17 PM »
Joan:  I couldn't find the date for this blog entry, but there is some interesting information that you probably already knew about, but I didn't.  I should be able to make the "low income" argument for unlocking.  :)  My plan is to live on less than $15k a year in retirement.

Just thought I'd share.

http://www.moneysmartsblog.com/how-to-unlock-an-ontario-locked-in-retirement-account-lira-lrif/

Perhaps Al could comment too since he seems to know a lot about this topic (even if he is in Alberta and not Ontario).

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #30 on: January 17, 2015, 06:00:59 PM »
Joan:  I couldn't find the date for this blog entry, but there is some interesting information that you probably already knew about, but I didn't.  I should be able to make the "low income" argument for unlocking.  :)  My plan is to live on less than $15k a year in retirement.

Just thought I'd share.

http://www.moneysmartsblog.com/how-to-unlock-an-ontario-locked-in-retirement-account-lira-lrif/

Perhaps Al could comment too since he seems to know a lot about this topic (even if he is in Alberta and not Ontario).

BPA! What a strategy! I love it!! It would be nice to just get it all out. And if aiming for a particularly low income especially that year, it sure would be much less tax to pay on he non-lira amount!

I'm a bit confused about the 50% unlocking rule. I have only to 50 years old to commute my pension and I have to apply to unlock within a few months of commuting the pension.  Yet, other rules say I can only unlock 50% at 55 years.  Are their different rules for differnt pensions?


Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #31 on: January 17, 2015, 06:30:14 PM »

BPA! What a strategy! I love it!! It would be nice to just get it all out. And if aiming for a particularly low income especially that year, it sure would be much less tax to pay on he non-lira amount!

I'm a bit confused about the 50% unlocking rule. I have only to 50 years old to commute my pension and I have to apply to unlock within a few months of commuting the pension.  Yet, other rules say I can only unlock 50% at 55 years.  Are their different rules for differnt pensions?

Rules vary based on which government has jurisdiction over the pension plan. In Alberta, for instance, you can do the 50% unlocking of Alberta Jurisdiction LIRAs at age 50. I believe that unlocking simply allows your bank to transfer the unlocked amount to a RRSP or a RRIF. The effect is to eliminate the limitation on the annual maximum that can be withdrawn from a LIRA/LIF.

The unlocking provisions are stackable - if the 50% unlocking leaves a low enough balance, then it can trigger the small balance unlocking....

Ontario may require you to keep the funds in the LIRA until age 55, but at least it's tax sheltered for those years.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #32 on: January 18, 2015, 01:03:48 PM »
4. We'll receive two CPPs (both at about 75%) and two OASs. Trying to decide whether to start CPP @ 60 or wait. We won't really need the CPP @ 60, but hey, we can invest the excess.

I used DRPensions Consulting (http://drpensions.ca/) to verify that if I take CPP early it is better for me, as waiting five additional NON-working years just reduces the figure unnecessarily. (and even working longer at part-time has such a marginal impact that I won't be doing that for only CPP reasons...)

As Squawkfox notes, it is necessary to do the 'mathy-math', and I don't have the patience for this (although I built the spreadsheet, Doug Runchey came up with slightly different figures, esp re different leaving date scenarios).  I am more confident in his knowledge of this gov't benefit than in mine.

:)

I've done the "mathy-math" - I'm a CA who likes data analysis and financial modeling, so this is "fun" for me.

I used the methodology information that Doug posted on the "Retire Happy" website ( http://retirehappy.ca/how-to-calculate-your-cpp-retirement-pension/ )  to calculate my CPP benefits. DW will actually receive slightly more CPP than the 75% calculated for me, as she will work a couple of years longer than I did.

Drpensions only does CPP calculations- has anyone used a professional to help make the decision?

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Re: To commute or not to commute (your pension value)?
« Reply #33 on: January 24, 2015, 05:44:57 PM »
My calculations lean toward commuting the pension. (Thank you everyone for your ideas - they really helped me examine this from all angles). I like the idea of the control and having the commuted value as a safety net for others after I die. BUT thinking about inflation.  Over 40 years - now until  90years old - how to maintain the buying power? Of course, one needs returns to beat inflation. This money is mostly tied up in non-tangible assets.  Hedging inflation, I don't imagine managing rental properties 65yr +.   When I look at the devastating effects of inflation, i wonder if ER is really within my realm of possibility. Am i missing something?

It has been suggested that if I use 5% as my earnings rate, that I am accounting for the bite of inflation (assuming returns of 7). I do feel 7-8% is (too) optimistic.

What rates ( both return and inflation) did you use when you decided to commute or not?

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Re: To commute or not to commute (your pension value)?
« Reply #34 on: January 24, 2015, 06:28:42 PM »
My situation is different than yours, so inflation isn't as scary to me.  I can live on very little and expect to be like my mother and get by on CPP and OAS if necessary.  My mom actually has more money now that she isn't working.  Unlike yours (which is funny since it's the same pension plan) my pension is partially de-indexed, and would be cut another 24% at 65 if I took a pension anyway. 

My plan is to keep three years' living expenses in cash and dollar cost average the rest into index funds.  Plus, I'll have my house which is bigger than what I'll need for just me.  Here's hoping that is enough of an inflation hedge for me. 

After the Bank of Canada's somewhat strange decision to lower the key interest rate, I'm interested to see the difference in commuted value when I check it in early February. 

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Re: To commute or not to commute (your pension value)?
« Reply #35 on: January 24, 2015, 07:34:44 PM »
Hi BPA- yes! Like you, hoping next month is a little higher CV! :-)

As you mentioned before- , that the pension gets reduced when we start to get CPP.  Another reason to commute? It ranges between a 22-11% reduction!

Since I left teaching a while ago, mine is currently fully indexed, but who knows, I suspect that could change.  Again, it's based on 16 years of service. - not a full career.

Inflation seems scary because from 50 to 90 (typical for my family) is a LONG time. At 2-3 % inflation, I could be looking at this stash being worth 1/3 of its former glorious self. Or said another way, having 1/3 the buying power.

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Re: To commute or not to commute (your pension value)?
« Reply #36 on: January 24, 2015, 08:43:16 PM »
I've found this conversation very interesting, as my husband and I both have defined benefit non-indexed pensions (in MB).  The effects of inflation are very worrying to me if we're talking about age 50/55 to 90+.  For my husband, it seems that he does not have an option to commute his plan- if he leaves his job, he just starts taking the (very reduced) pension at age 55 at the earliest.  Is this common?  Seems odd to me that he has no choice in the matter.  I can transfer mine to a LIRA.

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Re: To commute or not to commute (your pension value)?
« Reply #37 on: January 24, 2015, 09:34:30 PM »
I've found this conversation very interesting, as my husband and I both have defined benefit non-indexed pensions (in MB).  The effects of inflation are very worrying to me if we're talking about age 50/55 to 90+.  For my husband, it seems that he does not have an option to commute his plan- if he leaves his job, he just starts taking the (very reduced) pension at age 55 at the earliest.  Is this common?  Seems odd to me that he has no choice in the matter.  I can transfer mine to a LIRA.

That does seem odd.  I have a friends who are married and in the same pension plan as me.  He took commuted value and she is taking a pension.  His family is long lived but hers is not.  Seems to me they would have had better odds doing it the other way around.  But really...wouldn't it be nice to have crystal ball.

I'm glad that you didn't get analysis paralysis, Joan.  When I was googling recently, I found a thread on ERE where I posted asking about commuted value in January 2011.  I've been leaning that way for a while, but there are times when I second guess myself.  I just know that I won't be able to make it to 50.  I'm burned out.  I've weighed all of the factors and CV seems the right way to go for me. 


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Re: To commute or not to commute (your pension value)?
« Reply #38 on: January 24, 2015, 10:09:54 PM »

After the Bank of Canada's somewhat strange decision to lower the key interest rate, I'm interested to see the difference in commuted value when I check it in early February.

CV is based on three mid- to long-term Government of Canada bonds (CANSIM V122542 - 7 year, V122544 - long-term, V122553 - long-term real return). There may or may not be a correlation between yield changes on these bonds and changes to the overnight rate. These rates are determined only at the end of each month. You can at least see the magnitude and direction of the change here: http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-yields/

Al

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Re: To commute or not to commute (your pension value)?
« Reply #39 on: January 24, 2015, 10:19:20 PM »
I've found this conversation very interesting, as my husband and I both have defined benefit non-indexed pensions (in MB).  The effects of inflation are very worrying to me if we're talking about age 50/55 to 90+.  For my husband, it seems that he does not have an option to commute his plan- if he leaves his job, he just starts taking the (very reduced) pension at age 55 at the earliest.  Is this common?  Seems odd to me that he has no choice in the matter.  I can transfer mine to a LIRA.

That does seem odd.  I have a friends who are married and in the same pension plan as me.  He took commuted value and she is taking a pension.  His family is long lived but hers is not.  Seems to me they would have had better odds doing it the other way around.  But really...wouldn't it be nice to have crystal ball.

I'm glad that you didn't get analysis paralysis, Joan.  When I was googling recently, I found a thread on ERE where I posted asking about commuted value in January 2011.  I've been leaning that way for a while, but there are times when I second guess myself.  I just know that I won't be able to make it to 50.  I'm burned out.  I've weighed all of the factors and CV seems the right way to go for me.

BPA -would you mind sending me the link to that other musing in ERE? Only if it's easy.

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Re: To commute or not to commute (your pension value)?
« Reply #40 on: January 24, 2015, 11:00:06 PM »
My calculations lean toward commuting the pension. (Thank you everyone for your ideas - they really helped me examine this from all angles). I like the idea of the control and having the commuted value as a safety net for others after I die. BUT thinking about inflation.  Over 40 years - now until  90years old - how to maintain the buying power? Of course, one needs returns to beat inflation. This money is mostly tied up in non-tangible assets.  Hedging inflation, I don't imagine managing rental properties 65yr +.   When I look at the devastating effects of inflation, i wonder if ER is really within my realm of possibility. Am i missing something?

It has been suggested that if I use 5% as my earnings rate, that I am accounting for the bite of inflation (assuming returns of 7). I do feel 7-8% is (too) optimistic.

What rates ( both return and inflation) did you use when you decided to commute or not?

Joan-eh?:

For me, I used an inflation assumption of 2% and an investment return of only 4%. So a real return of just 2%. My inflation number may be low, but so is the investment return number. At least the Bank of Canada is trying to manage the economy to that inflation number.

BUT, I also ran a sensitivity analysis from 5% real return to -2% real return. My portfolio survived, however the model did not include a sequence of return risk analysis - that was performed separately. I'm personally more concerned with sequence of return risk than inflation, maybe that's just because my wife will have a fully indexed federal government pension (she is too old to take the CV now).

How bad does inflation have to be, and how long does it have to be sustained, to wipe you out?

How does that compare to taking the small(?) indexed pension? (i.e. just how much protection does it really provide you if you use the same inflation scenarios?)

How likely is it that there will be high inflation without high interest rates?

There is no right answer to this dilemma that applies to everyone - you can only find something that falls within your individual comfort zone. For everyone, that's driven by subjective assessments of risks.

I get the impression that your concern about future inflation is leaving you with no comfort zone for taking the CV. Maybe that is the right answer for you, but I think you should run some sensitivity analysis before finalizing your decision.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #41 on: January 25, 2015, 07:35:47 AM »
GLITCH?!?!

It just occurred to me that a pension can be split for taxes. But all the proceeds from the lira/lif/rrsp must be attributed to me! Right? No income splitting here.   

Opps, I may have missed an important calculation. My current pension will be generous, I have to be aware of hitting the OAS clawback, esp since DH will have much less retirement income attributed to him.


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Re: To commute or not to commute (your pension value)?
« Reply #42 on: January 25, 2015, 07:41:38 AM »
I've found this conversation very interesting, as my husband and I both have defined benefit non-indexed pensions (in MB).  The effects of inflation are very worrying to me if we're talking about age 50/55 to 90+.  For my husband, it seems that he does not have an option to commute his plan- if he leaves his job, he just starts taking the (very reduced) pension at age 55 at the earliest.  Is this common?  Seems odd to me that he has no choice in the matter.  I can transfer mine to a LIRA.

That does seem odd.  I have a friends who are married and in the same pension plan as me.  He took commuted value and she is taking a pension.  His family is long lived but hers is not.  Seems to me they would have had better odds doing it the other way around.  But really...wouldn't it be nice to have crystal ball.

I'm glad that you didn't get analysis paralysis, Joan.  When I was googling recently, I found a thread on ERE where I posted asking about commuted value in January 2011.  I've been leaning that way for a while, but there are times when I second guess myself.  I just know that I won't be able to make it to 50.  I'm burned out.  I've weighed all of the factors and CV seems the right way to go for me.

BPA -would you mind sending me the link to that other musing in ERE? Only if it's easy.

This was when I was first seriously considering taking it.  I had bad anxiety then and had planned to cash out and move east.  Right now if I took it, I would likely be able to afford to stay in Ontario and moving east is one of my fall back plans.  I'm glad that I've been able to stick it out because I don't think my son would have been as happy going to high school there as he has been here.  He has Tourette Syndrome and ADHD and I think it's really helped him that he's gone to the school that I teach at. 

http://forum.earlyretirementextreme.com/viewtopic.php?t=1988

I'd forgotten until I reread this thread that the OTPP made the decision to strip extended health care benefits for all teachers including ones who had already retired.  I have no doubt that those sorts of strips will continue if the plan is seen to be in trouble. 

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Re: To commute or not to commute (your pension value)?
« Reply #43 on: January 25, 2015, 07:45:08 AM »


I'm glad that you didn't get analysis paralysis, Joan.  When I was googling recently, I found a thread on ERE where I posted asking about commuted value in January 2011.  I've been leaning that way for a while, but there are times when I second guess myself.  I just know that I won't be able to make it to 50.  I'm burned out.  I've weighed all of the factors and CV seems the right way to go for me.

BPA - I am sorry to hear that you are burned out. You have the HARDEST job. It is so draining to spend quality time with kids day in and day out, let alone the prep and marking. When I left teaching youth to teach adults, my new job seemed like half the work. It wasn't - same hours - just a different energy.

If you don't want to quit quite yet, there is always the option of an unpaid leave of some sort. For some people they just need a break and they come back rejuvenated. (I hear it takes about 6 mos to recover from burnout) ....and for others the break confirms that it's time for them to leave the classroom.  I think it's why the 4 over 5 option is so popular. This type of work, especially today, is just not sustainable year decade after decade.  I hear the exhaustion/frustrations in your posts.

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Re: To commute or not to commute (your pension value)?
« Reply #44 on: January 25, 2015, 07:48:15 AM »
GLITCH?!?!

It just occurred to me that a pension can be split for taxes. But all the proceeds from the lira/lif/rrsp must be attributed to me! Right? No income splitting here.   

Opps, I may have missed an important calculation. My current pension will be generous, I have to be aware of hitting the OAS clawback, esp since DH will have much less retirement income attributed to him.

Yikes!  I'm not married so never had to consider this.  Also, there is no way I'd come close to hitting the OAS clawback.  Just curious how much longer you plan to work until retirement?  If you went now would that mitigate the clawback?  Would you take CPP at 60 like I plan to? 

Going earlier and taking CPP earlier are part of my tax planning, but I don't live in as high a COL area as you do. 

Joan-eh?

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Re: To commute or not to commute (your pension value)?
« Reply #45 on: January 25, 2015, 07:48:23 AM »
You remind me, that I have to see if I would have access to the health benefits. I'm not sure I do, because my service was so long ago.  Are the potential health benefits with your board or with OTPP?

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Re: To commute or not to commute (your pension value)?
« Reply #46 on: January 25, 2015, 07:58:55 AM »
GLITCH?!?!

It just occurred to me that a pension can be split for taxes. But all the proceeds from the lira/lif/rrsp must be attributed to me! Right? No income splitting here.   

Opps, I may have missed an important calculation. My current pension will be generous, I have to be aware of hitting the OAS clawback, esp since DH will have much less retirement income attributed to him.

Yikes!  I'm not married so never had to consider this.  Also, there is no way I'd come close to hitting the OAS clawback.  Just curious how much longer you plan to work until retirement?  If you went now would that mitigate the clawback?  Would you take CPP at 60 like I plan to? 

Going earlier and taking CPP earlier are part of my tax planning, but I don't live in as high a COL area as you do.

Retire at 60 likely, I still like my work. Yes, take CPP at 60.  Thats 10 years away -(Otpp makes us decide by 50th birthday) .. but who knows - just moving out of toronto would make us FI.  Nice to have the FU money :-)  I started saving and investing a lot of my salary at age 22 when I got my first job.

BPA, I see conflicting information online. Some places I read that We can unlock 50% of the LIRA portion within 60 days of commuting.  In other places, I read it has to be done at age 55. Have you noticed that?

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Re: To commute or not to commute (your pension value)?
« Reply #47 on: January 25, 2015, 08:04:48 AM »


I'm glad that you didn't get analysis paralysis, Joan.  When I was googling recently, I found a thread on ERE where I posted asking about commuted value in January 2011.  I've been leaning that way for a while, but there are times when I second guess myself.  I just know that I won't be able to make it to 50.  I'm burned out.  I've weighed all of the factors and CV seems the right way to go for me.

BPA - I am sorry to hear that you are burned out. You have the HARDEST job. It is so draining to spend quality time with kids day in and day out, let alone the prep and marking. When I left teaching youth to teach adults, my new job seemed like half the work. It wasn't - same hours - just a different energy.

If you don't want to quit quite yet, there is always the option of an unpaid leave of some sort. For some people they just need a break and they come back rejuvenated. (I hear it takes about 6 mos to recover from burnout) ....and for others the break confirms that it's time for them to leave the classroom.  I think it's why the 4 over 5 option is so popular. This type of work, especially today, is just not sustainable year decade after decade.  I hear the exhaustion/frustrations in your posts.

Actually I have considered teaching one semester a year.  It's not a bad plan.  At this point, taking CV sounds like a good plan to me.  Interest rates are low so the CV is relatively high.  In addition to that, I don't have a spouse and won't have one (I'm in a long-term relationship where we both agree that we need our own space and won't live together or marry...longest and happiest relationship of my life so far), and if I die youngish my son won't get a lump sum if I wind up taking the pension instead (can't even look to family to get a good read on potential longevity since people die old and young in my family).  When I consider what Al calls "plan amendment risk," I think that going early and taking CV is a good decision for me.  It might not be for everyone, but it is for me.

I still love the kids and would like to volunteer with them, but education policy in Ontario is driving me nuts and the whole union landscape is a bit of a disaster.  There is no solidarity among the affiliates, just hey, how can we screw each other over to get what's best for us and that drives me up the wall.  I've been a union rep for 14 years and find it really maddening. 

I need a change.  I'm thinking of doing the Masters program in Work and Society at McMaster when I finally pull the trigger.  I would find that interesting and I could TA.  I did my undergrad at Mac and think it would be fun to go back. 

GLITCH?!?!

It just occurred to me that a pension can be split for taxes. But all the proceeds from the lira/lif/rrsp must be attributed to me! Right? No income splitting here.   

Opps, I may have missed an important calculation. My current pension will be generous, I have to be aware of hitting the OAS clawback, esp since DH will have much less retirement income attributed to him.

Yikes!  I'm not married so never had to consider this.  Also, there is no way I'd come close to hitting the OAS clawback.  Just curious how much longer you plan to work until retirement?  If you went now would that mitigate the clawback?  Would you take CPP at 60 like I plan to? 

Going earlier and taking CPP earlier are part of my tax planning, but I don't live in as high a COL area as you do.

Retire at 60 likely, I still like my work. Yes, take CPP at 60.  Thats 10 years away -(Otpp makes us decide by 50th birthday) .. but who knows - just moving out of toronto would make us FI.  Nice to have the FU money :-)  I started saving and investing a lot of my salary at age 22 when I got my first job.

BPA, I see conflicting information online. Some places I read that We can unlock 50% of the LIRA portion within 60 days of commuting.  In other places, I read it has to be done at age 55. Have you noticed that?

I have read that it depends at when the pension plan decides a pension can first be taken.  For most public sector workers in Ontario, that's 55.  For us, it's 50.  However, I agree it would be a good idea to get confirmation on that. 

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #48 on: January 25, 2015, 08:09:09 AM »
You remind me, that I have to see if I would have access to the health benefits. I'm not sure I do, because my service was so long ago.  Are the potential health benefits with your board or with OTPP?

I think it might be with the board.  However, we are now involved in province-wide collective bargaining, so who knows how that might go?  Our district negotiated away extended health for all retirees in order to keep the retirement gratuity, and then a few years later the government swooped in and imposed a contract on us that stripped the retirement gratuity. 

I have friends who work for TDSB and could ask them what happened there if you like. 

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Re: To commute or not to commute (your pension value)?
« Reply #49 on: January 25, 2015, 08:13:38 AM »
I just sent an email to the OTPP asking about the 50 vs 55 issue.  I will let you know what they say.  Looks like I might be moving east after all.  ;)  At least my son will be done high school then.

ETA:  It's interesting.  I just realized that my anxiety in 2011 had to do with raising a child with special needs and that work wasn't stressing me out.  Since that time changes in educational policy plus things like being involved with a CAS case that went badly and dealing with 6 student deaths in 18 months made work the primary source of stress in my life.  I got counseling, but it's still stressful to remember.  Sweet girl I just adored committed suicide and then five others died after.  It was brutal.  We were in pain and the kids were in pain and I remember an issue where a grieving parent lashed out at a teacher at the funeral home (It's a long story but the parents didn't want the kid to know he was dying of cancer, so they didn't tell the teachers either. My colleague gave him 40% as his mid-term mark because that was what he earned and the teacher had no idea what was going on with the boy.  The teacher said that, of course, he would have given him a passing grade if he had known.)  The media was all over our school after the fourth death and things just got worse when the other deaths happened.  Everything was sensationalized.  The kids didn't realize that the media might twist the truth and use their words to support the twisted story.  They felt violated when pictures of what they thought was private grieving were splashed across the front page of the newspaper thanks to telephoto lenses. 

So, yeah.  I'm tired and burned out.  I love the kids but hate that educational policy is decided by people who have no clue.  I'm not at the point where I'm an ineffective teacher luckily.  I've always told myself that if I feel that happening, I will quit regardless of my commuted value or how close I was to taking a pension. 
« Last Edit: January 25, 2015, 09:04:22 AM by BPA »