Investing: taking your money beyond ‘pay grids and pension income’
So you’re making your way up the pay grid and have a defined benefit pension plan in place. Wonderful—your finances are cruising forward at a comfortable pace.
But why stop at ‘comfortable’?
After all, life comes with a constant flow of financial challenges and demands; sometimes ‘comfortable’ just isn’t enough to cover the unexpected. Plus, there are all of those goals and aspirations you have beyond simply ‘paying the bills’.
That’s where investing can put you in a better position to achieve your dreams, while still comfortably meeting your everyday financial obligations.
However, there is a certain misconception preventing more people from taking advantage of the power of investing. That misconception? Thinking they don’t have enough money to invest. In fact, according to an Ipsos Reid poll, it’s the number one obstacle preventing Canadians from investing in the first place.
Depending on where you are on the pay grid, perhaps you’ve had the same reason for putting investing on the backburner. Maybe having a pension plan in place also makes you think that investing doesn’t need to be much of a priority because all of those pension contributions will eventually pay off in retirement, right?
Yet you actually don’t need a lot of money to start investing.
And there is so much more than retirement to think about—such as saving for a down payment on a home, unexpected repairs and renovations, post-secondary education for your kids, cash flow during the summer months… and that’s just for starters. When it comes down to it, there are so many reasons to invest that you, as an education member, can’t afford to not be investing.
Here are 5 of those reasons (including one very educator-specific one):
#1: Put simply, investing grows your money.
While money doesn’t grow on trees, it does grow in stocks, bonds, and GICs. That’s the power of compound interest when you invest. Over time and with a proper plan, investing can put you on a path to achieving wealth well beyond where you are on the pay grid, or what your pension income is in retirement.
Check out this article to see how contributing as little as $100 a month can lead to sizeable earnings over time.
#2: If you stick to cash only, you’ll actually lose money to inflation.
If you’re building up money in your savings account over the years, you won’t be earning enough interest in that account to cover the ever-increasing cost of living. It’s actually a double-edged sword, because when your cash fails to keep up with inflation, it actually loses relative value and you’ll have less buying power. You’ll then have to add more to your cash balances to make up for the lost value (versus inflation). Yet if you’re not earning more, adding to your cash balances won’t even be possible.
Investments, on the other hand, can be indexed to inflation—preventing your assets from declining in value as time goes by (and the cost of living goes up). Educators Certified Financial Planner professional Graham Walker puts it all into perspective. “I speak with many clients who talk about how their everyday expenses seem to keep going up, yet their income remains the same. This is where investing enables you to preserve your buying power as inflation rises.”
But what about when the market takes a downturn?
Volatility comes just as natural to investing as profitability. The key is to remain calm and committed to your financial plan. Your assets will recover—just give it a little time… and patience.
Learn more on how to handle market volatility.
#3: Investments can give you livable income in retirement (over and above your pension income).
Planning for a financially secure retirement means factoring in calculations beyond your 85 or 90 Factor. While having OTPP or OMERS benefits to count on is a definite advantage, there is a longevity factor to consider (i.e. people are living longer). In fact, according to the Ontario Teachers’ Pension Plan, there are currently over 146 retired educators in Ontario over the age of 100.
With education members tending to retire earlier than the average Canadian (by age 59 in fact), it means you could potentially spend more years living in retirement than you actually spent working. Should you and your spouse/partner eventually need to move into an assisted living facility, these incremental costs could exceed what you would be receiving in pension benefits.
This is where investing can help fill potential gaps in your pension income.
Some investments can give you anywhere from 4% to 6% in livable income, which can then be used to bridge any pension income gaps and provide you with added peace of mind. Naturally the larger the portfolio balance, the steadier the income stream you can draw from it (in addition to your pension).
#4: Having a pension could actually boost returns on your investments.
It’s true. Research from Statistics Canada has shown that individuals belonging to an employer-sponsored pension plan (such as OTPP and OMERS) actually have greater returns on their outside investments.
How much of a boost are we talking about?
StatsCan analyzed the relationship between pension coverage and the investment performance in TFSAs for approximately 345,000 Canadians between 2009 and 2013. Overall, they discovered that belonging to a pension plan led to a higher average rate of return of roughly 0.50% to 1.25%.
As for possible reasons for the positive ‘pension effect’—StatsCan surmises that having a pension might cause individuals to start thinking about saving earlier in life. In addition to being proactive, having core retirement savings in a company-sponsored pension could also lead individuals to invest in riskier assets. And the greater the risk, the greater the potential for higher returns.
Do you know how much risk you’re willing to take on to achieve your goals? Click here to find out.
#5: Tax savings—need we say more?
There are two key investment vehicles that are the equivalent of giving yourself a tax break: RRSPs and TFSAs.
Registered Retirement Savings Plan (RRSP)
You may want to consider adding to your pension income in retirement by investing in an RRSP. If you begin moving up the pay grid and are looking to minimize the amount of income tax you pay on that higher salary, RRSPs also make a good place to ‘park’ that additional income.
While your investments sit in an RRSP, their growth is tax-sheltered, so their value may increase more quickly. By the time you start withdrawing funds (in retirement), you will most likely be in a lower tax bracket—in which case you will benefit from a lower tax rate on those withdrawals.
Being an education member, keep in mind that your individual RRSP contribution room will depend on any pension adjustments and carry-forward of unused deduction limits from previous years.
Check out RRSPs: what’s fact, what’s fiction, and what’s specific to education members for more information.
Tax-Free Savings Account (TFSA)
Whether you’re looking to build a ‘summer fun’ fund, or an emergency fund, a TFSA is the perfect investment vehicle to save for any financial goal. Unlike an RRSP, a TFSA does not reduce your taxable income, but it does provide tax-free investment income—which could add up to significant savings as that TFSA continues to grow in the short- or long-term.
TFSA Master Class—Lesson 1: Shift your tax-free savings out of ‘park’ to drive higher returns.
Whatever your goal or stage of life, we can help you invest wisely, every step of the way.
That’s because Educators Financial Group understands your cash flow in your working years and in retirement. This unique perspective enables us to offer you the investment products and advice that work within your budget—no matter where you are on the pay grid, or what your pension income is in retirement.
Let’s chat about growing your money beyond pay grids and pension income.