Should I quit my job, take my pension money and invest it myself?

Or should I work another three years and just get my full pension — paid monthly for life — then?

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By Julie Cazzin with Doug Robinson

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Q: I work for the provincial government of Ontario, I have 30 years of service and I will be 55 next year. I have been investing alone for over 20 years and getting good returns. I plan to take a buyout next year and invest it so that I can get monthly payments from my non-registered accounts, much like a pension would. Is it a good idea? Or should I work another three years and just get my full pension — paid monthly for life — then? What are the pros and cons of both? — Thanks Morty

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FP responses: Morty, that’s a good question that a lot of people will find relevant. There are many elements to consider, and each person will value these elements differently. To provide a general overview and general answer, I’ve summarized the most common factors you should consider and which side of the decision each is most likely leaning towards. I will emphasize that each situation is unique and that particular circumstances could tip the “tick” to the other side.

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Factors that favor taking the commuted value of your pension now

Poor health, bad habits (smoking, etc.) or any risk factor reducing life expectancy. For those in poor health, present value would be preferred. Conversely, good health and a history of family longevity favor taking the guaranteed pension.

Maximize the potential value of your estate: If you (and a spouse) die prematurely, there will be money left in your estate. But if you live longer and the investments run out, this option would be worse.

Spending flexibility: You can spend more or less in any given year compared to a fixed pension.

Tax planning: Greater flexibility can lead to more options, especially if you have other sources of income.

Survival risk: Upon your death, all investments can be transferred to a spouse or common-law partner, so that 100% of the income will continue. Standard pensions often only pay 66% to a partner. In some cases, you can choose to have 100% survivor options on pensions.

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Factors favorable to maintaining the monthly pension

Lifetime income security: Your basic expenses should all be covered by a guaranteed income. The Canada Pension Plan, Old Age Security and a company pension are such sources, so make sure they cover your basic expenses.

Inflation risk: Assuming you belong to the Ontario Municipal Employees Retirement System (OMERS), your pension plan is indexed to inflation.

Investment risk: All risk is assumed by the pension, so imperfect investment markets are not your problem.

Return sequence: The risk that the market will go down in the early years of retirement and affect the longevity of your portfolio is the biggest risk you face if you take the present value.

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Tax risk: A significant portion of your commuted value will be fully taxable. You immediately lose any future growth on the capital you pay in taxes.

Solvency risk: An Ontario government-sponsored pension plan is safer than many privately-sponsored pension plans.

Morty, I’ve identified most of the general issues you need to consider when deciding what to do. I encourage you to work through each point with a knowledgeable advisor to make an informed decision. Just keep in mind that most professional advisers have a conflict of interest when advising on these matters since their compensation is tied to the assets they manage.

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Nonetheless, the decision you face will be one of the most important financial decisions of your life, so I encourage you to get some good retirement advice.

The advantages of working three more years are that it will increase your years of service and your average earnings. Both of these factors will increase your pension and strongly support a decision to wait and collect a pension.

As for the investment, I would trust the experts at OMERS rather than the do-it-yourself retirees. It’s great that you’ve achieved solid results over the past 20 years. But I’ll still bet on the retirement experts over the next 40 years, especially as a retiree’s ability to make vital investment decisions changes as their health status changes.

Also keep in mind that you will likely lose between 10% and 25% of your present value in income tax immediately. You will need good reasons to prefer paying this tax rather than working three more years and increasing your guaranteed pension income.

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With these details in mind, I find myself strongly not taking the risk of choosing the present value option now.

Doug Robinson is a Certified Financial Planner and Wealth Advisor with Veritable Wealth Advisory in Peterborough, Ontario. Veritable Wealth Advisory is a full-service financial planning and investment firm that employs several certified financial planners and portfolio managers with offices in Burlington, Kingston and Peterborough.

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