[G J D Swain]

Greetings :

I found a Retirement Income calculator on the net and punched in what my pension administrator had estimated my CV (edit: CV = 'Cash Value' for those at home trying to follow along) was last year at age 53 , after I had confirmed that I had met all the criteria for retiring in 2010 - $168,000 CV .

The numbers matched fairly well to the estimate in the online calculator . It would cost $165,000 to be able to have my DB pension income matched by an Annuity . Good so far . However , my DB pension has a substantial reduction if I begin to draw it at age 55 - a 30% reduction , or 6% per year reduction calculated from age 60 back and so I included that large reduction in the calcs .

However , there is a way around that reduction for me . I can choose to leave the money there in the DB pension a few more years simply because my age at 58 , and my _CURRENT_ years of service add up to over 89 , the so called 'magic number' . This however will mean that I will give up control of that money and can no longer transfer it out into a registered plan of some sort .

In fact , if I leave the money in until 58 and not work a single further day , not only can I retire with a full unreduced pension , but I will also receive an additional $400/month bridge benefit !

So , instead of getting a reduced monthly cheque for $1440 at age 55 , I will get a monthly cheque for $2040 PLUS $400 at age 58 , so $2440 total (all figures before taxes of course) - that's an extra $1000/month or $12,000/year if I just leave the money in the DB for 3 more years (assuming it remains stable) .

Now , if I go back to that java calculator it tells me that , in order to purchase an Annuity equal to that larger unreduced DB pension I would receive at age 58 , I would have to come up with around $245,000 (compared to the above previously estimated CV of $165K at age 55) .

My confusion is - why isn't my CV estimate higher than the $165K , and isn't it a complete 'no-brainer' that I should just leave my money alone until age 58 ?

It seems simple yet the money guy I saw said I should just take out the $165K and put some in an annuity and some in the market for better performance .

I must still not be completely understanding this whole picture and wonder where I am going wrong here . Can someone please explain what I might be missing ? If I'm way out in left field can someone please politely point out the error of my ways ?

Thanks

G J D Swain

 

[MoneyGal]

Many, many factors in this decision.

For me, it's a complete no-brainer to leave the funds in (with the caveat that you need to take into account your assessment of the company's creditworthiness).

Take a lump sum and invest it yourself = you need to be responsible for that investment for the rest of your life and you run the risk of fully depleting the pool

Leave it in the pension = income for life, no longevity risk

You haven't said whether your pension income would be indexed to inflation, but briefly, there are 3 major risks in retirement that are not present when you are accumulating funds:

1. inflation - erodes purchasing power over time
2. Sequence of Returns - poor returns in the first few years may be unrecoverable
3. longevity - you don't know how long you are going to live, and you may live longer than your funds

A DB pension eliminates two of these risks and, if it is inflation-indexed, eliminates the first risk as well. Yes, you have no control over the money. IMO this viewpoint is self-serving from your FA's point of view. You need to ask yourself whether you really, really want control over that money, given the significance of the risks that accompany "control."

 

[Eric]

I think that the idea behind a Bridge benefit is to help employees on 'early' retirement to bridge the gap until they are eligible for the CPP. I believe it is imposed by law. Are you sure that in your case the $400 would be paid for life?

I think that the Bridge benefit is not included in the calculation of the CV. I think that, by law, if you accept the CV, you are forfeiting the Bridge benefit. I am no expert, but this is my understanding.

Pension calculations are full of oddities, because they are forced, by law, to add some social protection to some people. For instance, my pension was the same with or without the survivor benefit; although, if I had a survivor, it would cost them much more. I think the law forces them to include the survivor benefit, a social protection measure, but they are not forced to give you the equivalent if you have no survivor and you do not need it.

 

[MoneyGal]

Bridge benefit is a benefit - it isn't imposed by law. It will only be paid from date of retirement to 65.

And yes, if you take the cash value, you forego the bridge benefit.

 

[G J D Swain]

Bridge benefit is a benefit - it isn't imposed by law. It will only be paid from date of retirement to 65.

And yes, if you take the cash value, you forego the bridge benefit.

Hi Moneygal & Eric :

Thanks for the replies .

Ah so . Yes , I goofed . Of course the Bridge in my DB pension is only until CPP kicks in at age 65 and not for the whole lifetime . That's where I made the mistake on my calculations . $24,000 is available as a bridge to members who choose to retire early - so $200/month to $400/month depending on what your age is between 55 to 65 .

Still , the question remains - why isn't that $24,000 not included in my Cash Value estimate ? Obviously the administrators would rather that we left our money in the plan . Is this a way of deterring a transfer of the CV , or is it a government law of some kind ?

Thanks again

G J D Swain

 

[G J D Swain]

Many, many factors in this decision.

For me, it's a complete no-brainer to leave the funds in (with the caveat that you need to take into account your assessment of the company's creditworthiness).
Take a lump sum and invest it yourself = you need to be responsible for that investment for the rest of your life and you run the risk of fully depleting the pool
Leave it in the pension = income for life, no longevity risk"

Right , and I feel the same way now , but the guy I saw had me convinced otherwise , at the time . I held back and thought about it , then the market crashed and I just put the whole thing on the back burner .

You haven't said whether your pension income would be indexed to inflation,"

I just checked my booklet and it is increased 'Ad Hoc' , so I'm guessing that means as the Trustees see fit ?

but briefly, there are 3 major risks in retirement that are not present when you are accumulating funds:

1. inflation - erodes purchasing power over time
2. Sequence of Returns - poor returns in the first few years may be unrecoverable
3. longevity - you don't know how long you are going to live, and you may live longer than your funds

A DB pension eliminates two of these risks and, if it is inflation-indexed, eliminates the first risk as well."

Yes , I can see that now . Perhaps if I had been taking the CV out ever 5 years and investing it in Blue Chip or Bonds , or into Blue Chip and then into Bonds every 5 years I might have a portfolio worth speculating with , but as it is now , for me , at age 54 , the numbers seem to scream "leave it in until age 58 and grab your Bridge and dodge the 6% yearly reduction !"

Still I'd love to hear from anyone who might promote a cash value withdrawal . The guy I saw said I would have to do a CV withdrawal before my 55th birthday but I just read some more of the fine print in my pension booklet and it states that I can do a transfer to a LIF between age 53 and 65 .

Yes, you have no control over the money. IMO this viewpoint is self-serving from your FA's point of view."

Well , maybe it is self-serving for him . That's why I'm doing some number crunching myself . However , not many people I know are able to jump on the net and search for a calculator and then find a good forum and ask some pertinent questions . It's just easier to go to a FA (financial advisor) and let him make the decisions for a person , I think .

This is a very complicated part of our life and sometimes the info we get is hard to understand , although it is obviously very easy to understand to those who do this for a living .

You need to ask yourself whether you really, really want control over that money, given the significance of the risks that accompany "control."

Yes , I hear you . I mean , it is possible for a person to retire at 55 and assume they will live until 80 and then they manage to make it until 90 , with only CPP and OAS as income . That sounds to me like a lot of stress .

Thanks very much for your reply MG
Hope to hear some more comments from differing perspectives too from other forum members .

G J D Swain

 

[Berubeland]

There is one other consideration. That is your estate.

As an extreme example but a real one my mom got ill and retired as a teacher. She had a brain tumor and they did not know if she would live the operation was very complex.

In any case if she died my dad would only get half of her pension so they took out everything all the funds they were allowed to about $600000.

They turned those fund over to a financial advisor who promptly lost $100000 in one year.

Now they do all their investing themselves and are making money doing it.

 

[Eric]

Still , the question remains - why isn't that $24,000 not included in my Cash Value estimate ? Obviously the administrators would rather that we left our money in the plan . Is this a way of deterring a transfer of the CV , or is it a government law of some kind ?
G J D Swain

MoneyGal says that it is not a law; however it is a common practice. I think pensions include some 'hardship' considerations, such as no CPP or a surviving spouse. It is sort of a charitable social benefit that you get only if needed. The idea is that if you take a CV, you are on your own, and they will not consider you part of the family - so no hardship consideration. It does appear unfair to me. In my case, for instance, the pension provided a good health plan that was also not included in the CV calculation.

Jonathan Chevreau of the Financial Post has some good videos on this subject.

http://www.financialpost.com/personal-finance/wealthy-boomer/index.html

One of them does say that generally, it is better to take the pension even if the company has a shaky future. Another explains that people who retire a few years before their CPP get more in their pension (like the CPP bridge benefit) than older people or younger people. So consider yourself lucky.

 

[Saniokca]

1) I am 99% sure (need to see the plan text) that the bridge is NOT included in the CV calculation. Actually, in many many cases I've seen, it says in the plan text that to get the bridge you need to retire from ACTIVE employment (i.e. if you were to wait the three years without working you would not get it!)

2) I was a big fan of leaving money in the plan for the "guaranteed" income. However (and this is a big one!) , YOU NEED TO KNOW THE FUNDED POSITION OF YOUR PLAN. This is easily obtainable from the employer. I think some employers will allow you to take out half of the CV (this way you are effectively spreading some of the risk). Not many employers would do that - it means more administrative expenses for them.

3) I saw a post above saying that employers want you to leave the money in the plan. This is not true. Not only they need to be on the hook for this "promise" that they made to you, but they have to keep you on the books for a long time. Imagine that can't find you when it's time to start paying - they HAVE to make effort to find you, then when they do, pay us actuaries to recalculate amounts, etc.

 

[G J D Swain]

Thanks Berubeland , Eric and Saniokca :

All very interesting points and especially when a person like myself is just starting an attempt at getting a handle on this vast subject . Thanks for the link Eric , I checked them out a few days ago , actually . Good stuff there .

First , yes , to get that Bridge benefit the stipulation is that one has 1200 hours total in the 4 years previous to retiring . So if I stop working at age 56 I have to apply for the pension before age 60 or else I will loose the Bridge .

The FA I saw last year just before the crash told me that the Bridge was included in the CV when I asked him about loosing the Bridge benefit . Seems that maybe he was mistaken about this , or maybe he knew something that has not been mentioned here .

I will give him the benefit of the doubt and consider myself lucky that I did not pull my pension and invest in Blue Chip just before the chips hit the fan . Lots of people have been hurt by the market in that exact same time period .

I have the Funded position figures but not sure what they mean . I also see by the booklet that a little over $100,000 was contributed to my personal pension account by the employer but the CV , after 30 years is only $168,000 . That's around 2.3%/year total , but maybe I'm not using the correct formula to get the right percentage .

Also , my wage has almost tripled in 30 years (275%) but the 'pension contribution per hour worked' has increased only 58% . Doesn't seem right somehow . Sad that not a single person I know has even noticed this before , including myself .

Anyway , thanks again to all who have responded

G J D Swain

 

[Saniokca]

the 58% is very possible since it depends on the benefit formula. Some pensions don't even depend on your earnings (e.g. you get $50 per month for every year of employment). Yours sounds like a "career average plan". That means that they take the average of ALL your salaries and multiply it by some percentage.

I am a bit confused about the employer's contributions of $100,000 to your "personal pension account"? can you elaborate a bit on this?

 

[G J D Swain]

the 58% is very possible since it depends on the benefit formula. Some pensions don't even depend on your earnings (e.g. you get $50 per month for every year of employment). Yours sounds like a "career average plan". That means that they take the average of ALL your salaries and multiply it by some percentage.

My employer pays into the plan , a certain amount for every hour I work , but as I mentioned, in 30 years that $ amount/hour has only increased 58% . That would mean that I lost a lot of money to inflation since my wages increased 275% and still didn't keep up to the "true" C.O.L.A. in Canada (Cost Of Living Allowance) .

I am a bit confused about the employer's contributions of $100,000 to your "personal pension account"? can you elaborate a bit on this?

Well , I tried to find a way to express this amount and failed , obviously . I receive a booklet every year that shows how many hours I worked and how much money was added to my pension in that year and also a running total of how much $ was added since I joined the plan .

So , my booklet shows that roughly $100,000 was contributed in the last 30 years . However , like I was saying , my current 'Commuted Cash Value' is only worth $184,000 , so I calc'd roughly a 2%/year gain but really have no idea if that is the correct amount .

My point was that had my pension contributions kept up with my wage increases (275% instead of only 58%) and had the plan performed better , I think my CV would be significantly higher , to say the least .

Thanks for your reply

G J D Swain

 

[G J D Swain]

Bridge benefit is a benefit - it isn't imposed by law. It will only be paid from date of retirement to 65.

And yes, if you take the cash value, you forego the bridge benefit.

Thanks for the reply . I erroneously started out asking about 'cash value' here in this thread , when I actually meant 'commuted value' (sorry) .

So then , I think the bridge benefit is included in the Commuted Value , is it not ? I've read in several articles and forum posts where it is mentioned that the bridge (to CPP) is included . Below is a quote from page 2 of this interesting online .PDF http://www.advisor.ca/images/other/ae/ae_0706_pensionpaths.pdf

Quote - "Similarly , it (commuted value) must recognize enhanced benefits on early retirement , such as :
A) The ability to start early with no reductions
B) Reductions that are more generous than actuarial equivalent
C) A Bridge Benefit payable to age 65 "

G J D Swain

 

[Saniokca]

If you are 54 you are not retiring early - you are terminating. Hence (probably - 99%) no bridge. Unless the plan states an earlier "early retirement date" (i.e. the earliest date you can retire)

 

[G J D Swain]

If you are 54 you are not retiring early - you are terminating. Hence (probably - 99%) no bridge. Unless the plan states an earlier "early retirement date" (i.e. the earliest date you can retire)

Ah , I see . 55 is the earliest date . However . under the 'Portability Section' of my booklet it states that I can transfer the commuted value to a LIF between the age of 53 and 65 . So I gather I can transfer at 55 , and in that case the CV would reflect the bridge I am eligible for at that age ?

Thanks for your input .

G J D Swain

 

[Saniokca]

Ah , I see . 55 is the earliest date . However . under the 'Portability Section' of my booklet it states that I can transfer the commuted value to a LIF between the age of 53 and 65 . So I gather I can transfer at 55 , and in that case the CV would reflect the bridge I am eligible for at that age ?

Thanks for your input .

G J D Swain

Hmm I don't see why it shouldn't... You need to be an active employee for that though (I might be repeating myself here)

 

[G J D Swain]

Hmm I don't see why it shouldn't... You need to be an active employee for that though (I might be repeating myself here)

Hi :

Yes , I've confirmed with the pension people that I have met all the requirements for retirement at 55 . That is , I have worked 1200 hours in the last 4 calender years preceding my retirement . I asked if I can leave my employer now and collect at 55 (reduced) with the bridge and it was confirmed that I could .

Oddly though , my FA told me that I had to commute before the age of 55 . I have also read in various places on the net that a person must commute before 55 . I just assumed that was a federal or provincial law . Now I see that my pension allows commuting anytime between 53 and 65 .

Are there any stipulations that I may not be aware of ? None are mentioned in my larger ,'benefit bible' booklet .

Thanks for your continued interest .
Sincerely
G J D Swain

 

[G J D Swain]

Very , Very Slowly Learning

Hello Everyone :

From what I can gather via continued 'googling' and surfing , by federal law a person must be allowed to commute before they are eligible to retire . However , it is strictly up to the investors (pension handlers) whether they will allow commuting after that specific age , or not .

Hey! - Live Then Learn .
G J D Swain