If you’re a teacher living in Ontario, Canada, what steps should you take to financially plan for your retirement?
Well, the first thing you should do is sit down with a Certified Financial Planner and create an investment plan based on your personal risk tolerance and goals. You can click here to book a Zoom consultation with us.
Next, read over the details about your pension plan and what it means for you. This is an area where the media has confused a lot of people. You regularly hear stories about pension plans being underfunded. In Canada, the majority of pensions are well funded and have been properly managed.
In Ontario, teacher pensions are managed by the Ontario Teachers’ Pension Plan (OTPP). The Ontario Teachers’ Pension Plan is the largest single-profession pension plan in Canada. It is an independent organization, and administers the pensions of over 300,000 active and retired teachers in Ontario.
The OTPP administers a defined-benefit pension plan that pays lifetime pensions to eligible members and their survivors. They also provide benefits if members die, become disabled or permanently leave teaching before retirement.
They’ve been able to achieve:
- ~5% Annualized net rate of return since 1990
- 9% Annualized net rate of return above benchmark since 1990
If you are a teacher and are approaching retirement age, what can you expect?
When you retire from teaching, and you’ve reached your ’85 Factor’ (age + qualifying years = 85) or are at least 65 years of age, you will be eligible for an unreduced retirement pension.
According to the Ontario Teachers’ Pension Plan website, the amount of your pension is based on your salary and years of credit.
2% × Credit × “Best-five” average salary
Credit is the actual time (years, months and days) you have contributed to the plan.
They also use what they call your “Qualifying Factor” which is your age plus qualifying years. Your qualifying factor is used to determine your “85 factor” and to calculate any early retirement reduction.
Qualifying Years are the school years in which you have taught or bought back service for at least a portion of the year. These years determine when you’re eligible to start receiving a pension.
The example they give is someone earning $85,000 in their five highest salary years with 30 years of credit. In this case, their basic annual pension would be 2% × 30 × $85,000 = $51,000.
You can read more about how the Ontario Teacher’s Pension works on the OTPP website page here.
Contributions To The Pension Plan
The OTPP uses a two-tiered formula to calculate how much you contribute to your pension. It’s divided between your annual salary up to the Canada Pension Plan (CPP) contributions and benefits limit, and your salary above the CPP limit.
Contributions are matched by the Ontario government and participating employers on behalf of all members.
Important Note About Spousal Continuance
Upon your death your eligible spouse automatically receives 60% of your CPP‑adjusted pension, unless you tell them otherwise prior to receiving your frst pension payment.
You can increase that to 70%, but you need to qualify by answering some health questions.
The issue is this: What if you come to retirement and are NOT healthy?
At that point you may wish to set the spousal continuance to the max 70% BUT you won’t qualify if you are not healthy.
What to do? Set your spousal continuance to the max NOW.
OTPP will allow you to reduce that if you wish on retirement without any question or need to qualify.
Consult With Retirement Planning Experts
The team at Pension Solutions Canada is here to help you. If you’re unsure if you’ll have enough money when you retire, give us a call. We’ll also assist you with estate planning, address tax minimization, and answer all of your retirement questions.
Schedule a 15-minute call here with one of our Certified Financial Planners!
