The Big Picture
January 28, 2013
No matter where you are in your career, take a moment to stop and imagine what your retirement will look like. Even if it seems eons away, and the picture is a bit fuzzy, by understanding the role your Teachers' pension plays in that image, you can sharpen the focus of that picture.
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When you are ready to turn that picture into a reality, chances are your Teachers' pension will be your most valuable financial asset. Take the time now to zoom out and understand the other elements of your retirement picture and how they fit with your Teachers' pension.
Here are four steps to help you see your big picture:
1. Crunch some numbers
Try to estimate how much income you'll need in retirement. If all of your major debts and obligations are paid off, then chances are you'll need about 70% of your pre-retirement income.
Here's an easy formula to estimate what your Teachers' pension will provide:
Full-time years you worked X 2 = % of salary your Teachers' pension will provide
To get an even clearer picture, use the Pension Calculator in iAccessWeb, our secure member website, to generate multiple what-if scenarios. Experiment with retirement dates, buybacks, and salary projections to find the scenario that will best suit you.
Remember, reductions for early retirement, survivor benefits or CPP may apply.
2. Maximize your Teachers' pension
If you previously contributed to another pension plan, you may be able to transfer that credit into Teachers'. By consolidating all of your credit into one plan, you can make the whole greater than the sum of multiple parts. Buying back credit for employer-approved leaves also maximizes the value of your Teachers' pension. Are you torn between paying for a buyback and putting that money towards an RRSP or TFSA? In the majority of cases it makes more sense to invest in a buyback.
- Your Teachers' retirement income is not dependent upon the performance of personal investments. If you have the ability to pick the top performing mutual funds or stocks each year, than putting money into RRSPs or TFSAs could make more sense. But, for the majority of us, that's not the case. The security of a defined benefit pension is hard to beat.
- Your contributions to Teachers' are matched by your employer and the Ontario government. The same cannot be said for RRSPs or TFSAs.
3. Other retirement income
Canada Pension Plan (CPP) and Old Age Security (OAS) will complement your Teachers' pension. CPP is integrated with your Teachers' pension, but OAS is not. What does this mean? Each year, the CPP sets a maximum salary on which to base your contributions. This is referred to as your YMPE, or yearly maximum pensionable earnings. In 2013, the YMPE is $51,100.
This chart shows how the integrated rates work.
|Your Salary||CPP Contribution Rate||Teachers' Contribution Rate|
|up to $51,100||4.95%||11.15%|
In 2013, the maximum CPP retirement pension is $12,150 per year. Remember, because your Teachers' pension and CPP are integrated, we will reduce your Teachers' pension the month after you turn 65, regardless of when you decide to collect CPP.
OAS is not integrated with your Teachers' pension. The maximum basic OAS pension in 2013 is slightly more than $6,500 per year. OAS benefits are scaled back above a certain income level, about $70,000.
If you are still working, over the age of 65, collecting CPP and have elected not to contribute to CPP, your Teachers' contributions will be at the 12.75% rate.
4. Still need more?
By adding your estimated Teachers' income and CPP and OAS, you now have a sense of what your retirement income will be. If you feel you'll come up short, then consider where else to invest.
Be sure to inform your financial advisor that you're a member of Teachers'. The security that a defined benefit brings may mean you can have a higher risk tolerance with other investments.
If you decide to contribute to RRSPs, keep in mind your RRSP contribution room is lowered because you're a member of Teachers'. Take a look at Box 52 of your T4 slip to see your pension adjustment, or PA. A PA is an estimate of the value of the pension benefits you earned in a year. The greater your pension benefit, the less room you will have available to contribute to RRSPs. To learn how much RRSP contribution room you have, contact the Canada Revenue Agency (CRA).
Your TFSA contribution room is not affected by your income or whether you're a member of a pension plan. The government has set the limit for 2013 at $5,500. You can carry forward any unused contribution room.
Did you know Canada Pension Plan (CPP) also has a tool to help you estimate your CPP pension? Access it by visiting www.servicecanada.gc.ca.