Exploring Pension Options

As my regular readers know, a little more than a month ago my wife and I did the unthinkable for the average Canadian. We both quit our cushy full-time, gold-plated government pension jobs near Edmonton, Alberta. Then we sold and gave away 99 percent of our stuff, packed what was left in four suitcases and a few cardboard boxes, and moved approximately 11,000 km to the other side of the globe.

Our Journey

We are just getting settled in south east Asia as I write. It's taken a little adjustment in many ways. We moved from a comfortable, newly built suburban rowhouse surrounded by lush lawns and large nearby parks to an older—but newly renovated—apartment building in the middle of a large Vietnamese city. I've talked about the benefits of downsizing before, and I have zero regrets cutting our living space down by more than one-third once again.

Naturally we are renting. Renting provides ultimate flexibility and is a great way to make sure you are in control of your living expenses. There are no surprise costs, no maintenance fees, nothing. Just the monthly rent and an electric bill. This time our place is furnished (common for expat homes in our area).

We also getting used to the change in weather. Hot and sticky takes on a whole new meaning in south east Asia. There's little relief at night, early mornings are almost as humid as the day, and the smells of a large, developing tropical city hang in the moist air. I'm nearly accustomed now, but the first few whiffs are memorable.

The city environment is completely different here as well. True, nearly unfettered capitalism abounds! Everywhere you walk people are selling things. Fresh flower stalls. Small convenience groceries. A small food menu with a few tables. Large baskets of fruit on bicycles. Haircuts and shaves. There are hawker stalls on the sidewalks and many first floors of homes are converted into small shops and restaurants. The people here are hustling!

The best part is that it's working! In a country that was unthinkably poor just a couple decades ago, the common sight now is a local riding an imported motorcycle talking on a smartphone with a 4G data connection.

But onto the main point of this post: pension options!

The Math Behind Pension Options

While I still haven't received my pension options, my wife received hers. As promised, I wanted to share the numbers since it is my strong position that nearly everyone is better to cash out your pension than to take the monthly payments for life in our current financial environment.

In our particular plans, if you leave the plan early (more than 5 years of service but less than the "85 Factor" for a full pension) you have the option of taking a pension payout for the commuted value of your share in the plan, or leaving the pension in the plan and taking an estimated future benefit at age 55 or older.

I've adjusted the numbers because of privacy. Although I've shared my net worth for years, our pension payouts have a decent sized impact on our net worth. Also, I am currently building a new site where I will no longer be sharing our net worth every month. Instead, I will share my investment returns and let you guess where we stand.

Estimated Future Pension at 55: $485 per month (average of the different options)

Current Commuted Value: $100,000 ($65,000 in LIRA + $35,000 in cash)

Since we qualify a retirement at age 55 to be an early retirement, we need to assume that the future value of the commuted amount should be 25x our annual estimated future pension income. Because a government pension is theoretically highly secure, I would like to see a 30x multiple to be on the safe side.

To calculate our estimated future value, we need to make a few adjustments for tax. First, we will assume that our pension payment at age 55 within the plan will be taxed at 20 percent. Pensions are not very tax efficient and are taxed as regular income (with some splitting benefits).

Tax Adjusted Pension Benefit: $388 per month

This means the future value of the commuted pension adjusted for tax must exceed $139,680. That is the annualized benefit multiplied by 30.

Next, we need to adjust our commuted value for tax liabilities. I believe this is best done in two steps. First, we should adjust the cash portion right away as this is taxable upon payout. The tax charged for a non-resident is a flat 25 percent.

Tax Adjusted Current Commuted Value: $91,250 ($65,000 LIRA + $26,250 cash)

Next, we need to adjust our future investment returns on the cash portion for ongoing taxes. I will make a safe assumption that taxes will reduce returns on this portion by 1 percent annually. If we assume an inflation adjusted return of 5 percent for a portfolio over 27 years, the tax adjusted return on the cash portion will only be 4 percent annually.

Tax Adjusted Future Commuted Value: $318,363 ($242,675 LIRA + $75,688 cash)

Once again, we will adjust for taxes on the monthly income from the future commuted value. We'll assume the LIRA portion will be taxed at the same 20 percent. The cash portion will be taxed lower at 10 percent (capital gains and dividends will form a large part of the income).

Tax Adjusted Future Monthly Benefit for Commuted Value: $728 ($539 LIRA + $189 cash)

In the end, at an assumed gross inflation-adjusted return of 5 percent annually, you will be nearly twice as well off taking the commuted value and investing it yourself. In fact, if you can generate an inflation-adjusted return exceeding 2 percent per year, you are better off taking the commuted value.

As you can probably guess, my wife and I will be taking our share out of the pension plan and investing the commuted value on our own. First, I believe that I can achieve returns exceeding 2 percent annually after inflation. Second, I like to be in control of my own money.

Pension plans around the developed world are going through increasing pressure. Financial benefits are slowly being cut as current pensioners live far longer than expected and didn't contribute enough in their working years. In effect, many pension plans are the definition of a Ponzi scheme. The public pension system is also facing political pressures. I don't know what's going to happen the next time the world's financial markets get rocked in a 2008-esque moment, but I don't want my financial security subjected to the kind of political atmosphere I think may erupt. Taking the money out of the plan is another form of total risk control.

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I Quit My Job (And New Adventures to Come)

Exciting news! Approximately two weeks ago I met with my supervisor and gave him notice that I am quitting my job. I should be officially off the books next week.

The best part... I've got absolutely no new job lined up to hop into and have no desire to work another job. But my wife and I have a new adventure planned for our future.

For the several thousand readers who don't know me personally, I have worked in law enforcement for the past nine years. I've had a broad range of experience in the field, working positions ranging from a patrol officer to traffic enforcement to bylaw enforcement to animal control. This means I've headed up investigations into everything from unsightly properties to serious dog attacks to armed robberies.

The experience of law enforcement was life-changing for me. Some countries have military conscription; I believe prosperous countries should seriously consider encouraging their graduates to serve in law enforcement for a few years. Law enforcement will teach you more about human behaviour than any other career I can think of.

However, after nine years my heart wasn't in law enforcement anymore. I think I am probably too independent for the hierarchical structure of the law enforcement world. While the work can be interesting and I worked with many great people on the front lines, the bureaucracy gets tiresome and the policies and procedures are increasingly inhibiting.

By watching our spending, working hard, and successful investing, my wife and I have built a pretty substantial financial cushion and this is a great opportunity for us to do something completely different with our lives. As I always say, this journey is about freedom.

The Future

While I haven't made any serious efforts to find new things to occupy my time for monetary gain going forward, my wife and I have made plans for a huge shift in our lives.

In August 2019 we will be moving overseas to Hanoi, Vietnam. We hope to live there for several years and use it as a base to discover eastern Asia. We've never been there before; in fact, I've never been west of coastal British Columbia. But we've heard a tonne of great things about Vietnam and Hanoi, particularly from friends who have visited there.

The people are supposed to be wonderful, cost of living is low, and Hanoi has much more comfortable weather than other cities in the region like Saigon, Bangkok, Jakarta, or Kuala Lampur.

On the financial side, taxes on stock investments in Vietnam can be as low as 0.1 percent per sell-side transaction. This means I will change a few things in my portfolio, but my investing should become simpler and much more tax friendly in the long run. However, I will take a bit of a tax hit as I will likely be taking money out of RRSP accounts at some point down the road.

My wife, an elementary school teacher, has taken a position with a prominent American school in Hanoi. She's very excited to work with a new curriculum and enter the world of expat international schools.

Her new school is making the transition to Hanoi extremely easy. With their help we've already secured a furnished apartment, got our visas in order, and are getting a full tour of Hanoi and everything we need to know when we arrive. We are also coming into a community of individuals with similar interests.

Once things get settled (likely in the middle of August), you may see some changes around the blog. I might take up more writing, dive deeper into some of the portfolios I work with, do some consulting, and start a regular newsletter.

I'm always open to new ideas from readers, so please contact me if you have some thoughts on where I should spend my time and further develop the blog.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.