If you are a Canadian older than 50, the biggest question you may face in the next few years starts with one word: When?
When can you retire? Do you have to wait until you're 65, or can you pack it in earlier? The answer depends on your personal circumstances, but for millions of Canadians still fortunate enough to have employee pension plans, the solution might be found in the number 85.
Canadians who look toward the number 85 are those who belong to a defined benefit pension plan. Teachers, federal, provincial and municipal government employees and many unionized workers fall into this category.
Under a defined benefit plan, your employer, and typically you as well, contribute throughout your working life, and when you retire you receive a fixed, or defined, monthly income.
If you reach retirement age, there's nothing to calculate – the payout you receive has already been defined. The "85 factor" comes into play for pension holders trying to figure out whether it's possible to take early retirement.
"The rule of 85 is a straightforward formula. It's your number of years of service, plus your age. If that number is over 85 you can consider getting out [while still collecting some pension from your plan]," says Andrew Pyle, an adviser and portfolio manager at Pyle Wealth Management in Peterborough, Ont., and an adviser with ScotiaMcLeod.
The formula often comes up in Canadians' minds at the beginning of the year, as we commiserate over the seemingly endless winter and sit down to tax and financial planning. Some 4.5 million Canadians belonged to defined benefit plans in 2012, with an additional 3.5 beneficiaries, according to research done by Boston Consulting Group commissioned by several of Ontario's major pension funds.
The 85 factor can be sweet for those who qualify. For example, under the Ontario Teachers' Pension Plan, a teacher who is 53 and has taught since age 21 (32 years) is eligible for a full, unreduced pension, based on his or her highest five salary years.
A teacher who has earned $85,000 in those best years would get a $52,500 pension in 2014 – more than twice the official poverty line of $23,298 for a single person in a major Canadian city (based on Statistics Canada's 2011 data).
The trade-off for registered pension holders is that they don't have as much room to contribute to RRSPs compared with Canadians who don't have a registered pension. The RRSP contribution limit of $23,820 for the 2013 tax year is reduced for pension holders by the amount that was contributed to their registered pensions last year.
This low contribution limit is hardly a terrible burden because there are now other tax-efficient opportunities to save, such as the tax-free savings account (TFSA), says Evelyn Jacks, financial author and president of the Knowledge Bureau, a national educational institute that focuses on financial education.
"The vast majority of people are not contributing as much as they can to their TFSAs," she says. Canadians can put in $5,500 this year, and any investments they make inside these funds can be withdrawn tax free; in addition, those who did not open funds after the program started in 2009 can put in money to catch up for the years they missed.
Indeed, just one group of Canadians needs to consider not setting up TFSAs – the estimated million people who are dual citizens of Canada and the United States. The U.S. Internal Revenue Service does not recognize the tax-free element of the plans, and may send U.S. citizens who hold TFSAs a bill when they withdraw money.
While not everyone will consider retiring in their 50s, "you should be thinking about when you do want to leave when you're 55," Ms. Jacks says.
She's not talking about freedom 55, though; rather, it's the discipline of planning. Even if you hope to work to 65 – or longer – it's important to look ahead.
What should go into your decision about whether it makes sense to punch out early or not?
The experts say that even though people tend to avoid planning ahead, it should begin sooner rather than later.
"It's important to take the time and be proactive. It's like being proactive about your health," Ms. Jacks says.
"Just as you might need a personal trainer to hold you accountable for your physical health, it's a good idea to consult with a certified retirement planner or a wealth manager so you can have as sound financial health as you can."
Regardless of whether the 85 factor applies to your circumstances, more than just financial considerations should go into your retirement planning, Ms. Jacks adds.
"Retiring to something is important. Retiring to nothing is a void, and it can be stressful and it can make people ill. A successful retirement is a multitude of things, including a healthy mind, body and spirit."