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December 16, 2019 | Banker Angst

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The finance minister says it’s all okay. Canada will be a northern paradise. The best employment picture in the G7. Only Andrew Scheer will lose his job.

But Susan isn’t so sure. She’s not buying the everybody-gets-a-pony message in this week’s economic update. In fact as a banker, she’s scared. The finance sector layoffs have already started after a disappointing set of earnings for the Big Six. And, as you know, the banks want to dismantle their costly and elaborate web of physical locations, shedding front-line workers and forcing customers to find an ATM or go online.

(This is precisely how I obtained my sweet little stone BMO branch – so there is an upside…)

Bank of Montreal just announced that 5% of its workforce, or more than 2,000 people, will be laid off. RBC’s chief exec is warning of a few rough years. The fintech industry is snapping at the bankers’ heels. And loan loss provisions are up sharply – more than 50% at the CIBC and a third at TD and Scotia, for example.

Susan has some serious questions, therefore. But wisely prefaces them with a MSU.

If it wasn’t for your wise advice, I would neither have saved the amount of money that I have, nor learnt anything about investing.  My savings rate is approximately 60% of my salary, but every year I earn the same amount as I save.  This would not have been possible by investing in GICs, and I’ve tripled my investment money in the last 8 years.

Here’s my question.  My industry, Finance, is laying off thousands in the coming year, both in the US and in Canada.  I fear a job loss in the next few months or weeks.  What do you recommend I do to prepare for it?

I’m particularly stumped at what to do about my DB pension.  While I want to break it out into a LIRA, I’m afraid I will lose a substantial portion of it to taxes as I have no RRSP room.

You save two-thirds of your salary? That’s deserving of an Order of Canada, or at least a life membership (and your own parking spot) at Costco. Hopefully you’ve been stuffing your TFSA (since the DB pension restricts RRSP room accumulation) and building up a nice non-registered account chock full of growthy ETFs and enough fixed income to let you sleep at night, should the axe fall. (Sounds like you might have been too aggressive of late, however – so dial it back.) We have no details on your personal life, but you gotta be a frugal gal. Perfect, when your employment’s dodgy.

The pension? Big decision.

If you leave the funds where they are, inside the plan, there’s little to fear in terms of stability. The banks aren’t going bust. Ever. They are systemically important, and federally essential. Outside of government pension money and your dog’s love this is about as secure as it gets.

But there are still valid arguments for commuting the pension, leaving the plan and managing this money on your own. For example, if you stay in, every payment received in retirement will be fully taxable at source. No way to mitigate that. If you don’t need the income, you must still take it. That could push you into a higher tax bracket, which sucks. On the other hand, if you take possession of the cash and it sits inside a registered fund, you can dip in whenever you want and thereby better control your own marginal tax rate in retirement.

Second, by commuting you seize control. Instead of relegating investment decisions to an unknown and unseen pension administrator, you make your own decisions. That can be immensely satisfying. Third, you can tailor the investment strategy to your own needs, goals and personality. Pension managers’ primary mandate is to ensure funds are available to meet future obligations, while you might be more concerned about growth and getting a Porsche (to drive to Costco). Fourth, when you croak the money belongs to your estate, not the pension plan. You can pass it on to spouse, family, friends, charities and pets.

Now, what about the tax hit when commuting?

Typically a portion of a commuted pension can be rolled into a LIRA (locked-in retirement account – just like an RRSP, but not cashable until you reach retirement age). The remainder is given as cash,  taxed in that year as income. The Hoovering can be cut if you have RRSP room available but, sadly, poor Susan has none.

What to do?  Nothing. Take the money. Pay the tax. Move on. Remember if you stayed in the plan 100% of every cheque for the rest of your life would be taxable, so all you’re really doing in commuting is paying it now. It’s also wise to optimize when the cash is received. Most employers will offer an option of taking it immediately when leaving the pension plan, or a few months later within a new calendar year. Obviously taxes will be lower in a year of unemployment.

The biggest reason people don’t commute is, of course, fear. They think staying inside the corporate womb is somehow safer than taking charge of their own destiny. In some cases, (like this) that may make sense. For the 2,000 GM workers losing their jobs in Ontario this week, for example, it makes none.

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December 16th, 2019

Posted In: The Greater Fool

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