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Discussion Starter #1
Hello. This is my first post, although I have been reading this forum for many months trying to improve my knowledge of how to better handle my personal finances. I would appreciate your advice.

I have recently received notice of layoff as my hospital position is being eliminated. I live in Ontario, am 38, and have been enrolled in the defined benefit pension plan for 14 years (mostly working part-time). I have always planned to retire at age 55 with a full unreduced pension. My spouse also has an excellent defined benefit pension plan. Now I need to decide whether to
1. leave my money in the pension plan to take as a deferred pension at age 55 ($602/month) or unreduced at age 60 ($860/month) (both with bridge benefits to age 65)
OR
2. take the commuted value of my pension to put into a Locked-In Retirement Acct ($103,000).

My first thought was to leave it alone and take the deferred pension someday, but as I think of what the $103,000 could be worth in 17 years I begin to have second thoughts. I am pretty conservative but think if I invest in something where I can reinvest distributions or dividends it could be the better choice. What would you do?

Also there is a pretty good chance I may end up back in the same pension plan at another hospital, but if it takes longer than 6 months the first plan is closed and 'deferred' and I will have a second separate plan, so will never get in '30 years' service in a single plan.

Thanks for any advice!
 

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Two important points. Is the $860 per month at age 60 indexed with inflation after that ... and does the $860 per month rise between now and age 60, with inflation.

If not, I would take the $103,000. If the first question is yes, I would re-think it (let us know) and if the second question is also yes, I would leave it.
 

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Discussion Starter #3
There is 'partial protection from inflation'. The last adjustment reported "COLA is equal to 75 per cent of the previous year's increase in the consumer price index (CPI)." From what I can understand, 'deferred pensioners' are included in the adjustments but I will definitely look into that. Thanks for the tip!
 

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There are a lot of factors in this decision. One of the issues is that right now, you are comparing the present value of a lump sum ($103K) with unknown future values:

- what that sum might be worth in the future if invested by you
- what the PV of your pension income stream would be, given a bunch of assumptions

One of the things I would do, were I in your shoes, is attempt to estimate the PV of your future pension income stream. You will need to assume an inflation rate as well as some longevity horizon (and, if there are survivor benefits, you will need to include those as well; or plan a longer longevity horizon). Then discount that future income stream to present value to give you some ballparking for comparing the two sums.

Another big issue, at least for me, is that a pension is a 100% sustainable income stream. In your case, it would be partially indexed for inflation as well. The value of these features is critical. In my view, another dimension you need to consider in order to properly compare the lump sum vs. pension options is the cost at retirement of purchasing a 100% sustainable, inflation-indexed income stream -- only because that's what you'd be giving up.

However, you haven't said what you would do with your assets, if you managed them yourself, at retirement. Would you intend to grow your assets by some target average amount, and then purchase an inflation-linked SPIA with some or all of the final amount?

Good luck in your decisions.
 

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I have recently received notice of layoff as my hospital position is being eliminated. I live in Ontario, am 38, and have been enrolled in the defined benefit pension plan for 14 years (mostly working part-time). I have always planned to retire at age 55 with a full unreduced pension.
So you have a HOOPP pension, correct?
If so, a simple suggestion is to leave it in there until 55.
What are the chances that you can invest it better inside a self-directed LIRA than the folks at HOOPP can?
However, if your wife's pension is expected to be enough for both of you to live a comfortable lifestyle during retirement, then you could take the commuted value now and either invest it or withdraw part of it to enjoy some thinks you like now, like travel or food or whatever.
But if the only reason you are considering converting this amount into a self-directed LIRA is because you think you can invest better than the pension plan, I would put my bet on the pension plan folks.
 

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FT: the issue with these kinds of calculators -- any calculators that evaluate or include pensions -- is that you have to include both random longevity and random investment returns, to evaluate the sustainability of a retirement income portfolio.

Longevity has a much higher standard deviation than investment returns; and is the most difficult aspect of a plan to get a handle on.

DB pensions provide 100% sustainable portfolios, potentially with some credit risk (for non-governmental pensions), and potentially with some inflation risk.

I think the calculator you are describing is one which would allow you to price inflation-adjusted SPIAs at retirement. Otherwise you aren't comparing apples to apples - comparing a portfolio with no longevity protection against a pension is apples and oranges.

There are calculators which evaluate both random longevity and random investment returns, but don't underestimate the amount of math and computational power required to create 'em.
 

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Discussion Starter #9
Thanks for all the input. MoneyGal, I had thought that I would live off of the dividends/distributions if I took the payout and let it grow for 17 years, though I'm not sure if there would be some requirement to withdraw some of the original amount in a LIRA. I had thought that I could possibly by then have higher monthly payout of dividends than I would get from the pension but maybe not considering the inflation protection. But you are right that I must consider the value of the 'pension-for-life' and inflation protection. Sixes, yes, it is a HOOPP pension and point-taken about whether I could do as well as the pension managers, especially since my investment knowledge is limited and I am very conservative.
So all in all, I think the 'safest' option for me is to leave the money in the pension. It seems the choice that I would be least likely to regret. Who knows, if I can find new employment at a HOOPP employer, I can continue to increase my benefits in it.
My spouse and I figure if we can both retire at age 55 with 30 yrs in defined-benefit pension plans, we will have a very comfortable retirement with complete peace of mind that we will never run out of money. It would be hard to do better than that!
Thanks again for helping me think this through.
 

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Square: Glad to know this forum is providing some value to you.

The issue with a plan to "let the assets grow and then live off dividends" is your exposure to sequence of returns risk (as well as longevity and inflation risk). If that was your plan, you would need to find ways to protect against a market downturn in the years immediately before and after your intended retirement date (sometimes called the "fragile risk zone" -- the 5 years before and after retirement).

A sequence of poor returns in those years, just as we have experienced in the 2007-2009 period, can cause an unrecoverable drop in your portfolio value. "Pensionizing" your retirement income -- either by retaining a pension, or by purchasing pension-like assets for retirement income (SPIAs) greatly reduces or eliminates sequence of returns risk and eliminates longevity risk.

The issues in distribution (aka "decumulation") portfolios are very different than in accumulation portfolios, because the (investment and financial) risks you face in retirement are different than those you face while accumulating funds for retirement.

I hope that doesn't all ready like goobledegook -- there's a lot of "buzzwords" in there...
 
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