Monday, February 12, 2018

Post 3659 - What Would You Do?

I don't talk about it much, but I work as a civil servant. I have the part-time writing gig for Frank, but most of my income emanates from my day job.

The government recently decided to allow civil servants to tap into what is called a public service award, an amount of money paid to retiring civil servants. One week of salary for each year of service, up to twenty six weeks. In order to get this money, you couldn't leave your job in any way other than retiring. If you left to go somewhere else, you didn't get it. If you got fired, you didn't get it.

They want the money off the books, so they're letting us get the money now. By now, I mean in the coming few months, as there are only so many people working away at calculating these amounts owing, and it takes a while to do this work. I won't pretend to know about it.

Last week, we all got letters spelling out what our PSA amount will be. We also got options for how to receive that money. We could get it as one big payment, less income tax, CPP contributions, EI contributions, and everything else. Those going for that option, will likely get about 50% of that money. Maybe 55% at the most.

You could also opt to put all, or some, of that money into a retirement savings plan and defer the tax, as you would never see it.

What you do with that money, and how it is disbursed as above, depends on one's financial situation. I decided to go for the full payout, although it means taking a kick in the teeth, tax wise. I took on a fair amount of debt before my mother died, and added to that right after she passed. I have had to add yet more to get other important things done, too. I have been dutifully paying it down over the last few years, and I have about two years left to go.

If i get this payout as I have described, I can pay off that balance of that debt pretty much instantly. I will free up the cash designated for this debt, and put it toward other things, including savings. It seems like a no-brainer to me.

But others like the idea of socking the money away into the RSP thing, getting the tax break, and applying THAT money to whatever debts and other financial obligations confront them.

In speaking with a co-worker today, I opined that many people give little thought to their financial planning. They just want their net pay every two weeks that they can spend on what they want. As they approach retirement, they feel they should retire as much of their debt as they can, but that is about it.

I am not too far away from that attitude, and we suspect that most people are not, either.

I think my decision works for me. The die is cast. I mailed in my decision last week.

I am wondering what you would do in my case, and why? You don't have to tell me your precise financial situation. Don't give me actual dollar amounts of what you owe, or what you would spend it it. Just give me a rough idea of what you would do, and why.

I look forward to your thoughts.

See you tomorrow.



Anonymous said...

I'm currently at step 3&4, which is easy after you get step 2 done.

1. Pay all day to day debts off from highest interest rate to lowest.
2. Lump sum payments until mortgage paid off.
3. RRSPs until your income is reduced to the same tax bracket that you figure you will be at when you retire.
4. TFSAs to maximum.

Anonymous said...

Hey Bev - I recently started reading your blog so I guess you have at least 1 loyal follower - lol.

Anyway like you I/we had to decide about the service award. For us it was an easy decision.

Again, like you we have taken on some debt over the last few years. In our case I was injured 3 years ago and that reality has meant many things, increased debt being one.

At the end of the day we looked at the payout as an "early" gift. The tax deferral wasn't really a consideration because our thought was simple - we live in Canada and the tax must be paid. The only question was pay it now or later. Our answer was now.

For us paying down our debt now would loosen the monthly strain, provide some stress relief and free up a few dollars for other stuff. My wife - the smart one - also pointed out that the money saved in interest by paying our current debt would balance out the potential tax savings the deferal would have provided. Like I said, she is the smart one and I'm blessed to have her by my side.

So at the end of the day taking the payout was an easy decision for us.

I do really enjoy your blog. Please keep it going, it is good stuff. I appreciate its not easy to keep up as life can keep us busy by boy, I sure can relate to 99% of what you say by way of your writing. The other 1% is either really funny or something new of which both I appreciate.

Thanks Mel

Greg Beaulieu said...

Interesting development re the PSA that I had not heard of. Mine came to me when I retired in 2014. One interesting thing I learned was that when you retire the tax laws allow a certain amount of such retirement awards to be added to your RRSP over and above whatever contribution space you may have, so I took advantage of that. I still had some left over that got added to my income that year which I had to pay tax on. Normally I would suggest putting as much into a RRSP as possible but depending on how much debt you have and the interest rates you are paying it may make some sense to use it to reduce that even if it means you need to pay tax. It will free up income that is presently being used to make payments on the debt. Either one of those things makes more sense financially that using the money on immediate instant-gratification frivolous spending.

Bevboy said...

Thanks, to all three of you, for taking the time to write me. Much appreciated.

Please keep reading, and don't be too shy, you two Anonymous people, to tell me who you are.