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Should you take the money and run?

Special to the Globe and Mail

It may sound like a tempting offer.

You decide to retire early and your employer offers you the option of taking out accumulated pension funds -- possibly hundreds of thousands of dollars -- and investing them yourself, rather than waiting for years for a guaranteed pension.

Should you bite?

There's a ton of issues to consider, says Marilyn Lurz, an independent Toronto pension consultant.

"Lifestyle, longevity, health, investment savvy, are all factors that may influence what you do with your money," she says.

If you take the money and run, you have to become a savvy investment strategist overnight, she adds. You need to understand diversification, the different types of investments, what might happen to company-paid benefits, says Ms Lurz, who gives seminars on the subject.

"When you look into the subject of how well prepared Canadians are to handle an investment strategy, I think you find out that on average they are not very well informed.

"We rely heavily on investment advisers, who take their pound of flesh."

One thing to think about is how healthy you are and how long you expect to live. The longer you live when you have a guaranteed pension, the more you beat the odds.

"So this makes the decision very difficult for our hypothetical 52-year-old who decides to leave and retire early. 'Am I going to live a long life or not? Do I need to protect the people who are going to inherit my assets?'

"The lion's share of pension plans are pretty secure. The counterpoint is: Do you think you can take your money and protect it carefully? Can you prevent a nefarious investment manager from disappearing to the Cayman Islands with all your money?"

Another thing to consider if you go it alone is whether you will lose out on indexing or ad hoc inflation increases that might bolster a pension.

Lorna Eastman, a Victoria certified financial planner, says making a decision requires a very careful analysis. "What you are really giving up is a guarantee," she says.

She also points out that there could be a locked-in and a non-locked in portion to the money offered, but also excess benefit that is taxable.

"So if you give me a chunk of money in lieu of a pension, and you are going to lose a portion of that to income tax right off the top, it makes it more difficult to produce the same amount of income."

Ms. Lurz says it's sad that the decision has to be all or nothing. "What would be really neat is if it was half and half. But that's not an option. So, it makes the decision for our 52-year-old very tough."

© The Globe and Mail

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