Ask Educators: how can I fill a potential pension income gap due to inflation?
One of the most commonly asked questions we get from education members in retirement involves pension income and inflation.
Specifically, many retirees have been wondering why their annual pension adjustment rarely matches the rate of inflation reported in the media. Sometimes it’ll be higher and on other occasions, it’ll be lower.
According to the Ontario Teachers’ Pension Plan, that’s because the media compares the Consumer Price Index (CPI) for the current month to the same month a year earlier.
OTPP, on the other hand, compares the average monthly CPI for the 12-month period ending in September to the 12-month average a year earlier (the CPI ratio), effectively smoothing the adjustment from year to year. The current levels of inflation are then factored into future pension increases as they flow into the averaging period.
About the CPI: The Consumer Price Index is the measurement of the average change over time in the prices paid for consumer goods and services.
Understanding how your annual pension adjustment is calculated is one thing—figuring out how to fill a pension income gap that may remain due to inflation is another.
After all, when the cost of everyday life is continuing to go up beyond the pension income you’re bringing in, you need practical solutions that you can implement now.
The first thing you can do is assess your overall financial situation.
- How much money is coming in every month vs. going out?
- Do you have any outstanding debt impacting your monthly cash flow? (I.e. mortgage, loans, etc.)
- Do you have any additional savings/investments you can tap into?
Next, identify any areas where you can save.
“One of the biggest savings barriers for retired education members is debt,” says Educators Senior Financial Advisor Ahmed Rageh. “If you’ve entered your pension-collecting years with a balance remaining on your mortgage, credit cards, or and/or other types of loans, your focus should be to pay those balances off as soon as possible. To help expedite this, you may want to consider consolidating multiple high-interest loans into a line of credit at a lower rate. This has the potential to free up monthly cash flow by making one monthly debt payment (instead of several). The savings can then be applied to boost others areas in your budget where you need it the most, such as food, utilities, and other everyday essentials.”
Boost your retirement cash flow even further with these 5 tips for savings up to $500 a month.
Once you’ve identified areas in your budget where you can save, Ahmed recommends putting that money away into an emergency fund.
“Getting into the habit of saving money can be difficult,” continues Ahmed. “Especially in today’s world, where—thanks to technology, we don’t even have to leave home to shop for literally anything and everything. However, with inflation being as high as it is now, it’s crucial to start approaching spending through the lens of needs versus wants. If you can live without it, sock that money away instead. Because if inflation continues to increase any further, you’ll definitely be glad to have an emergency reserve of cash flow saved up.”
Another source of income could potentially come from any investments you may have, but what if your portfolio has recently taken a bit of a dip.
“The market ebbs and flows with the pulse of the economy and now isn’t any different,” explains Ahmed. “Naturally, any dip in value can be scary—especially when you’re in retirement. But history has shown that the stock market does eventually bounce back and maybe even sooner than you might think. Before you do anything, however, be sure to consult with your financial advisor, because the worst type of investment decision is one that is driven by emotion.”
If you’re still a long way off from retirement, plan for the future now by looking for ways to maximize your investments in your pension years.
That’s where a spousal RRSP can potentially be a tax planning tool you leverage to bolster household income in retirement.
How a spousal RRSP works:
- It would be set up in the name of the lower income-earning spouse
- You don’t have to be married to open a spousal RRSP, it also applies to common-law partners
- You can make contributions to and receive tax deductions from a spousal RRSP (keeping in mind to stay within the contribution room for both)
Benefits to a spousal RRSP:
- The higher-earning spouse would receive a tax deduction that could lower their personal tax obligations for the year (this means putting more money back into your household)
- The lower-earning spouse would get taxed at a lower marginal tax rate when the money is withdrawn
Tip: Since an education member’s RRSP contribution room is dependent on factors such as salary level, whether you/your spouse started teaching earlier or later, or took a year off (I.e. ‘X over Y’ leave)—there are also other options beyond a spousal RRSP that can be explored. Click here to have one of our financial specialists discuss these options with you further.
If you still have any questions regarding the impact of inflation on your pension income, reach out to us for educator-specific advice.
From pay grids to your pension plan, Educators Financial Group has a unique understanding of how your pay structure works during your working years and in retirement. It’s the kind of insight that can truly go the distance when it comes to helping you maximize every bit of pension income, regardless of what inflation happens to be at the time.
Let’s chat about maximizing your pension income. Have other financial questions? Send them to eNews@educatorsfinancialgroup.ca to be featured here next.
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