I want to retire early. What should I do with my defined benefit pension?

The article offers retirement-planning advice on whether to commute a defined benefit pension valued at about $1.3 million, with a $900,000 LIRA option and roughly $200,000 of after-tax proceeds. It also outlines tax-efficient use of $150,000 cash bonus, $60,000 vacation/sick payout, and $160,000 of RRSP room across the retiree and spouse, plus TFSA and beneficiary planning. The piece is advisory in nature and does not present a market-moving event.

Analysis

The investable takeaway is not the pension decision itself; it is the embedded duration swap. A non-indexed DB pension with weak survivor economics behaves like a long-duration nominal bond that silently loses real value if inflation stays sticky, while a LIRA/RRSP/RRIF stack allows active hedging, tax arbitrage, and bequest control. The spouse’s 10-year age gap materially increases the option value of portability: the probability-weighted benefit of tax-deferred compounding and survivor rollover rises over a 20- to 30-year horizon, especially if retirement starts now and the household has a long joint-life expectancy.

The biggest second-order issue is sequence-of-returns risk in the first 5 years after retirement. A commuted lump sum concentrates market timing risk at the exact moment cash flows flip from accumulation to decumulation; that argues for a bucketed reserve, not an all-equity portfolio, if they commute. Conversely, keeping the pension transfers inflation risk and balance-sheet risk to the plan sponsor, which is attractive only if the sponsor is exceptionally strong and the spouse’s survivor payout is economically meaningful after discounting.

The tax angle is where most DIY decisions break. Immediate RRSP/spousal RRSP use can convert a one-time taxable event into a multi-year deferral machine, but the real edge is shifting future income into the lower-bracket spouse and preserving TFSA room for the highest expected-return assets. The consensus mistake is treating this as a binary commute-or-keep decision; the better framing is partial immunization: extract flexibility where it exists, defer taxes where possible, and preserve the option to re-risk only after the first retirement drawdown window has passed.

Key Decisions for Investors

• For investors facing a DB pension choice, model a partial-commutation framework first: hedge 3-5 years of essential spending with fixed income/cash-like assets, and only re-risk the residual pool after the first 24 months of retirement cash-flow visibility. Best risk/reward: lower sequence risk with minimal long-run return drag.
• If the employer plan permits a lump-sum commute, compare the implied discount rate against a real-asset hedge basket: long TIPT/TLT-like duration is less relevant than owning inflation-linked income streams or equity income with growing distributions. Timeframe: 5-10 years; the edge is protection against nominal-erosion of the annuity.
• Use spousal RRSPs/RRIFs as the primary tax-smoothing tool in high-spread households: direct contributions to the lower-income spouse can reduce lifetime family tax by several percentage points versus funding the higher earner alone. The trade is strongest when one spouse is 5+ years younger and has lower future pension income.
• Keep TFSA capacity for the highest-conviction growth assets rather than bond proxies. The after-tax compounding advantage is largest for volatile, high-expected-return names; the risk is emotional, not structural. Time horizon: 10+ years.