Should we take a buyout that amounts to a lump sum payment or should we take lifetime pension payments 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. Many feel better about managing their own money. They feel good about 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
• Payments stop if you die
• There is no inheritance for your children

Lump Sum Payment

• Pay a lump sum into a registered plan
• You have control over the investments
• You also have control over how much is withdrawn
• Withdraw money for an emergency
• 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. Make the right decision for your situation and risk tolerance.

My company is offering a lump sum payout of my pension. I am wondering if I should 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 for 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 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 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.

Most people would think that this question of whether your employer pension is safe or not would be unthinkable! People have worked all of their lives. They depend on the employer pension during retirement. They are more at risk these days than they ever were before. Unions had negotiated pensions for their union members. 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. Employee pensions are at risk. Pensioners who have been retired for some time may experience a 50% drop in their monthly pension checks. This has many people worried. 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 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. 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 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.

The same thing applies to pension plans. Company pension plans should be diverse. They 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 investment strategy. The pension plan is only one part of their income during retirement years.

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

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

I 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 fewer penalties? That is the question that is faced by many people every year. 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 came 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. 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 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 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.