# To Commute or not to Commute, Help!



## 1050jimbob (May 9, 2015)

My wife is a 25 year teacher in Ontario. She has the option to commute her OTPP pension at age 50,in two months and resign her contract. We are fortunate and have been good savers and have no debt and are considering this option for many reasons.Any input would be so appreciated.If you are a certified financial planner and can PM me I will start a private email dialogue.


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## Eclectic12 (Oct 20, 2010)

Based on almost no information in the post and other posts whether those who commuted their pension, then had investments tank so that the guaranteed DB pension ended up being better ... I'd say don't commute.

However ... without an idea of the "many reasons" to consider this or what other sources of income (another DB pension? investment income? frugal lifestyle that will continue into retirement?) ... this suggestion does not take into account the unknowns where it may or may not be appropriate.


Cheers


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## hboy43 (May 10, 2009)

Hi:

I have no qualitative input, the mathematics of this being too complicated for me. However, my hunch is that anyone that does something "different" in their retirement from the standard 85 or 90 factor is going to get subtly screwed, just because they can be subtly screwed. Why is a union going to care about a shorter term union member, they can be used to subsidize the regular members that put in their 30 years? For example your funds only vest after a certain number of years, so if you leave early, your gains in those years go to the long term union members and you get your funds returned to you at a really low interest rate (been there, done that).

Like I said, I cannot put hard numbers to this, but I would be stunned if I was not correct in my thinking, being a student of human nature. Isn't it funny how your pension is some easy function like the average of the best 5 years times 2 percentage points per year up to 30 max, but the commuted value calculation needs a PhD in mathematics to figure out? All highly suspicious to me.

hboy43


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## GreatLaker (Mar 23, 2014)

It's not a simple decision and you should seek advice from a fee only financial planner or accountant that can do present value calculations on a reasonable set of assumptions. One that will not be biased by a large commission or trailer fee from managing your money.

Some things you need to consider:

Your wife has a DB pension but do you? How much of your retirement income will come from guaranteed sources like DB pensions or CPP/OAS?
How much of your retirement income will come from sources that are indexed?
Have you ever managed that much money yourself or have a trusted low-cost advisor that can do it for you?
Do you have heirs that you want to leave funds to?
If she dies first would you want to receive a survivor's pension?

Taking a pension means the pension sponsor bears all the longevity risk, all the market risk and (in the case of an indexed pension) some or all of the inflation risk. Taking the commuted value puts those risks onto the plan member, but lets them benefit from a strong market and possibly leave a larger inheritance. Teachers pension is not like a company that could go bankrupt... likely it is a very solid stable long-term indexed pension fund.

Another issue is the Maximum transfer Value. You may not be able to shelter all the commuted value in a LIRA. The rest would have to be put into an RRSP (if you have the room) or taken as a taxable cash payment.

Here are some resources:

http://www.pensionstrategies.ca/files/Newsletter%20-%20Actuarial%20Analysis%20-%20Pension%20versus%20Commuted%20Value%20-%20Feb%202012.pdf

http://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=118181&hilit=commute

http://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=115291&hilit=commute#p476476

http://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=112351&hilit=commute

http://www.dgfs.ca/Pension_Decision_Commute_or_No.pdf

http://www.advisor.ca/images/other/ae/ae_0706_pensionpaths.pdf

Hope this helps
Bruce


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## My Own Advisor (Sep 24, 2012)

Those teacher pensions are the best in the land. I would also advise you to get some professional advice if you are serious about the commute. Otherwise, keep it with teachers and enjoy the fixed income it will provide. 

hboy43, good points


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## Eclectic12 (Oct 20, 2010)

hboy43 said:


> ... For example your funds only vest after a certain number of years, so if you leave early, your gains in those years go to the long term union members and you get your funds returned to you at a really low interest rate (been there, done that).


The OP did say Ontario so this appears to be old info ... as I understand it, Ontario changed their pension laws to require immediate vesting in 2010.



> The *new laws will require immediate vesting for plan members*, whereas the prior rules required vesting within 24 months of plan membership. Accordingly, if your plan has a vesting period, amendments will be required to comply with the new rules.


http://www.benefitscanada.com/pensi...-and-your-ontario-registered-pension-plan-846


Then too ... "twenty-five year" teach likely means the vesting has long since past.


Cheers


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## Eclectic12 (Oct 20, 2010)

hboy43 said:


> ... Isn't it funny how your pension is some easy function like the average of the best 5 years times 2 percentage points per year up to 30 max, but the commuted value calculation needs a PhD in mathematics to figure out? ...


Interesting ... it's easy to figure out the employer is putting in 1% of salary, the employee is putting in 1% for thirty years but from the number of "will I have enough at retirement" conversations I've had with people, it's clear that this is not a simple calculation either. Does this mean there's something suspicious?

Or how about one's ETF or MF holdings ... the calculations for one's share of $ billions in assets aren't easy either ... is that also suspicious?


Cheers


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## GreatLaker (Mar 23, 2014)

Calculating commuted value requires values like expected lifespan, interest rates and inflation (for indexed plans), none of which may be known in advance, so a lot of estimating is needed. Here is some further information from "Ask an Actuary".
http://www.cia-ica.ca/about-us/actuaries/ask-an-actuary/faq---pensions

I get a pension statement each year that provides my pension benefits including commuted value. I thought an annual pension statement was required for all RPPs. Are other pension plan members here getting an annual statement?

Another excellent resource is The Pension Puzzle by Bruce Cohen and Brian Fitzgerald
http://www.amazon.ca/The-Pension-Puzzle-Complete-Government/dp/0470839538


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## sags (May 15, 2010)

I never received a pension statement from the GM pension plan.

The shortfall in GM's pension was revealed a few years ago by a retiree who looked into it and disclosed it to the media, and it snowballed after that.

Since the government "bailout" we have received an annual statement of affairs for the pension. Trying to figure out what it actually says is another matter.

On the issue of commuted values............Great Laker supplied some great information, and the answer is almost always..........."it depends".


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## Eclectic12 (Oct 20, 2010)

^^^^

Whereas I've received an annual pension statement every year ... this has been true for three different DB pensions. I can recall the pension amount but don't recall any of them including the commuted value.


+1 that it depends ... though compared to just about any other pension out there - the OP's pension likely pays the most and has the least risk. Without knowing the reasons for considering the commuted value or the overall financial picture - it is a guessing game as to what is better. 


Cheers


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## rikk (May 28, 2012)

Eclectic12 said:


> Interesting ... it's easy to figure out the employer is putting in 1% of salary, the employee is putting in 1% for thirty years but from the number of "will I have enough at retirement" conversations I've had with people, it's clear that this is not a simple calculation either. Does this mean there's something suspicious? Cheers


Fwiw from OTPP, nope, not a simple calculation ... "The commuted value is the lump sum you would need today to replace your future pension. It depends on a number of factors, including your age, your earned pension benefit, your qualifying years of service, and bond yields. It can fluctuate considerably with changes in inflation rates, interest rates or the calculation basis."

The OPs wife can sign in here http://www.otpp.com/ and contact whoever does the calculation ... or ... that's what I would do.

Not the best time (e.g. at 2% per year and 25 years in, pension would be 50%) to be taking a commuted value, my opinion, but there is the OPs wife's before age 50 constraint so it's a now or never situation ...


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## Eclectic12 (Oct 20, 2010)

rikk said:


> Fwiw from OTPP, nope, not a simple calculation ...


AFAICT ... no one thinks it is a simple calculation. 

The question is whether simple pension formula coupled with complex commuted value formula should be viewed as suspicious and sway one from one choice to the other. The example is another simple then complex situation that so far, I haven't heard being called "suspicious". 

Personally, the employer taking on the longevity risk, investment risk etc. would be far more valuable to me ... but that's my personal situation.


Cheers


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## 0xCC (Jan 5, 2012)

Also the fact that the commuted value calculation uses bond yields as an input would make me wary of "locking in" the value of the pension in today's environment.


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## rikk (May 28, 2012)

Eclectic12 said:


> AFAICT ... no one thinks it is a simple calculation ... Personally, the employer taking on the longevity risk, investment risk etc. would be far more valuable to me ... but that's my personal situation.Cheers


Sure, was just providing some info ... and for clarity, in this case it's not the employer, it's an independent organization, the OTPP ... alrighty then, chores to do.


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## fraser (May 15, 2010)

I am not suggesting that you take the commuted value but if you do now is the perfect time.

The commuted value will generally vary inversely to the current interest rate and the projected interest rate because it is a present value calculation of a stream of payments.


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## 0xCC (Jan 5, 2012)

fraser said:


> I am not suggesting that you take the commuted value but if you do now is the perfect time.
> 
> The commuted value will generally vary inversely to the current interest rate and the projected interest rate because it is a present value calculation of a stream of payments.


Good point. I realized after I made my post that low bond rates should actually increase the lump sum payout because the calculation should involve answering the question "at current bond rates what is the lump sum required to provide the cash flows that taking the pension would have produced?".


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## MoneyGal (Apr 24, 2009)

Eclectic12 said:


> ^^^^
> 
> Whereas I've received an annual pension statement every year ... this has been true for three different DB pensions. *I can recall the pension amount but don't recall any of them including the commuted value.*
> 
> ...


The commuted value must be calculated for each individual and it is complex. There's no reason to provide commuted values on annual statements and arguably lots of reasons not to.


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## Beaver101 (Nov 14, 2011)

MoneyGal said:


> The commuted value must be calculated for each individual and it is complex. There's no reason to provide commuted values on annual statements and *arguably lots of reasons not to*.


^ granted the calculation of the cv may be complex based on various actuarial assumptions taken but what are the reasons (lots) as to not to provide a cv when requested (perhaps not annually) for such a critical decision to make as to take it or not? eg. short life expectancy consideration rather than longevity.


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## fraser (May 15, 2010)

Tax planning played a major role in my pension annuity vs commuted value decision. My supplemental pension was paid out at commuted value and the timing could not have been better...made up for some of the tax issues.


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... granted the calculation of the cv may be complex based on various actuarial assumptions taken but what are the reasons (lots) as to not to provide a cv when requested (perhaps not annually) for such a critical decision to make as to take it or not? ...


AFAICT ... the point is the annual pension statement, which may or may not include a commuted value amount. The way I read MG's statement, it is limited to the annual pension statement. I don't recall anyone saying that someone facing such a decision should not be provided with one. 

I've never been presented with the choice ... but I seem to recall other posters given the choice being saying that part of the info provided was the CV, should they go that route.


Cheers


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## Beaver101 (Nov 14, 2011)

^


> ... The way I read MG's statement, it is limited to the annual pension statement. ...


 ... and that's why I included "perhaps not annually" but I still do not understand why there would be "alot of reasons" not to provide a cv, if requested - annually or not.


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## Eclectic12 (Oct 20, 2010)

From a basic level ... unless there's a decision to make - it is an unnecessary expense. Where it's published for everyone in the DB plan, the cost is shared.

From a practical level ... what's the point in say a thirty year old to request the CV be calculated using point-in-time assumptions for a choice to be made twenty plus years down the road? 

Bear in mind that for some DB pensions (maybe most?) - the only way a CV decision comes up is where the employee has quit and has to decide between leaving the pension earned as-is or taking the CV elsewhere.


As for factors that have to be set at the time of the calculation that could change, there seems to be interest rates, longevity rates, age, pension benefits earned, commencement date of the pension, reduction factors for starting the pension early, form of the pension (ex. is surviving spouse going to receive benefits after death) and inflation indexing.

Add to that, pension legislation at the time of the calculation.

http://www.cia-ica.ca/about-us/actuaries/ask-an-actuary/faq---pensions


I'm thinking this is similar to if the mortgage company started publishing a "here's what you will owe on your mortgage in twenty or thirty years" as part of the annual mortgage statement or on request. It's not a perfect analogy but like the CV, it is dependent on variables such as interest rates, unscheduled paying off of mortgage capital etc. which can change the situation dramatically plus are difficult to assess.


IMO, with so much room for variation - the CV calculation is only good for a short time span. Anything else is a gamble that could be misleading.


Cheers


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## fraser (May 15, 2010)

I see absolutely no point in providing anyone under 55 or anyone not yet eligible to retire in their DB plan with a CV amount. This amount goes up and down based on interest rates.

It is only has value if one is leaving the organization or is considering early retirement, or is retiring. A CV today will be far more if the interest rate jumped to 6 percent next year. TI know of one person who took a CV in the past two years simply because the CV was at it's absolute highest at that point. He took the money and invested it at 15 plus percent returns for the past several years. When and if rates go up, and he reaches his mid -late sixties his plan is to by an annuity.


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## Beaver101 (Nov 14, 2011)

Eclectic12 said:


> From a basic level ... unless there's a decision to make - it is an unnecessary expense. Where it's published for everyone in the DB plan, the cost is shared.


 .. not disagreeing with the additional cost of cv calculations for "everyone" in the plan ... only those who wants to know what their cv amount is and why would there be "alot" of reasons not to provide it ... other than the (selective) costs involved, what are those other many reasons other than the actuarial assumptions/interest rates, mortality, etc. factors?



> From a practical level ... what's the point in say a thirty year old to request the CV be calculated using point-in-time assumptions for a choice to be made twenty plus years down the road?


 ... agree that most 30 years old (or even 40s) don't care what their "pensions" plans have to offer, let alone worry about cvs ... recall the need for the bad-assed stereo/toy of the year instead? :biggrin: 



> Bear in mind that for some DB pensions (maybe most?) - the only way a CV decision comes up is where the employee has quit and has to decide between leaving the pension earned as-is or taking the CV elsewhere.


 ... or plan wind-ups ... connect the dots to the Nortel's pension windup thread opened yesterday. 



> As for factors that have to be set at the time of the calculation that could change, there seems to be interest rates, longevity rates, age, pension benefits earned, commencement date of the pension, reduction factors for starting the pension early, form of the pension (ex. is surviving spouse going to receive benefits after death) and inflation indexing.
> 
> *Add to that, pension legislation at the time of the calculation.*
> 
> http://www.cia-ica.ca/about-us/actuaries/ask-an-actuary/faq---pensions


 .. agree, many factors involved in calculations to make it all so "complex" sounding but in fact, it's the legislation that is so complex..... or these moving parts,



> - *Interest rates and mortality rates in accordance with actuarial practice.
> - Pension legislation at the time of the calculation. *
> 
> *The lump sum present value is usually determined assuming the pension commences at the date when it would have the highest value.*


 ... exactly who makes the determination of the commencement date where the cv is of highest value? The actuarial standard board or the legislation?


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## Beaver101 (Nov 14, 2011)

fraser said:


> I see absolutely no point in providing anyone under 55 or anyone not yet eligible to retire in their DB plan with a CV amount. * This amount goes up and down based on interest rates.*
> ..


 .. yes, as you explained in post #15. I'm checking on behalf of a friend who wants to take early retirement.


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... not disagreeing with the additional cost of cv calculations for "everyone" in the plan ... only those who wants to know what their cv amount is and why would there be "alot" of reasons not to provide it ...


What I am not clearly explaining is that the few people (ex. ten employees) asking for a CV at a whim is going to be expensive. They seem to need to provide their target retirement date (not likely the same date), then the background parts are setup (ex. interest rates, current FMV of the pension investment portfolio) and finally the calcs are run. 

So I'm thinking running a CV calculation for a few employees is going to be a useless cost that everyone has to pay for.


Keep in mind that this applies is for requests of a CV at a whim, where there is no need.

An employee who has two or three weeks to decide whether to withdraw from the pension or someone nearing retirement who has the choice of a CV likely has the right to have a CV given to them. Now that I think back, when I left a company - the letter spelling out the choices of what to do with the DB pension included a CV number under the choice to "transfer to a combination of LIRA/RRSP/taxable income", as I recall.




Beaver101 said:


> ... agree that most 30 years old (or even 40s) don't care what their "pensions" plans have to offer, let alone worry about cvs ...


It's not about whether they care but about how useful the information is plus the expenses the pension would have to pay for. To use an analogy ... this would be like taking unpaid time off of work in 2015 to get a roofing company to provide an estimate to know what the 2027 roof replacement is going to cost. One has the estimate ... but how likely is it to be accurate twelve years later? 




Beaver101 said:


> ... or plan wind-ups ... connect the dots to the Nortel's pension windup thread opened yesterday.


Yes ... that would be another area CV's would come into play ... an oversight on my part.




Beaver101 said:


> ... agree, many factors involved in calculations to make it all so "complex" sounding but in fact, it's the legislation that is so complex..... or these moving parts ...


It seems to me that the legislation is a drop in the bucket compare to the other factors.

The threads on CMF trying to figure out how much is needed to retire are similar, just a different goal. The factors that get talked about for this are what level of retirement spending?, how much is already saved?, what are the projected retirement income sources? what is the assumed growth rate of the money already invested? how much is projected will be put aside from now to retirement? etc.




Beaver101 said:


> ... exactly who makes the determination of the commencement date where the cv is of highest value? The actuarial standard board or the legislation?


My interpretation is that the plan would determine this. The plan usually says something like "employees are expected to retire at age 65 but can retire as early as 60 without the earned benefit being reduced. For each year before age 60, the earned benefit will be reduced by 1.5%". 

The CV is to determine the pot of money needed today to arrive at enough money in the future to be equivalent. It seems to me that this dividing age is going to determine the maximum benefit as anything earlier is going to reduce the yearly payout. A reduced yearly payout is going to reduce the CV pot that is needed today.


Cheers


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## Beaver101 (Nov 14, 2011)

Eclectic12 said:


> ...
> 
> It seems to me that the legislation is a drop in the bucket compare to the other factors. ...
> 
> My interpretation is that *the plan would determine this. * The plan usually says something like "employees are expected to retire at age 65 but can retire as early as 60 without the earned benefit being reduced. For each year before age 60, the earned benefit will be reduced by 1.5%".


 ... if it were the plan terms were to determine this (and not legislation), then it's all more the reason to provide cv calculations to plan members when requested. Besides, those terms (reductions et al for early retirement, etc.) would be subject to legislation, would they not?



> *The CV is to determine the pot of money needed today to arrive at enough money in the future to be equivalent.* It seems to me that this dividing age is going to determine the maximum benefit as anything earlier is going to reduce the yearly payout. A reduced yearly payout is going to reduce the CV pot that is needed today.


 ... again, all the more reason to have cvs calculated or provided more frequently, perhaps for members who have reached a certain age, say 50 than at age 30, with costs consideration in mind... or perhaps plan administrators can (not?) consider this as a value-added service to their clients.


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... if it were the plan terms were to determine this (and not legislation), then it's all more the reason to provide cv calculations to plan members when requested.


To plan members who can use it (ex. 50 year old considering retirement who can make the choice in a few years) ... then yes. For plan members who is it useless for (ex. 18 year old who typically won't have the choice to use a CV amount or pension until age 60), then no.

Going back to my roof replacement analogy ... getting the replacement cost estimate for this year or next is likely to be useful where getting the estimate for twenty or thirty years into the future is not useful.


The key IMO is that for someone getting a CV number generated ... two factors that are going to drive the maximum pension payout for the person requesting the CV calculation. The first is numbers of years of service. This will already be known. The second is when the pension can start without being reduced. This is set by the plan. 

There are other factors such as where one gets a promotion so that one's salary goes up significant in a year or two ... but the CV is a point in time calculation so it can't be factored in.




Beaver101 said:


> ... Besides, those terms (reductions et al for early retirement, etc.) would be subject to legislation, would they not?


In terms of requiring the amount being based on current actuarial practices/codes and when it needs to be reviewed, I expect it would be subject to the legislation. 

In terms of "it must be 1.5% that starts at age 6#" - no. Legislation fixing the amount of the reduction would mean the pensions themselves are the same. As I've already said, one of my private pensions has allowed retirement without reduction at different ages ... this means different amounts of money are needed and is not likely spelled out in the legislation.

Don't forget ... the legislation is setting the restrictions as well as reporting requirements - after that, there's a lot of room for differences. Case in point, I've read annual reports where the workers in the DB pension are credited pension service on a one to basis (ex. work one year, pension service is credited by one year). The CEO on other hand, is credited on a one to three basis (ex. work one year, pension credit is for three years). I doubt the legislation anticipated this imbalance or that legislators want to go back to update the legislation for the few numbers that have this ratio.




Beaver101 said:


> ... again, all the more reason to have cvs calculated or provided more frequently, perhaps for members who have reached a certain age, say 50 than at age 30, with costs consideration in mind...


YMMV ... IMO a key requirement before even thinking about providing this is that the pension provides the choice of CV or pension. As I say, none of my pensions have allowed a choice of CV or pension so the only situation that it makes sense to me to allow a request/provide a CV is when one has quit. [ A pension windup would also force a CV calculation but I would expect that's part of the payout process (just like when an employee quits).]

The OP says the pension under discussion has this choice ... so I would expect that the request to have a CV calc done is allowed. If it is provided automatically, likely it would be close to the usual retirement date. 


For everyone else ... a lot is going to depend on what's in their plan.

Cheers


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## sags (May 15, 2010)

fraser said:


> I see absolutely no point in providing anyone under 55 or anyone not yet eligible to retire in their DB plan with a CV amount. This amount goes up and down based on interest rates.
> 
> It is only has value if one is leaving the organization or is considering early retirement, or is retiring. A CV today will be far more if the interest rate jumped to 6 percent next year. TI know of one person who took a CV in the past two years simply because the CV was at it's absolute highest at that point. He took the money and invested it at 15 plus percent returns for the past several years. When and if rates go up, and he reaches his mid -late sixties his plan is to by an annuity.


Not a bad plan really...........lock up gains in a portfolio into a series of annuities.........just in case.


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## Beaver101 (Nov 14, 2011)

sags said:


> Not a bad plan really...........lock up gains in a portfolio into *a series of annuities*.........just in case.


 ... don't you have to be rich first to do that or like how much $ do you need for a "series" of annuities? $10K or $100K or $1,000K? I better start playing the markets to reach my $1,000K... :biggrin:


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## fraser (May 15, 2010)

I retired but I did not start my company pension for several years. 

I considered the CV but decided against it for a number of reasons. The first was that in reading Pensionize Your Nesteg I realized that I did want the comfort and security of knowing that I had one additional 'given' in my financial retirement picture. The second reason was tax....a fairly large proportion of my CV was taxable (my employer gave me a CV and then a further breakdown of the amount that could be sheltered and the amount that would be taken into income and taxed immediately. 

I would recommend Pesionize Your Nestegg to anyone facing this decision. It adds some tangible and non tangible aspects to the decision and it is a good read for those entering retirement.


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## Beaver101 (Nov 14, 2011)

fraser said:


> I retired but I did not start my company pension for several years.
> 
> I considered the CV but decided against it for a number of reasons. The first was that in reading Pensionize Your Nesteg I realized that I did want the comfort and security of knowing that I had one additional 'given' in my financial retirement picture. *The second reason was tax....a fairly large proportion of my CV was taxable (my employer gave me a CV and then a further breakdown of the amount that could be sheltered and the amount that would be taken into income and taxed immediately.
> *
> I would recommend Pesionize Your Nestegg to anyone facing this decision. It adds some tangible and non tangible aspects to the decision and it is a good read for those entering retirement.


 ... true that tax is a major consideration in taking the cv or not especially if the cv amount is substantial. However, this is only a deferment of taxes and when you add in your RRSP, CPP income at retirement, the taxes payable may be even more. 

Now back to your comment in earlier posts about the low interest rate environment of today in relation to cv values, would it not be more advantageous now to consider a cv even more than it will be say 10 years from now at retirement when interest rates are much higher and annuity will be costlier?


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## fraser (May 15, 2010)

I am not an expert but I think of cv's and annuities as being opposite each other. They represent payee and payor of a stream of payments.

When interest rates are low my understanding is that the cv value will be higher than if rates are high.

My belief is that the best (least expensive) time to purchase an annuity, all things being equal,is when interest rates are higher.


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## Beaver101 (Nov 14, 2011)

^


> My belief is that the best (least expensive) time to purchase an annuity, all things being equal,is when interest rates are higher


 ... yes, it would seems to be the case as normally thought but that idea doesn't seem to resonate with me (anymore) ... maybe I should go and research some comparable past and present annuities prices or get into the annuities' nitty gritties. Cheers, :bee:


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... true that tax is a major consideration in taking the cv or not especially if the cv amount is substantial. However, this is only a deferment of taxes and when you add in your RRSP, CPP income at retirement, the taxes payable may be even more.


Is this going to matter much?

Don't forget that for someone making $120K in Ontario with only the personal amount, the average tax rate paid worked out to about 30%. Yes, some of the money paid might have a higher tax rate attached to it but as I understand it, taking the CV where there is a sizeable taxable portion could mean paying taxes on multiples of one's salary (minus TFSA contribution room). I'd want to think things through before letting a "this rate" versus "that rate" on a percentage sway the decision.

Then too ... one could pay all of this tax on the taxable part of the CV *and end up in the same situation* if part of the CV that is tax deferred does the same thing.


It is not a simple situation AFAICT.




Beaver101 said:


> ... Now back to your comment in earlier posts about the low interest rate environment of today in relation to cv values, would it not be more advantageous now to consider a cv even more than it will be say 10 years from now at retirement when interest rates are much higher and annuity will be costlier?


What pension is allowing one to take a CV 10 years before retirement, without moving to another job or retiring?

As I understand it (ignoring the worker who has quite), the plan have to provide the option, where the one's I've read about - one has to stop working to get the CV paid.


Cheers


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## Beaver101 (Nov 14, 2011)

Eclectic12 said:


> *Is this going to matter much?
> *
> Don't forget that for someone making $120K in Ontario with only the personal amount, the average tax rate paid worked out to about 30%. Yes, some of the money paid might have a higher tax rate attached to it but as I understand it, taking the CV where there is a sizeable taxable portion could mean paying taxes on multiples of one's salary (minus TFSA contribution room). I'd want to think things through before letting a "this rate" versus "that rate" on a percentage sway the decision.
> 
> ...


 ... I would think it will matter if you end up with $1 (or +) million(s) in your RRSP at age 65. :biggrin: Of course, this is far from a simple situation and this is why we're having this discussion, yes /no?



> What pension is allowing one to take a CV 10 years before retirement, without moving to another job or retiring?


 ... I didn't say anything about "taking the cv" prior to moving to another job or retiring and certainly not "10 years before" retirement ... what I said was plan sponsors (actually plan administrators) should offer calculations of cvs more frequently, say for employees aged 50 and above - this is 5 years prior to "normal early" retirement at age 55, courtesy of the "Freedom 55" promotion.



> As I understand it (ignoring the worker who has quite), the plan have to provide the option, where the one's I've read about - one has to stop working to get the CV paid.


 ... not necessarily the employee has to "stop working" to "get paid the cv". A cv can be coerced on an ex-employee on termination of employment apart from plan wind-ups.


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... I would think it will matter if you end up with $1 (or +) million(s) in your RRSP at age 65. :biggrin:


Sorry for the delay ... I ran some projections which estimated a bit over 20% could be pulled out of the $1 million RRSP. Then I was trying to figure out how the minimum withdrawals would affect the overall numbers.

At that point, I wondered who would have built up such a large number.

If it's the person in the DB pension - I question how it's possible considering that the pension adjustment has been decimating the RRSP contribution room earned for 25 years or so. Using my less generous private DB pension to estimate, over the 25 years - there's only around $115K of RRSP contribution room being granted. The DB pension in question for the OP is more generous so it's likely reducing this further.

Then too, the OP is saying the starting age was 25, so there's not likely a lot of RRSP contribution room built up in advance plus the contribution rates are 10% and higher (as high as 13+%) reducing cash available.


If it's the person who decided against the pension and has taken the CV, I can see a big RRSP as far more likely. I'll have to estimate but since there's no pension income ... just the RRSP withdrawals, plus the other sources (ex. CPP, GIS, taxable investments) there's far more headroom to make withdrawals without tax issues.





Beaver101 said:


> ... Of course, this is far from a simple situation and this is why we're having this discussion, yes /no?


There's lots of decisions and ways of estimating ... for example, the top CPP is a bit over $12K but how likely is it that the individual has 39 years of contributions *plus* equaling the YMPE? How much does one reduce the $12K to compensate?

What happens if one converts to a RRIF at age 65 instead of 71? What changes has the last budget made to the minimum withdrawals?




Beaver101 said:


> ... I didn't say anything about "taking the cv" prior to moving to another job or retiring and certainly not "10 years before" retirement ...


Hmmm ... saying


> more advantageous now to consider a cv even more than it will be say 10 years from now at retirement


 means one has to be willing to pull the trigger on getting the CV, does one not?

Otherwise, today's CV value, where interest rates/annuity numbers are at etc. is noise.




Beaver101 said:


> ... what I said was plan sponsors (actually plan administrators) should offer calculations of cvs more frequently, say for employees aged 50 and above - this is 5 years prior to "normal early" retirement at age 55, courtesy of the "Freedom 55" promotion.


Sorry for repeating ... but unless one is going to use it - this is back to "get a price for five or ten years down the road".

I haven't seen anyone with the choice of a CV as part of pension identify under what situations they can request a CV calculation but I expect that the 50 year old could request it.




Beaver101 said:


> ... not necessarily the employee has to "stop working" to "get paid the cv". A cv can be coerced on an ex-employee on termination of employment apart from plan wind-ups.


I'm not following ... I've already agreed that a CV can be forced on a person. I thought the discussion at this point was more like the OP, where it was at the *employee's* choice. If it's forced, it's forced.

To re-phrase ... "For the employee who is making the choice between a CV or pension (ignoring the worker who has quit) ... "


BTW, if we are trying to build a complete list - add in "employees" for the coerced CV category. :biggrin:


Cheers


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