Ask Educators: should inflation impact my decision to retire early?
With the inflation rate at an all-time high, Randy, an education member approaching his 85 factor, had the following question for us.
“I’ve been wondering about how the current rate of inflation might affect a teacher’s decision to retire early. I’m about 1.5 years away from my 85 factor—and with inflation outstripping salary increases, does it makes sense to retire a year early just to protect the value of my pension? Before, an inflation rate of 1%-2% was not a significant issue. However, with rates (currently) pushing 4%-5%, the situation is quite different. I know I’m not the only one thinking about this.”
To help shed some light on this particular question, we turned to Educators Certified Financial Planner professional Lisa Raponi.
Thanks for the great question; this is definitely one of the hot topics with education members right now. When it comes to your own situation, the decision to retire early all comes down to whether you feel the financial gap is significant or not. But what kind of gap are we talking about?
Assuming you’re making roughly $95,000 as you’re approaching your 85 factor (which tends to be the average salary of an education member nearing retirement), here are two scenarios based on the question at hand:
- Scenario 1: wait until you reach your 85 factor and retire with a full pension (30 years of service)
– Full pension amount = $57,000/year
- Scenario 2: retire one year shy of reaching your 85 factor
– Reduced pension amount = $53,722/year
As you can see from the scenarios above, the difference in your pension would be $3,278 less by going with the second option. That comes down to the fact that the penalty for retiring early is either 2.5% per point below your 85 factor (your age plus your years of service), or 5% per year away from age 65—whichever is less.
This reduction would apply for the rest of your life.
Going forward, while the reduced pension would be increased every year by an inflation adjustment using CPI (Consumer Price Index) subject to a maximum, keep in mind your overall income will have gone from $95,000 per year to $53,722. That’s quite the difference. Even though your salary may not rise in excess of the inflation percentage, from an income perspective, you would have been better off waiting.
For education members that are already retired, budgeting is key.
Because even though your pension is increasing by CPI, we know the costs of certain things are increasing beyond CPI (such as gas and travel prices). So, it’s best to tighten your budget for now, at least until you determine whether inflation will have a long-term impact on your pension/retirement income.
Trying to navigate the whole pension/inflation discussion can be quite complex and confusing—especially since there are many variables to factor in.
For that reason, it’s best to reach out to an Educators financial specialist, who will be able to determine your best course of action based on your specific situation. You can also check out the OTPP or OMERS website for a better understanding of your pension income inflation adjustment.