An Independent Voice That Advocates For The Classroom Educator Without The Corrupting Politics Tied To Our Union And DOE Leadership.
Friday, November 27, 2015
How Much Is Your Pension Reduced By Taking A Loan Out At Retirement?
Some educators believe its a good idea to take a loan from their pension just before retirement and use that money to fund a large ticket item or invest it into the equity market. These educators can take up to 75% of their pension money (QPP) out of the pension system and still get a good pension. However, before an educator should take money out of their pension contribution, they should know how much their pension would be reduced on an annual basis.
Since most educators who want a full pension retire at 60 or later and want to get Medicare (65) and Social Security (62 to 70), I used the range from 60 to 70 years of age to calculate the amount an educator's pension will be reduced by taking out a loan just before retirement.
Age....Annual Reduction Factor.....% Reduced per $1000
FRA Full Retirement Age and Reduced Social Security. MED Medicare FSS Full Social Security. MSS Maximum Social Security (32% greater than FSS).
Let's look at three examples and how each would have their pension reduced by taking out a loan just before retirement,
For example let's look at educator #1, She has reached retirement age of 62 years old and gets a full 25 year pension ($50,000). She takes the maximum pension, with no beneficiaries. However, she decides to take 75% of her QPP ($40,000) and use it to put a down payment on a retirement condo in Florida.
Pension - (QPP loan x % reduced) = Adjusted pension.
$50,000 - ($40,000 x 6.133%) = $47,547 .
Therefore, her pension is permanentlyreduced by $2,453 annually. Moreover, unless the educator puts the QPP money she withdrew in a tax deferred account (IRA), she would need to pay taxes on the money. Consequently, short term gain will result in long term pain from a reduced pension during her lifetime.
Then there is educator #2 who is 66 years old and he waited so that he could retire with full Social Security benefits. He worked 20 years as a second career teacher and decided to rollover 50% of his QPP to an IRA so as not to be taxed on the withdrawal.. He will use the IRA to fund a custodial account for his grandchildren. He took the option (option #1) that gives his spouse 100% of his pension if he dies. Therefore, his pension is as follows:
(Pension x 0.85) - (QPP loan x % reduced) = Adjusted pension
($40,000 x 0.85) - ($20,000 x 6,885%) = $32,623
Therefore, his pension will be permanently reduced by $1,377 annually.
Finally, there is educator #3. She has 30 years in the system and retires at the ripe age of 70. She takes the maximum 75% QPP loan which, in her case is $50,000. She wants to use the money to travel the world and doesn't care about reducing her pension or the tax consequences since she waited to this age to collect Social Security and will be subject to the RMD anyway next year. She has no beneficiaries.
Pension - (QPP loan x % reduced) = Adjusted pension
$60,000 -($50,000 x 7.898%) = $56,051
Therefore her pension will be permanently reduced by $3,949 annually.
All three educator FAS was assumed to be $100,000 for simplicity.
I take no position on the taking of a QPP loan at retirement. It's a personal decision that every educator must decide on.