What are you waiting for? With high inflation rates peaking this past June, we are seeing the largest annual inflation increase since 1991. This is stressful for Canadians as the cost of living and doing business rises. More than ever, Canadians need to understand how to budget, invest and plan for their future. During times of high inflation, you get less for your money when purchasing. When inflation is too high, interest rates rise to slow the economy and bring inflation down.
What does this mean for your pension?
If you’re leaning toward a one-time payment of your pension and are at the eligible age to commute, you may want to consider doing so before interest rates go up further.
Why? Because rising interest rates will impact the amount you receive. The higher the interest rate used to calculate your lump sum, the lower the lump sum payment.
The interest rate that pension companies use in the lump sum calculation has been rising with inflation. With interest rates being so low these past few years, the lump sum option has been an attractive one for retirees.
If the upward trajectory on rates continues, you will retire with a smaller lump sum next year than you would this year. And the differences are significant. We are talking tens of thousands of dollars.
When deciding what to do, remember that:
Your best option depends on what you want your future to look like. If you can’t handle another 5 years in your role, why would you put yourself through that stress? Life is too short.
When you understand when you want to leave, understand how much it is going to cost you. But, keep in mind that any costs can be recovered in new-found revenue generating opportunities or moving to a less expensive area, etc. These are the advantages of freedom.
If your focus is on maximizing the total amount of your pension and you are comfortable waiting, the lump sum is not your option.
If your priorities are financial flexibility, mental wellness and improved overall happiness, taking a lump sum payment could be a fit for you. Please reach out if you need help deciding when to take your pension. We will help you understand each scenario so you can choose the best option for your future.
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