Just curious to know if anyone has taken the commuted value of his or her pension to achieve ERE?
The amount I would receive at age 50 when I could start drawing a pension is more than I would need. And that's still six and a half years away.
The amount of my commuted value is currently nearly 30 times my monthly expenses. I'd stick around for a bit to build up a cushion, but I'm thinking 2012 could be my year.
I've considered the lump sum taxation issue and it's not great but not as much of a hit as I thought I might take.
Taking a pension seems unpalatable to me for several reasons:
1. benefits keep getting stripped (eg. indexation for inflation and extended health care benefits)
2. the value of the commuted value is high because of low interest rates vs the stripping of benefits mentioned above
3. I know that all it takes is a change in government here and all of the so-called protections for pension plans currently in place could be gone (and one previous government was rumoured to be looking at reducing benefits to our pension plan to fund tax cuts)
It is a Defined Benefit Plan, but from my perspective, it seems that the rapid changing of benefits, and potential for governmental interference, is making this DB far less enviable than it used to be. Just because it's always been regarded as a panacea, doesn't mean it still is, or always will be.
I should also mention that I live in Canada.
Thanks.
Commuted Value to Finance ERE?
If you can add this money to the rest of your savings and then have an amount that will last forever (taking only 3-4% out each year), I'd say: why not?
On the other hand, the commuted value seems rather low. You tell me in 6.5 years time this pension would give you more than you need, until you die (and ok, assuming the thing keeps existing), and now it's only worth three years of expenses? That seems like much much lower, given that I would expect you to live at least until age 70 which would be twenty years of pension. (so 20x12xsay 1000 in 8 years versus 30x1000 now is 240,000 versus 30,000...
So that feels like a big loss to me. Waiting 6 more years gives you so much more.
Maybe there's also a middle road: will the commuted value increase quickly over the next few years? If so, maybe waiting 2 or 2.5 years is a nice compromise between early freedom and finances.
On the other hand, the commuted value seems rather low. You tell me in 6.5 years time this pension would give you more than you need, until you die (and ok, assuming the thing keeps existing), and now it's only worth three years of expenses? That seems like much much lower, given that I would expect you to live at least until age 70 which would be twenty years of pension. (so 20x12xsay 1000 in 8 years versus 30x1000 now is 240,000 versus 30,000...
So that feels like a big loss to me. Waiting 6 more years gives you so much more.
Maybe there's also a middle road: will the commuted value increase quickly over the next few years? If so, maybe waiting 2 or 2.5 years is a nice compromise between early freedom and finances.
Thanks for responding, Dutchgirl.
Currently the CV is worth $282,840. If interest rates stay low and the stock market doesn't nosedive, it will continue to increase fairly rapidly. Those are big ifs to count on.
If I take a pension at 50 (in 6.5 years), pension monies will decrease by about 25% when I turn 65 because it's linked to the Canada Pension Plan. If I take commuted value, I get the Canada Pension Plan money (as early as age 60, but a lower amount) in addition to the Commuted Value.
I hope this makes sense.
Currently the CV is worth $282,840. If interest rates stay low and the stock market doesn't nosedive, it will continue to increase fairly rapidly. Those are big ifs to count on.
If I take a pension at 50 (in 6.5 years), pension monies will decrease by about 25% when I turn 65 because it's linked to the Canada Pension Plan. If I take commuted value, I get the Canada Pension Plan money (as early as age 60, but a lower amount) in addition to the Commuted Value.
I hope this makes sense.
So is this sentence correct, or did it just need an extra 0?
"The amount of my commuted value is currently nearly 30 times my monthly expenses."
Also, maybe you could use this calculator? http://www.mrmoneymustache.com/2011/06/ ... d-you-too/
"The amount of my commuted value is currently nearly 30 times my monthly expenses."
Also, maybe you could use this calculator? http://www.mrmoneymustache.com/2011/06/ ... d-you-too/
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George the original one
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I'm not familiar with Canadian laws and pensions, but my USA defined benefit pension is worth far more than its cash value. Probably by a factor of 3 or 4. Thus, to me, it is worth hanging on for at work for the next 4 years to ensure that nothing can happen to the pension benefits at a normal(*) retirement age.
Instead, I'm building up the taxable account to have enough to bridge me 5 years until the retirement age. Is there a possiblity that your situation is similar and that you would achieve a significantly higher payout than the commuted value implies?
(*) age 58 is normal for my employer
Instead, I'm building up the taxable account to have enough to bridge me 5 years until the retirement age. Is there a possiblity that your situation is similar and that you would achieve a significantly higher payout than the commuted value implies?
(*) age 58 is normal for my employer
Thanks for responding, George. I have considered doing a semi-retired scenario at my current job where I would work for half the year instead of a bridge. If I were to leave early, the payout of my pension would not be very much unless I paid both my part and the employer's part, and I wouldn't want to do that. It's both expensive and gives the pension plan even more control over my money.
The changes to our pension plan benefits do concern me. If it were still indexed like it was and/or if there were still extended health benefits, it would be worth it to stick with the pension. We've also been warned that more cuts to benefits are likely.
Good food for thought though. If I could transition to a semi-retired way of life within the next year or so, and quit and take the commuted value if I don't like the way things are going with work or the pension plan, that is a viable option.
The portion of my pension plan to January 2010 is fully indexed (unless they make retroactive changes which they've done before). If I could spend some of the next 6 and a half years working only half the time, that seems like a reasonable compromise.
The changes to our pension plan benefits do concern me. If it were still indexed like it was and/or if there were still extended health benefits, it would be worth it to stick with the pension. We've also been warned that more cuts to benefits are likely.
Good food for thought though. If I could transition to a semi-retired way of life within the next year or so, and quit and take the commuted value if I don't like the way things are going with work or the pension plan, that is a viable option.
The portion of my pension plan to January 2010 is fully indexed (unless they make retroactive changes which they've done before). If I could spend some of the next 6 and a half years working only half the time, that seems like a reasonable compromise.
What sort of non-pension assets do you have, and is it possible to use those as a bridge?
The pension plan at my company allows you to "retire" at a given date and begin drawing upon your pension at a later date. Because the age at which you begin drawing is part of the calculation of how much cash you get per year, delaying might be beneficial if you have the cash to live on in the meantime.
The pension plan at my company allows you to "retire" at a given date and begin drawing upon your pension at a later date. Because the age at which you begin drawing is part of the calculation of how much cash you get per year, delaying might be beneficial if you have the cash to live on in the meantime.
That is certainly possible (although not yet) and a scenario I had considered, but with benefits being stripped from the DBP, and more stripping likely to come, I am wondering if taking the commuted value and moving to a less expensive part of the country sooner might be a good idea. Especially since I could sell my house here and buy a decent one elsewhere with the equity. Other than that, my savings are about $20K so up to 2 years of living expenses. It may be wise to wait and save another couple of years.
I like my job but love being on holidays more.
Thanks for your input.
I like my job but love being on holidays more.
Thanks for your input.
Hi BPA,
I am from Canada too. If you do to decide to commute your pension, you should consider tranferring the assets into a Locked-In RSP. If you do this, you will not have to pay taxes on taking out your pension as a lump sum. A locked-in RSP is like an RRSP but the maximum amount that you can withdraw is reduced by how much outside income you make.
The "locked-in" term is a bit of a misnomer as -- if it is a federal pension plan -- the federal pension rules allow you to withdraw up to 1/2 of the yearly-maximum pensionable earnings from the Locked-In RSP. The calculation is a little more complex: (0.50)(YMPE)-(0.66)(Expected Annual Income). The YMPE for 2012 is $50,100. In theory you could withdraw up to $25,050 in 2012 assuming that you do not have any other income.
You can find the form online which will help you calculate how much you can withdraw on an annual basis.
If the pension plan is a provincial plan, the rules may be a bit different.
I hope this helps you with deciding which way to go.
I am from Canada too. If you do to decide to commute your pension, you should consider tranferring the assets into a Locked-In RSP. If you do this, you will not have to pay taxes on taking out your pension as a lump sum. A locked-in RSP is like an RRSP but the maximum amount that you can withdraw is reduced by how much outside income you make.
The "locked-in" term is a bit of a misnomer as -- if it is a federal pension plan -- the federal pension rules allow you to withdraw up to 1/2 of the yearly-maximum pensionable earnings from the Locked-In RSP. The calculation is a little more complex: (0.50)(YMPE)-(0.66)(Expected Annual Income). The YMPE for 2012 is $50,100. In theory you could withdraw up to $25,050 in 2012 assuming that you do not have any other income.
You can find the form online which will help you calculate how much you can withdraw on an annual basis.
If the pension plan is a provincial plan, the rules may be a bit different.
I hope this helps you with deciding which way to go.