Monday Reading: Lump Sum Payment Edition

Last month I wrestled with my pension decision and opted to take the lump sum (commuted value) rather than a deferred pension at age 65. That decision meant forgoing a ~$15,000 per year pension in retirement. Instead, I would receive a $290,000 lump sum – $134,000 in a locked-in retirement account and the remaining $156,000 paid in cash.

I received the lump sum cash payment on Friday. It’s strange to see more than an entire year’s salary ($110,500 after taxes) deposited into your chequing account. Fortunately, I’m a disciplined budgeter and have already mapped out a spending plan for the rest of the year.

First, I sent $30,000 over to my Wealthsimple Trade account to fully max out my available TFSA room (finally!). Next, I sent another $3,700 over to Wealthsimple Trade to max out this year’s available RRSP contribution room. I’ll use the funds to add to my holdings of VEQT in both my RRSP and TFSA.

The funds for my LIRA have not arrived at TD Direct Investing yet, but when they do I’ll also purchase VEQT in that account and hold it there until retirement.

The other major change for our finances this year is that we’ll no longer have to withdraw from our small business account to meet our spending needs. We had planned to pay ourselves dividends, but instead any income earned this year will remain inside the business account where it is taxed at a lower rate.

Speaking of business income, it’s been surprisingly steady this year despite the disruption caused by COVID-19. While web traffic and advertising have slowed by 30 percent or more, I’ve been busier than ever with freelance writing and my fee only financial planning service. It’s good to have multiple income streams.

Finally, we’re resigned to the fact that we’re likely not going away this summer and so we want to make the most of the time we spend at home. We’ve purchased some new patio furniture and spent the weekend cleaning up our backyard. We’d also like to buy a hot tub and so we’re exploring our options there. 

Don’t think we’re splurging just because there’s a large lump sum in our chequing account. Instead, I think of it as using our travel refunds to invest in our stay-at-home experience this year and beyond.

This Week’s Recap:

I managed just one post here this week when I looked at changing investment strategies after a market crash.

This post remained incredibly popular – the top ETFs and model portfolios for Canadian investors.

Over on Young & Thrifty I wrote about how to invest in oil through stocks and ETFs.

I also looked at borrowing to invest when the market is down.

Promo of the Week:

I’ve been catching up with some the recent changes at Willful Wills – the online platform where you can create a will for as little as $99. I initially reviewed Willful Wills two years ago.

They still have the same the pricing plans – $99 Essentials (just a will); $149 Premium (will an 2 Power of Attorney documents); $249 Couples (will + POAs for two people).

Willful is now available in seven provinces (Ontario, BC, Alberta, Sask, MB, NS, NB).

They’ve added the ability to account for pets (assign a pet guardian + leave money for their care), and added a charitable giving feature (ability to leave a $ amount to a charity, and ability to leave a % of your residual estate to charity).

Willful has created more than 20,000 documents since launching in 2017. They’ve also given out over 1,300 plans to frontline healthcare workers during COVID (healthcare workers can apply here), and are currently offering a free printing/shipping offer.

While the law still doesn’t allow for digital signing, witnessing, or online storage of wills or POAs, Ontario’s new emergency order does allow for virtual witnessing – and Willful has launched a partnership with Notary Pro to help Willful customers get their wills virtually witnessed (and we’re watching legislation in other provinces hoping they follow suit).

Whether you’re creating your first will, or need an update, be sure check out what Willful has to offer.

Weekend Reading:

Michael Batnick answers the question, why aren’t stocks down more? I’ve been hearing that a lot lately.

Even a common sense investor like Ben Carlson has a stock picking side. Here are some crisis investing lessons learned from his fun portfolio.

Here’s Millionaire Teacher Andrew Hallam on financial experts trying to time the market:

“If you sold some of your investments because you think stocks will fall, you are thinking like a hedge fund manager. If you have suspended your regular investment contributions while you wait for the markets to stabilize, then you are thinking like a hedge fund manager. If you have money to invest but you want to wait for stocks to fall even further, you are thinking like a hedge fund manager.”

How are your investments protected? This MoneySense article explains the role of the CDIC and CIPF, and breaks down the different kinds of protection each offers.

Here are two conflicting views regarding when to take CPP. (I recommend deferring CPP to age 70):

  1. Jonathan Chevreau reconsidered when to take CPP benefits amid COVID-19 risk and elected to take it at 66.
  2. Rob Carrick argues that the pandemic makes it even more sensible to delay the start of CPP retirement benefits.

The Alberta Investment Management Corp (AIMCo) made a $3 billion blunder with a volatility trading strategy (options and derivatives):

“It’s not very hard to lose $3 billion selling volatility,” said one quantitative hedge fund manager who frequently trades with the likes of AIMCo. “You’re doing stuff that has a minus-infinity potential outcome.”

Check out this podcast interview with Millionaire Teacher Andrew Hallam on whether you should try to time the stock market.

In his latest Common Sense Investing video, PWL Capital’s Ben Felix explains why the stock market is not the economy, and the economy is not the stock market:

Worried about your RRSPs tanking? Michael James on Money says, so is the Canada Revenue Agency.

An incredibly brave post from Kind Wealth founder David O’Leary, who shares how he filed for bankruptcy at age 25.

Finally, this powerful piece in the New York Times is worth a read: My restaurant was my life for 20 years. Does the world need it anymore?

Have a great week, everyone!

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12 Comments

  1. David_TO on April 27, 2020 at 1:39 pm

    Hi Robb,
    Your post is nicely timed as I am suddenly in a similar situation. I’m 59 and facing an immediate early retirement with a lump sum severance payout of 50% now and the remainder spread out until I reach 65. I would like to keep investing (my overall portfolio is down about 20%) but now I need the security of a retiree. I may or may not return to the workforce. Fortunately, I have a good DB pension and enough savings to draw on that we’ll be comfortable. Instead of VEQT, would VBAL be better option? I’m also glad to learn about Willful Wills. My three year plan to become retirement-ready has just been thrown out of the window so now I have to catch up quickly.
    Thanks!

    • Robb Engen on April 27, 2020 at 4:41 pm

      Hi David, sorry to hear about your sudden early retirement. It’s difficult to say what would be a risk appropriate portfolio for you without knowing all of your details.

      VEQT is 100% equities and so it is not suitable for someone so close to retirement unless you had other immediate sources of income to fund your spending. VBAL represents the traditional 60/40 balanced portfolio and may be more appropriate.

      Again, I’d caution that you also need a plan for income in the short-to-medium term that does not rely on withdrawing from the equity portion of your investments.

      The goal is to strike the right balance between immediate and long-term needs.

  2. CR on April 27, 2020 at 3:37 pm

    Was your payout locked in as of your date you left your workplace? I thought I read that the current bond rate is making commuting values sky rocket right now.

    • Robb Engen on April 27, 2020 at 4:43 pm

      Hi CR, the payout amount was locked-in as of early January. It was much higher than I had anticipated ($291k compared to what I was guessing would be around $225k), but you’re right that the valuations have surely increased from there.

      I read that some pension providers were freezing the option to take the commuted value at this time to protect the health of the pension. Fortunately this was not the case for me.

  3. Richard on April 27, 2020 at 4:10 pm

    Robb,
    I wonder about the wisdom of you investing all your LIRA money in VEQT, which, last time I looked, has an annual dividend yield of about 1.6%. Assuming you’re 40 years old or thereabouts, by not investing that money in some dividend-paying blue chip equities that have 4 to 6% annual yields, you’re loosing out on 25 years or more of significant dividends. Sure, invest in VEQT for some other kinds of accounts, but maybe reconsider for your LIRA.

    • Robb Engen on April 27, 2020 at 4:49 pm

      Hi Richard, VEQT holds many thousands of stocks from all around the world, including ones that pay high dividends, and ones that don’t (Shopify being a great example).

      I’m not investing for income, I’m investing for total return. The best and most reliable way to do that is to invest in a broadly diversified portfolio of index ETFs (like VEQT).

      I understand the appeal of investing in dividend stocks (I used to do it myself), but there’s nothing magical about dividends and there’s no evidence that supports dividend paying stocks outperforming the broader stock market.

      I can’t predict which stocks will outperform over the next 20+ years. That’s why I just buy every stock in the world (through VEQT) and capture the returns of the global stock market.

  4. Mark on April 28, 2020 at 4:59 am

    Why didn’t you shelter some of the cash payment from taxes by using your available RRSP contribution room? You just needed clearance from CRA (one form) and the funds you deposited to your RRSP would have gone directly there without the withholding tax. Even though you didn’t have a lot of room, you still would have saved some money.

    • Robb Engen on April 29, 2020 at 9:19 am

      Hi Mark, in short I didn’t know how much RRSP room I’d have since I had to make this decision prior to filing my taxes. I knew it would be around ~$3,000 but I guess I was too lazy to take the extra step to find out and then fill out the appropriate form. Point taken, though!

  5. Stacy Norman on April 28, 2020 at 8:31 am

    Hi Robb,
    I retired two years ago a week before turning 50. I had a 10-year plan that involved pulling my pension in a lump sum. My wife is a teacher and has a very good Defined Benefits Pension (she retires in June at age 54). I had a significant amount of cash left over after maxing out my RRSP. One of the strategies I employed was leveraging a Flow-through fund to minimize my taxes on the lump sum cash payment. Essentially it is a decades-old tax mechanism that turns any amount invested from taxable income to taxable capital gains. It, however, comes with risks as the investments are typically related to natural resources exploration, so you really only want to leverage this for monies that are sitting in the highest tax bracket. So from that perspective, it works well with large lump sum payments. I did plenty of research and found one that I was comfortable with past performance and current management. Recently it was just rolled over to a mutual fund the final step of the flow-through process. Projecting Capital gains tax, I will have saved about 25% in taxes. Food for thought!

    • Robb Engen on April 29, 2020 at 9:28 am

      Hi Stacy, thanks for sharing your experience with flow through shares. It’s an interesting scheme, but it goes against my general rule – which is to not let the tax tail wag the investment dog. I also don’t like the idea of my money being locked up for two years in a risky oil & gas venture.

      I mean, I get the tax savings aspect, especially at the highest marginal rate. I’m fortunate in that I could rearrange our finances so that we would have no other income when I took this large lump sum payout.

  6. Twyla on May 2, 2020 at 9:27 am

    Hi Robb,
    I wonder if your decision to take a lump sum payout of your DB pension had anything to do with the management of the fund by AIMCo?
    Would you advise others who are paying into LAPP to consider pulling their commuted pension out due to the poor fiscal ideology that is directing AIMCo (the AB gov’t & finance minister)?

    I’m employed by AHS but not in a union anymore and I have some serious doubts about the investment direction taken by AIMCo in recent months. Just wondering if that had any effect on your decision to take the lump sum rather than the defined benefits later in life.

    Thanks!

    • Robb Engen on May 2, 2020 at 4:36 pm

      Hi Twyla, to be honest I didn’t think it was a concern who managed the pension fund until the news about AIMCo taking over the teacher’s pension came to light. A bigger concern for me was that the plan’s solvency ratio is only around 57%, meaning it can’t cover the expected liabilities at this time.

      I’m not sure what the solvency ratio of the LAPP is, so I’d definitely look into that to help measure the overall health of the plan.

      I definitely hear your concerns about AIMCo’s poor investment decisions. That said, I couldn’t give blanket advice to pension members to stay or leave because the decision is highly personal and depends on so many other variables (as discussed here: http://boomerandecho.com/my-pension-decision-deferred-pension-or-commuted-value/)

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