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Best Financial Decision Ever ?

Whilst wandering through my massive archive of older articles, I tripped across Take the Money or Leave It? I wrote it a month after I got laid off from Nortel. Somehow, this ended up showing the Best Financial Decision I ever made ? Well it certainly looks to be the case. I have a retirement, path to victory.

best decision
Image courtesy of Stuart Miles at FreeDigitalPhotos.net

In that article I mused the following interesting question (remember this was 2008 during the great crash):

The options I have are:

  • Leave the money in my former (or soon to be) employer’s pension scheme and start drawing from it at either age 55 or later.
  • Take the money out and put it into a Locked In Retirement Account (LIRA), or at least the portion that the government allows.

As background my current employers pension plan is under funded, by a fairly large amount. I also have passed a point, so that I can draw from the pension when I am 55.

Thanks to Mrs. C8j, Michael James and a little common sense on my part I ended up doing the second option and it was the best financial decision (read luckiest)  I ever made due to the fact that:

  1. Nortel’s Pension plan was even more under funded than anyone knew and it had serious issues and effectively collapsed. I kept hearing that the Ontario Government had “insurance” to back up the pension, but given the money I took out that “insurance” would not have covered the amount I should have been paid. “There is no way the government would let Nortel and/or its pension fail”? I think we know what happened there as well.
  2. The money I received went into an LIRA in December 2008. This was when stock prices were the lowest, and it grew a great deal, until I took it out to buy into my current employer’s pension plan. Blind luck and no great “market timing” strategy on my part. It was simply me needing to buy, luckily when the market is lowest.

Best Financial Decision Ever?

Many financial decisions cannot be evaluated immediately. Sometimes it takes a while to realize it was the best decision, or a massive blunder.

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Is Pension Income Splitting a good thing?

Let me preface this by stating that I think Canada should adopt a combined family income model for taxation. In this model spouses could combine their income and then income split on the basis of that. As part of my retirement plan, I hopefully, will be able to use Pension Income Splitting (from T1032, joint election of split pension income).

Pension income splitting has been around for over 10 years. So far no government has tried to curtail the use of this tax avoidance tool. Who can use this powerful tool? Only couples with pension income, or pension-like income vehicles, and typically these couples will have one spouse that has a higher rate of income.

How does Pension income splitting work?

The arithmetic involved is quite simple: I can give up to 1/2 of my entire pension income to my wife and have it taxed at her rate of taxation. While this might raise my wife’s tax bracket, it will lower mine as well. My current estimates show that I might save up to $600 a year by pension income splitting.

The program is quite simple, all I need do is fill in the form T1032 when I submit my taxes. I can then opt out the next year, by not submitting that form in my taxes. Splitting your CPP income with your spouse is much more complicated (but can be done as well).

Pension Splitting

Pension Income Splitting is Bad For Canada?

The C.D. Howe institute has published a report that claims that income splitting will, “… infect your soul, curve your spine, and keep the country from winning the war…” (to paraphrase George Carlin). I am not sure exactly why there is a big hate-on for this program, as you can do similar things if you create a Spousal RRSP (but you have to do that far in advance of your retirement).

The major reason I can take advantage of this program is that my spouse has a small pension. If we both had the same income level, pension income splitting would make no sense.

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Now I’m Fifty Five

Many years ago, I turned fifty-five and thought I should mention it to everyone. I am now much older but still not a full-fledged senior citizen.

I can start collecting CPP (at a considerable discount. It is possible to retire with my pension from work (at a significant discount). There are even discounts at a few stores and restaurants.

Fifty Five
Fifty-Five

I have seen the world change dramatically over these years.

When I was a kid:

  • Banks were only open from 10 to 3 PM Monday to Thursday and opened Thursday night 6-8 PM and Fridays were open until 5:00 PM. Oh and there were no ATMs, those only started appearing when I went to University (remember the Johnny Cash Machine). Hence when someone wasn’t working all their hours in the office, the nasty remark you could make was “Sam works Bankers’ Hours“. Now that would mean Sam is working a lot of overtime. You don’t even have to go to the bank any more!
  • I applied for my first Credit Card and was turned down!
  • My first job was as a Paperboy and I collected payment every week, door to door. I delivered telephone books as a summer job.
  • The first few TVs my family owned were Black and White, and the first colour TV we had was leased from Granada.
  • My brother brought home his first computer in 1977 (I think), it was two boards with a 4 Digit display (I think it might have had 2K of memory). Later my Dad bought the family a VIC-20 and we played Pong (and the Sword of Fargoal) and thought it was great.
  • I got paid with an actual Cheque, that I had to take to the bank (which wasn’t open often (remember)).
  • I had to apply (and got turned down once) for a cheque payment card at Loblaws (so I didn’t have to carry cash to pay for my groceries).
  • My first mortgage interest rate was 14% and we locked in for 5 years because that was cheap.
  • I carried a dime around in case I had to make a phone call on a pay phone.
  • At my job when I was on-call I carried a pager, and I had a special device that held 8 quarters in case I had to call into work (on a pay phone).
  • It used to be normal to have someone pump your gas, there were Milkmen who delivered milk to your house, and there was even Mailmen who delivered Mail.
  • Long Distance phone revenues used to be the backbone of the telecomm world, now it is free. Remember waiting to call your mom until after Saturday noon until Sunday at 6 PM (so you got 67% off).
  • Entire technologies have gone by the way side:
    • VHS Video Tape rentals and Blockbuster, 8-track tapes, Audio Cassettes (remember the mixed tape?).
    • The AOL CD Coaster, but remember AOL still exists (and people are still paying for it).
    • The Pet Rock came and went
    • The entire Y2K thing
    • Direct Film, where you could get the film in your camera developed in 24 hours? How about film cameras?
    • Furbees came, went and came back

Yes, the world has changed dramatically in the past 55 years.

OK, all you other “end of the Baby Boomers” crowd, what other fun financial things did I miss from yesteryear?

More Birthday Ideas

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My Biggest Purchase Was Not A House

The epiphany about my biggest purchase only hit me a while ago. I was chatting with some co-workers about purchasing houses. Yes, I bought my house last century, so the price was not nearly as high as the prices are. My biggest cash outlay, however, was about 33% more than what I paid for my house.

Biggest Purchase
Now THAT is a big purchase

Just to be clear, the most significant purchase was not a house, a holiday home (i.e. cottage) or any real estate.

If you guessed it has something to do with retirement, you are correct. I had not put that much money into my RRSP (nor did I have an RRSP that was that large). Thanks to the Pension adjustment I was unable to do so.

When I left Nortel, I was lucky enough to have been at Nortel long enough that my pension was worth a large amount of money. Thanks to my wife and Michael James, I luckily removed my money from the Nortel Pension before Nortel declared bankruptcy. This left me with a very large Locked in Retirement Account (LIRA) and a smaller RRSP. I then was able to buy into the Federal Civil Service Pension.  When I bought into the pension, I paid for all of the pension. It was for the period that I was allowed to transfer from Nortel. This is a program called Pension Buyback or Service Buyback.

This means that even though I have a federal pension, I paid for most of it, and this was my biggest purchase. More precisely, my defined benefit pension from Nortel paid for it.

The interesting part of the story is that the only reason I was allowed to buy into the Government pension was:

  1. I started working for the government within two years of leaving Nortel.
  2. Nortel’s pension is an “accredited pension plan” that the Government recognizes. The Government allows for transfer of funds and time from it into the Government Employees Pension plan.

I was very lucky that I qualified for part (1) of that statement (i.e. joined government within two years after being Laid off from Nortel), so again I fall bass ackwards into a good decision.

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Are Employer Pensions in Canada Dying ?

Stats Canada published an interesting study on Pensions in 2014, entitled, “Pension plans in Canada, as of January 1, 2014 “, and in it was the great news that more Canadians (total) have pensions (from 2012 to 2013). (Remember I did ask Do you have a Pension?)

Looking at all sectors and all types of pensions, 169 more Canadians had Pensions from 2012 to 2013 (no, that is not in hundreds of thousands or thousands, it is 169). For all intent and purpose, there was the same number of folks with pensions. However, the types of pensions that they have has changed a fair amount.

  • 20,868 fewer folks in Defined Benefit Pension Plans
  • 6,428 more folks in Defined Contribution Plans
  • 14,609 more folks in Hybrid Pension Plans, where Hybrid means, “Other plans include plans having a hybrid, composite, defined benefit / defined contribution or other component.

So what does this really mean? I think the idea of the work-related pension is changing (some might say becoming extinct, but maybe not just yet), and most folks (the next generation after me) are going to have to take care of their own retirement savings. I was lucky enough to fall into a pension, but unless you work for the government (or a bank) you are unlikely to have a classic pension plan (private-sector pension plans are down 0.2%).

This explains why you have some folks (like the Ontario government) that think that folks need to have more retirement savings, and they are going to impose it on you (with the proposed new Ontario Provincial Pension), whether you want it or not.

What is interesting is in the mid-90 folks at Nortel wanted out of the Pension Plan (a defined benefit program at the time) because it was screwing up their ability to put money in their RRSPs. Many thought they weren’t going to stay at Nortel their entire career.

Is the idea of a company pension dead? Opinions, dear reader?

Registered pension plan membership, by sector and type of plan

From this page at Stats Canada

 201220132012 to 20132012 to 2013
 numbernumbernet change% change
All sectors: Total6,184,9906,185,1591690.0
Males3,092,4793,108,76216,2830.5
Females3,092,5113,076,397-16,114-0.5
Defined benefit plans4,422,8384,401,970-20,868-0.5
Males2,053,0602,044,367-8,693-0.4
Females2,369,7782,357,603-12,175-0.5
Defined contribution plans1,030,3191,036,7476,4280.6
Males616,941625,1658,2241.3
Females413,378411,582-1,796-0.4
Other plans1731,833746,44214,6092.0
Males422,478439,23016,7524.0
Females309,355307,212-2,143-0.7
Public sector3,179,3123,184,2764,9640.2
Males1,183,0461,185,4862,4400.2
Females1,996,2661,998,7902,5240.1
Defined benefit plans2,995,7713,002,0686,2970.2
Males1,104,5911,107,3822,7910.3
Females1,891,1801,894,6863,5060.2
Defined contribution plans146,290143,034-3,256-2.2
Males60,74959,493-1,256-2.1
Females85,54183,541-2,000-2.3
Other plans137,25139,1741,9235.2
Males17,70618,6119055.1
Females19,54520,5631,0185.2
Private sector3,005,6783,000,883-4,795-0.2
Males1,909,4331,923,27613,8430.7
Females1,096,2451,077,607-18,638-1.7
Defined benefit plans1,427,0671,399,902-27,165-1.9
Males948,469936,985-11,484-1.2
Females478,598462,917-15,681-3.3
Defined contribution plans884,029893,7139,6841.1
Males556,192565,6729,4801.7
Females327,837328,0412040.1
Other plans1694,582707,26812,6861.8
Males404,772420,61915,8473.9
Females289,810286,649-3,161-1.1

Source(s):

CANSIM table 280-0016.

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