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Feb. 2, 2007
Plan for better golden years
Join an RRSP program at work – you could double your savings.
JORY SIMKIN
If someone were to offer you $200 in exchange for $100, would you
take the deal? Believe it or not, many Canadians are not taking
advantage of this opportunity, which is being offered to them monthly.
It is surprising how many Canadians are not taking full advantage
of their company's matching group RRSP (registered retirement savings
plan).
A group RRSP is simply a collection of individual RRSPs offered
by the employer, where the employer arranges for employees to make
contributions through regular payroll deductions on a pre-tax basis.
Often the employer will offer a matching plan, where the employer
will match every dollar the employee puts in to the plan, usually
with 50 cents or an equal dollar. This means that without being
in the RRSP for more than a minute, you have just made a 50-100
per cent profit. Not bad for a minute's work!
To give an example of how this can add up, if you were to put $75
every month into a plan that matched dollar for dollar, starting
when you are 25, by the time you retire at age 65, with a net annual
rate of return of six per cent, you would have accumulated $401,000.
Many companies used to take full responsibility for their employee's
retirement with defined benefit pension plans, which delivered a
certain amount of money a month from when the employee retired until
their death. Employees never had to be concerned about their retirement.
There has been a strong movement away from the defined benefit plans
to off-loading the responsibility back to the employees to care
for their own retirements - generally through RRSPs.
According to Investment Executive, 59 per cent of Canadians
say that setting financial goals is very important. However, only
30 per cent have a written financial plan and a whopping 22 per
cent say they are relying on an inheritance to fund their retirement.
It is important to take control of your financial future by creating
a financial plan and making sure you take advantage of any free
money your company is willing to give to you. Generally, the group
RRSP plan comes with online services that allow you to create a
financial plan. It is also advisable to meet with a certified financial
planner to ensure that your plan will meet your requirements at
retirement. Once you have decided how much you are going to need
at retirement and how much you should be saving monthly to reach
that target, it's time to take advantage of all of the benefits
of a group RRSP.
Maximizing your matching RRSP program gives you free money and an
instant return on your investment. But that's not the only benefit.
With a group RRSP, contributions are made on a pre-tax basis by
payroll deduction, so the amount of tax your employer is required
to deduct at source is calculated after your group RRSP contribution
is deducted, resulting in an instant tax saving.
In other words, you will not overpay your taxes during the year
and then have to wait until your income tax return is processed
to receive a refund. No matter how satisfying it may be to get a
tax refund from Revenue Canada, getting one means you gave the government
an interest-free loan. With a group RRSP, you are getting that money
you just saved in tax working for you right away.
Another major advantage of the group RRSP is that you get lower
MER (management expense ratio) fees on your funds because you are
essentially buying in bulk. MERs are what fund companies charge
to manage your funds. The more money that is in your company's group
RRSP, the more buying power you have and the lower the MERs are
going to be. You can reduce the MERs that you would pay retail in
a personal RRSP by up to one per cent. That might not seem like
a big difference, but over a period of 30 years, a one per cent
increase in annual investment returns can result in a substantially
larger retirement account.
The final advantage of a group RRSP is that, since the funds are
generally offered through an insurance company, they are given special
consideration and may be considered creditor-proof.
A group RRSP is a great tool to build and enhance your retirement
account. Group RRSP websites have a lot of valuable educational
information and some have tracking systems to show if you are on
target to meet your retirement goals.
Jory Simkin is a certified employee benefits specialist
and certified financial planner with Simkin Financial Services Inc.
For more information, visit www.simkinfinancial.com.
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