Last week, we looked at the key points of taking the cash value instead of receiving the annuity from your pension. As I mentioned before, if you ever have to make this decision, you have to be very careful as you will not be able to go back and change it. There are a few important points to outline when you take the pension plan:
Life long annuity
This is probably the most important factor when it comes down to a decision; if you keep your pension plan; you have the assurance that you will receive a specific amount for the rest of your life… Unless your employer is a carmaker. This is probably the trickiest question you have to think about: Will your employer keep the capacity of paying all these annuities? Depending for who you work for, this can be an easy or a really though question to answer. However, if you have a doubt, maybe that cashing in your pension plan would be the best decision.
Annuities a usually adjusted according to the inflation rate
This is a half true statement. Most annuities will increase from time to time but only to match a part of the inflation rate. Most of them won’t follow the CPI. For example, several annuities will increase at the rate of inflation minus a few points or 50% of the inflation rate. Therefore, don’t think that the $45,000 you receive today from your pension will worth the same amount in 15 years.
What happen if you pass away?
Imagine that you retire at 60 and die at 62… life sucks sometimes! In this situation, your spouse would only receive 50 to 60% of your pension. While the fact that you are not alive anymore will help decreasing your spouse budget, other expenses (rent, mortgage, taxes, utilities, etc) will stay as is. There will probably be missing a few thousand from your pension anyway.
It is easier to plan your retirement
When we do financial plans for client, it is always based on market yield assumptions. If we appear to be dead wrong in our rate predictions, our clients will get a very bad surprise at the age of 80! On the other side, when you project an annuity in time, you know exactly how much the client will receive in 30 years from now. In fact, the only risk to take into consideration is the financial situation of the employer.
Annuities are not flexible
While the interesting side of the annuity is that you receive a stead income flow established for life, there is no flexibility in regards to the payment. Therefore, you are stuck to wait after your check months after month. While it may seem like a disadvantage, I would say the opposite. You can cash in your RRSP’s at anytime of your life but if you withdraw too much money early in retirement, you will be missing money later on.
Not convinced yet about which of cashing you pension plan or taking the annuity is the best choice? The next post of this series will outline the main advantages and disadvantages of each option. However, the best move you could do is to meet with a financial planner before you make your decision 😉
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