Need help with a big retirement decision.

[skyhi]

Greetings everyone, I am new out here so please be nice. P

I am retiring from my job at one of the big three auto manufacturers, and I am unsure of what route I should take to fund my retirement.

I am 52, in good health, single, no kids, house paid for, only $40,000 in rrsp contributions (ie lots of room)

I have 3 options...

1) Take the pension offered by GM (Aprox $3400 per month bridged (ie once i start collecting old canada pension, etc my pension payout gets less so i will always make $3400 and will never take home more)

2) Take the commuted value of the pension ($737,000) to invest myself or through a financial advisor.

3) Transfer the commuted value to a copy cat annuity via a bank or insurance agency (some offering $10,000 cash back)

My thought process... (and struggles to decide)

-I am unsure of the long term stability of GM, thus impacting my pension.
-I believe the market is way over inflated and that the economy as a whole is due for a sizable downturn. (ie I would hate to have my money newly invested only to see it drop 30% or more and then have to rebuild.)
-Transfer the value of my pension to a annuity of say dejardins (who is offering the best rates atm)

Neither my pension nor a annuity would be indexed to inflation and that concerns me greatly.

I am going to sell my house and either rent or downsize (my house will net as much as my pension)

So I am asking for advice on what the best path forward for me would be... What would you do and why? How would you protect your money from inflation, a stock market crash or just play it safe and take the annuity/pension and invest the proceeds of the house? (what form and ratio would your investments take?)

thanks

 

[disneysteve]

Welcome!


What are your plans going forward? Do you intend to stay retired for the remainder of your life or will you be looking for work in another capacity?


What are your anticipated monthly expenses?


Do you have any savings? Is that what the 40K is?



If you sell your house, how much would you likely spend on a new one, or how much would you be spending for rent?


I certainly wouldn't want 700K+ tied up in anything that isn't inflation indexed when you're only 52.

 

[Luvtoride]

Sky hi,
Congrats on being in the position to RE at a young age. It sounds like you have laid out the options well although you are still doing research into the best option to exercise.

Have you gotten a quote yet from any insurance companies as to what type of SPIA they would provide with the lump sum pension GM has offered you. I think you need to compare that to the $3400 monthly amount GM will be paying.

I’m not sure I understand the max $3,400 when you start receiving your federal security payments. Does GMs contributions actual decrease so you receive no more than the $3,400 monthly amount. I assume that wouldn’t be the case with a private SPIA. Like I said, you need to know the actual numbers by the private companies to make a good comparison.

I’m generally in favor of taking a pension annuity vs a lump sum payment to invest on your own. As a 50 year old, at $3,400/ month, the 737,000 lump sum equals about 18 years of payments (realizing this is a present value). If you’re in reasonably good health you could easily expect to collect that amount for twice that number of years if not longer.

As for the viability of GM and their pension liabilities and ability to continue to pay, I wouldn’t be too concerned about that. I’m not familiar with Canadian Pension funding rules but this area is so highly regulated in the US, large companies like GM could not get away with under funding their pension liability for current employees/ pensioners. If GM ends up in financial distress our economy is going to be in very bad shape, IMO.

Best of luck and I’m sure you will lots of good advice here.

 

[travelover]

.........I’m not sure I understand the max $3,400 when you start receiving your federal security payments. Does GMs contributions actual decrease so you receive no more than the $3,400 monthly amount............

I retired from a different MegaMotors, but the way it worked for me was that initially my monthly payout was X+ what my Social Security would be at age 62. When I hit 62, my monthly payout was just X with the assumption I would then take Social Security (which I did not). I, too, worried about the viability of Mega and was glad to front load my payout.

 

[OldShooter]

... I would hate to have my money newly invested only to see it drop 30% or more ...

If market history is any guide, drops have always been followed by recoveries. I think this tends to get forgotten. The proven strategy is to hold enough cash/fixed income that you can go a few years without selling equities into a depressed market. If you do that, history says the recovery will cause your portfolio to, well, recover and grow from there.

I've lost track of the number of dips and recoveries DW and I have seen since our first one in 1987, but we have always stayed the course and never sold equities. It has worked out very well for us.

 

[mboley]

If market history is any guide, drops have always been followed by recoveries. I think this tends to get forgotten. The proven strategy is to hold enough cash/fixed income that you can go a few years without selling equities into a depressed market. If you do that, history says the recovery will cause your portfolio to, well, recover and grow from there.

I've lost track of the number of dips and recoveries DW and I have seen since our first one in 1987, but we have always stayed the course and never sold equities. It has worked out very well for us.

Totally agree with OldShooter. Being afraid of a drop will just keep you nervous enough to miss out on future gains. You didnt say what you had in the market now? I would take the lump sum and invest at least 30% now and the rest in large chunks when you see those drops you think are coming; hopefully you guess correctly. If Dems pass Bidens infrastructure bill I would assume its a good bet the market is headed even higher.

 

[chassis]

Take the commuted value and invest it yourself. You will be better off in the long run but you must have some ability and interest to manage your own finances. If you are not confident managing your finances then still take the commuted value and put it into an index fund or bogleheads three fund portfolio.

The market isn’t overinflated. It never is. The market ebbs and flows. It always goes up in the long run. Pullbacks are part of an investor’s life. Put the money to work in the market.

 

[Dtail]

If market history is any guide, drops have always been followed by recoveries. I think this tends to get forgotten. The proven strategy is to hold enough cash/fixed income that you can go a few years without selling equities into a depressed market. If you do that, history says the recovery will cause your portfolio to, well, recover and grow from there.

I've lost track of the number of dips and recoveries DW and I have seen since our first one in 1987, but we have always stayed the course and never sold equities. It has worked out very well for us.

+1 conceptually, although we do sell some equities each year.

 

[OldShooter]

+1 conceptually, although we do sell some equities each year.

To be clear, we do sell equities too as part of general portfolio management, but never sell into a big dip.

I know, I know, this sounds like market timing but to some degree any decision to buy or sell involves market timing. (Today? Tomorrow? Next month?) If we ever need to sell after a dip, we will try to hold out until a bunch, if not all, of the recovery has happened.

I don't think there is any magic answer to your question about inflation, @skyhi. Our inflation insurance is serious six figures in TIPS. So far (since 2006) that has hurt us in total return but we view that "loss" as the cost of the insurance.

 

[Surewhitey]

I know nothing of a pension in relation to old Canada pension. What I read is that you'll never get more than $3400 for the rest of your life. If you take the lump sum and invest it conservatively & make just 5.5%, that'll give you $3400/mo + whatever old Canada pension gives you.

I'd be curious to know about your current spending history and how taxes affect your options in Canada as I understand the health benefits there costs you a bit of tax $$.

 

[RobbieB]

I typically sell equities after I review the years planned expenses. The state of the market has never played much of a part, more the state of the checking account and upcoming projects, although it's never been like 2008.

If it was it would be time to sell some bonds.

 

[pb4uski]

Not enough to go on. What will your pension be once your old canada pension starts? Needed to assess if the $737k is a fair offer. Do you have any other significant retirement savings?

I don't know about Canada in most countries pension plans are separate from the company... essentially in trust... and the pension plan provides periodic reports on funding adequacy.

If you end up taking the lump sum then you could start with a very conservative AA to reduce your sequence of returns risk and withdaw from the fixed income component so over time your equities allocation will increase with both growth of equities and reduction of fixed income for spending... See https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

I share your concern that the market is over its skis and have been in capital preservation mode for a while now... but a rising equity glide path addresses that concern.

Now all of that said, fixed income is a really challenging area these days too... which is why equites are doing so well in that there is no place else that looks attractive.

 

[RobbieB]

Yeah, buy more bonds when interest is looking to rise?

 

[tmm99]

Welcome!

How are your expenses? Things look very tight to me as you're still young, but maybe you spend very little?

You could input some numbers on firecalc.com and see...

 

[pb4uski]

Yeah, buy more bonds when interest is looking to rise?

Just hold to maturity and no worries.

 

[Sunset]

OP, I'm thinking you don't have enough to retire on, and are retiring too soon.

Are you currently living on $40,800 income and paying income tax, property tax, living expenses out of that ? because retire now and that is what the GM pension would be, and it's purchasing power will be 1/2 that in 25 yrs, certainly not enough.

The $40K in RRSP is tiny (RRSP is like IRA in the USA).

The bridged pension seems to be a bad deal to me, as CPP at 65 max is $1,203 and Old Age Security (OAS) is $626 assuming you lived in Canada after age 18.
Together they are: $1,829 / mo

So the GM pension will pay you only $1,571 /mo at age 65 and because it's bridged, the indexing of the CPP and OAS will cause the amount GM pays to decrease each year. Meaning you don't get the benefit of indexing on what would be over 1/2 of the pension monthly amount.

I cannot even see a way to live off the $737K + $40K (rrsp) to age 65 and collect the CPP and OAS with the remaining money left (around $200K).

Some might think selling the house as it will provide close to $700K, but then the expenses jump a lot, as 1 bedroom apts cost around $1,500/mo and more in Toronto.

Please state your actual expenses, hopefully you have been writing them down for a couple of years, so you KNOW precisely what they are. When I did that, I found some surprises! Without knowing your expenses, it makes for less accurate estimates.

 

[Bamaman]

Let's see. You're a 52 year old single man living in London, Ontario which we Americans would consider to be a high cost of living place. You're living in an average price house, for London, and the housing market has cooled a little recently. You intend to sell the house and either move down in size or rent.

General Motors has offered an early retirement package which will pay $3,400 a month (Canadian dollars) which is about $2720 U.S. dollars per month. You've got the alternative of taking a lump sum of $737K (Canadian) which is $589,600 (U.S. dollars.)

You've not said what your monthly cost of living is, or if you intend to get another job since you're so young. And what about savings and other assets that may supplement the rather marginal income GM's pension would provide? It sounds as if you're rather conservative fiscally, and that you are a little afraid of the future economy.

That said, I'd take monthly stipend and adjust your living expenses to live within your means, even if that means taking on another profession.

 

[DrRoy]

I understand that the bridged pension gives you more money now, but you may be better off to take it unbridged.

 

[ChicagoGal]

I retired in April and juggled the same decision - lump sum or pension annuity. I took a couple of months to think about it, but just this week decided to take the lump sum. My concern about inflation eroding the purchasing power of the annuity over what could be a 40 year retirement outweighed my concern about what dips the market may (will) take.

 

[jojo777]

I retired 6+ years ago in Dec 2015. I had 845k between pension lump sum and 401k. They gave me 100k in severance. I lived quite frugally. I went to work part time and did not touch my money. I now have $1,422k. I'm in the college years now, so I don't plan to touch it for 4.5 more years until I turn 59.5. I am going to do a home equity line of credit next year, only because I want to live a little less frugally and not hurt myself where financial aid is concerned. If I touch my retirement, it will disqualify me from financial aid. I'd take the lump sum again given the choice.

 

[jazz4cash]

I’d say not enough info for me to comment let alone make a decision. Do you have an option to defer starting the pension to increase the payout? I know you may not be comfortable with security of a GM pension but that only affects lump sum vs annuitizing. Is there a govt guarantee like we have in US (PBGC)?

 

[RobbieB]

Just hold to maturity and no worries.

But I've got the bonds to SELL if the market goes south. Which is the only time I would sell. I sell stocks for income.