Your Financial Goals

Joining the Public Sector

There are many investment options available and it is always recommended that you seek professional advice when considering your financial future. This section provides a condensed view of some of the common investments for new public sector employees, but you should sit down with a Tradex advisor to customize a plan that is a right fit to help you achieve your financial goals.

Pension Entitlements

Your PSSP, or Public Service Superannuation Plan, is probably your biggest asset. A $40,000 pension is approximately equivalent to the annual earnings from a $1,000,000 30-year Government of Canada Bond! In 2010 your current rate of contribution is 8.4% of your salary and the rate is reduced by CPP contributions.

Some of the other features of the PSSP include the maximum contribution period and the options you have to enhance your pension benefits through elective service. The PSSP has a maximum contribution period of 35 years at regular rates, with 1% of salary after 35 years to cover indexing. Elective service can enhance pension benefits to generally provide a great risk-free “investment”. Some options include prior public service, CFSA, and employment outside the public service.

Additional information on your pension entitlements can be found in our Pension Planning Plus booklet. Tradex operates exclusively for the public sector and can help you with your retirement planning from the start.

Start Early

It is extremely important to put your earnings to work for you as early as possible. The chart below outlines the potential growth based on compounding interest for two individuals interested in retiring at age 65. Heather began contributing $3,000 annually at age 20 and then stopped at age 35. Steve did not start contributing his $3,000 annually until age 35 but contributed right up until retirement. As the chart shows, Heather gets $1.6 million for contributing early, while Steve would receive only half a million even though he contributed for longer (assuming both obtain 10% annual returns). It’s all about gains – as your initial investments grow and generate gains, those gains become savings and they, in turn, produce additional gains of their own. This is compounding and it is the reason why starting early is very important when trying to achieve your financial goals.

Tax-Free Savings Account

The Tax-Free Savings Account label can be somewhat misleading in that this option, or plan, is not restricted to any single type of investment. You have all of the options Canadians are familiar with for RRSPs (Savings Accounts, GICs, Bonds and Equities) available to you in a Tax Free Savings Account (TFSA). With the flexibility and tax sheltering features that the TFSA offers, it is the best option for individuals who only have one savings or investment vehicle. With this option every dollar earned from this investment is kept fully sheltered from taxation.

Tax-Free Savings Accounts are a relatively new way to earn investment income tax-free. Beginning in 2009, Canadian residents over 18 are able to contribute up to $5,000 a year into a Tax-Free Savings Account that is not subject to taxes on investment income, including interest or capital gains, earned on this type of account. Taxes will not be charged on the money withdrawn from this account either. However, contributions made to this account will not be tax deductible.

There is no lifetime limit to the Tax Free Savings Account, or TFSA, and if you are unable to contribute the $5,000 in a particular year the unused portion is carried forward and you can use it to contribute in future years. Amounts withdrawn from a TFSA will increase the subsequent years contribution limit by the same amount.

Registered Retirement Savings Plans

A registered Retirement Savings Plan (RSP) is an investment account designed primarily for saving toward your retirement years. As a retirement savings vehicle, regulated by the Canadian government, RSPs have special tax benefits. Your annual RSP contribution can greatly reduce the amount of income tax you pay in that year and the money you put away can have years of tax-deferred growth potential. You only pay tax on the amounts you withdraw.

Contributions to an RSP can only be made by individuals with "earned income" taxable in Canada, which includes salaries, self-employment income, maintenance and alimony payments, and net rental income (but does not include income from pensions or investments). Certain other types of income may be eligible -- consult a tax advisor or Canada Revenue Agency (CRA).

CRA issues statements to individual taxpayers with their "Notice of Assessment" informing them of their RSP contribution limit for the following year. It is calculated as 18%, prior gross earned income, less pension adjustments. Each contribution will generate a tax reduction and can be made up to 60 days into the next calendar year. For a further list of frequently asked questions, click here.

Income Splitting and spousal RRSP

The more taxable income you have, the higher your tax bracket. You should, therefore, consider allocating future taxable income as evenly as possible between you and your spouse or common- law partner. This is commonly known as "income-splitting".

You are entitled to put all or part of any allowable RSP contribution into an RSP in the name of your spouse or common-law partner. Generally the maximum immediate benefit is achieved by all contribution room of the spouse with the higher marginal tax rate being utilized first . When you both withdraw your RSP savings during retirement, the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RSP.

As the contributor to a spousal RSP, you benefit from the tax deduction while building a retirement nest egg for your spouse or partner. Amounts withdrawn from a spousal RSP will be considered part of the taxable income of your spouse or partner, to the extent that you have not contributed any amount to a spousal plan in the current year or the two preceding years. A spousal RSP is most beneficial in a situation where the spouse would otherwise have little retirement income while the contributor would have a significant amount of income.

With the recent introduction of pension splitting, less care in balancing spousal RRSP to pensions is required as some adjustments can be made on each spouse’s tax return when pension and RRIF income is received.

High-Yield Savings Accounts

High interest savings accounts are ideal for short term holdings such as emergency funds or planned expenditures within twelve months as they are not subject to market fluctuations. These accounts may offer several times the return that is provided on major bank accounts. These accounts may also be used in conjunction with an allocation or reallocation to other investments to take advantage of dollar cost averaging

Guaranteed Investment Certificates

GIC stands for guaranteed investment certificate. When you buy a GIC, you invest a sum of money for a specific period of time. When you cash in your GIC at the end of the specified term, you are guaranteed to receive your full principal investment plus interest. You are getting a lower level of risk but you pay for this by having a reduced potential gain.

Term Life Insurance

Tradex can help you get the level of protection you need and the premium you want by customizing your Term Life Insurance plan’s duration and coverage. As you start your career, the main need for a Term Insurance plan is to protect your dependants by replacing your income contribution to the household, should the need arise. Term Insurance provides an option superior to plans typically offered by lending institutions. A Tradex advisor can go over the available options with you to highlight the benefits of Term Insurance in a no obligation consultation.