Let’s say you’ve worked for the local government of Ottawa, Canada for 22 years, and you’re three years away from your 60th birthday...and from collecting that pension. What a glorious day it will be when you can retire to Halifax. You'll have built up that pension for 25 years, and you can then start that commercial fishing operation you've been dreaming about all that time.
But one day, you come to work and find out that your new boss is a 33-year-old "ex-hockey player who loves to talk about where he went to school. He won’t leave you alone. He just talks, and talks, and talks. And micromanages you into the ground. If he keeps it up, you’re not going to make it to 60. Instead, you’ll be serving a life sentence at the Milhaven Penitentiary. You don’t want that. So, you’ve decided that you’re going to quit your work as a mapping technician and start living that dream in Halifax.
What's going to happen to that pension?
Well, good news. You're still going to get a nice payout. You'll receive the "commuted value" of your expected pension. The "commuted value" is a lump sum payment. It's assessed at the present value of the earned benefits and future cash flows.
With this money, you can put it to work in the markets. If you can replicate the pension board’s investment strategy, you could earn the expected payouts of your future pension payments, and you won’t have to deal with Billy ever again.
You can take a new job. You could be a technician again...just with a better company.
Related or Semi-related Video
Finance: What is a Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]
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