My wife and I currently both work full time – I work in private industry and my wife works for our city’s board of education. This means that I don’t have a defined benefit pension plan but my wife does.
We plan on having kids in the future and we’ve considered whether it would be worthwhile for us to buy-back some of the time she will have missed while on maternity leave.
How it Works
The amount of defined benefit (DB) pension income my wife will get when she retires depends on her years of service. If she misses work because she took some time off (maternity leave, leave of absence, etc) this will lower her years of service – as well as her retirement income.
We plan on maximizing her pension income as much as we can, so a pension buy-back is something we will definitely consider.
Maximizing Pension Income
Maximizing her pension income when she retires depends on a few factors:
- Income while working. This is controlled by the board and while she receives small raises as her years of service increase, we aren’t expecting her income to be substantially higher than it currently is.
- Age. My wife plans on retiring when she is 55 and so she will have lower pension income than if she were to retire at 65. This is because of the ‘pension factor’ which takes into account (1) age and (2) years of service.
- Years of service. This is the other half of the pension factor and obviously the higher the years of service, the higher her pension income will be. This is something we would like to increase through buying-back her years of service missed due to a maternity leave.
What is the Cost?
The cost is different for each person and is determined by:
- Her age. Since she will only be about 35 years old when we plan on buying back the credit, this will work in her favour (the younger, the
- When the missed service years occurred. Time isn’t on our side for this one. The longer we wait, the more it will cost us.
- Her current salary. Again, the longer we wait, the higher her salary will be and the more it will cost to buy-back the credit.
Other Issues We Will Consider
There are a few other things we will need to consider when we look at whether it is worth it to buy-back the missed years of service.
- Present cost. The cost of the buy-back is obviously the biggest factor and we will need to budget for it. She does have some money in a separate RRSP so we may need to consider transferring it over to help reduce the total cost.
- Length of time with current employer. Most DB plans reward loyal employees with a long tenure and hers is no different. She plans on working for the same employer for her working career – so this means her pension will become even more valuable.
- Transfer upon death. Her RRSP will transfer over to her estate but her pension will not. In other words – her pension is less flexible than an RRSP as far as estate planning.
- Life expectancy. Although anything can happen in the future, my wife’s family has a history of living well into their 90’s so she plans on living that long. Her pension provides guaranteed income for life – so it becomes that much more valuable for someone who expects to live longer than average.
Time Value of Money
According to a recent edition of Money Sense magazine, one lady wanted to buy-back her missed years of service in her pension plan and had to pay $45,000 for time taken off over 20 years ago while on maternity leave. If she had bought the missed credit right after her maternity leave it would have only cost her $4,000. The longer you wait – the more it will cost to buy-back the missed years of service.
Is It Worth the Cost?
We’ll have to compare what the pension will be with & without the buy-back, and weigh that against the cost of the buy-back itself. In some cases it might make sense to not do the buy-back, but in ours I am willing to bet it will be worth it. We won’t have a definitive answer until we get to that point and can compare the actual numbers.
Conclusion: Each situation is different but in our case we definitely plan on determining the cost of a buy-back and whether it will be worth it. My wife plans on staying with her current employer for the rest of her working career and we will likely have the available funds, so it will most likely make sense for us to do the buy-back.