When I first announced to some of my coworkers that I intended on retiring early, their immediate response was that I would not earn my full teacher pension. All I could think of in response was that if I was retiring early, chances are I didn’t need to rely on my full teacher pension.
Their response didn’t even factor in my individual situation. Personally I got into teaching a bit late. In order to work until I earn my full teacher pension I would have to work for another 22 more years. No thank you, not interested.
Misunderstood Teacher Pensions
That pension conversation happened years ago, but lately, the topic of pensions has come up again in conversations. I was surprised by how many other teachers that I talked to didn’t understand their pension.
Fair enough, the majority of them are decades away from drawing from it. But some of my colleagues are very close to earning their full pension. In fact, some of them could have been drawing from their pension years ago.
A bit of background may help to clarify the situation. I am well aware that pensions are not as common as they once were. Where I live, teachers are public employees and therefore have access to a defined benefit pension based on the magic number of 85 (more on that later). Teachers’ pensions are a benefit of the position. Although they are widely known I would argue that they are poorly understood.
When it comes to pensions there are 2 main types, defined benefit, and defined contribution. If you are lucky enough to work at a job that offers a pension, chances are it’s defined contribution. That being said, most government workers have a defined benefit pension.
The following information is for informational purposes only. It is not intended to provide advice for financial recommendations. Please see the counsel of a financial professional for any pension-related decisions.
What is a Defined Benefit Pension?
A defined benefit pension is one in which your employer promises to pay a regular income after retirement. Both the employee and employer contribute to a defined benefit pension, but there is no investment choice for the employee. All contributions are pooled into one general fund that is managed by either the employer or a pension plan administrator.
The retirement income is usually based on some formula that includes salary, age and years of contribution. My teacher pension is based on the magic number of 85 meaning age plus years of contribution have to equal 85 in order for me to qualify for a full pension.
The pension amount is set regardless of how the investments perform. How the investments perform provides some risk to defined benefit pensions. If the fund no longer has money, the pension no longer exists. This can be a risk if the company goes bankrupt. But if the company is still operational, they may just increase pension contributions of current workers.
Defined benefit pensions are less portable between companies. They are usually transferred into a locked-in retirement account (LIRA) or sometimes can be converted into a lump sum cash benefit at termination. But be careful of taking this option if you have a defined benefit pension because you may owe taxes on this amount.
Indexed defined benefit pensions are ones that are adjusted for cost of living and inflation.
Defined benefit pensions are becoming much less common overall but are still common for public service employees. As a teacher, I have access to a defined benefit pension.
What is a Defined Contribution Pension?
Whereas defined benefit pensions are becoming less frequent, they are being replaced with defined contribution pensions.
With a defined contribution pension, your contributions are known in advance but not the retirement amount (like in a defined benefit pension).
Employers and employees both contribute to a defined contribution pension. But the employer only promises to match employee’s contributions, not what the retirement payout will be. This is where you will hear of an employer matching an employee’s contribution up to a certain amount.
What this means is that if a company has a 5% match then if the employee contributes 5% of their income to their defined contribution pension, the employer will do the same. If you contribute $1000, and your employer also contributes $1000, then your $1000 becomes $2000 without even hitting the market.
A benefit of a defined contribution pension is that employees often have some level of control of how their money is invested. They may have to pick from certain investment offerings, but there is a level of choice.
The income available in retirement for a defined contribution pension depends on money management and performance of the investment. When you retire the money gets converted into a LIRA, an annuity, or a combination of the two.
Because defined contribution pensions can be in the form of an RRSP, they are more easily transferred if you change jobs or employers. Often times employees may not realize they have a defined contribution pension because their employer match program is in the form of an RRSP.
Defined contribution pensions are more common in the private sector. Hubby’s pension is a defined contribution pension.
How to Qualify for Your Pension?
Most pensions have some form of vesting period and magic number. The vesting period is how long you need to be working and contributing to the pension plan before you can begin to draw from it.
The magic number is usually the sum of age plus years of service in order to hit a certain number. Once you reach that number then you qualify for a full pension. As a teacher, my magic number is 85, which seems to be fairly common and my vesting period is 10 years. If I were to quit teaching before 10 years then my contributions would be converted into a LIRA or paid out in a lump sum payment.
Working Past Your Magic Number
Once you reach your magic number, if you do not retire and begin to draw from your pension then you are essentially working for a fraction of minimum wage.
Let’s get back to teacher pensions and look at an example
Gabriella has just turned 65, traditional retirement age. She is a teacher and has a defined benefit pension. Gabriella has been a teacher for the past 42 years. She has worked well beyond the 85 magic number, in fact, she has reached a magic number of 107.
When she finally decided to retire, we sat down and calculated some numbers. The difference in her take-home pay from when she was working full time to when she retired and started drawing from her pension is $827 a month.
Not considering any marking or planning time, Gabriella would work on average 130 hours a month. That means, for every day she worked past her magic number of 85, she was working for $6.36 an hour.
You would be very hard-pressed to find any teacher who only works 130 hours a month. In this case, Gabriella has been working for much less than $6.36 an hour, yet the minimum wage is currently $15 an hour.
The sad thing is, before putting in her paperwork to retire, Gabriella had never thought about what her pension might be. Or how close it would be to her teaching take-home pay.
Yes, $800 a month can make a big difference, but it is worth calculating the value of your time. Is Gabriella’s time only worth $6.36 an hour?
It’s pretty sobering when you look at the numbers.
Gabriella could have retired 11 years ago. Think about all of the things she could have done with her time in the past 11 years.
Now I would be remiss if I didn’t mention the satisfaction that Gabriella has probably received from her job over the past 11 years and throughout her career. And the hundreds of students who she has had a positive impact on. For many, teaching is about more than just money.
Final Thoughts on Teacher Pensions
Compared to Gabriella’s example above, I am on the opposite end of the spectrum in my desire to quit teaching decades before reaching my full teacher pension magic number. This doesn’t mean that I am only in the teaching profession for the money. Achieving financial independence will mean that I don’t have to rely on my pension. I can continue to help and inspire youth without being in a classroom every day.
The whole pension discussion shapes how people think and act. I know many people with a teacher pension who do not have any other savings for retirement. They act as if their job and pension are 100% secure. No job, and pension for that matter, is ever 100% secure.
Not only do pensions limit how people save for the future, but they also keep people at jobs they do not enjoy. They control people’s time for the promise of a payout later on. The notion that someone would ever leave a job that has a full pension is seen as absurd.
Yet, isn’t there more to life than dollars and cents?
It saddens me to see so many coworkers working beyond their full pension magic number, or continuing to be miserable at work in order to just reach their full pension.
Striving for financial independence gives options, being a slave to your teacher pension doesn’t.