I recently came across an article in Money Talk Life, a commentary published by TD Bank, and written by Don Sutton. The piece deals with the issue of the timing of beginning one’s pension. Needless to say, there are many financial issues and implications to consider. As with all things of this nature, every individual’s circumstances are different. There is never a “one size fits all” solution. The article is quite long, but I thought that it might be useful to touch on some of the major points raised in it.
For most people, the “default” age for pensions and retirement is 65. However, over the last number of years, that number has been much less hard and fast than it once was. Obviously, there are many options, such as retiring before or after age 65. As well, lifestyle issues come into play, and what financial assets are available over and above the pension clearly come into the equation.
Looking at defined-contribution pensions (and these are becoming more and more common), the pension at retirement is not based on a specific formula, as is a defined-benefit pension, but rather on the investment returns generated by the contributions to the plan over the years. Much of the decision making in cases like this depend on the time horizon involved. If the time horizon is short, it may be better to take the pension early, or at least to move the pension assets into less risky vehicles.
So what are some of the things you ought to be considering in terms of helping you decide what the best timing is for taking your pension?
Well, one of the major things is health. Would that we all had a crystal ball when it comes to this consideration. This is a case where no one can see into the future. That said, it probably makes the best sense to look at averages. Let’s keep in mind that likely people beginning to look at these issues will be in their 50s. The latest figures from Statistics Canada show that for individuals currently 50 years old, men can expect to live to about 81.5 years and women to about age 85.
In many cases, one’s health begins to decline, at least to some extent, in the late 70s. So, keeping that in mind, it may be prudent to plan any extensive travelling earlier on in retirement. All of this involves some detailed number crunching and analysis of various scenarios. If your pension payments are enough to cover your lifestyle needs, you may want to consider taking your pension upon retirement and deferring drawdowns from other sources of funding.
While I know I have just been discussing averages and their importance in making these choices, sometimes it is clear that we are not average. Let’s take a case where you are dealing with some serious health issues in middle age. While it is always important to understand that every situation is different, in such a case it may be better to draw down on other sources of income first, and delay using pension payments until later, depending on health status. In fact, it may be best to take the value of your pension at that point as a lump sum payment, which is called the “commuted value” of the pension.
The article mentions that in preparing retirement plans, the life expectancy they use is 90. At our firm, a few years ago we raised our number from 90 to 95. Doing that provides a bit of a “stress test” on our plans and the fact is that we see many more people living into their mid- 90s than we did even a decade ago. Obviously, everyone has their own planning approach, but we prefer to use age 95 in terms of life expectancy.
The terms and benefits of your pension, and the type of pension you have, will certainly come into play in your decision-making. While we have mentioned defined-contribution pensions earlier in this article, some readers may well have a defined-benefit pension. These have become less and less common in the private sector. This type of pension guarantees a monthly pension payment. It is not uncommon that individuals will have both types of pensions.
And, in addition to that, you may also have RRSP’s or RRIF’s. This would have been most uncommon when individuals often spent their entire working career with one firm, which often provided a defined-benefit pension.
With an RRSP, you can decide to withdraw whatever amount you wish, at whatever time you wish. Keep in mind, though, that all amounts withdrawn are fully taxable as income in the year withdrawn, and there is also a withholding tax applied to withdrawals. One other thing to keep in mind with respect to RRSPs is that they must be converted to a RRIF at age 71. The next year, amounts must be withdrawn annually. The annual amount is based upon a legislated formula. Every case is different, but it is often possible to reduce taxes by looking at one’s situation on an annual basis. We would recommend that you retain a Certified Financial Planner or Registered Financial Planner who will bill you at an hourly rate for these services, in the same fashion that your accountant or lawyer would.
One thing that we find over and over in our practice is that clients just really have no idea at all of what they are likely to be spending in retirement. To be fair, some have a very well thought out approach. But many don’t. And they are hardly to blame. It’s tough to quantify the cost of something that you’ve never done before!
The bottom line is this: pension decisions are very, very important ones. We would most strongly recommend professional advice with respect to any decision-making in this area.
President, HG Partners Limited
Director, Private Client Group &
Senior Financial Advisor,
HollisWealth Advisory Services Inc.
This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth® a trade name of Investia Financial Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth®
HG Partners Limited is an independent company. iA Financial Group and Industrial Alliance companies have no liability for activities outside of HollisWealth®