Financial Planning, Retirement Issues


Lifetime Pension Payments or lump Sum?

July 21st, 2017 ernie Posted in Pension Plans No Comments »

Lifetime Pension Payments or lump SumShould we take a buyout which amounts to a lump sum payment or should we take a lifetime pension with benefits? There are pros and cons to both scenarios. Some people will be more comfortable with the knowledge that they will receive a fixed amount for as long as they live. While others feel better about managing their own money and having that lump sum to leave to their children as an inheritance. We will list some of the pros and cons for each. There is no right or wrong answer to this question. It really depends on the person, their situation in life and their risk tolerance.

Lifetime Pension Payments

  • Fixed pension for as long as you live
  • May include indexing for inflation
  • No perceived risk, many are guaranteed
  • You don’t need to worry about the impact of the markets
  • Cannot draw down in an emergency
  • If you die early the money is gone, payments stop
  • There is no inheritance for your children

Lump Sum Payment

  • Lump sum is paid into a registered plan
  • You have control over the investments
  • You also have control over how much is withdrawn
  • In an emergency more money can be withdrawn
  • Must take responsibility for managing into retirement
  • Must plan for lifetime withdrawals
  • Risk of running out of cash before you die
  • If you die early, all money left overs goes to your heirs
  • May lose sleep at night, do you have enough to last

As you can see there are some big advantages and disadvantages to both. Work with an advisor to assess what your payments would be in both scenarios and make the right decision for your situation and risk tolerance.

 

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How much do I need to save to retire a millionaire

November 21st, 2016 ernie Posted in Pension Plans No Comments »

How much do I need to save to retire a millionaireEveryone sometime in their lives asks the following question? How much do I need to save to retire a millionaire? The answer is not that hard to come up with. It really depends how old you are and how much you have already saved for retirement. Consumers who start early and stick to it, have an advantage. Their savings work for them and their investment income continues to build towards their retirement objective. In the following paragraphs we will give you some examples. You decide where you are and whether you can meet the objective of having a million dollars by the time you retire.

How much do I need to save to retire a millionaire

Assuming a 10% average annual rate of return which is the historical average of the S&P 500. Assume you are going to 40  years, a 25-year-old could build a $1 million retirement nest egg by saving just $175 a month in their investment accounts. Their total contributions over those 40 years would amount to less than 10% of that total, just $84,000. All the rest would come from the income from your investments.

If you are 35-years old and starting from scratch, your monthly contributions would have to be more than twice as great as a 25-year-old’s. Saving $470 each month in your retirement investment accounts over the next 30 years will yield $1 million, assuming the average 10% annual rate of return. Your total contribution over the years would be $169,000.

At 45, if you’re starting from scratch, then your monthly payments will need to be significantly higher. To reach $1 million by age 65 with 10% annual growth, you’ll need to contribute $1,330 a month. Your total contribution will be about $319,000.

As you can see it pays to start early! During your 40’s and 50’s it can be your prime earning time where you make the most money. However what if you get laid off or there is a health issue. Or perhaps you don’t like your boss. Would you not like to have the flexibility to make your own decision regarding when you retire. Start saving now!

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Don’t count on a pension to stay afloat in retirement

January 30th, 2015 ernie Posted in Pension Plans No Comments »

Don't count on a pension to stay afloat in retirementYour 40 years old, have worked for the same company for the past 20 years and expect to retire with a full pension around 55 or 60 years of age. Is this a good assumption to make and can you depend on your company to do the right thing when the economy gets difficult? The sad reality is that layoffs, down sizing, right sizing or what ever you want to call it are a reality for many consumers.Don’t count on a pension to stay afloat in retirement.

When it happens at age 40 or older it can be difficult to recover the same wage level and also prepare for retirement when you have to use some of your savings to get by while you look for a job.This is the reality for many Americans and the answer is that you have to assume that it will happen and plan for it and not count on a pension to stay afloat in retirement. If you are one of the fortunate few that do not get laid off or otherwise lose your job, then the plans you put in place are a huge bonus towards your retirement and will allow you to do far more than you ever planned in retirement.

Don’t count on a pension to stay afloat in retirement

This is a conservative assumption to make for many consumers who have good jobs now, however if you are one of the lucky ones and do get a pension when you retire, then you will be better off anyway since you will have both your pension and savings to rely on and enjoy during retirement years.

If you have not started saving now, start immediately. With the interest and dividends reinvested your retirement savings can add up quickly making you more comfortable as you approach retirement years. Even just knowing that you have the savings you need will give you the confidence to retire early and enjoy life, start a new career or what ever turns your crank and not worry about having to count on a pension to stay afloat in retirement.

Count on a pension to stay afloat in retirement

Here are five rules that will help you on your way to prepare for retirement with or without a pension:

  • Pay off credit card balances each month
  • Pay off your mortgage before you retire
  • Pay off other debt before you retire
  • Never miss a payment on a loan, utility payment or any other kind of payment
  • Put away at least 10% a year towards retirement
  • Live within your income level and do all of the above

If you can follow these rules throughout your life, you will be in excellent shape regardless of whether you receive a pension or not. The best part, you don’t need to count on a pension to stay afloat in retirement, you have independence from your job and you have the freedom to live your live in the manner you wish even if you do get laid off.

Save

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Should I cash out my pension?

May 21st, 2014 ernie Posted in Pension Plans No Comments »

Should I cash out my pension?My company is offering a lump sum payout of my pension. II am wondering should I cash out my pension? The payout is $261,000 and can be rolled over to a traditional or Roth IRA. Will I have to pay taxes on a Roth rollover? If I don’t take the payout, one option is to receive $1,577 monthly in a single-life annuity starting at age 60. I will turn 60 in December and my wife is one year younger. We will continue working until at least age 62. My wife and I currently have $700,000 in retirement savings (mostly traditional IRAs) and plan on working at least another two years. We are debt free except for our home mortgage of $215,000. Should I take the payout or stay with the monthly payment? — Carl

Re: Should I cash out my pension?

The advantage of taking a lump-sum payout is that you retain full control over those assets. And unlike an annuity, you can pass any leftover money to your heirs when you die. But taking the pension in a lump sum also means that you’ll be responsible for managing those assets. Consumers in this situation need to ask themselves whether they want the responsibility and risk of handling this money, or whether they want the certainty that comes with a guaranteed monthly pension. The answer to the question in part depends on how you deal with risk and whether this kind of investment will keep you up at night. Many people will prefer the certainty of an annuity vs. the uncertainty of the stock market.

Life Expectancy and Should I cash out my pension?

One other factor to consider is your life expectancy. If you’re in a great health and feel confident that you’ll outlast the life expectancy used by your pension administrator to calculate your pension, then the annuity might be a better option. However, single-life annuities come with a drawback: that money ceases to be paid out when you die. For that reason, you may  to switch to a joint-and-survivor annuity if you opt not to cash out. Although your monthly payment would be smaller, those payments would continue to your spouse if you die before her.

Consumers should also note that rolling over a lump-sum pension payout to a Roth IRA would trigger taxes on the full amount. Because your tax bracket is probably higher now than it will be when you’re retired, you’re likely to be better off deferring that tax bill for now and rolling your pension assets into a traditional IRA.

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Is your employer pension safe?

December 30th, 2013 ernie Posted in Pension Plans No Comments »

employer pensionMost people would think that this question of whether your employer pension is safe or not would be unthinkable! People who have worked all of their lives and are depending on the employer pension during retirement are more at risk these days than they ever were before. Unions had negotiated pensions for their union members and now retired people are finding that the same companies are not able to fund their pensions.

In unprecedented moves, both public and private employers are raising the alarm bells that employee pensions are at risk and pensioners who have been retired for sometime may experience a 50% drop in their monthly pension checks. This has many people worried and many feel that they may have to go back to work or move in with the kids.

Several governments around the world have cut or reduced pensions and monthly checks to pensioners. In the United States, several cities and states are reducing or eliminating pension checks. The majority of people are still okay in terms of receiving the monthly pension check as we write this at the end of 2013. However as cities go bankrupt State governments experience increasing financial difficulty the only way they can turn is to reduce pension payments to their pensioners. This puts many people at extreme risk in their old age and during their retirement years.

Employer Pension – Diversity

One of the key building blocks for pension plans, and for investors saving money for retirement is diversity. Financial advisors will tell you to never place all of your investment in one company, one stock, or one investment vehicle. Diversity is the only protection you have against a particular company stock becoming worthless and jeopardizing your retirement plan.

The same thing applies to pension plans. Company pension plans should be diverse and should be managed properly but the sad reality is that this is not always the case. As a result more and more people are finding that they should also be planning their own investment strategy where the pension plan is only one part of their income during retirement years.

While it is too late for those people who are retired and in their late retirement years, consumers who are still working and have an opportunity to set aside money for the retirement regardless of whether they expect to receive unemployment pension or not should start doing so now.

Building up savings which can be used during your retirement years provide you with protection and the bonus particularly if your employment pension comes through. Think of it as an insurance plan that will enable you to have the quality of life that you would like to have during your retirement years. There was much less stress on you as well given that you don’t need to worry or be concerned about losing your government pension, your employment pension or your union pension!

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When Should I Take My CPP

October 21st, 2011 ernie Posted in Pension Plans 1 Comment »

When Should I Take My CPPI am turning 60 next year and wondering if I should take my CPP early along with the penalties or should I wait a few years and then take my CPP with less penalties? That is the question that is faced by many people every year and the common theme that I hear is “Take it Now”.  From close friends to financial advisers, they all seem to agree, don’t wait to take your CPP you could be dead early and miss out entirely. But what about the economics of taking it early?

I decided to do a few calculations and this is what I cam up with. If you have suggestions or disagree with this approach , please leave a comment with details in the comment field. This is a pretty common decision that many people are faced with and  there are lots of ideas about what to do regarding taking your CPP earlier than age 65. Comments and ideas are very welcome.

When Should I Take My CPP  – at 60?

Canadians  have always been able to collect their CPP before turning 65 (the earliest you can start is age 60), although there is a penalty that depends on when you start receiving the benefit. As a rule, the pension is reduced by 0.5% for each month prior to turning 65. If you start at 60, for example, you will reduce your benefit by 30%, making it considerably less than if you wait until 65.

That’s the dilemma I faced myself as I approach turning 60 and I am considering the  the pros and cons. As it turns out the math is pretty simple. I assumed that I would start taking my CPP at 60, and would live for 15 years after that. With a 30% penalty my income from CPP would be a total of $133k excluding any increases from indexation.  If I wait until 65, there will not be any penalty when I begin collecting, but I will only collect for 10 years under this assumption. The total is $108k, so obviously I am further ahead if I only collect for 15 years. The breakeven point appears to be 17 years and if I live longer then the delay scenario begins to pull ahead.

Government Changing the Laws

Another factor to keep in mind particularly this year is the the federal government’s announcement last spring that it is bringing in legislation designed to improve the system’s fairness. The legislation was passed in December and the government will be phasing in changes between 2011 and 2016.

Starting in 2012, the penalty to take the CPP early will be 0.6% instead of .5%  a month for each month before turning 65. This move bumps the penalty up to 36%, if you start at age 60.

As well, starting in 2011, the government is phasing in new rules if you delay the benefit after turning 65. The so-called “late pension augmentation” will be increased to 0.7% a month, from 0.5%, for each month after age 65 until age 70. This means you can collect an additional 42%, versus 30% under the old rules, assuming you wait until 70.

In addition, starting in 2012, you will no longer have to stop working, or earn significantly less, to start receiving the benefit.

If your genes suggest that you may live well into your 90’s, then you might consider taking the risk of delaying collection of your CPP, however in my case no one has lived past 80 years of age, so I am taking mine early and the math bears out this decision. If your health is not great, this may be another reason to begin collecting early.

No More Contributions to CPP

There is another  major advantage in that once you start receiving the CPP, you no longer have to contribute to the plan. This means a saving of $2,100 a year, assuming you are earning up to $46,300 in employment income. Over five years this adds up to $10,500 in total savings and if you are  self-employed, the saving is doubled, to $21,000, because self-employed individuals also have to pay the employer’s share of CPP contributions.

Starting in 2012, if you start collecting before 65, you must continue contributing to the CPP. Once you reach 65, you can still make voluntary contributions to the CPP — both of which will increase your CPP retirement benefit.

These are some of the factors that need to be considered in this decision. Mine is pretty simple, but readers should take into account the following:

  • Current health
  • Life expectancy
  • How long you will work
  • Tax consequences and impacts of other income
  • Government plans to phase in changes to the CPP plan

Comments and suggestions are welcome.

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Thanks for A Retirement System

September 7th, 2011 ernie Posted in Pension Plans No Comments »

Retirement SystemWe all love to gripe and groan about the state of something in North America. The government is spending too much money, our health care system is expensive and slow, we are paying more taxes and on and on. Sure some things can be improved and will be improved over the coming years, but we already have such a great system of freedoms and safety nets that we should also be thankful for what we do have. More than half of the countries in the rest of the world do not have the life expectancy, the support systems and retirement systems that you find in North America.

Our Retirement System

Here are 10 reasons why we should be happy with our retirement system and why we should always take the glass half full approach!

1. Better demographics
2. Social Security and Medicare
3. Personal savings
4. Better 401(k) plans
5. More advice, and free money
6. The ability to work longer
7. Longer lives
8. Better health care
9. There is retirement
10. It’s more than money

More Detail about our Retirement System

1. Better demographics – sure baby boomers are retiring in droves and placing a burden on the health system. But this retirement exodus makes way for young people to get jobs and continue the lifestyle we have in the US and Canada.

2. Social Security and Medicare – At least we have some medical care as compared to none. And yes it is expensive and yes it can be drastically improved. But can you imagine a system with no medical care and no support for medical issues in retirement. Some countries are faced with this issue and it is not a pretty site.

3. Personal savings – There are lots of people with insufficient savings for retirement. But many have something and many have enough. We have families that can support us and we are not losing our homes to wars and famine. Many people today have savings or pensions that they will have available in retirement.

4. Better 401(k) & RRSP plans – 401(K)’s are used in the US and RRSP’s are used in Canada as a means of tax free savings. At least we have them and people are placing money in them for their retirement.

5. More advice, and free money – There is sometimes way too much advice out there on the net and in banks and other investment houses. But at least it is there and you have to use your own brains to make sure that you are invested well – The golden rules – Diversify, Go for quality, get Involved.

6. The ability to work longer – Now we can even work longer, past the age of 65 if we want. Some people groan at this idea, while others welcome it as something to do in their retired years and as a source of contact with people, almost a social life for some.

7. Longer lives – We have good food, we have good medical care and we have a safe environment compared to many other countries. We are living longer to enjoy our families and our lives, especially in retirement.

8. Better health care – We probably complain about health care the most, but we have it and we have excellent care when it comes to the serious stuff. We do have to solve the expense side of health care, but compared to not having health care options we are so far ahead of other countries.

9. There is retirement – We take this for granted, but if you plan properly, save your money , there is retirement and you have some of the funds you need to enjoy it. Your own savings should be high on the priority list, but you also will receive some money from the government as well. Enjoy retirement and enjoy every day!

10. It’s more than money – Enjoy the family, enjoy the weather and enjoy your friends and acquaintances. If you have ever had a serious illness, then you will understand that every day is a blessing and we should all enjoy just being alive!

Count our blessings, at least we have a retirement system!

 

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