# Pension buyback vs Annuities vs Self direct RRSP



## wandernorth (Mar 30, 2012)

Let us say you can buy back 2 years define benefit pension services without employer match @ lump sum of $22,000. That will increase pension say $250/m from 60. Let 's assume another 20 year until retire at 60.(male ,40, good health)
I think it is reasonable to compare these three scenario: 


a. put $22000 to RRSP invest for 20 years @ rate of 3% gain yearly

b. buy $22000 annuities and start payout 20 years later , how much I can get this way monthly? 

c. buy back pension to increase payment $250/m (There will be CPP reduction of $50 after age of 65, so after 65 it is only $200/m)

I know all people is saying buyback pension is a good choice. But I am not convinced. It is not only the money locked in vs self-direct RRSP.

Money wise, it almost takes 8 years before you can even break even. Not sure how annuities works, is it something like Defined Benefit pension plan or DCPP?


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## Daniel A. (Mar 20, 2011)

I'll only speak to the issue of buyback being a good choice.

If you have a government pension your investment is guaranteed no risk. In a company you would need to weigh the strength of the plan.

The RRSP option is a wild card for return.


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## RedRose (Aug 2, 2011)

*WanderNorth*

I was thinking on the same lines to puchase some buy back years, but I will be drawing within the next 5yrs or less.
Did you look at also contributing voluntary cash to the pension fund too. That also increases your pension.

Annuities and Segregated Income Funds I am just trying to get my head around those. The fees are much higher so less real nett but guaranteed to a point.

Hope this helps as I too am wandering along the same path. Rose


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## wandernorth (Mar 30, 2012)

RedRose said:


> *WanderNorth*
> 
> I was thinking on the same lines to puchase some buy back years, but I will be drawing within the next 5yrs or less.
> Did you look at also contributing voluntary cash to the pension fund too. That also increases your pension.
> ...


Not sure how much I will get at 65 if I put 22,000 into annuities now.Any one know?
What is "contributing voluntary cash to the pension fund "? Never heard about this.


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## MoneyGal (Apr 24, 2009)

Impossible to say without knowing your age and gender. Here's a generic overview of the product you (might) be looking for - a deferred annuity:

http://www.moneyville.ca/article/846164--turning-your-retirement-savings-into-a-deferred-annuity

I did the calculations in that article - that's me in that staircase - and they will not have changed significantly since the time the article was written, because interest rates have not changed significantly. 

You might also (depending on your age) consider some of the other financially-engineered products which are a hybrid of an annuity and a traditional stock market investment, such as Manulife's Pensionbuilder or any of the guaranteed minimum withdrawal benefit products available from the large insurance companies (you are too far away from retirement to actually invest in any of these, though).


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## RedRose (Aug 2, 2011)

*Money Gal, *Thank YOU for that link. I have read it and several of the link to that one.
Great stuff...I am learning as I go, getting close to making a decision.
It's been a tough year.


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## rcoyle (Apr 9, 2012)

You are thinking this through very well and Money Gal makes some excellent points and her article reference is very good.
I did some calculations with regards to the RSP and they go like this. To compare apples to apples and because your CPP will reduce by $50.00 per month your RSP will need to provide $200.00/month which is $2400.00/yr to equate to your pension. Using the rule of thumb that you can withdraw 4% from your retirement savings per year (indexed) you will need $60,000.00 per year at retirement to generate that $2400/yr for a 25 year retirement. in order to get to $60,000.00 you will need to earn a return of 5.14% per year which is significantly higher than the return you indicated in your post. I am not sure where you came up with 3%, however you if you choose the RSP route you can consider investing a little more aggressively but only if your risk tolerance is appropriate for that.

Some other considerations are that yes you have accessibility to your self directed RSP and this can be a 2 edged sword as many people will withdraw from their RSP's prior to retirement leaving them with less than they need to fund their retirement goals. Also if you live longer than 25 years, choosing the RSP option could result in your money running out whereas the pension, if it is a good plan will continue for life. Another factor affecting comparability is "what indexing does your pension plan offer" and the strength of your pension provider. 

Just for fun I did an annuity quote through Manulife for a $60,000.00 payment for a 60 year old male, indexed at 2% per year. This assumes you give the insurance company the $60,000.00 at age 60. At todays rates which are subject to change the annuity would pay $231.00 per month, indexed for life, with a 3 year guarantee, however, after 3 years it would end on death, so if you have a spouse, that may not be appropriate. You can buy a joint annuity however the monthly payment will drop. Also annuity rates may be quite different by the time you are 60. I don't have the quick quote capability to run a deferred annuity, handing over the $22,000.00 now.

By the way Money Girl, Pensionize your Nest Egg is an awesome book.


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## wandernorth (Mar 30, 2012)

I know comparing RSP to Pension is hard to do. But pension vs annuities should be a clear cut. I am a male ,good health,40. A. I use money to buyback service and I will get $200(X) monthly for life time and indexed to inflation. B I use the same money to buy joint annuities and will get Y amount of money indexed for the life time as well. One thing I don't know if the annuities is as solid as DBPP?


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## MoneyGal (Apr 24, 2009)

rcoyle said:


> By the way Money Girl, Pensionize your Nest Egg is an awesome book.


Thanks very much. I handed in the completed manuscript to the publisher two years ago today. :02.47-tranquillity: 

Wandernorth: I'm not sure I understand your question (or what your question actually is). You can get an annuity quote which will match the features of your DB pension. Very generally speaking, annuities sold in the private market will have a stronger implicit guarantee than an annuity from any one individual company. However, again generally speaking, you will not be able to match the payout from the DB pension with a private annuity, for a variety of factors. 

Are you asking what an annuity would pay out? An insurance broker can provide you with quotes from various issuers.


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## wandernorth (Mar 30, 2012)

MoneyGal said:


> However, again generally speaking, you will not be able to match the payout from the DB pension with a private annuity, for a variety of factors.


 That is what I am trying to find out if it is true. Means X>Y. If it is the case, I will go with DBPP , annuities is no an option then.


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## steve41 (Apr 18, 2009)

I glanced quickly thru this thread, and the mention of tax seemed to be noticeable by its absence. To make a true comparison, you should probably compare 'after tax' results.


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## RedRose (Aug 2, 2011)

Yes, *Money Gal's* book, *"Pensionize Your Nest Egg," *is very well written with some very good points of view.

I would recommend it to anyone thinking on these lines. The way I see the world now is that DB pensions are a promise BUT... with the economic times and depending on the business and pension funds that promise is empty if they go belly up. A guarantee that is empty is just not there.

The segregated annuity is a good option with the best of both world's from what I can gather.
A wide diversification seems to be the better with all the investment vehicles being utilized in a hybrid...that Product Allocation term.
It is a good read for anyone considering Lump Sum vs Pension.


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## wandernorth (Mar 30, 2012)

I go with buyback for two reasons:
a.Do monthly payment, so it is like another mortgage with term of 24 year @4.8% ,even better, it is open,tax deductible.
b. Just another investment ,$1 in today , $2 out 20 years later with low risk. 100% in 20 years isn't too bad I figure(5% yearly)


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