All members of the Canadian forces who are enrolled before Mar 1, 2012 are facing a impending decision on what to do with their payment in lieu of Canadian Forces Severance Pay (CFSP). For some it will mean several hundred dollars, for others who have been around a while, it could mean up to over $20,000.
All member should have by now received a letter indicating what their eligible time period is and will have to make a decision on which of the following three options they will be picking between 14 Dec 2012 – 13 Mar 2013.
The choices are :
1. Take the cash now;
2. Take part of the cash now and part of it when you release from the forces; or
3. Take the full amount when you release.
From the “water cooler” talk most people seem will be picking the “cash now” option. However, I don’t get the sense that this decision is made with any detailed analysis and that it’s taken because it seems to be the common sense thing to do.
Well being a member of the forces and also a Certified Financial Planner, such hand-wavy approach to money matters will never do. So I ran some scenarios to see if the accepted wisdom is indeed the right approach.
My conclusion are:
If you are not a Pte, and intent to contribute the funds to your RRSP, then it make sense to take the cash out option. Otherwise, waiting is a better choice.
Now to to reach the conclusions I made the following assumptions:
1. I assumed that you will have normal career progression as per pay band – if you are planning to commission, the result maybe different. You can test that easily by doing your individual analysis. Email me if you want the spreadsheet that will allow you to do that easily.
2. I have ignored the effects of inflation because I assume that our pay will increase somewhat in step with inflation and using real returns I made this a non-factor.
If you want to look at the spreadsheet feel free.
Hope this helps you make your decision.
FinanciallYou 