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Jean B | Serverance Pay:Take a lump sum of $64,000.00 or take 1.5 years pay continuance? |
Additional Details
My current salary is $45,000 and pay continuance stops if I find another job that pays over $35,000 to $40,000 per year.
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whatsupwithpants
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The answer really depends on a couple things.
1) What was the annual salary being earned?
2) What are your plans for the money? Are you at stage in your life where you can invest the full amount or will you need to make continuous draws on the lump sum? If you can invest a portion or all of the lump sum payment, you should also factor in the total interest you could earn on it when making your decision.
Here's an example:
Let's first assume you will be able to invest the whole amount at 5% because you have sufficient savings or already have a new job lined up. (5% is totally arbitrary)
The lump sum would be worth approx. 69,000 over 1.5 years.
To earn the same amount from the continuance pay (assuming bi-weekly payments) over the same time period at the same interest rate, you would have to receive payments of approximately $1,700 per payment. That payment stream would equate to an annual salary of around $44,200. If your annual salary is less than $44,200 in this case, you would want the lump sum.
If you can't earn any amount of significant interest on the lump sum, it would equate the a bi-weekly payment of around $1,640. That payment stream would equate to an annual salary of $42,500 instead. In the case that you were to make regular draws on the lump sum, you would choose the lump sum if you made less than $42,500 annually.
While the example likely doesn't fit your exact situation, that's the type reasoning you would have to go through to weigh the benefit of one over the other. It also doesn't take any withholding or income taxes in to account |
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P&M
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Depends. You should look at your marginal tax rate, and see if you take 64K this year plus your existing income received will push you over to the next marginal tax rate. If so, you might want to take it over two years. |
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smile4u
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I believe it depends more on how responsible you are with your money. Will you be able to put the lump sum away and live on it without overspending? Or do you need a more stable income for the long term. Its all up to you and your willpower. Good Luck |
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debwils_4kids
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It would depend primarily on what the current salary is. If 1.5 years of the current salary is a lot more than I would opt to continue my salary. |
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CanadianBlondie
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It depends on a few things.
First, your current salary - is the pay continuance your normal pay rate? Second, is the lump sum, if divided by 1.5, $42,666, equal to your current annual rate of pay? Third, if not, are you able to save the money and make up the difference?Fourth, are you planning on working during the next 1.5 years? Fifth (related to third point), are you planning to live off of this money during that time, or save it?
From a tax perspective, if you earn roughly $43,000 per year, adding $64,000 to your income will put you in a higher tax bracket unless you are able to put over $30,000 into a RRSP, or have other deductions such as child care. You would need to factor the after tax amount into your tax decision. They will withhold 30%, but that will not be enough. |
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halrosser
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If your current pay rate is - lets say 24,000/yr, then take the 64,000.
Take the lump sum - they may change their mind later - or charge you back for the paper clips they can't find since you left. |
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kstaxman
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If you are still of working age and are going to continue to work most of the time it will be to your advantage tax wise to take it over the 1.5 years. This will allow for the best income distribution as long as you aren't going to get a much better paying job by next year. In that case the lump sum COULD be the best answer. What you really need to do is talk to a good tax advisor who also does financial planning. This might be the best time to plow some of this into your retirement account (plans) as if you start working for someone else soon you should have some extra money to handle. Don't blow this chance to use this money to your best advantage. Severance pay can be a real benefit if it's managed correctly but it’s easy to waist it and treat it as a windfall. (Also check into if you take the 1.5 year payout if this qualifies for any retirement plan, 401k, ect., that your employer may provide. Sometimes it qualifies and if so it is another reason to take it over time.) |
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Tara
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Take the salary continuance. It will probably work out to a better pay out, and they have to continue your benefits for that period. If you take the lump sun, you are likely to get hammered with taxes. Also, it will be helpful to have regular pay stubs for use if you need to apply for a credit card, are planing on moving ect... |
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parker_n_mj
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The decision would have a lot to do with current salary level. If the annual salary is greater than $64K, I'd have to take the continuance. Otherwise, most likely I'd take the lump sum. |
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