Author Topic: Any Canadians transition to a government job for the benefits/pension?  (Read 4928 times)

BigBangWeary

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(This question involves plenty of hypotheticals and generalizations. If you are lover of specifics you may want to avert your eyes for this one)

I was wondering if any Canadians here have transitioned to a provincial or Federal job as part of their FIRE strategy. At what age does it become counterproductive to shift from the private sector to the public, do you think?

I have saved hard and invested well, but those bridge benefits, inflation-indexed pensions, and near guaranteed job security are starting to look more and more dear as I get older and start to raise a family.

Assuming it is possible, I would love to put in 10-15 years and have a portion of my total portfolio guaranteed. Who wouldn't! Then again, perhaps public perception and the realities of our economics will force some real change to these plans. Maybe now is not the time to change tact ...

Anyways, I know I am speaking in generalities and am sure to offend some, but my friends who work in government jobs all got in early and are surprisingly unaware about how their pensions or benefits work (or are changing).

So if you are a personal finance-savvy government worker in Canada, school me!


Goldielocks

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #1 on: November 22, 2016, 01:38:42 AM »
I did the opposite.

I was offered a job with provincial health care at age 38, in BC.  The same week, I was offered a job with a private firm, so I compared the two head to head.

Two items made me decide on the private firm  1)  the slightly better commute (it was only an hour back then, now it is well over), and 2)  the cost for benefits with public company.

Yes, the public company would pay famously, but only upon normal retirement age..   eg combination of service and age =80 years...   If i decided to quit at age 50 there would be a hit, even if I did not take the pension until age 65 (when the combined would still only be 77 years, not 80).

Also, the take home pay was quite a bit smaller.  I was required to give something like 10% of my salary to the benefit plan, which was heavily matched...  So much so, that the retirement pension for fully aged pensions was sometimes more than the takehome in the year before retirement.

However, in my case, we had already saved up quite a bit by age 38, so the normal growth of that demanded far, far , less money to be invested each year, else we end up paying more in taxes after retirement.  not a good solution.

And with kids in grade 3 and 6, and a single income family, i wanted to retain as much money as I could for our family needs.  We needed more money today for mortgage, kids summer camps, insurance and RESPs than we needed retirement funds when they are in their 30's.

So, I declined the public pension and benefit in favour of a private company, where I can better control my retirement allocations and funds for FIRE.

Goldielocks

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #2 on: November 22, 2016, 01:39:42 AM »
I will throw this bone out there though....  it makes sense to work part time to earn CCP credits, even in FIRE, as the payback (because your employer contributes) is quite good.

AMandM

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #3 on: November 22, 2016, 02:12:05 PM »
My sister in TO just quit her job and entered a graduate programme to become a teacher, precisely because of the pension benefits.  She is 49 and she calculated that she has just enough years left to work after getting her teaching credential to qualify for the retirement plan.  She also has her RRSP savings from her previous job, though I don't know how much.

Goldielocks

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #4 on: November 22, 2016, 02:29:06 PM »
My sister in TO just quit her job and entered a graduate programme to become a teacher, precisely because of the pension benefits.  She is 49 and she calculated that she has just enough years left to work after getting her teaching credential to qualify for the retirement plan.  She also has her RRSP savings from her previous job, though I don't know how much.

Yeah it works both ways -- you can save enough in about 15 years to make a retirement from nothing.. but if you already have retirement savings "in the bag" it is a pretty poor benefit.

Zikoris

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #5 on: November 22, 2016, 02:36:53 PM »
To my understanding, those government pensions massively screw over early retirees through penalties and such. I greatly prefer working for a company that just matches my retirement contributions and lets me invest it as I see fit.

okits

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #6 on: November 22, 2016, 10:51:43 PM »
My sister in TO just quit her job and entered a graduate programme to become a teacher, precisely because of the pension benefits.  She is 49 and she calculated that she has just enough years left to work after getting her teaching credential to qualify for the retirement plan.  She also has her RRSP savings from her previous job, though I don't know how much.

Is she certain she can snag a job upon graduation?  From a friend who recently finished teacher's college, apparently this is difficult. 

BigBangWeary

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #7 on: November 23, 2016, 03:44:30 AM »
Goldielocks, interesting perspective, thank you. I suppose I forget just how flexible being in charge of your own retirement can be. Then again, if we have another 2008-like event just before or during retirement, I think the government worker comes out ahead in terms of stress-free retirement. But yes, flexibility becomes more important to those of us eyeing early retirement. Point taken.

AMandM I have so many friends who have been waiting years to get full time positions (Concurrent Ed Queens grads, good qualifications and connections etc.). After a decade of part time work a number of my former peers have made the move to other career choices. I do hope she is able to follow through with her plan.

Goldielocks, That is how we should view it, yes. When I look at my current nest egg I see a number, but allowing myself to safely assume/calculate the future value based on a reasonable cost-adjusted return is something I have a hard time doing. At least in terms of feeling secure about it.

FireDice

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #8 on: November 23, 2016, 08:38:08 AM »
Taking a Federal Gov't job later in your career makes early retirement pretty difficult. With the Fed pension, you get your the average of your best 5 years multiplied by 2% multiplied by the number of years.  (eg. 10 years at 70K -> 14k/yr pension) And you're eligible for that money only once you're 60, taking it earlier is heavily penalized. 

You seem adverse to watching your nest egg ride up and sown in the markets, have you considered an annuity for a portion of your retirement?  With it you'd get some of the stability you're seeking.  It's a recommended strategy of Fred Vitesse in "The Real Retirement" which a good book in persuading you that you are likely going to need less in retirement than you think (using real numbers).

While not a Mustachian move, it may be a good option.

wwilberforce

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #9 on: November 23, 2016, 11:31:10 AM »
My sister in TO just quit her job and entered a graduate programme to become a teacher, precisely because of the pension benefits.  She is 49 and she calculated that she has just enough years left to work after getting her teaching credential to qualify for the retirement plan.  She also has her RRSP savings from her previous job, though I don't know how much.

Yikes! There's a teacher surplus in Ontario at the moment.  It could take years of supply teacher work before she gets hired to a full-time permanent position. I hope your sister is aware of this....

powersuitrecall

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #10 on: November 23, 2016, 01:19:39 PM »
To my understanding, those government pensions massively screw over early retirees through penalties and such. I greatly prefer working for a company that just matches my retirement contributions and lets me invest it as I see fit.

Taking a Federal Gov't job later in your career makes early retirement pretty difficult. With the Fed pension, you get your the average of your best 5 years multiplied by 2% multiplied by the number of years.  (eg. 10 years at 70K -> 14k/yr pension) And you're eligible for that money only once you're 60, taking it earlier is heavily penalized. 

Depending on the pension, one may be able to commute the pension at time of retirement.  This Meaning you remove yourself from the pension's obligation for payout at 65 in exchange for a tidy sum of money.  You get a tax sheltered portion which can be moved to a Locked-in RRSP at your favourite discount Broker, and a cash portion which is taxed as income the tax year that is received.  This is the case with my pension, as long as I do it before the age of 50. 

I started my public service career 7 years ago, after working 14 years in the private sector.  I was starting a family. The job security and location was favourable so I took it.  This was before I started thinking about RE, but it's going to be just fine.  If I left today, I would receive ~$81K tax sheltered and ~$124K cash (~$93K after taxes).

AMandM

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #11 on: November 23, 2016, 06:10:30 PM »
Is she certain she can snag a job upon graduation?  From a friend who recently finished teacher's college, apparently this is difficult.

I asked her this when she first discussed the plan with me.  Apparently the francophone schools don't have a teacher shortage. She was confident she will get a job.  I'm not in Ontario, so I don't know how realistic that is.

BigBangWeary

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #12 on: November 24, 2016, 12:39:17 AM »
FireDice Thanks, that gives me some help with the numbers. So (again generalizations here) correct me if I am wrong, but using the 4% rule a private sector worker would need to be able to save at least $350,000 in those same 10 years to equal the $14,000 per year that pension would be throwing off at 60. But I would probably add to that since the pension would be gold-plated and inflation adjusted, and that counts for a lot. So maybe worth $400,000+. Do others think that sounds about right?
I have not read that book, and I am going to add it to my list. It is true that I am getting a bit more conservative as I move forward in life, but part of that probably has to do with the fact that I see the writing on the wall in my current industry and I know that one day these days of making hay will be over.

Powersuitrecall - But don't you remove the true power of the government pension then? I mean the fact that unlike our own investments, yours are guaranteed regardless of whether another 2008 happens, and the inflation matching? That, and the fact that if you live to be 110 it will still be paying out. I hear a lot about people taking commuted pensions, but do they calculate the true value of having the above? What are your thoughts?

AMandM Im glad to hear it is different outside of Ontario. If anyone ever has doubts about the current teaching situation in Ontario check out the 187 pages of commentary on the Career section of RedFlagDeals. If you have children dreaming of being teachers it is worth making sure they are informed of the situation http://forums.redflagdeals.com/teaching-jobs-yrdsb-tdsb-560261/187/

FireDice

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #13 on: November 24, 2016, 07:57:22 AM »
FireDice Thanks, that gives me some help with the numbers. So (again generalizations here) correct me if I am wrong, but using the 4% rule a private sector worker would need to be able to save at least $350,000 in those same 10 years to equal the $14,000 per year that pension would be throwing off at 60. But I would probably add to that since the pension would be gold-plated and inflation adjusted, and that counts for a lot. So maybe worth $400,000+. Do others think that sounds about right?

That sounds about right.  Note, however, the 4% rule accounts for inflation.  Also, you have to save that money by the time you're 60 (correction now 65), depending on your age and when you want to retire you might have some years of compounding to build the nest egg.   Finally, that 14000K is taxed, so depending on your other income a smaller amount in a TFSA is equivalent. 
powersuitrecall is correct, you have the option of taking it out in lock-in RRSP and taxed cash before age 50 (now 55).  The value of which is dependent on current interest rates, if rates go up, the value will drop.

I don't want to dissuade you from the public service, it can be really rewarding and the benefits are good.  Before you accept a position, get a real handle on all the rules and options for your pension ans see how they fit your plans.  I've edited the ages because some of the rules have changes since I started.  http://www.tpsgc-pwgsc.gc.ca/remuneration-compensation/collectivite-community/employeur-employer/pr-pp-01012013-eng.html

powersuitrecall

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #14 on: November 24, 2016, 09:30:06 AM »
Powersuitrecall - But don't you remove the true power of the government pension then? I mean the fact that unlike our own investments, yours are guaranteed regardless of whether another 2008 happens, and the inflation matching? That, and the fact that if you live to be 110 it will still be paying out. I hear a lot about people taking commuted pensions, but do they calculate the true value of having the above? What are your thoughts?

It's something I've thought about quite a bit.  I wrote about it in my journal here and here.

A lot of it boils down to how comfortable one is with the 4% rule, and how comfortable one is with investing in general.  I am comfortable with both, so the fact that pensions are guaranteed and are indexed adds little value to me.  As FireDice stated, the 4% rule accounts for inflation as well as it does countless financial crisis events of the past, including 2008.

As an early retiree (age < 50), I will have to decide between taking a lump sum and a deferred annuity.  I will not have the option of taking even a highly penalized pension, since I won't have the required years, or be at the minimum age.  In my calculations I found that, even when assuming a conservative 4% growth of investments, the present value of a deferred annuity was worth ~65% of what the lump sum payment would be.

Other than straight up math, there are some other reasons one might want to take a lump sum rather than a pension / deferred annuity:

Tax efficiency/flexibility: I can choose where my income comes from (sheltered or not).  An annuity is considered 100% income and is taxed as such.  There are advantages to keeping reported income low (gov't benefits, income taxes, etc).

Inheritance: I am married and with kids. They will inherit my portfolio when I die rather than my wife receiving only 50%.

One aspect that I did not talk about is the lack of access to the Public Service Health Care / Dental Plan.  I don't believe this is available when taking an annuity, but it is definitely not available when taking the lump sum.  I'll look more into this as my FIRE date approaches - a planned increase in health care spending will be warranted and should be added to the FIRE stash requirements.

backyardfeast

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #15 on: November 24, 2016, 09:59:53 AM »
I think a lot of this comes down to personality and perspective.  Also, I don't know your field, but you may want to look at universities or other public sector options outside government, per se; there are a wide range of pension structures out there.

Two stories.

1.  My mother worked her way through her undergrad in an on-campus job that had a pension contribution, which she took.  She did this for 10 years or so, I think, and then moved on and had a varied and interesting career.  Toward the end of her career, she ended up working back at the same university, first as a contractor.  As she neared retirement, though, she realized that if she were an employee (which was their preference), and contributed to the pension plan, her earlier years of service would still be usable!  I believe she worked about 5 years as an employee, at a peak salary (much less than she earned as a contractor, though), to get the pension as high as she could, and then retired around 60.  As in your case, her pension is only a portion of her income, but it gives her a secure base that her other investments and CPP etc top up handsomely.  I am thrilled that she took advantage of this opportunity and is comfortable now.

2.  I teach at another university, and luckily our pension plan is tied to the provincial one (not true of all institutions, they vary a lot).  Zikoris is right that there are substantial "penalties" associated with when I retire.  But I think my colleagues who see this as "losing out" are crazy.  If I work until 55 (which is fine with me; I started working and saving late), my pension will be around $2500/mo.  If I work until I'm 65, my "unpenalized" pension would be closer to $7500/month.  A BIG difference!  But also a big difference in taxes; that $7500 is about what I'm grossing now.

But who cares?  My decision about when to retire will be when we have enough income to live on comfortably.  With both DH and my CPP and his OAS, and some other savings and income, that $2500 may be quite enough.  My plan is to work until 55 and then take it a year at a time to decide when we've hit the sweet spot.  To me the idea of "penalty" just isn't relevant; it's all about the power of how to be happy living frugally so that you don't NEED much.  It's just another way of playing the OMY syndrome.

tomatops

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #16 on: November 24, 2016, 10:20:40 AM »
I think a lot of this comes down to personality and perspective.  Also, I don't know your field, but you may want to look at universities or other public sector options outside government, per se; there are a wide range of pension structures out there.

Two stories.

1.  My mother worked her way through her undergrad in an on-campus job that had a pension contribution, which she took.  She did this for 10 years or so, I think, and then moved on and had a varied and interesting career.  Toward the end of her career, she ended up working back at the same university, first as a contractor.  As she neared retirement, though, she realized that if she were an employee (which was their preference), and contributed to the pension plan, her earlier years of service would still be usable!  I believe she worked about 5 years as an employee, at a peak salary (much less than she earned as a contractor, though), to get the pension as high as she could, and then retired around 60.  As in your case, her pension is only a portion of her income, but it gives her a secure base that her other investments and CPP etc top up handsomely.  I am thrilled that she took advantage of this opportunity and is comfortable now.

2.  I teach at another university, and luckily our pension plan is tied to the provincial one (not true of all institutions, they vary a lot).  Zikoris is right that there are substantial "penalties" associated with when I retire.  But I think my colleagues who see this as "losing out" are crazy.  If I work until 55 (which is fine with me; I started working and saving late), my pension will be around $2500/mo.  If I work until I'm 65, my "unpenalized" pension would be closer to $7500/month.  A BIG difference!  But also a big difference in taxes; that $7500 is about what I'm grossing now.

But who cares?  My decision about when to retire will be when we have enough income to live on comfortably.  With both DH and my CPP and his OAS, and some other savings and income, that $2500 may be quite enough.  My plan is to work until 55 and then take it a year at a time to decide when we've hit the sweet spot.  To me the idea of "penalty" just isn't relevant; it's all about the power of how to be happy living frugally so that you don't NEED much.  It's just another way of playing the OMY syndrome.

Awesome stuff. I have to agree in your statement of "penalty" vs. "power".

I'm in the public sector as well, but just out of curiosity, have you also chosen to max out your RRSPs with your gig?

Ishmael

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #17 on: November 24, 2016, 10:56:48 AM »
If you leave the federal public service before age 50 (but after you have at least 2 years service in), you can take what's called a "Transfer Value", which is a lump sum of money in lieu of a pension. Right now, with low interest rates (and possibly going to go lower?), that lump sum is significant, and is much more attractive to me than the future pension.

This lump sum has two parts - "inside tax limits" that can be rolled into a LIRA, and "outside of tax limits", which is considered income. The formula to calculate is found here: http://www.milliondollarjourney.com/how-to-calculate-pension-maximum-transfer-value-mtv.htm. If you have RRSP room, you can use it to mitigate the tax hit somewhat.

We're also currently 3 years without having a  signed contract, so once we negotiate a contract for the past 3 years, we'll be receiving retroactive raises and a lump sum of cash. More importantly, this will cause the "best 5 years salary average" to move up slightly, also increasing the "Transfer Value" lump sum amount.

As I'm currently in the OMY phase, I'm hoping for these events to all come together to make the timing just right for me, and pull the plug, opt for the lump sum (after Jan 1st 2018, as that will mean I'll only have the lump sum on my income for 2018, not salary + lump sum - you have a year after leaving the public service to elect for the lump sum, and you can lock the value in at any point during that year). I also have some RRSP room I left in anticipation of this all occurring.

Also, I believe that new federal public servants have a slightly different pension plan than I do (thank the Cons), but I don't know what the differences are.

Goldielocks

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #18 on: November 24, 2016, 11:02:22 AM »
Also note that because of years remaining, the value put in by employer per year of service is higher after 45 than under 35.

The sweet spot for defined benefits is working after 45 but before the commuted value / receive lump sum option ends, once vested.

powersuitrecall

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #19 on: November 24, 2016, 11:27:55 AM »
Also note that because of years remaining, the value put in by employer per year of service is higher after 45 than under 35.

The sweet spot for defined benefits is working after 45 but before the commuted value / receive lump sum option ends, once vested.

Can you point me to more on why this is?  I'm planning on retiring at age 47.  Why does the employer contribute more after 45?  Because there is less time for compound interest to do it's thing?

backyardfeast

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #20 on: November 24, 2016, 01:05:53 PM »
Quote
I'm in the public sector as well, but just out of curiosity, have you also chosen to max out your RRSPs with your gig?

Definitely no maxing out here! (See "starting late" above. :) )  However, I do make contributions these days, and will over the next 10-15 years, just for the tax savings as my income is *just* into the next tax bracket, and RRSPs are an easy way to bring it back down.

[a]bort

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #21 on: November 25, 2016, 03:14:28 PM »
Thank you so much for this thread. I have been working for a crown corp. for 4 years now and since discovering FIRE have been looking for information on what happens to my defined benefit plan if/when I leave early. The only information I could find internally is that I can either have it become a "deffered pension" that I start receiving at 55 at a penalized rate, or take a lump sum, but there was no information how either options would actually be calculated, and I've read contradictory information from other sources.

So currently I am not even taking my pension into consideration when planning for RE, I'm just focusing on getting to that 4% rule with my own savings, and anything that I would end up getting from my pension would just be an added bonus.


Goldielocks

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Re: Any Canadians transition to a government job for the benefits/pension?
« Reply #22 on: November 27, 2016, 02:03:58 AM »
Usually, distributions upon leaving the company prior to 55 can be made to buy an  annuity, to another registered pension plan (new employer), kept in the pension for retirement later, or rolled into a new LIRA. (locked in retirement account).

A portion of it sometimes is freed up for non-locked in use, your age, etc.  This must be selected within 60 days of leaving the company / receiving your payout.

Eacy year, the employer must ensure that the defined benefit plan is funded for the pension amount that you have earned so far.  Because of changing interest rates, and the time value of money, more is needed if you are older, or interest rates are low.

Actuarial average supposedly states that on average, $9 of funding is required to generate every $1 of benefit of future pension.  But older employees need more and younger ones need less.   Your employer has to fund the pension amounts for a group, so uses the average for all.

When you get a lumpsum, of a vested pension, to put into a LIRA, the employer needs to calculate what your entitlement is at age 65, converted into today's Present value of that sum of money (PV) ( your future pension is simply an annuity worth x$ per year until age 90, calculated as a PV lump sum today, using today's low interest rates.)

If you are older, there are fewer years of compounding growth until your expected retirement at age 65, so more $$ is needed, for the same pension of a 45 year old, when expressed as a lump sum of money today, than for a 25 year old.