3 ways to maximize your group RRSP
“Nothing is more expensive than a missed opportunity.” H. Jackson Brown Jr.
Approximately 40% of Canadian companies offer some form of group retirement savings plan for their employees. Whether it’s a pension plan or a group RRSP, if you happen to work for an employer with a plan, you owe it to your future self to take full advantage of it. In my role, I meet lots of people who have access to some really great retirement savings plans and lots of people who are missing out on some of the advantages that they offer. If you have access to a group retirement plan, here are three ways that you can maximize your good fortune:
1. Think beyond the match
All too often, people with group retirement plans restrict the amount that they contribute to the amount that the employer will match. However, most plans allow employees to make voluntary contributions, above and beyond their matching amount and not enough employees take advantage of this. One concept that we talk about a lot with employees is the idea of retirement adequacy: how much do you need to save in order to have an adequate amount for the retirement you want to enjoy? For many people, that number requires more than what they and their employer are contributing to their group plan.
Related article:How much should you save for retirement?
When you consider that most financial experts agree that saving 10% of our gross earnings towards retirement is a good rule of thumb, the fact that the average group retirement plan offers a 3% match means that many employees are falling far short of that 10% goal. If an employer is willing to contribute an amount equal to 3% of your salary and you’re putting in 3% of your salary, your total savings rate is 6%.
Ideally, someone getting a 3% match should be contributing at least 7% of their earnings in order to hit a 10% savings rate but not enough employees are doing so. Looking at this from another perspective, it can be argued that the employer contribution should be a bonus to a plan member’s savings: if you have the ability to save 10% (or more) of your gross earnings, don’t be content with just saving 7%, let that average 3% match kick you up to a 13% savings rate. Saving more than you “need” to, is never a bad thing!
To add insult to injury, recent studies by Sun Life on the participants in their group plans found that many people are leaving money on the table by not even contributing enough to get the maximum match that they’re entitled to. Interestingly, the highest earning employees were the ones most likely to be missing out on free employer money – some plan members studied were leaving over $10,000/year on the table! If you have access to a group retirement plan, you owe it to yourself to touch base with your payroll department to make sure you’re at least getting the maximum employer match you’re entitled to and, if you have the ability to save more, then kick up your contribution rate at the same time.
Related article:Pay yourself first
2. Use the CPP/EI max-out saving strategy
I know it’s not the most succinct heading but I couldn’t find a funky way of summarizing it in less than five words! This is my favourite strategy for boosting my group RRSP savings and the beauty of it is, it lets you save without ever noticing the extra contributions. The only down-side of this strategy is that it can only be used by people who make more than about $60,000/year because it takes advantage of that part of the year after you’ve maxed out your CPP and EI contributions.
Related article:How much will you get from CPP in retirement?
Once your CPP and EI contributions are maxed out for the year, your tax home pay increases because you’re no longer paying those premiums each pay cheque. For most people, this increase is a nice little bonus that quickly gets absorbed by all the spending opportunities that are out there. However, this savings strategy harnesses the power of those extra dollars by funneling them into your group retirement plan instead letting them reach your pocket. All you need to do is arrange with your payroll department that, once you max out your CPP and EI for the year, your contributions to your group RRSP or pension plan will increase by the amount you’re currently paying in CPP/EI premiums for the remainder of the year.
For example, if you’re currently paying about $500/month in CPP and EI premiums, chances are that you’ll max out around August. This means that for the last 4 months of the year, you could contribute an extra $500/month to your group RRSP or pension plan and your take home pay would stay exactly the same (assuming you’re making before-tax contributions). Once January rolls around and the CPP and EI premiums kick in again, you simply stop making the extra contributions. In this way, your net pay stays the same all year round and you can contribute an extra $2,000/year to retirement savings without feeling it in your pocket.
If you want to know when you’ll max out in 2016, take a calculator and your latest pay stub and run the following calculations:
First subtract your total CPP contributions for the year to date (YTD) from $2,544.30. Then divide that number by the amount you’re contributing to CPP per pay. Your answer (rounded to the nearest whole number) tells you how many pay periods you have left before you max out. For example: Jenny pays $150/pay in CPP premiums. So far this year she’s contributed $1,800. $2544.30 – $1,800 = $744.30. When Jenny divides $744.30 by $150 she gets 4.96. This means she has about 5 more pay periods until she’s maxed out her CPP for the year.
Your EI premiums should max out around the same time. To do that calculation, subtract your total EI contributions for the year from $955.04 and divide the answer by the amount you contribute to EI each paycheque. For example: Jenny pays $55/pay in EI premiums. So far this year she’s contributed $660. $955.04 minus $660 is $295.04. When Jenny divides $295.04 by $55 she gets 5.36. This means she has about 5 more pay periods until she’s maxed out her EI premiums for the year.
Using the example above, once her CPP and EI maxes out, Jenny can contribute an additional $205 per pay to her group RRSP but her take home pay would stay the same. Those extra contributions over 10, 20, 30, even 40 years will make a significant difference to the value of Jenny’s account at 65 and, chances are, she’ll never even notice the additional savings coming off her paycheque.
3. Consolidate your savings
Many people have a personal RRSP account outside of their group retirement savings plan and often people are contributing to their personal account as well as their group plan. Assuming that your group retirement plan allows members to transfer in money from other institutions, there may be some solid reasons for doing so:
Firstly, if your group plan allows you to make before-tax contributions then it makes sense to save extra direct off your paycheque rather than to make after-tax contributions through your bank or financial advisor. For example: Joe sets up an automatic payment of $100/month into his bank RRSP. Assuming that he’s in a 32% tax bracket, to make that $100/month contribution, Joe had to earn about $150 and pay $50 in taxes in order to take that $100 home and then he has to wait until the end of the year to get his tax-refund on that $100 contribution. If Joe were to contribute $150/month to his group RRSP, he would get a $50 tax saving direct on his cheque and his take home pay would be about $100 less. In his pocket it would feel the same, but he’s managed to increase his savings rate by 50% without even feeling it.
Related article: Understanding Marginal tax rates
Now Joe might like getting his tax refund at the end of the year or he might have a great relationship with his advisor at the bank and those are both valid reasons to keep doing what he’s doing. However, if neither of those arguments apply to you and you have access to a group retirement plan, it’s worth considering consolidating all your regular savings to your group plan.
Another factor to consider is that often the investment fees members pay on the investments inside their group plan are significantly lower than the fees they pay on their investments with a bank or financial advisor. Average retail Management Expense Ratios (MER) are around 2.5% whereas the Investment Management Fees (IMF) charged on a large group plan can be less than 1%. This means more of your investment return stays in your pocket and that means better returns (and higher account values) over time. Depending on the MERs you’re paying, the IMFs available through your group plan and what exit fees your financial institution might charge for transferring out your money, it could be very beneficial to you to consolidate all your retirement savings into your group plan but it’s important to do your homework before making a final decision.
Related article:Low fees matter over time
At the end of the day, having access to a group retirement plan, can make a significant difference to your ability to save. Employer matching, the convenience of being able to “pay yourself first” direct off your paycheque (often with before-tax dollars) and the lower fees available through many group plans all combine to help fill the ‘retirement gap’ and build a more secure financial future. If you’re not taking full advantage of your plan, then I encourage you to do so!
I am reluctant to increase my contribution to my group RRSP and also to my DC pension at my employer. This is because these funds will become part of a locked-in account (LIRA I believe it is in Ontario). It seems like the options for withdrawing or managing my monies within a LIRA are very limited, unlike a self-directed RSP or non-registered accounts.
I am hoping to retire in the next 2 years, and have 2 LIRA’s from previous employers, and another one from my current employer. Do you have any advice or recommendations on what to do with the 2 previous LIRA’s to get the most flexible control, and also if there is an option to not have my “final” DC pension go into a LIRA?
If by “flexibility,” you mean flexibility of investment choice, you can transfer your LIRAs to a discount brokerage where you will have complete control over the investments. That’s what my wife did with her DC pension plan when she left a previous employer.
If flexibility for you means the ability to unlock your LIRA then there are exceptions that you may be able to pursue. In Ontario, see this link: https://www.fsco.gov.on.ca/en/pensions/lockedin/Pages/nonhardshipunlocking.aspx