Last month federal Finance Minster Jim Flaherty revealed the “Economic Action Plan 2012“, the budget will see the eligibility age for Old Age Security (OAS) raised from 65 to 67. OAS payments can also be deferred by eligible Canadians for a maximum of five years beginning in 2013 in exchange for higher benefits. These changes will affect Canadians under the age of 54. If this is you, now is a good time to revisit your retirement plans.
There are 3 sources of retirement income that are available to Canadians when they retire. Some people refer to them as the 3 pillars or the 3 legged stool.
1. Government programs : (CPP & OAS)
2. Employer sponsored plans: (Defined benefit pension plans (DB), Defined contribution pension plans (DC), Structured RRSP’s (STRP), Deferred profit sharing plans (DPSP’s), stock plans)
3. Individual Accounts: (Individual RRSP’s, TFSA’s non-registered plans)
Generally speaking there are 3 variables that Canadians have control over that would impact the final retirement income they receive from their employer sponsored plans and individual accounts. These are;
2. Investment return
In regards to time the earlier the participant sets up the plan and starts contributing the more they will have at retirement due to the magic of compound interest & longer exposure to market growth. For investment return the participant who holds more aggressive investments such as equities over a long period of time comes ahead of the conservative investor who has their money in low risk type investments like fixed income funds. It can be argued that contributions are the one variable that participants have the most control over. Particularly those Canadians who have access to employer sponsored plans.
Believe it or not only 40% of working Canadians have access to employer sponsored plans. The remaining 60% (over 12 million Canadians) will have to rely on Government programs or their own individual accounts to reach their goals.
For those working Canadians who are lucky to work for an employer that provides a group retirement savings plan such as a DC pension plan or STRP do benefit from employer contributions. These plans, also known as money purchase plans, usually have contribution formulas where the employer matches the employee’s contributions up to a certain limit. Food for Thought: One coffee or small snack a day translates to $5000 extra dollars a year in retirement
Food for Thought: One coffee or small snack a day translates to $5000 extra dollars a year in retirement
If a worker does have access to a group plan where contributions are matched then the employee should take full advantage of the employer match. Example, if an employer matches a 100% of employees contributions up to 6% of earnings then the employee should put in 6% of their pay to get the full match. There are some employees who site budgetary constraints for not putting in the full match. Unfortunately they miss out on the ‘free money’ that is put on the table. Another way to look at it is to ask yourself what investment out there provides you with a 100% return on every dollar you put in. The employer contributions are also seen as an automatic pay raise.
Other matches that are common are an employer matching 50% or 25 % of every dollar an employee puts in to the plan up to a certain limit. The employer can also base their contributions on years of service.
If the employer allows employees to put in additional voluntary contributions on top of what the employer matches, employees should consider taking advantage of this option as well. This is another great way to leverage your group retirement savings plan. Just remember not to exceed the Canada Revenue limits. For 2012 the limits for a DC pension plan are the higher of 18% of current year’s income or a dollar amount of $23,820 and for a STRP it is 18% of previous year’s income or $22,970.
The other benefit of group plans is the low Investment Management Fees (I.M.F’s) that the company has negotiated on behalf of the employees. The fees are usually lower than the fee’s that an individual would get from an outside retailer like a bank. If you have market related investments in your RRSP at a bank then the fees are called MER’s (Management Expense Ratios). These fees go to the fund manager for managing the investment. If you do the homework and you see that the fees at the outside retailer are higher than what is being charged in your group plan there is an option for you. You can always ask the provider who record keeps your group plan if you can transfer those ‘outside’ registered assets into the group plan to benefit from the lower fees. Please remember to find out what fees the relinquishing institution will charge you for transferring the money out.
For those of you curious to project your retirement income websites that you might find helpful to do this are Fidelity and Standard life.
Please see links below