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I am a teacher and automatically contribute into the Teacher's Pension Plan every paycheque. This pension plan is considered to be one of the best in the country. Do I need to have an RRSP as well? Should I be putting extra money away every month for retirement?

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I would say yes: it's worth building additional retirement savings on top of a defined benefit pension plan (plans that pay set annual income). Here are a couple of reasons:

  1. Don't put all your eggs in one basket. While OTPP is probably in good shape, things can and do happen to pension plans. While there is a provincial system in place to guarantee some of your pension income ($1000/mo) if your plan goes bust, your benefits are not 100% guaranteed.

  2. Defined benefit pension plans are designed to provide recurring annual income, like your paycheck when you are employed. You can't "take more out" from your defined benefit pension plan when an emergency comes up. Whereas, your RRSP (and eventually RRIF, in retirement) are accounts from which you can take out extra in any given year, if necessary.

That being said, Canada Revenue Agency (CRA) won't let you save as much in your RRSP as other people who don't have pension plans:

Normally, individuals in Canada are entitled to save 18% of their earned income, up to a limit ($21000 in 2009) in an RRSP each year. However, to level the playing field, individuals who are in a pension plan get a "Pension Adjustment" (PA) number on their T4 which reduces their available RRSP contribution room. Otherwise, they'd be able to tax-shelter more income for retirement than others.

So, I would suggest if you have the RRSP room, consider using it. I'd also suggest you look at a Tax Free Savings Account (TFSA), especially if you don't have much RRSP room due to the pension adjustment. If you're not sure whether to use an RRSP or a TFSA, consider both.

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Let's say your marginal tax rate is 33%. For every dollar you put in an RRSP, you'll get 33 cents back on your taxes, while the whole amount grows tax free inside the investment. If you can afford it, money in an RRSP generates a lot of free money.

  • a tax return is just what it says 'a return of your money'--you should try to put your self in a position where you are paying taxes quarterly, not loaning your money tax free to the government. – Tim Jun 14 '10 at 2:30
  • @Tim: If you have the RRSP deducted directly on your paycheque, you get the tax back on it immediately. – Scott Whitlock Jun 29 '10 at 2:14
  • @Tim - Actually, in Canada, you aren't loaning it for free. The government pays fairly considerable interest on overpaid remittances. As of Q3 2014, the prescribed interest rate on overpaid remittances for non-corporate taxpayers is 3% annually, compounded daily, which beats the hell out of a savings account or just about any other common short-term investment of similar security. – Compro01 Jul 24 '14 at 17:07
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It depends on what kind of pension you get and your anticipated retirement income. If you have one of those nice defined benefit plans that pays 90% of your last 5 years' average salary annually, you might not want to bother with a separate RRSP and put your money into other use instead.

While most Canadians should worry about not having enough to retire on, some might end up with too much and costing them in the form current purchases and entitlements to government retirement benefits.

Figuring out how much you need for retirement is not trivial either. A lot of people talks about planning for needing 70% of what you made now as a way to preserve your lifestyle. Well, my opinion is that those type of generalization might work for the people in the middle of the income band and is too little for those in the low-income and possibly too much for those with high income. My own approach is estimate your retirement income requirement by listing out your anticipated expenses as if you were doing budget. I would agree that's not the best approach either (back to my comment about no one size fits all), but it's one that I feel most comfortable with.

Once you have that figure, factor in what you think you will get from the government (OAS, CPP and etc) and you will have the amount of money you need for retirement. I will warn against using "average life expectancy" to forecast your retirement needs, 'cos 50% of the people will end up with extra money (not a bad problem) and the other 50% will run out of money (bad but very true problem) if you use that approach.

Instead of going on and write an essay on this topic, I will simply say this - everyone's situation is different and, just like solving any other complex problems, you need to start with "end" in mind and work things backward, with a ton of different scenario to be able to cope with whatever curveballs life might throw at you. If you spend enough time in the library/bookstore looking through books on the topic of "estate planning" and "retirement planning", you will find people arguing back and fro on these topics - this is a sign that this is complex and no one has the one "good" answer for.

Do a bit of reading by yourself and, if still unsure or just want to be sure, go spend the money and review your plan with a fee-only advisor. They will be able to provide another opinion on your situation after thoroughly studying your situation.

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