The closer you get to your qualifying factor, the brighter that beacon (and bigger your pension) is going to be. However, many members are deciding to retire before reaching their 85 (OTPP) or 90 (OMERS) factor. And they are doing so without realizing the kind of financial impact that decision is going to have.
But is retiring a few years shy of that magic number really going to make that much of a difference in your pension income?
Well, that fully depends on a few details beyond your 85 / 90 factor.
Educators Certified Financial Planner professional Lisa Raponi helps put this into perspective.
“One of the biggest financial stresses in planning for retirement is the drop in income from salary to pension, regardless if you reach your 85 or 90 factor,” explains Lisa. “That stress increases exponentially when you add in an early retirement penalty. That’s why future OTPP and OMERS recipients have to look beyond their factor in order to determine whether or not they can live off the reduced income.”
OTPP = 2% x credited years of service x best 5-year average salary
OMERs = 2% x credited years of service x highest paid 60 consecutive months
Using the OTPP calculation as an example, let’s say you’re an education member that earned an average of $75,000 in your best five working years and maxed out your 85 factor at age 56, after 29 years of service.
2% x 29 years x $75,000 = an annual (unreduced) pension income of $43,500*
That’s a difference of $31,500 between your working years and retirement.
Well that depends on your age, or how far away you are from reaching your qualifying factor. Because one of those variables will determine the extent of the penalties your pension would be hit with (for retiring early).
Those penalties are calculated as follows:
– 2.5% per each point you’re away from reaching your 85 factor; or – 5% per year you’re away from age 65 (whichever is less).
– 5% per each point prior to the 90 factor; or – 5% per each year prior to age 65 or 30 years of service (whichever is less).
In the case of OTPP, your pension is reduced by 5% (2.5% x 2) since you are two points shy of your 85 factor. For OMERS recipients, your pension is reduced by 15% (5% x 3) since you are three years away from reaching 30 years of service.
The above graph is purely for illustrative purposes. To determine the penalty you’d be looking at for your early retirement scenario, be sure to connect with an Educators financial specialist.
“Well for one, don’t wait until retirement,” says Lisa. “Far too many education members hold off on making any type of plans until the day they reach their 85 or 90 factor. Trust me, you don’t want to discover that you’ll be dealing with a pension income gap at the eleventh hour. Take some time. Do a bit of research. Go into retirement with your eyes wide open and your finances in check. When in doubt, reach out to me, or any one of my colleagues here at Educators. We know your pension, both OTPP and OMERS, inside and out.”
How much would a one-year leave cost you? Use OTPP’s calculator for an estimated cost (excluding interest).
Perhaps, but let’s chat about it first. Because timing, as they say, is everything. Especially when it comes to an education member’s retirement benefits. So, before you hand in your notice, call on the financial specialists at Educators Financial Group. That way you can feel confident about making the right decision that considers both your personal and financial reasons to retire.
*For illustrative purposes only. Login to OTPP or OMERS account for specific pension information related to your situation.