Posted on November 4, 2016
Why I am buying back my pension
Fun site for Canadians in certain provinces: all benefits you are eligible for in your region. When I checked it wasn’t updated for this year’s tax season but I am hopeful it will be.
As you probably have read, I have the opportunity to buy back pension years where I worked for the federal government but wasn’t a permanent employee. It actually amounts to 3.5 years (go contracts!). Of course, I am currently not permanent now; I am actually a term, which means I am an employee who can be renewed yearly. I am still entitled to all the benefits of being an indeterminate public servant but my contract may have a chance of not being renewed.
So while I want to buy back my pension, I will wait and see if they will renew my contract in March. The reason for this is that you need to be vested for two years before you can be eligible to withdraw a pension. So since I only started contributing in March of this year, I will have to have another year under my belt before it vests. So if they renew me, I will have those two years locked down. If they renew me and I buy back the 3.5 years, I will have 5.5 years of pension under my belt by the end of March 2018.
Over the years I have heard the same advice about pension buy backs “oh you should do the math, it may not be worth it!” Since the federal government pensions are defined benefit pensions however, I can’t see a reason NOT to buy it back. The pension fund assumes a 5.5% real rate of return so by buying back I am essentially buying a government bond with a guaranteed interest rate. Since it also adjusts for inflation, I don’t have to worry about the state of my investment in this case. I fail to see a reason NOT to buy it back.
Of course, there are challenges here. Firstly, I have the option of taking payment plans (with varying interest rates) or paying in one lump sum. The options are to pay back in 3 years, 5 years, or 10 years (omg!). After I calculated the interest, I realized that borrowing to pay in one lump sum – if you can pay off the amount in less than a year – is cheaper than the payment plans offered by the government. The challenge here is that you need the contribution room for pensions/RRSPs to be able to go this route. Thankfully (or poorly planned, you decide) I do have enough carried-over contribution room to pay the entire amount in one tax year.
Secondly, I need to have a full physical where my doctor makes a best guess that I will live at least another 5 years. This is doubly-awkward: if she says I won’t, not only will I not be able to buy back but I also have a chance of kicking it within 5 years. Double whammy!
Thirdly, I only have one year in which to buy back at the estimate I was given. The government calculates your buy back at your current salary. So even though I am buying back years where I made half as much as I make now, I have to buy back at my current salary because my pension will be based on current salary dollars. Of course, if I miss this deadline the payment will go up substantially. Our union also negotiated new salary rates recently so I absolutely must not miss this deadline or I will see the buy back amount rise substantially.
Of course, I am hedging my bets to get in and get my physical first thing in the new year (now that I am walking & after many hours of physio!) as I have until the end of March to get all the paperwork in. It also gives me time to save up as much money as possible to put towards it and I calculated that I will actually be able to pay about $18400 out of pocket without tossing the balance on my line of credit. The buyback amount? $18318. What are the odds?
Since I plan to work 5-10 more years in the Public Service (renewed term willing!) that would give me a lowball pension of approximately $1000-$1500 at 60* (in today’s dollars), adjusted for inflation. So this makes planning working part-time/early retirement much easier, as once I hit 65 I will have that guaranteed income – and if I die, it will transfer to Mr. Tucker.
Since the public service has all sorts of fun calculators, let’s play with them. Assuming I only work six years from March 1st, 2016 (when I entered the pension plan)and buy back the 3.5ish years I worked previously, let’s see how that pans out:
If I retire at 46 and start drawing my pension at 60*:
If I retire at 46 and start drawing an annual allowance at 50:
How about if I work a little longer? Maybe I could work until age 50?
Retiring at 50 and drawing a pension at 60:
Retiring at 50 and drawing an annual allowance:
The early retirement reduction is…wait for it…49%**
This is a cute thought exercise but I am not an actuary so it isn’t accurate. Also, since I entered the Public Service after 2013 I won’t actually be able to “retire” until I am 65 (new, fun rules!) so really it will just sit there until I am 65 when I can begin drawing an inflation-adjusted pension. I also put in my current salary but not any raises or promotions I may have in the next 5-10 years, just to keep it constant. Because there is an increase every year on my salary and I feel like a bit of a go-getter, those things are more than likely.
What is interesting here is that if you have a pension coming down the pipe and you are planning on retiring earlier you have two choices:
– Save like you don’t have a pension and when yours does come, it’s a pleasant boon
– You can do the heavy calculations and determine what you need to save to support yourself between when you retire and when you can draw on your pension
I haven’t done the heavy lifting in the calculations department yet but that will depend on how I feel in a few years. Our current plan is for Mr. Tucker*** to retire in 5 years. If I stay in the Public Service I will have more options than he would, work-wise: I can probably do compressed time, drop down to part-time, or take leave with income-averaging for a few years. We won’t theoretically need to touch our nest egg until much later if I explore work alternatives for a bit as all the above options will still bring in enough money to support the family. Of course, no one knows what will happen in the future but our current plan continues to be to save like mad to pay off the house and buy back my pension. After that we will rethink – and recalculate – what our plans are in 2018.
OH, and if I work until I am 65?
*Bridging is for the years between 60 and 65. It stops at 65 because that is when it is assumed you will be drawing from the Canada Pension Plan (and for some, Old Age Security).
** I have no idea why the dates are different here but I don’t think it will make enough of a change to care.
*** Hilariously, we will get a huge chunk back in child benefits and tax credits if Mr. Tucker isn’t working