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 (Registered Retirement Savings Plan), if you’re fortunate enough to work for an employer with such a plan, it’s crucial to leverage it to its fullest potential. In my experience, I’ve encountered many individuals who have access to excellent retirement savings plans but aren’t fully capitalizing on the benefits they offer. Here are three strategies to maximize the advantages of your group retirement plan:
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1. Think Beyond the Match
Many employees limit their contributions to the amount their employer will match, often missing out on the full potential of their retirement savings plan. While it’s common to contribute just enough to receive the employer match, it’s wise to go beyond this minimum.
Consider the concept of retirement adequacy—how much you need to save to enjoy the retirement you envision. Often, this amount exceeds what both you and your employer are currently contributing. Financial experts generally recommend saving around 10% of your gross earnings for retirement. If your group retirement plan offers a 3% match and you contribute an additional 3%, your total savings rate is only 6%. Ideally, you should aim to contribute at least 7% of your earnings, using the employer match to boost this to a total of 13%.
Unfortunately, many employees, especially high earners, are not even contributing enough to get the maximum employer match. According to recent studies by Sun Life, some employees are missing out on over $10,000 annually in free employer contributions. Ensure you’re contributing enough to receive the maximum match and consider increasing your contribution rate if possible.
2. Use the CPP/EI Max-Out Saving Strategy
This strategy is perfect for those who earn more than $60,000 annually. It involves taking advantage of the increase in your take-home pay once you have maxed out your Canada Pension Plan (CPP) and Employment Insurance (EI) contributions.
Once you’ve hit the annual contribution limits for CPP and EI, your net pay increases because these premiums are no longer deducted from your salary. Instead of allowing this increase to boost your spending, funnel it into your group retirement plan. Arrange with your payroll department to increase your contributions to your group RRSP or pension plan by the amount you were previously paying in CPP/EI premiums.
For instance, if you’re contributing $500 a month to CPP and EI and max out around August, you could direct an additional $500 a month into your retirement savings for the last four months of the year. This way, your take-home pay remains consistent throughout the year, but you contribute an extra $2,000 annually to your retirement savings without feeling the impact.
3. Consolidate Your Savings
If you have both a personal RRSP account and a group retirement savings plan, consider consolidating your savings into your group plan. Group plans often offer significant advantages, including:
- Tax Efficiency: Contributions to a group RRSP are typically made before tax, increasing your effective savings rate. For example, if you’re in a 32% tax bracket and contribute $100/month to a personal RRSP, you need to earn about $150 to cover the contribution after taxes. If you contribute directly to a group RRSP, you only need to reduce your take-home pay by $100 to achieve the same savings.
- Lower Fees: Group retirement plans usually have lower investment management fees compared to personal accounts. While retail Management Expense Ratios (MERs) average around 2.5%, large group plans might charge less than 1% in Investment Management Fees (IMFs). Lower fees mean more of your investment return stays with you, leading to better growth over time.
Before consolidating, review your plan’s fees and any potential exit costs from your current investments. Evaluate whether the benefits of consolidation align with your long-term retirement goals.
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By implementing these strategies, you can make the most of your group retirement savings plan and enhance your financial security for the future.