Should This 45-Year-Old Woman Take The Commuted Pension?

The Financial Post wrote an article last month about a woman in Ontario who has three children and is 45 years old, is working as a communications consultant.

She earns $6,150 per month. Her mortgage is $276,330 and she owes $25,000 on a loan from her ex-husband, repayable without interest when she sells her house. Her retirement income target is her present after-tax income.

When retired, she can draw on a defined-benefit pension from a former employer. She can wait to take the pension of $1,070 per month beginning at age 65 or she can take an upfront payment known as the commuted value of the pension, which in her case, totals $170,540.

Should she take the commuted value?

In this case, it would likely be the best option. There is potential that she could grow her capital between today and age 65 (that’s 20 years!). If she can grow it at three per cent per year compounded for 20 years, it will nearly double to $308,040 in 2020 dollars. Split evenly over the 30 years, it would support an income of $15,258 per year, adjusted for inflation, till she reaches age 95.

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