# $800000TV or $60/yr in 19yrs... What should I do?



## DrMatt (Dec 11, 2011)

I'm struggling with this one and looking for CMFr'r thoughts and advice... it's a first world problem, and not a bad dilemma to have... But it is a dilemma and I would appreciate any comments you might have.

I'm thinking about switching jobs... If I leave my current employer I'm left with the subject heading choice. A pension transfer value (TV) of ~800k: $400K would go into a LIRA... The remainder would be paid out as income... (So close to 200k after tax).... Or I can defer an annuity of 60k/yr starting in 19 yrs... although there is an option to draw sooner with a 5% per year deduction (so e.g. the option of 30K/yr starting in 9 years)...

We have no debt and no mortgage and I can likely save more than 100k/yr for the next 9 (or more) years... 

I'm leaning toward leaving it there and thinking of it as a bond in our portfolio... And then putting our 100k/yr savings all into equities... But a 200K+ payout would go a long way toward a family cottage (which we will probably buy regardless)... And a 400k LIRA is nothing to sneeze at... But do you think I could get 60k/yr out of it in 19 yrs managing it myself?

What would you do?


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## Spudd (Oct 11, 2011)

I would keep the pension, since it is a diversification and guaranteed.


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## Nemo2 (Mar 1, 2012)

Spudd said:


> I would keep the pension, since it is a diversification and guaranteed.


Seconded.


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## Woz (Sep 5, 2013)

Is the annuity indexed with inflation? If it isn’t then the lump sum seems like the better deal. 

As a rough example, the yield on 19 year provincial bonds is ~3.6% which probably has a similar level of default risk to your annuity. Assuming you’re taxed at 45%, if you put the $600k in long term provincial bonds and held them to maturity then you’d have ~$1.07M after 19 years ($783k in the LIRA and $290k in an unregistered account). If your retirement lasts 25 years and you can get the same 3.6% return in retirement then that’s enough for $66k per year before taxes.

However, there are many other benefits to taking the lump sum in that example. In retirement, you’d pay more taxes with the annuity than with the lump sum because the taxes in the unsheltered part of the lump sum haven’t been deferred. If you die before 25 years of retirement then you’d have money to leave as inheritance vs $0 for the annuity. If bond yields go up then you’d be able to get a higher than 3.6% yield in retirement which would generate even more income than the $66k.


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## fraser (May 15, 2010)

I tend agree with Woz. Because of your age to retirement and because the communted value at the moment is high because of the low interest rates.

However, I would get some professional help on this to outline your options and the consequences. But I would be very careful who I engaged. Be sure to get a fee for service professional. Many of the so called 'financial experts' will advise you to take the money if only because they want to get the commissions that will flow from it should you decide to invest the payout with them. You need professional, unbiased advice.

Unfortunately, in Canada, just about anyone can call themselves a financial advisor and most of the designations are no surety of getting sound, unbiased advice. The designations can be meaningless if you happen to end up with the wrong person. You need to truly understand the math before you can begin to make the best decision for you. Don't rush the decision.

I would also want to see the options in two forms-pre and post tax. The tax consequences could have a significant impact on the outcome and on your decision.


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## My Own Advisor (Sep 24, 2012)

Go for pension, for reasons above, plus...try this on.

You would need ~$2 M portfolio, say a very sizeable basket of dividend stocks, churning out ~4.5% dividend yield to get your $60/k per year after tax.

That pension is golden and guaranteed. I wouldn't turn that down.

If you have no debt, no mortgage, and can save more than 100k/yr for the next 9 years, that's a pretty nice cottage and fat pension in 19 years


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## DrMatt (Dec 11, 2011)

Woz said:


> ?.. you’d have ~$1.07M after 19 years ($783k in the LIRA and $290k in an unregistered account). If your retirement lasts 25 years and you can get the same 3.6% return in retirement then that’s enough for $66k per year before taxes.


How are you calculating this? 
I get $1,070,000*0.036 = $38,520? 


Thanks for all your comments. So far 3:2 in favour of leaving it in!


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## DrMatt (Dec 11, 2011)

fraser said:


> You need professional, unbiased advice.


I agree this is very hard to come by. The "MD Management" group seems pretty good and I will run this by them.

Also... It is indexed starting in 2023 (whether it's drawn early or not).


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## Butters (Apr 20, 2012)

My Own Advisor said:


> Go for pension, for reasons above, plus...try this on.
> 
> You would need ~$2 M portfolio, say a very sizeable basket of dividend stocks, churning out ~4.5% dividend yield to get your $60/k per year after tax.
> 
> ...



Yes 4% dividends, but he could also take out 4% of value assuming it goes up... meaning he would need half that # you posted
doesn't the stock market average around 6-12% for 10 year time frames

Although, I still agree, if you're a super healthy guy, i vote pension.. I would hope a doctor is healthy

If you have any conditions or problems, take the money... as Woz pointed out


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## Woz (Sep 5, 2013)

DrMatt said:


> How are you calculating this?
> I get $1,070,000*0.036 = $38,520?
> 
> 
> Thanks for all your comments. So far 3:2 in favour of leaving it in!


38,520 assumes you don't draw down your capital at all. I calculated $66k by typing =pmt(3.6%,25,-1070000,0) into a excel sheet. 3.6% is the rate, 25 is the number of years, 1070000 is the present value, and 0 is the final value.


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## fraser (May 15, 2010)

Indexing makes a difference.

But.....if it is a public sector pension there is always the chance of the indexing provision going south, or being curtailed in a drastic way.
If it is a private pension the decision becomes more difficult since the end result will depend on how well the DB plan is funded.

It is also difficult to assess health 19 years out.

Don't count my vote. The only one that counts is yours. The only one who is looking out for your financial well being is you!


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## Woz (Sep 5, 2013)

DrMatt said:


> Also... It is indexed starting in 2023 (whether it's drawn early or not).


That changes things. You take on inflation risk with the lump sum that you wouldn't have with an indexed annuity and the $66k I gave wasn't adjusted for inflation. Ignoring tax implications in retirement, if you make it past 17 years then you're probably better off with the annuity, unless you're willing to take on more risk.


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## Woz (Sep 5, 2013)

Here's a spreadsheet for the comparison.


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## MoneyGal (Apr 24, 2009)

The issue with projections that use static life expectancy is that they don't account for the tremendous variation in longevity after age 65. Even as life expectancy has been rising (for the population as a whole), with most of the gains now in life expectancy post age 65, the volatility of longevity hasn't changed over the past 100 years (or possibly has even increased). 

What this means in practical terms is that lifetime income (i.e., a DB pension) provides an insurance component in the event that you live a very long time. This insurance component is not cost-free and whether it is "worth it" for you will depend on what you might think of as your personal longevity risk aversion (i.e., how worried you are about outliving the average by many years).


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## MoneyGal (Apr 24, 2009)

DrMatt said:


> I agree this is very hard to come by. The "MD Management" group seems pretty good and I will run this by them.
> 
> Also... It is indexed starting in 2023 (whether it's drawn early or not).


What you actually want is an actuary in private practice. MD is still a product shop and will have a bias, plus no guarantee of the specialized knowledge required to value a stream of future income based on life expectancy. While the MD advisors may have their CFP, that isn't deep enough knowledge of the issues.


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## fraser (May 15, 2010)

Agree completely. And you should have a qualified tax accountant review the options. The pre tax and post tax bottom lines could vary substantially.

I was in a similar position but much closer to retirement. The numbers came out very close. But the after tax numbers substantially changed the equation.


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## lb71 (Apr 3, 2009)

My Own Advisor said:


> That pension is golden and guaranteed.


The guarantee is only as strong as the investments and company backing it (hello Nortel). I would probably lean towards keeping the pension, but have you checked the current surplus/deficit position of the pension fund? Would your new employer allow you to transfer the TV over, assuming they have a DB plan?


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## Mortgage u/w (Feb 6, 2014)

Take the $800k. You never know what the future holds.


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## My Own Advisor (Sep 24, 2012)

lb71 said:


> The guarantee is only as strong as the investments and company backing it (hello Nortel). I would probably lean towards keeping the pension, but have you checked the current surplus/deficit position of the pension fund? Would your new employer allow you to transfer the TV over, assuming they have a DB plan?


"Or I can defer an annuity of 60k/yr starting in 19 yrs..."

I thought this was an annuity, so the assets are guaranteed as long as you live or the guaranteed period.


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## Rainey (Mar 18, 2012)

DrMatt, I'm working through the same choice you describe. 

One of the key questions for me was what happens to the pension if I die early (I have young kids). 

If I took the TV, that money would be there for my family to access. If I stick with the DB, what do they get?

Another question to throw into the mix.


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## Eder (Feb 16, 2011)

Grats on the payout...results of much hard work no doubt....take the $$ and run....you might get run over by a bus next year (heaven forbid) or in 19 years we might all be speaking Russian and using yuans. Money is much more important (useful) in middle age when health,energy & ambition reigns. The cottage sounds great and is a fine investment that offers more enjoyment than RY stock.


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## Green (Mar 25, 2014)

If I would trust the employer to be around in 19 years, I would leave it in.
Pension funds can't exist without a donor. If the company folds, that pension 
would be given to an insurance company, as an annuity and you get less.
Another important thing is that you live long and have a spouse, who will continue
getting a portion of the pension.
The minimum and maximums withdrawals in LIRA and LIF make investing 
difficult. Today’s safe long term investments pay only 3%.


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## lb71 (Apr 3, 2009)

My Own Advisor said:


> "Or I can defer an annuity of 60k/yr starting in 19 yrs..."
> 
> I thought this was an annuity, so the assets are guaranteed as long as you live or the guaranteed period.


Nortel employees had a "guaranteed" pension, and look where they ended up. Retirees are getting about a 25%-40% haircut. 

The guarantee is only as strong as company backing it and the assets in the pension fund. If the fund is in deficit/underfunded, the company is required to get out of it. Usually have to get back to normal in five years, but some companies have been granted exemptions due to financial considerations such as Air Canada when it was going through bankruptcy. (It's still underfunded I believe.) If the OP's company goes through some financial difficulties in the future and declares bankruptcy, the OP's pension could be reduced. It is a small risk, but the OP is not guaranteed 60k/year at retirement. He is promised that amount.


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## lb71 (Apr 3, 2009)

Rainey said:


> DrMatt, I'm working through the same choice you describe.
> 
> One of the key questions for me was what happens to the pension if I die early (I have young kids).
> 
> ...


There is generally survivor benefits paid to dependents is you pass away before retirement. You need to ask your plan administrator what options are available. But there could be lump sum payments or annuities available for your kids.


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## DrMatt (Dec 11, 2011)

So here's a new dilemma... If I can remain in this job for only nine more years my immediate annuity will easily be ~$100k/yr (assuming no pay raises! Which is highly unlikely... So more likely 120-130k/yr)... If I leave, my total compensation would go up and I would be able to invest over 1MM in the next nine years... Plus the TV if I take it!

So... would you 'stick it out' in a job for nine years for that kind of pension?? When the job might not be your dream job, but isn't terrible, and can be quite fun at times... but is mostly fun when you're traveling... and your wife hates when you travel and wishes you'd take a job where you didn't travel so much?!... Nine years... For that kind of pension? 

Trying to create that kind of return and cashflow with a DIY approach with total deposits at the most 1.4MM... is scary... But challenging... you only get one shot... Nine years is nine years...

(I know this is my decision alone... But it's great to get some of your ideas and approaches and musings... It's all food for thought and helps a lot... So THANK you ALL!!!)


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## RBull (Jan 20, 2013)

Lots of good advice on here. 

I would take the pension hands down. Guarantee & indexed=unmatched peace of mind. Especially so since you have the best of both worlds being able to save big and build a sizable nest egg of your own. 

You'll also have to work something out to keep a happy wife and life for you both. Your problem is a nice to have for most folks.


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## fraser (May 15, 2010)

Only you can make the decision. But consulting with an actuary and good financial advisor will give you the math as well as point out some pros and cons that you may not be aware of.

Much easier to make a decision when you have the data. Data, ie hard numbers pre and post tax beat gut feel any day as far as I am concerned. But I am a numbers oriented person. Once you have these, you can add other factors into the equation.

But there is always the unexpected. I was offered a position at one point and decided to remain with my employer for a number of reasons. As luck would have it my salary, because of performance bonuses, increased almost fifty percent in my final six years. This resulted in a much larger DB than I had expected. The opposite can happen as well-just look at the haircut that people at Nortel and a few other companies took on their respective DB plans.


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## bmoney (Jun 22, 2013)

DrMatt, 26 posts and not one compelling answer, why am I not surprised? Because I'm a consultant in the actuarial/pension field and I have people call me up and ask the question every day. Let me save you some time and money, skip the actuary and accountant, they can produce a report and it wouldn't be worth the paper it's printed on. Our consulting rate is $300-$500/hour, sure we can put something together, but how do you quantify the known unknowns? Ie: investment returns, tax rates, inflation, longevity risk, business risk. You cant - we'll you can, but how much do you want to spend on what amounts to an educated guess? Listen, take a deep breath, dig down deep, you can answer this question yourself without having to run a bunch of numbers. Do you want to take a risk investing this money, or is your major risk whether this company or YOU will still be around in 19 years time. It's common that we seek information to validate our own conclusions. What do most of my clients choose? They take the pension.


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