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Glenn Lowson / The Globe and Mail

The Globe and Mail

At 57, Ted has been laid off from his media job of more than 30 years and is facing a big decision.

"I was planning to retire at 62, when I could start my defined benefit pension at full payout of $2,060 a month," Ted writes in an e-mail. Now he has to decide between a monthly pension and a lump-sum payout of more than $450,000.

Ted's wife, Moira, who is 51, works in the same industry, making about $78,500 a year. She had been hoping to retire at 55 but they have pushed that out to 57. Their house in Southern Ontario is valued at $750,000 and they have no debt.

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They have two children, 19 and 21. The younger will be leaving for university this fall. "We have a daughter starting university in September and have $25,000 coming from our tax-free savings accounts to help her with school," Ted writes. "She will have to pony up for the rest."

Ted wonders whether he can afford to retire now, or will he have to look for another job? They have $50,000 worth of home renovations planned over the next five years, starting this year, and they'd like to travel at some point. Their retirement spending goal is $70,000 a year after tax.

We asked Ross McShane, vice-president, financial planning at Doherty & Associates in Ottawa, to look at Ted and Moira's situation. Mr. McShane holds designations in financial planning, accounting and portfolio management.

What the expert says

After running the numbers through his computer program, Mr. McShane says Ted can retire now if he chooses to. If he finds some work, any extra income will give them an additional cushion for unforeseen expenses, or in the event Moira stops working earlier than anticipated.

Should Ted take the commuted value of his pension?

"This is always a tough decision to make and should be based on several factors," the planner says – longevity, health, whether the pension is indexed, the rate of return on the invested lump sum and "the need to protect the spouse if the annuitant, Ted, dies prematurely."

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In Ted's case, he may prefer to take the commuted value and invest the money, Mr. McShane says. "My rationale is this: The pension is not indexed to inflation; they need a rate of return on their investments of only 4 per cent nominal (or 2 per cent after subtracting inflation), which should be attainable on average over time; the investments would pass to Moira when Ted dies; and Ted would have more control over how much he takes into income each year and the timing of withdrawals." Ted's pension has a guarantee period and a 60-per-cent survivor benefit.

"My analysis suggests that as long as they earn 4 per cent on average, the amount they commute – the lump sum – would only be depleted in Ted's late 90s if he was withdrawing $24,684 (the deferred pension benefit) every year from age 62 on," the planner says.

The plan assumes they will begin collecting Canada Pension Plan and Old Age Security benefits at the age of 65. When Ted is 72 and Moira is 66, they will need to draw about 5 per cent a year from their portfolio to cover the spending gap.

Now, for some tax planning. Ted has $14,920 of unused RRSP contribution room, plus another $20,000 of room based on his 10 years of service before 1996 that can be deducted against his severance under federal tax rules. His income this year will be about $142,000, comprising eight months of salary and $93,000 of severance pay and other one-time items.

The refund from his RRSP contribution will be based on a 43.41-per-cent tax bracket, "resulting in a significant tax saving," the planner says. Both Ted and Moira will be in a lower tax bracket when they retire.

Moira should use up her nearly $60,000 in unused RRSP contribution room in tranches over the next couple of years to lower her taxable income to about $40,000, he says. This will allow her to deduct her contributions in a tax bracket ranging from 29.65 per cent to 31.47 per cent. She should contribute about $30,000 to her RRSP in 2017.

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In 2018, Ted is expected to receive the taxable portion of his pension money ($140,000). The rest will go to a locked-in retirement account (LIRA). The $140,000, along with Moira's salary, will cover their lifestyle expenses for 2017 and still leave a one-time cash surplus of $107,700, part of which could go to their daughter's schooling and house renovations. Starting in 2019, Ted will have no income unless he decides to return to work in some capacity.

"If he doesn't, he should withdraw about $40,000 from his RRSP in 2019 in order to use up his 20-per-cent tax bracket and help cover expenses," the planner says. Ted should delay converting his LIRA to a life-income fund until 2019, when he will be in a much lower tax bracket, the planner adds.

The couple's portfolio (TFSAs, RRSPs and non-registered) is prudently managed on a discretionary basis using individual securities, Mr. McShane says. He suggests they target an equity weighting of 55 per cent to 65 per cent and a fixed-income weighting of 35 per cent to 45 per cent.

Now, what if Moira decides to retire at age 55 rather than 57?

They would lose two years of her salary and pension contributions. The result is that they will deplete their capital when he is 94 and she is 88, Mr. McShane calculates. They would therefore need to downsize their house to cover the gap, spend less or earn more than 4 per cent a year on their investments.

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The people: Ted, 57, Moira, 51, and their two children.

The problem: Facing forced retirement, should Ted take a deferred pension or a lump sum?

The plan: Take the lump sum and invest it.

The payoff: Financial security.

Monthly net income (2017, including one-time items): $14,810

Assets: Chequing account $26,000; his TFSA $82,705; her TFSA $66,020; stocks $37,670; his RRSP $45,240; her RRSP $178,340; commuted value of his DB pension plan $453,000; her defined contribution pension plan $127,290; his defined contribution pension plan $56,865; house $750,000. Total: $1.82-million

Monthly disbursements: Property tax $500; home insurance $80; maintenance $120; utilities $275; grocery store $700; clothing $100; health care $90; cable, phones, Internet $400; entertainment, dining out $300; hobbies, activities $75; travel $500; transportation $310; personal $60; miscellaneous $2,325 (items not accounted for above). Total: $5,835 .

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com. Some details may be changed to protect the privacy of the persons profiled.

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