Michael Zagari

Personalized Pension Planning

This week I worked together with a client who at age 70, decided to retire from a long-standing position with a university based in Toronto. In order to organize his departure, he requested information pertaining to his most valuable asset, his company pension plan.

A few weeks ago, Mr. Client finally received his pension package that included 15 different income options. Yes, that’s right, 15 options with a variety of different provisions and survivor benefits.

Considering that Mr. Client’s pension would represent over 50% of his total retirement income, selecting the right option was important. It was also irrevocable. In other words, Mr. Client’s decision was final and there was no possibility of changing his option in the future regardless of the circumstances. Mr. Client would either live with his decision for the rest of his life or a default option would be selected should he decided to ignore the paperwork process. Either way a decision was going to be made in the next 30 days.

In order to get started with our analysis, we asked Mr. Client to send us a copy of his pension options including his Old Age Security and Canada Pension Plan details. We also wanted to confirm if Mr. Client would be entitled to benefits as a former employee. To be more specific, medical, dental and life insurance which would otherwise be very costly to maintain outside his employer’s plan. Once we obtained all the necessary data, we started to build Mr. Client’s base plan which is a representation of his current financial situation with no intervention on our part. This way we can compare multiple “what-if” scenarios to his base plan and see the direct impact of each option.

After completing our analysis, we successfully eliminated 12 options leaving us with 3 promising scenarios. Either our client was going to take a monthly pension at maximum value but at the cost of his spouse receiving nothing upon his passing. The second option involved a reduced monthly pension but included the 100% survivorship benefit for his spouse. This would mean Mr. Client’s spouse would continue to receive his entire pension until her passing with the estate receiving nothing. The last option involved taking full ownership of his entire pension plan and transferring the accumulated value to a Life Income Fund. With this option Mr. Client would be able to make his own investment decisions, provide a tax-free transfer to his spouse upon his death with the potential of his estate receiving the balance (if applicable) after his spouse’s passing.

In order to narrow down Mr. Client’s options even further, we needed to confirm if he could afford the pension reduction and have the 100% spouse survivor benefit without sacrificing his own lifestyle requirements. In addition, we needed to verify the long-term impact of his cash flow and the tax implications for his spouse since she already had a variety of taxable income sources.

Upon further review we concluded that even with the reduction of pension benefits, Mr. Client would receive more income than he needed to meet his retirement lifestyle needs. By choosing to take ownership of his pension plan we could unlock other interesting features above and beyond the 15 different pension options. One additional benefit would be to elect to have Mr. Client’s income withdrawal requirements based on his spouse’s age who is 5 years younger. In short, we would match taxable income with lifestyle requirements and avoid paying taxes on cash flow not required.

What is this week’s takeaway?

No matter the situation, being aware of the possible outcomes is extremely important and should be reviewed carefully before any major decisions are made. Avoid making decisions on the rush or based on the data that appears on the surface.

Dig deeper because you never know what kind of value you will find.

Have a great weekend everyone!

Talk soon,

Michael Zagari, FCSI, CIM, CIWM

Investment Advisor with Mandeville Private Client Inc.

Financial Security Advisor with Zagari + Simpson

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This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice.

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