My total cash assets are approx 585k; I have no debt, but neither do I have other assets (ie property, car, etc). I have very low rent and live within my means. My money is held about 1/2 in RSP, the balance in USD and CAD accounts, currently 75% of total in various investment vehicles (pref'd shares, corporate bonds, reits and such - pretty conservative).

My employer provides an indexed, defined benefit pension that will likely pay about 900/month when I am 60. I have to decide when I quit, whether I want to wait and collect that, or withdraw the pension amount (115k). I could add it to my current investments and live off the investment income.

Which is the better plan?

  • 1
    Can your rent increase? – Pete B. Apr 28 '17 at 12:59

Defined benefit pensions are generally seen as valuable, and hard to replace by investing on your own. So my default assumption would be to keep that pension, unless you think there's a significant risk the pension fund will become insolvent, in which case the earlier you can get out the better.

Obviously, you need to look at the numbers. What is a realistic return you could get by investing that 115K? To compare like with like, what "real" investment returns (after subtracting inflation) are needed for it to provide you with $10800 income/year after age 60?

Also, consider that the defined benefit insulates you from multiple kinds of risk:

  • investment risk: your own investments may not perform well enough to provide the same benefit.
  • inflation risk: this is sort of connected to investment risk, but worth thinking about carefully in itself. If inflation jumps up, would your investments also perform well enough to offset that?
  • mortality risk: you live longer than average.

Remember that most of your assets are outside the pension and subject to all these risks already. Do you want to add to that risk by taking this money out of your pension?

One intermediate strategy to look at - again for the purposes of comparison - is to take the money now, invest it for 10 years without withdrawing anything, then buy an annuity at age 60. If you're single, Canadian annuity rates for age 60 appear to be between 4-5% without index linking - it may not even be possible to get an index-linked annuity. Even without the index-linking you'd need to grow the $115K to about $240K in 10 years, implying taking enough risks to get a return of 7.6% per year, and you wouldn't have index-linking so your income would gradually drop in real terms.

  • Note that the annuity quotes probably aren't for indexed payments. The op says the DB plan is. That means even more money is required. – brian Apr 30 '17 at 14:54
  • @brian, no I was checking for indexed payments. I'll edit to make that explicit. – GS - Apologise to Monica Apr 30 '17 at 15:01
  • Tell me where, I've never seen an indexed annuity quote for Canada. – brian Apr 30 '17 at 15:03
  • @brian sorry, was just checking my source (lifeannuities.com/annuity_rates) and you're right. I must have misread something. I did find something that indexes at 2% but that's not really proper index-linking. – GS - Apologise to Monica Apr 30 '17 at 15:05
  • Note that unless it's a great DB plan, the indexing may be partial as well. Mine is 1/2 cpi. – brian Apr 30 '17 at 15:06

I would say that it depends. If you have to do it now, or in the near future, I would keep the pension, as I think the current market is overpriced and approaching bubble status. (And, to interject politics, because I'm pretty sure Trump will screw it up before too long.) If you can take the money out and invest after it crashes, though...

Though I'm sure that some people will object to this as market timing, I had a similar opportunity in '09. I took the money, moved it into an IRA invested mostly in index & international funds, and have been quite satisfied with the result.

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