# RRSP for public servant



## jumbalaya (Jan 17, 2013)

I'm 23, working for the federal government. plan to stay 32 years and retire at 55 with a 0.2 * 32 * ~100k = ~64k a year pension. should I go the RRSP route at all? it basically locks up my money until i'm 60 (penalty) or 65 (no penalty). i have a house already (with mortgage), and don't plan to go back to school.

thanks


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## OhGreatGuru (May 24, 2009)

There are too many imponderables here. Part of it is what your life plans, financial needs/wants, and investor profile are. 

The other part is what are the real odds of you staying in the job for 32 years; and will the government decide to change the retirement benefit again before then? For years it was no penalty to retire at age 55 if you had 30 years service - but they changed that only recently. Suppose they up it another 5 years before you retire? how will that affect your retirement plans?

About all I can say is, if you want to invest some extra money for 20-30 years, you may as well use your RRSP room for the tax benefit, because the earlier you invest the better the payoff. Is there a spouse anywhere in your future? The RRSP room might be useful for a spousal RRSP.


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## jumbalaya (Jan 17, 2013)

Thanks. the changes to the retirement benefit only apply to those who join after Jan 1, 2013. i'm grandfathered in already.
odds of staying 32 years... that i can't say. 

so you're saying i should use my RRSP room, but if there's a spouse then I shouldn't?

I just don't feel comfortable locking in the money for 42 years... I don't want to pay the withholding tax.


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## rikk (May 28, 2012)

If I could start over, and had the extra money (after the mortgage, car payments, food, kids, beer) to put towards savings, I'd first top up the TFSA ... look at even simple x$ compounded 32 years, then the RRSP ... again look at even simple x$ compounded for 32 years ... if nothing else it should at least earn it's own tax. And just to say, that RRSP isn't locked up ... if you need it, sure you pay the tax, but it's not locked up ... you'll pay the tax eventually is my experience.


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## jumbalaya (Jan 17, 2013)

Thanks. The changes to retirement benefits apply to new employees as of Jan 1, 2013 - I'm grandfathered in.

staying 32 years... I would like to, but that's not up to me.

I dont' feel comfortable locking in my money for 42 years... I don't want to pay the withholding tax.

rikk - I'm working on maxing out my TFSA right now. So this withholding tax... can I get a better explanation of this? Say I'm in a 33% tax bracket when I pull money out early. They withhold, say, 10%. Does that mean, at tax time, I pay 23% more?


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## MoneyGal (Apr 24, 2009)

If you withdraw money from your RRSP, *no matter what stage of life you are in* (retired, not retired) you will pay income tax on the withdrawal. 

Notionally you are putting the money in during your working years (when your tax rate is likely higher, as you have earned income), and withdrawing it during retirement, when you do not have earned income, and thus your tax rate may be lower. 

The tax you pay on withdrawals is not a "penalty" and depending on your specific situation, may not be lower in retirement than it is during your working years. 

The "withholding tax" is simply a prepayment of the income tax that is likely to be due on the withdrawals when your income tax for the year is computed.


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## andrewf (Mar 1, 2010)

Isn't RRSP taxed the same regardless of when its withdrawn?

The withholding tax is akin to the tax withheld by your employer...


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## jumbalaya (Jan 17, 2013)

Awesome, thanks for the responses. 

Just a side question - are the tax brackets I should be considering here? http://www.taxtips.ca/taxrates/on.htm (right side, 2012, other income?)


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> Isn't RRSP taxed the same regardless of when its withdrawn?
> 
> The withholding tax is akin to the tax withheld by your employer...


If you mean the withholding tax, it depends on whether the withdrawals are big enough to trigger it and at what percentage. Some writers have suggested to space out RRSP withdrawals of I believe under $5K (and use different RRSP accounts) to avoid paying the withholding tax.

Of course, the risk is that all of the income tax will be due when the tax return is filed so there will likely be a tax bill to prepare for when the income tax return is filed.

The RRSP withdrawal amount *is* income in whatever year it is withdrawn. That's in addition to whatever other income was earned that tax year.

http://wheredoesallmymoneygo.com/minimizing-the-rrsp-withholding-tax-on-withdrawals/


If you mean the income tax, then no. For some, the RRSP withholding tax will be too little, for some it will be too much and for some it will be "just right" for the final income that is received in that tax year which will determine the taxes due. :chuncky:

[ Note that that's after all the tax credits, deductions etc. have finished adjusting the taxable income. ]


Cheers


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## Eclectic12 (Oct 20, 2010)

jumbalaya said:


> ... Just a side question - are the tax brackets I should be considering here? http://www.taxtips.ca/taxrates/on.htm (right side, 2012, other income?)


For the taxable income in Ontario, then yes.

I suspect you are more interested in the RRSP withholding tax rates, where are in the link posted above.


Going back to your original, "To RRSP or Not" - what do you see as the downside to using an RRSP? 

With you being young, there's the possibility of retiring but not collecting your pension right away. 

This would let you money into the RRSP, get a large refund and then when there is less income withdraw from the RRSP, potentially paying less income tax. 

That's after the money has had a long time to grow tax deferred.


I'm not sure I'd want to give up that benefit without carefully considering all options.


Cheers


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## jumbalaya (Jan 17, 2013)

eclectic12 - great link, helped me understand RRSPs more.

currently i'm in a lower tax bracket than I should be at in retirement, so I'm hesitant on starting a RRSP

preferably, I would like to retire before 55 and live off investments for a while before taking the pension, but it seems that I can only retire at 55 at the earliest without taking a penalty to my pension.

I think I can start a RRSP and not claim contributions until later... maybe I'll do that.


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## andrewf (Mar 1, 2010)

RRSP withdrawals are 'other income'.


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## andrewf (Mar 1, 2010)

As with employer withholding, the amount withheld may be more or less than what is owed.


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## jumbalaya (Jan 17, 2013)

rikk - exactly my predicament... i'm happy with 64k a year in retirement.
however, i'd love to retire before 55 and if that means living on RRSPs, then i'd start saving now.
btw, how are you in a 24% bracket making 80k?

andrew - thanks.


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## MoneyGal (Apr 24, 2009)

It's average tax rate, though, right? Not marginal.


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## jumbalaya (Jan 17, 2013)

moneygal - oh I see

rikk - if you had retired earlier, you would've had a smaller pension though, no?

say I work 28 years instead of 32. i'd get 0.02 * 28 * 100k~, minus a huge penalty (5% per year before age of 55 i believe?)
I wouldn't want that...


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## rikk (May 28, 2012)

MoneyGal said:


> It's average tax rate, though, right? Not marginal.


Average


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## james4beach (Nov 15, 2012)

In our generation, I don't think you can count on the government pension. All the long-term accounting shows that the government pensions are unsustainable, and they will probably get cut at some point. Look at what's happening in Europe these days... many of those pensions were "guaranteed".

Just because you've been grandfathered in, doesn't change things. It's the government and the government makes the laws. I suggest you take the long-term accounting problem seriously as it's an inevitable problem, and you can't pretend that somehow all this money actually exists.

There is no such thing as "free money", and I hate to break it to you but the baby boomers and those retiring in the next 10 years are probably taking what's left of the money. There's a chance the pensions will still exist for you & me, but I would not bet your life on it. My suggestion is to save plenty on your own.


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## james4beach (Nov 15, 2012)

And I don't think any 50 or 60 year olds have anything to worry about, but for us young guys & gals who still have 30-40 years to retirement... the outlook is very uncertain. No pensions, perpetual low interest rates -- I really struggle to see how us young ones will ever accumulate retirement savings.


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> And I don't think any 50 or 60 year olds have anything to worry about, but for us young guys & gals who still have 30-40 years to retirement... the outlook is very uncertain. No pensions, perpetual low interest rates -- I really struggle to see how us young ones will ever accumulate retirement savings.


Perhaps the concept of "retirement" - as known during the last 5 - 6 decades is now coming to an end.
Folks in our age group should begin to come to terms with the fact that there is no retirement.

And that suits the plans of the govt. and the 1% perfectly...an endless supply of labor for the latter group, and an endless supply of taxes with no corresponding entitlement claims for the former group.

We should write an obituary for retirement - from Otto von Bismark in 1883 to approx. 2008/9.


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## andrewf (Mar 1, 2010)

I dunno... at some point, most people can't really work any more, even if they 'need' to, in order to live.


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## MoneyGal (Apr 24, 2009)

I love it! Keep in mind that von Bismarck set the age at which a government-sponsored pension could begin at 70, at a time when the average life expectancy in Germany was 45. If we kept the gap between life expectancy and the start of CPP/OAS constant from Bismarck's time until now, no pension would start before age 95. :02.47-tranquillity:


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## andrewf (Mar 1, 2010)

I find life expectancy at birth figures very misleading due to variations in child mortality. I wonder what the life expectancy at age 18 was at the time.


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## MoneyGal (Apr 24, 2009)

An approximation only, from U.S. data: life expectancy for a white male age 20 in 1890 was 40.66 years (so, to just over age 60. Still no pension!) 

Source: U.S. Dept. of Commerce, Bureau of the Census, Historical Statistics of the United States.


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## jumbalaya (Jan 17, 2013)

won't they just raise taxes to pay for our pensions?


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## andrewf (Mar 1, 2010)

The strategy so far seems to be pushing back the age of eligibility. I half expect it to be 70 by the time I retire.


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## GoldStone (Mar 6, 2011)

jumbalaya said:


> won't they just raise taxes to pay for our pensions?


Will they raise MY taxes to pay for YOUR pension? I sure hope not.

Also, Laffer Curve.
http://en.wikipedia.org/wiki/Laffer_curve


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## Sampson (Apr 3, 2009)

GoldStone said:


> Will they raise MY taxes to pay for YOUR pension? I sure hope not.
> 
> Also, Laffer Curve.
> http://en.wikipedia.org/wiki/Laffer_curve


But they do this already. As long as they can keep the Ponzi scheme going when I retire, I'll be happy.


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## HaroldCrump (Jun 10, 2009)

jumbalaya said:


> won't they just raise taxes to pay for our pensions?


They are already doing that. Have been doing that for many years now.
In addition to reducing the benefits, by raising age limits, increasing clawbacks etc.


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## Sampson (Apr 3, 2009)

You're a knowledgeable guy when it comes to CPP Harold. Have you ever looked deep into the 'sustainability' and how that is erroding or even if it is?


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## HaroldCrump (Jun 10, 2009)

Sampson said:


> You're a knowledgeable guy when it comes to CPP Harold. Have you ever looked deep into the 'sustainability' and how that is erroding or even if it is?


Since the changes made in 1996 - 1997, the CPP is now expected to be sustainable (given a 4% real ROR) for 75 years, the current projection duration.
By erosion, I assume you mean if the fund income is being used to pay for the current pensions?
Not at this time, but projections state in about 10 years time, a (very) small % of income erosion will happen.

Note that this includes the increased penalties of taking CPP early (i.e. before 65).
In the last 10 years, I believe they have tinkered with this penalty twice.

Frankly, I would be far more concerned with the sustainability of OAS than the CPP.
I believe we are headed towards that 70 yrs. eligibility at some point in the next 30 years, as andrewf suggested above.

The motto of future governments is going to be an even more aggressively progressive taxation system, and reduced benefits for many social programs.


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## doctrine (Sep 30, 2011)

> won't they just raise taxes to pay for our pensions?


The cynic would suggest that perhaps the federal government would cut federal pensions if they could not afford them, and not burden the rest of society. Also, although you intend to work for them for 32 years, federal servants can be fired for many reasons, including government cutbacks. Therefore, you should consider all options to diversify when it comes to retirement savings. Including, perhaps, more focus on owning land and/or your house before retiring, maxed TFSA (which also may or may not be guaranteed to remain tax free in the future), and other non-registered investments.


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## james4beach (Nov 15, 2012)

jumbalaya said:


> won't they just raise taxes to pay for our pensions?


We live in a democracy, so that depends on whether the voters allow that. 40 years out is impossible to project... who knows what the social values will be, or prevailing mood among voters. Maybe everything will be the same as today, or maybe it will be wildly different.

All I'm saying is that the government pensions are not a sure thing so my advice would be to take future pensions with a grain of salt. There's a lot of uncertainty on that time horizon, far more than in the last few decades.


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> The strategy so far seems to be pushing back the age of eligibility. I half expect it to be 70 by the time I retire.





Sampson said:


> But they do this {raise taxes to pay for public pensions} already. As long as they can keep the Ponzi scheme going when I retire, I'll be happy.


All true but probably not the complete picture. 

My private db pension is cancelling some privileges, making eligibility age older and doubling my contributions over the next five years. I suspect there's a mix of actions for the public pensions as well.


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> We live in a democracy, so that depends on whether the voters allow that. 40 years out is impossible to project... who knows what the social values will be, or prevailing mood among voters.


There is much more current examples that the gov't itself is starting to change what it is doing. 

With the deficit Ontario is in, I thought part of the whole labour mess with the public unions was because the gov't is saying they are not going to keep raising taxes to make up pension shortfalls - which translated to increased contributions by the plan member & changes to the pensions.




james4beach said:


> ... All I'm saying is that the government pensions are not a sure thing so my advice would be to take future pensions with a grain of salt. There's a lot of uncertainty on that time horizon, far more than in the last few decades.


Which is a good point to consider and IMO, a selling point to putting money into an RRSP. Maybe not as aggressively as someone without a pension but definitely not avoiding it.


Cheers


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## jumbalaya (Jan 17, 2013)

Eclectic12 said:


> Which is a good point to consider and IMO, a selling point to putting money into an RRSP. Maybe not as aggressively as someone without a pension but definitely not avoiding it.
> 
> 
> Cheers


i think this is the conclusion i'm coming to... thanks everyone.


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## 44545 (Feb 14, 2012)

Jumbalaya,

Forgive me if I'm repeating some of what's been written already; I only skimmed the responses to date.

Your government pension reduces your RRSP contribution room. You'll have something like $8,000/year of RRSP room that isn't eaten up by the government pension contributions.

Your TFSA, of course, is $5,500/year, though I've heard rumblings of that being upped to $10,000/year if/when the federal budget balances.

Max out your TFSA and RRSP and dedicate as much money as you can to non-registered savings after that, with an eye toward tax efficiency.

The government pension is nice but what if you only stay 25 years? (that's 25 years * 2% = 50% pension, early-retirement penalties aside)

Having a huge nest-egg in your own accounts might facilitate early retirement without worrying about drawing the government pension early. Certainly, it's better to approach retirement realizing you've got more money and more options, than the converse.

http://www.finiki.org/wiki/Tax-Efficient_Investing
http://worthwhile.typepad.com/worth.../the-basic-arithmetic-of-rrsps-and-tfsas.html


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## jumbalaya (Jan 17, 2013)

Yes that's true, I realize that I get much less RRSP room than my counterparts in the private industry.

As an aside, a dream (pipe dream maybe) of mine would be to retire after 25 years, but somehow achieve a decent government pension (not sure if possible).
early-retirement penalties are significant - 5% each year you retire early, so that 50% is probably something like 15%?

Can I delay taking the pension (start at age 55), and not get penalized so harshly? Retiring at 48, living off savings until 55?

Sorry, this is off topic, but as I said, the conclusion is to utilize the RRSP.


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> We live in a democracy, so that depends on whether the voters allow that.


You are over-estimating the effect of votes on tax policy.
Look at Ontario as an example - an outstanding example of insane and irresponsible fiscal policy.
Yet, the voters have been re-electing the same clowns that created this situation over and over again.

In the tug-of-war between entitled govt. workers and hapless tax-payers, thus far the former is winning hands down.


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## rikk (May 28, 2012)

jumbalaya said:


> Yes that's true, I realize that I get much less RRSP room than my counterparts in the private industry.
> 
> As an aside, a dream (pipe dream maybe) of mine would be to retire after 25 years, but somehow achieve a decent government pension (not sure if possible).
> early-retirement penalties are significant - 5% each year you retire early, so that 50% is probably something like 15%?
> ...


I suggest go here for what if calculations ... http://apppen-penapp.tpsgc-pwgsc.gc.ca/penavg-penben_prod/cpr-pbc/rapport-report/ret.action ... plug in that e.g. 25 years service ... then you decide when you'd like to collect, what penalty you will accept, how much of a self directed retirement plan you're willing to put in place ... and keep in mind, things will change.

There is considerable pension etc. information posted by GC on the web, you might go browsing.


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## jumbalaya (Jan 17, 2013)

rikk said:


> I suggest go here for what if calculations ... http://apppen-penapp.tpsgc-pwgsc.gc.ca/penavg-penben_prod/cpr-pbc/rapport-report/ret.action ... plug in that e.g. 25 years service ... then you decide when you'd like to collect, what penalty you will accept, how much of a self directed retirement plan you're willing to put in place ... and keep in mind, things will change.
> 
> There is considerable pension etc. information posted by GC on the web, you might go browsing.


i've used that site before, thanks. i've read a lot of information on it, just trying to get other viewpoints from people in "plain english"

I'm quite reluctant to take any penalty... it's extremely harsh. From what I know now, the earliest one can retire without penalty is 55 with 30 years of service. I will have 32 years by then. 

However, if I do take the penalty, I don't believe my investments will make up for it (e-series and ETFs)...


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## Spudd (Oct 11, 2011)

You don't have to take a penalty, you can retire early and defer taking your pension until you are 60. I found this information on the site provided by Rikk. So, if you save up enough to live off for a few years, you can retire and live off that money for however long before taking your pension. Of course your pension will be reduced due to fewer years of service, but you can look at the level of your pension and decide your retirement date accordingly. 

Deferred Annuity

Is a pension benefit that is payable at age 60 to contributors with at least 2 years of pensionable service who are not entitled to an immediate annuity when they leave the public service. A deferred annuity can be converted to a reduced annual allowance at any time between ages 50 and 60. The deferred annuity benefit is calculated using the same formula described for an immediate annuity.


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## jumbalaya (Jan 17, 2013)

so this implies the earliest age of retirement is 50? provided that you wait until age 60 to start the pension?

this is intriguing... thanks for explaining it clearly for me.

i would have to live off my savings for 10 years then... probably not going to happen, realistically. good to know there's an option, though.


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## Spudd (Oct 11, 2011)

No, what they're saying is that you can retire (or quit and go work somewhere else) at any age. If you take the deferred pension, it will be calculated based on your years of service and there's no penalty, assuming you start it at age 60. If you take it between age 50-60, there will be a penalty. I think based on the wording that it is not possible to take it before age 50.


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## jumbalaya (Jan 17, 2013)

sorry for my misunderstanding. regardless, the double whammy of the smaller pension and only being able to take it at 60 will be detrimental... offset by taking another job at early retirement, though. interesting... thank you for your clarification.


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## Eclectic12 (Oct 20, 2010)

jumbalaya said:


> Yes that's true, I realize that I get much less RRSP room than my counterparts in the private industry...


Likely true ... though to be clear, the critical factor is not so much "private" or "public" as it is a "less benefit" (which means more RRSP room) and "more benefit" (which means less RRSP room) thing.

I'd bet some of the special DB pensions that executives have are giving a better benefit than yours so that you'd have more RRSP room than the executive.


The formula to calculate the pension adjustment (pa) for a db pension which reduces earned RRSP contribution room uses only numbers and benefit, not public or private. 


Cheers


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