When building a financial plan it is important to fully analyze an individual’s income source and benefit arrangements. By doing so, a proper strategy can be put in place to maximize a person’s wealth and guide them towards accomplishing their financial goals.
As a public servant, some of the strategies employed can be quite different when compared to someone working in the private sector. Although the government’s pension and benefits are typically top of the class there may be specific ways that government employees can do even more with the money they receive.
Let’s explore some of these tips!
1. Severance Payment: In our past article entitled “Government Severance Payments: Keep More Money in your Pocket!” we addressed the many different options you have if you are entitled to receive a severance payment. Essentially, one of the best options would be to transfer it to your RRSP (if you have room) to reduce or eliminate the tax burden. If you have been employed by the government for a long time you can have access to additional RRSP room for the severance payment. This allocation equates to $2,000.00 for every year of service before 1996 and an additional $1,500.00 for every year of service before 1989. If you are able to roll a large sum into your RRSP you will then be able to take the amount out in small increments over time by converting your RRSP to a RRIF at retirement and pay less tax on each dollar withdrawn. If you don’t have the RRSP contribution room, you can try to time your retirement so that it falls at the beginning of a new calendar year where you know you will be earning a lower income. This way the tax impact of the severance pay will be much smaller.
2. RRSP: As a government employee, much of your RRSP contribution room gets eaten away by your pension adjustment. Since you will typically receive sizeable pension earnings in your retirement years it may not be the wisest choice to contribute to your RRSP. This will simply add to your retirement income and at times can hinder your chances of receiving certain retirement benefits and push you into higher tax brackets. As mentioned above, the RRSP can be a vehicle used to save taxes on your severance payments, or in instances where you find yourself in higher tax brackets. In cases where one spouse earns a sizeable income at the government and the other earns a smaller salary, the remaining RRSP contribution limit can be used to help restore income equality for a couple throughout retirement. By contributing to a spousal RRSP, the income deduction will go to the higher income contributor, yet in retirement years the income from this vehicle will be taxed in the hands of the holder at a lower tax rate.
3. TFSA: Since the RRSP is usually not the most effective vehicle for public servants, the Tax Free Savings Account is typically the best alternative. By investing in a TFSA you get to grow your post-tax earnings tax free and get to take it out with no future tax consequences. When funds are withdrawn from your TFSA they will not be added to your annual earnings for tax purposes. This is an advantage when your retirement earnings are already high due to your pension.
4. Non-registered Investments: Just because you have a stellar pension does not mean you should stop saving! You may think your pension will supply enough income throughout retirement but many people will be surprised to learn that it will not completely enable them to maintain the same standard of living that they are currently experiencing. Do you want to take a cruise down south? What about unexpected roof repairs to your house? When all tax deferred and tax free accounts have been maximized it is a wise decision to build up a nest egg in a non-registered account to supplement your other sources of income.
5. Buying Back Pension: To buy back or not to buy back? That is the question. In certain instances such as maternity leaves or sabbatical leaves you will have missed out on years of contribution towards your pension. You usually have the option to buy back these years in order for them to count towards increasing your pension. Your employer will typically give you the tools necessary to perform a cost benefit analysis. Generally, if you intend to stay with the same employer for a prolonged amount of time it is best to buyback pensionable years when you are younger or earlier in your career, this typically correlates to years when you have a lower income and have had a shorter tenure in your current position. The reason for this is that the cost of buying back those years of service will be lower because of your shorter service period and lower income. The end benefit will be quite large as your income will likely rise with your longer service period which will act as a multiplier in obtaining larger earnings at retirement. Your life expectancy will also have an impact on your cost benefit analysis but it is a variable we cannot easily predict. It is best to focus on the variables you can better forecast; your years of service and the salary in your final years.
6. Insurance: An essential piece of financial planning is to prepare individuals for their future. However as we know, the future is unpredictable and predictions are typically based on various assumptions. For this reason, it is always wise to hedge against unforeseen circumstances. One of the best ways is to use insurance. If one individual’s public pension will be providing the majority of your family income throughout retirement, what would happen if this person were to disappear from the picture? In case of death, the spouse will continue to receive death benefits as a percentage of the deceased spouses’ pension, but this will not equate to the full amount that was previously received. Making sure you have life insurance to properly fulfill your family’s obligations in the event of death is an important aspect to think about.
With these new tips in hand, take a look at your finances, are you maximizing your wealth and well prepared for the future?