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Retiring Soon? Big Decisions: Commute or Not Commute

You are approaching retirement within the next 5 years and there are huge decisions coming your way.

You have worked so hard over the past 25-35 years and you are wondering what your options are; What should I do? Who should I speak to? What are my options? 

Approaching retirement can be a huge challenge because in many cases the pension is the only nest egg available outside of CPP and OAS. You may have some RRSPs but they are relatively small as the contribution room has been small given pension adjustments over the years. You are wondering how to bring all of this together in a plan that will provide for You and Your Family for the rest of your lifetime.

You have heard through co-workers that you will have options, leave with pension provider and elect a deferred pension payable at say age 58-60 or elect to receive an immediate reduced pension, from the pension annuity that will provide 100% income to you and 60% to your spouse if you die prematurely, on second death, the pension income normally stops, with no value transfer to your children.

You have heard co-workers talk about commuting their value, which is another option most pensions have, but has to be commuted by a certain date, such as your "early un-reduced retirement date" or age 60 in many pensions (these dates are indicated on all annual pension statements), like the Newfoundland Government (Provident 10) Union pensions. Commuted value is the present value of the future series of cash flows required to fulfill a pension obligation. Commuted value is, therefore, the net present value of a future financial obligation. The total pension obligation is a product of long-term interest rates and life expectancy based on mortality tables, and possibly indexing, if your pension is in fact indexed or partially indexed to inflation.  

If you do decide to commute your pension, there are added benefits such as the ability to pass the money after tax is paid to your beneficiaries on second death. There are also other considerations such as replacing your Group Medical Plan. Manulife has great options for this as their Follow Me plan coverage is guaranteed with no medical questions when you apply and pay your first premium within 90 days of your employee benefits ending. Flexcare may also be an option, if you have no pre-existing conditions and their catastrophic drug plan is also great. One last big consideration is personal longevity and the ability to provide an income for your whole lifetime, this is where retirement planning is so important!

There are other options, such as transferring to your new registered pension plan, if the new pension will accept the transfer, taking a refund of the employee contributions, which normally is not desirable unless you only have a couple years working and you have lost your job, for some reason.

Planning is the most important part, see a CFP Professional, who is licensed to provide you with a comprehensive retirement plan, and pay attention to expected rates of return, I can't stress this enough!

It is very important that the investments are set up within your investment objective, risk tolerance and time horizon, In short they have to meet your personal situation. We have to follow stringent rules and codes of conduct on projected rates of return for each different investment type, which are updated annually by FP Canada, this is of utmost importance... Live Life Confidently with a CFP Professional at your side


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