# Pension Cashout / RRSP Asset Allocation



## Longstreet (Dec 27, 2010)

I will be leaving my job with the federal government this summer after 10 years of employment. After speaking to a financial advisor about my pension options, the best route given my goals and desired lifestyle would to cash out my pension contributions and put it into a RRSP. The amount will be approximately $200K. I am 28, married with a child soon on the way. My current salary is approximately $80K-$90K per year gross and I expect a noticeable increase in salary over the next 3-4 years in the private sector. I love working and I don't plan on retiring until my health forces me to, hopefully 

I am humbly seeking the advice from the bloggers and experts that visit and comment on this website about what exactly I should do with the money. My plan at this point would be too approach my bank (one of the big 5) and put them into mutual funds. I am looking for aggressive growth and have a very high tolerance for risk. In a few years from now, I plan on adding a bond component. My initial breakdown sees the money split evenly amongst the following funds:

a. Canadian Index Fund - MER %.72
b. US Index Currency Neutral Fund - MER %.72
c. International Index Currency Neutral Fund - MER %.70
d. Emerging Markets Equity Fund - MER %2.4
e. Global Resources Fund - MER %2.13
f. Global Precious Metals - MER %2.26

My bank currently does not have substantial ETFs. I also plan investing in non-registered stocks once I max out my and my wife's TFSA and RRSP room.

Any comments or feedback would be greatly appreciated.


----------



## Sampson (Apr 3, 2009)

I assume if you have amassed $200,000 in your pension (even if 50% is employer funded) that you have little to now RRSP room. Also, if you plan to take your commuted value out (unless you transfer to another eligible DB plan) you might be losing out over the longterm.

Perhaps you can just leave it in and start taking it in your 60's, should continue to grow for you.

Regarding your bank and ETFs, just open a discount brokerage, you have enough money to qualify for low fees and all account fees to be waived so just open the self-directed account and you will have access to all ETFs in the World (at least traded and Canadian and US markets).


----------



## CanadianCapitalist (Mar 31, 2009)

Can you post the rationale, if any, provided by your advisor as to why cashing out is the "best route" for you? You should keep in mind that your advisor's recommendation might be influenced by having an extra $200K to manage.

IMO, you should carefully consider whether you should give up a deferred federal pension worth about $17K in (10 years employment x 2 percent x best five years of salary) today's dollars and indexed for inflation when you turn 60. Keep in mind that you will likely not be able to shelter the entire commuted value of the pension. It will be partly taxable, so you will probably have less than $200K to start with.


----------



## MoneyGal (Apr 24, 2009)

What CC said. 

I personally think that having a "small" DB pension from the federal government while maintaining the possibility of saving outside a DB pension for the rest of your career is essentially a perfect retirement income strategy: you get indexed, lifetime income at the lowest cost possible and with the strongest possible counterparty, and then you can create wild riches with the *rest* of your earnings over your career. 

You could consider the DB pension the bond component and then go all-in for equities on your personally managed money. 

I just can't imagine a *realistic* scenario in which dropping the DB pension makes sense, particularly if you want/need bonds in your portfolio. The DB pension *is* in effect a bond.


----------



## Four Pillars (Apr 5, 2009)

CanadianCapitalist said:


> You should keep in mind that your advisor's recommendation might be influenced by having an extra $200K to manage.


+1. 

If you keep your money in the pension, the 'advisor' makes no money. If they can convince you to cash the pension in and invest with them = they make money.


----------



## rikk (May 28, 2012)

If you haven't already, I suggest you speak with your HR person ... you may find that with 10 years service, you cannot simply walk away with that $200K.


----------



## RBull (Jan 20, 2013)

Make that another person with the same viewpoint as CC and MoneyGal. 

To me that's a no brainer. My spidey senses go off when I hear a strategy from an advisor that benefits them- perhaps more than you.


----------



## Eclectic12 (Oct 20, 2010)

^^^^

+1 .... I'd look at it long and hard before I cashed the pension in. It's pretty rare to have as generous a pension, *with indexing*. Trying to do better on one's own through investing is a difficult target. 

Keep in mind that since the gov't (or rather the tax payer) is on the hook to make up any shortfall due to the markets. Once the funds are under your control, if your advisor (or you) make any mistakes, there's no one but you to make up the difference.


+1 on talking to your HR person as I've never heard of being able to transfer to an RRSP. Usually it is a *Locked In* retirement account, which is like an RRSP but withdrawals before retirement are much more difficult.


The only reason I transferred my private DB pension to a LIRA is that it expected forty years of employment and a 2% investment return to fund the benefits. That's a much more reasonable target to match or exceed.


If you decide to leave the pension there - think of it as an annuity that's indexed.


Cheers


----------



## MoneyGal (Apr 24, 2009)

p.s. If the $200K seems like "a lot" of money for the "small" amount it's going to pay in retirement, that _should signal how valuable the DB pension is._


----------



## Longstreet (Dec 27, 2010)

rikk said:


> If you haven't already, I suggest you speak with your HR person ... you may find that with 10 years service, you cannot simply walk away with that $200K.


thank you all for all of your very quick and thoughtful responses. In reply to your comments and queries, my financial advisor knows that he will not be managing these funds and gets paid a flat fee from my employer for his advice rather than on commission. I spoke with my HR department and they are the ones who gave me the $200K estimate. The rationale behind cashing it out vice keeping it in the DB is that the value of the cash out is worth relatively a lot of money right now because of prevailing bond rates. Also, if I elect for a deferred DB pension and I pass away before age 60, my wife will get nothing. If it is in my RRSP, she inherits the money. Also, contribution room is not an issue.


----------



## MoneyGal (Apr 24, 2009)

Longstreet said:


> thank you all for all of your very quick and thoughtful responses. In reply to your comments and queries, my financial advisor knows that he will not be managing these funds and gets paid a flat fee from my employer for his advice rather than on commission. I spoke with my HR department and they are the ones who gave me the $200K estimate. The rationale behind cashing it out vice keeping it in the DB is that the value of the cash out is worth relatively a lot of money right now because of prevailing bond rates. *Also, if I elect for a deferred DB pension and I pass away before age 60*, my wife will get nothing. If it is in my RRSP, she inherits the money. Also, contribution room is not an issue.


This is true. But have you considered how likely this is?


----------



## MoneyGal (Apr 24, 2009)

OK, I'm coming back to this, having read this thread in concert with your other thread about the executive MBA and the stay-at-home wife. 

Feel totally free to ignore this; I'm posting for the sake of discussion, as this is a discussion board. 

I really recommend that you take a look at the book "Are you A Stock or a Bond?" http://www.amazon.ca/Are-You-Stock-Bond-Financial/dp/0133115291

(Or you could read this somewhat more technical, but truly excellent monograph on the same topic from the CFA institute: http://www.cfainstitute.org/learnin...capital__asset_allocation__and_insurance.aspx) 

The reality is that you are engaged on a risky path, without a lot of hedges, and you are proposing to take away one of your only existing forms of insurance. I know you think you "don't need" longevity-protected retirement income now, but from a lifetime wealth perspective, you WILL need it at some point and you are poised to give up the cheapest, strongest form of longevity and inflation insurance you could possibly obtain -- something you can't even actually buy on the private market, because you are "not risk-averse."

Here's the thing: you SHOULD be risk-averse with your financial capital, because your human capital -- the largest single asset on your existing balance sheet -- is already risky. Oil and gas is an inherently unstable industry (I was raised in that industry and have one sibling working in O&G now). Having only one income-earner is inherently risky. If your reason for dumping the DB pension is that you want to provide for your wife in the event of your premature death (which, by the way, is considerably *less* likely than you living well beyond 65), you should just buy term insurance to cover that risk, not drop the thing that provides you with retirement income insurance. 

Anyways. Sermon over.


----------



## CanadianCapitalist (Mar 31, 2009)

Longstreet said:


> In reply to your comments and queries, my financial advisor knows that he will not be managing these funds and gets paid a flat fee from my employer for his advice rather than on commission. I spoke with my HR department and they are the ones who gave me the $200K estimate. The rationale behind cashing it out vice keeping it in the DB is that the value of the cash out is worth relatively a lot of money right now because of prevailing bond rates. Also, if I elect for a deferred DB pension and I pass away before age 60, my wife will get nothing. If it is in my RRSP, she inherits the money. Also, contribution room is not an issue.


If you haven't done this already, you should ask for a pension statement from your employer. I will be really surprised if there are no survivor benefits for your spouse (and children) if you do, you know, happen to kick the bucket before you start to collect deferred pension at age 60.

http://www.tbs-sct.gc.ca/pensions/survivor-survivant-eng.asp


----------



## james4beach (Nov 15, 2012)

I'm with CC and the others on this... it may not be wise to cash out a FEDERAL pension.

This is one of the rare cases where the money may be safer in the federal pension than in your own hands (I wouldn't say this for a private sector pension). There could be both more value in the pension, and more safety due to guarantees backed by the nation.


----------



## Longstreet (Dec 27, 2010)

Thanks for the advice. I am still gathering information and weighing my options.

Suppose I wanted to cash it out. I am currently at RBC and ING and have been looking at their investment options. After delving deeper, a friend referred me to questrade. Because of the high dollar amount of the purchase compared to the commission/transaction fees and the availability of ETFs on questrade vice RBC and ING, I'm thinking that I can put the $200K into a questrade RRSP account and buy ETFs vice higher MER mutual funds from RBC. Judging strictly from the criteria that I will be cashing it out, does this sound like a remotely coherent plan? What is everybody's opinion on margin accounts? I'm a bit weary of them, but I am definitely open to advice. Thanks.


----------



## Saniokca (Sep 5, 2009)

Longstreet said:


> Also, if I elect for a deferred DB pension and I pass away before age 60, my wife will get nothing. If it is in my RRSP, she inherits the money. Also, contribution room is not an issue.


Are you sure about that? I haven't worked on federal plans much but it seems VERY odd that she would get nothing - usually she would get 100% of the benefit...

see numbers 4-6 here:
http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=4495


----------



## Saniokca (Sep 5, 2009)

who told you about the "nothing" part by the way?

If the pension is indexed that "adviser" better have a very compelling arguments as to why you should withdraw. Don't forget that even if he is fee based, if you leave the money in the plan you aren't likely to come back to him too often in the future.


----------



## MoneyGal (Apr 24, 2009)

I don't think the OP is getting good/accurate advice, or is possibly misunderstanding something. There would be a survivor benefit both before and after his age 60, and it is higly unlikely he'd be able to shelter the full commuted value. [shrug]


----------



## Four Pillars (Apr 5, 2009)

Longstreet said:


> Suppose I wanted to cash it out. ...
> 
> I'm thinking that I can put the $200K into a questrade RRSP account and buy ETFs vice higher MER mutual funds from RBC. Judging strictly from the criteria that I will be cashing it out, does this sound like a remotely coherent plan? What is everybody's opinion on margin accounts? I'm a bit weary of them, but I am definitely open to advice. Thanks.


I share everyone else's opinion on the thread that you SHOULDN'T cash out and should stop thinking about it. Just don't do it.

If someone did want to cash out then yes, putting the $$ into ETFs at a discount brokerage is a reasonable general plan. Of course they have to figure out asset allocation, risk levels, specific products to buy etc etc.

Just ignore the 'margin' part of the account name. It just means you can borrow money if you want. You don't have to.


----------



## MoneyGal (Apr 24, 2009)

I think he shoud totes get as much margin as possible. And use it! Go wild!


----------



## Longstreet (Dec 27, 2010)

I've received my pension statement from my employer. Although these are estimates, they are fairly accurate as the date of my cessation of employment is relatively close. I have 2 options:

Transfer Value / Cashout - $193 000 that is already taxed sheltered and will be transferred directly into a RRSP. 

Deferred Pension - $14 000 per year starting at age 60. The pension will be indexed to inflation. 

I will assume inflation will be %3 per year and my nominal rate of return if I invest it will be %6 per year. 

Using a calculator at the Bank of Canada, the future value at age 60 of my $193 000 investment will be approximately $470 000. If I obtain a real rate of return of %3 per year, the interest off of $470 000 (0.03 x $470 000) is equal to my yearly pension. 

Unless my math is completely off, it appears as though the transfer value is better because I own the asset that is producing the same income rather than getting a cheque from the government. I know there is the risk that I my real return will be lower than %3, but it may also be much greater. I like the thought of investing in equity based ETFs and having control of my own finances than collecting a government pension.

This is a microcosm of my life in general right now. People at work tell me that I'm crazy to leave my job because it is guaranteed for life, great health/dental benefits, and a federal pension. However, if you're good enough at your job, you can earn way more and get better benefits than a federal government job. The government is a safe place but not the best place by far. Plus, I like the thought of not leeching off the underfunded public pension scheme and being a net contributor to society (fiscally speaking), although I have been employed in the service for 10 years.


----------



## Spudd (Oct 11, 2011)

Do you know, is it indexed to inflation before you retire as well? i.e. if you quit now, will you get $14k per year upon retirement which is then indexed to inflation, or will you get $14k*inflation?


----------



## james4beach (Nov 15, 2012)

So no other benefits (survivor benefits) if you stay in the gov pension?

Maybe off topic, but I think a 3% real rate of return is going to be pretty hard to get in ZIRP. Today for instance inflation is supposedly 2% (but many think it's understated and probably more like 3%). Many of us in the investment world are projecting returns such as 2% to 6% going forward which gives a real return range of -1% to 3% going forward. So real return of 3% seems optimistic. Those are just my estimates anyway, for what it's worth.


----------



## james4beach (Nov 15, 2012)

Longstreet said:


> Unless my math is completely off, it appears as though the transfer value is better because I own the asset that is producing the same income rather than getting a cheque from the government.


There are other types of intangible risks in managing the money yourself. I'm not trying to scare you, but I think it's worth considering these when comparing to Government of Canada obligations... which I presume have tremendous backing.

Will your brokerage stay solvent? You could potentially lose a lot of money in a broker fraud/collapse situation (look at CIPF financial statements and you'll see that they don't easily pay out insurance claims, even though brokerages have CIPF insurance). In the USA, several large brokerages have collapsed in the last few years, even post-financial crisis.

There's similar risk that the instruments you choose to invest in have some kind of fraud or structural problem. For example if you own an ETN (similar to an ETF), and the issuing bank collapses, your ETN shares get wiped out to $0. The derivative and leveraged ETFs could similarly suffer massive sudden losses.

These are all real risks -- and people elsewhere in the world have lost money like this. I'm not fully certain of how secure a government pension is, but I presume it ranks pretty highly in law (I'm not sure: you have to check into this). Assuming the government pension has ultimate backing, if that's true, then it is safer than anything you can do in a brokerage account.


----------

