Its not just a myth the baby boomers were lead to believe though. It's a situation where they simply don't cut back on spending unless there is no alternative; part of this is the fact that people want to retire younger and do more. The other factor is that more and more people are facing a retirement where their mortgages will not be paid off (never mind other debts they have).
Clearly I would have to defer to the experts here but doesn't the retiring allowance only apply to amounts earned before a certain year? I want to say 1997...but that is just my guess.
It was 1995 that the retiring allowance rollover was ended.
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Most financial institutions and IAs preach 60-80% of pre-retirement income as the income you'll require in retirement. However, I think the actualy range is about 50-80% in most cases, or even less than 50%. I think that financial institutions tend to overstate that a bit, for their own benefit. There are lots of people who exist fine on well under half of their pre-retirement income. Every case is different. Many variables determine this. For example, someone who has had a very high income but has traveled lots during their working career (like my neighbour) may have no interest in traveling, and can live on well under 50% if they have modest lifestyle goals.
Getting by on 50% or less of pre-retirement income could be done if your pre-retirement income was quite low. OAS, CPP and some savings will get you there.
Sorry to bump this, but I'm in a similar pension buy and I thought I would consult the collective CP for some ideas.
Questions: For FV calculations, what is a reasonable APR to use. I've been using 4% in my calculation, does that seem reasonable?
2) (Sorry - this wordy - unhide for detail)
Spoiler!
When I'm calculating the PV of my future deferred pension, I am assuming my pension is making a negative return. The company will index the inflation once annually after retirement following this formula: 75% of CPI - 1%. Example: If the CPI was 5% for a year, my pension would be indexed by (0.75*5) - 1 = 2.75%. The indexing has some floors and ceilings - it will always increase by at least 25% of CPI (so in low years, the -1 would not result in a negative index), and the most it can increase is 5%, even if the calculation returns a higher percentage (living with 30% inflation? Sorry, pension is up only 5%).
So given that calculation and looking at the annual CIP for the last 20 years, my pension would be indexed 0.67%. However, looking at the annual CIP for the last 20 years suggest inflation has averaged 2%. So if my average index is +0.67 but inflation is -2%, the rate I'm using in my pension to determine how cash it pays out in the future, I'm using -1.33% as my APR.
tl;dr version = I am using a -1.33% APR for the FV calc of my pension in 2033 dollars, since my pension's annual index increase has been 0.67% but Inflation has averaged 2% over the last 20 years.
3) From there, I'm made a table assuming how long I will live after I start receiving the pension. This is so I can determine the FV in 2033 dollars that I would have to invest to receive the same payment as if I have no pension. Because the 2033 dollars can then be used to back track to the PV of dollars I have to invest in 2011 if I had no pension. I am using an APR of 2% (4% APR - 2% inflation)
Whew
This is all to see when it makes more sense for me to look at taking the lump sum they are offering to move into a LIRA, or if it makes more sense to accept the deferred pension.
Of course, the biggest driver of all of this is the morbid question of how long I plan to live after I turn 60. Based on my current calculations, the pension seems to be the better choice if I live 12 or more years after my pension starts. I live 10 or fewer years after my pension starts, the LIRA lump sum seems better because it is more money than it cost me myself to save money until 2033 to buy the annuity. Living 11 years essentially means one has no advantage over the other.
So my head is spinning, but the basic question I'm asking is whether my investment rates and inflation rates seem reasonable.
Last edited by TurnedTheCorner; 12-19-2011 at 11:08 AM.
Also, I kind of wish I could merely get some cash, but all of my options that toss the pension ensure my account will be locked-up. Any idea if the financial institution can buy something in the LIRA that I could convert into accessible cash without tax consequences? Like, is their something like a RRIF I could buy with it but instead of getting paid now it would supplement my monthly income now or could be drawn upon as needed?
I'm not sure what you're looking for in terms of the income (I re-read this a couple times, but I'm still not sure). Are you looking for something to provide income today or something that will give you income when you are older and eligible to begin withdrawing from the Locked-In Account?
There are definitely options in that latter case, but depending on your age maybe nothing that can be done today.
My options seem to be to leave the money in the deferred pension, or transfer funds to a LIRA for retirement. There seems to be no option to access any of the funds immediately. I as wondering if transactions in the LIRA can be made for different instruments that might free up the money to be available immediately. Either in a lump sum or through supplementing my current income.
I'm not hopeful that anything can be done, but I thought I would ask.
Does a 4% APR for an investment return seem reasonable? 2% inflation rate seem reasonable?
My options seem to be to leave the money in the deferred pension, or transfer funds to a LIRA for retirement. There seems to be no option to access any of the funds immediately. I as wondering if transactions in the LIRA can be made for different instruments that might free up the money to be available immediately. Either in a lump sum or through supplementing my current income.
I'm not hopeful that anything can be done, but I thought I would ask.
Does a 4% APR for an investment return seem reasonable? 2% inflation rate seem reasonable?
Well if the LIRA is a small amount (under the small amount unlocking limit) then you might be able to access that. I can't recall exactly off hand, but I think that is about $14,400 (check that out before you make firm plans if it might apply!). Also if you are over 50 years old for an Alberta pension or 55 for a federally regulated pension you could unlock half of it and gain access that way. You aren't allowed to split up your pension to make an amount smaller to get under this figure, in case you had any hopes of that.
Otherwise there are limited ways in which you can gain access to the funds. Financial hardship (where your annual earnings are less than a figure...again you would want to look this up but IIRC its around $22k). There are a few tests to prove hardship IIRC (not an area I've dealt in very much) and while this is possible you have to qualify.
I don't know of any methods to spin money off from a LIRA and use the cash outside it, other than taking the actual pension at that time or unlocking it as mentioned above.
I couldn't totally say whether 4% is reasonable for a return, but its not outlandish. It obviously depends on what the funds are invested in, but that sounds prudent in the grand scheme of things. 2% for inflation over the longer term sounds a little low. I think that the longer term average is about 3.1% (which isn't going to make things look too impressive based on a 4% ROR and 3% inflation once you decuct the taxes....so maybe that 4% is extra conservative?
Damn you thread resurrectors. I thought this was a new thread, not noticing the date.
It always amazes me that people will get upset when they see the tax hit on a lump-sum payout but not care too much about the taxes they pay all year long on that income.
I'm dealing with a client now who is in the highest bracket in Alberta and will be getting a bonus of approx $50,000. When I tell him his tax hit will be $19,500 he freaks. He wants me to flip it directly into his RRSP to save the taxes. Well, he's paying the same amount of taxes on some of his other income and doesn't seem to care much about that.
Damn you thread resurrectors. I thought this was a new thread, not noticing the date.
It always amazes me that people will get upset when they see the tax hit on a lump-sum payout but not care too much about the taxes they pay all year long on that income.
I'm dealing with a client now who is in the highest bracket in Alberta and will be getting a bonus of approx $50,000. When I tell him his tax hit will be $19,500 he freaks. He wants me to flip it directly into his RRSP to save the taxes. Well, he's paying the same amount of taxes on some of his other income and doesn't seem to care much about that.
Odd that.
Try reasoning with someone about the OAS clawback! Sure its a clawback, but you didn't make contributions at all...it was nevee really your money!
Thanks for the responses Slava. The term "Locked In" didn't give me much hope, but you never know with the way creative financial instruments get cooked up. I'll monkey with the numbers some more and decide what age I can expect to reasonably live until, and then decide from there.
This is always why I didn't enjoy finance. It seems too many calculations and decisions are made based on a rate of return that seems to just come from thin air.
Last edited by TurnedTheCorner; 12-19-2011 at 07:13 PM.
Thanks for the responses Slava. The term "Locked In" didn't give me much hope, but you never know with the way creative financial instruments get cooked up. I'll monkey with the numbers some more and decide what age I can expect to reasonably live until, and then decide from there.
This is always why I didn't enjoy finance. It seems too many calculations and decisions are made based on a rate of return that seems to just come from thin air.
If you want any help or anything feel free to PM me. I could run through some calculations for you as well if you want.
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