Reply Wed 12 Dec, 2012 10:21 am
This is a question about pensions. I'll start with background and then pose my question.

I left my position to do a PhD. In this previous position I had accumulated an employer sponsored pension that is now valued at $50,000. I have been given three options for what to do with the pension:

1) Purchase an annuity that begins payments at age 60 at 312/month. Payments are reduced at age 65 to 234/month and continue until I die.

2) Purchase an annuity that begins payments at age 50 at 174/month

* Options 1) and 2) come with dental and health benefits and annuities are indexed to inflation.

3) Accept a lump sum payment of $50,000. $30,000 must enter an RRSP. $20,000 can be paid in cash but is considered taxable income.

* Option 3) does not include dental and health benefits.

I am deciding between 1) and 3). I am in good health so I don't expect to die before age 65, hence option 2) does not seem sensible. Health and dental benefits are not deal breakers.

Our (spouse and I) initial take is that Option 3) is the front runner. It allows us to balance our goal of having long-term retirement savings with the ability to drastically reduce our debt load. Using the 20,000 (less taxes) to pay debts would free up cash, which we would use to increase our mortgage payments and invest in short-term savings vehicles.

My main questions are the following. How much am I giving up in potential retirement income by foregoing option 1) in favor of option 3)? What annual rate of return would be needed on my RRSP portfolio to ensure that $30,000 invested today is equal in value to the annuity offered under option 1)?

Any help offered is much appreciated
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