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By Heather Compton
Special to the Financial Independence Hub
Always show up for a free lunch!
That’s the tongue-in-cheek advice I give all “soon to retire” folks but, frankly, taking advantage of free lunches is key for every investor.
I use the term “free lunches” for all manner of benefits and it’s alarming to me how many people pass them by. Many employers offer employees matching contributions to Retirement Savings accounts that require the employees to pull out their own wallet too.
One major corporation I worked with gave all employees a contribution of 6% of their salary to the Defined Contribution Pension Plan. The employer would contribute a further 4%, contingent upon the employee also contributing 4%. That’s a great free lunch! A shocking number of employees felt they couldn’t afford to participate: they said they couldn’t meet all their other financial obligations without that 4% of salary. Actually, by making the 4% RRSP contribution they also earned a tax deduction, so the after-tax, out-of-pocket expense was even less.
Don’t overlook the daily Special
Many companies offer employees the convenience of group savings programs, even where there are no company-funded contributions. That too has value; the investment choices available in these plans often have significantly below market rate MERs (management expense ratios) and no account fees or cost to buy or sell. One company with which I am familiar has a savings plan offering a solid range of investment funds with MERs ranging from a low of 0.10% to a high of 0.58%.
Only a knowledgeable investor, capable of building a low cost ETF (exchange traded fund) portfolio, could match this low-cost option. If the contributions are made to a group RRSP, the employer can also add the convenience of reducing the tax paid at source. Since the contributions and investments are made regularly, often monthly, we can add the benefit of dollar cost averaging to the mix.
What other free lunches are often overlooked?
Have a close look at the company benefit coverage: some employers offer flex-benefits that allow options for benefits not utilized. If a spouse has good medical and dental coverage, it may be possible to use your credits toward tax-favored options like a Health Spending Account or Group RRSP. Don’t make the rookie mistake of taking that credit in cash: that’s taxable income!
Does the company offer a share purchase plan? Some companies allow for share purchases at below-market price with no purchase commissions and the ability to participate in the DRIP (dividend reinvestment program). Some make it even easier by offering one year interest-free loans, repayable through payroll deductions.
No company free lunches? No problem!
Our Canadian tax system offers some free lunches too. Saving for a child’s education via an RESP (Registered Education Savings Plan) earns a 20% Canada Education Savings Grant (CESG) of up to $500. Free lunches are also available to disabled persons utilizing Registered Disability Savings Plans (RDSP).
The Tax Free Savings Account (TFSA) allows all Canadians contributing to a plan the opportunity to earn investment returns tax-free. Check the Canada.ca web site for details on all these programs.
Heather Compton retired from a career as vice president and senior investment advisor with a major financial services firm and husband Dennis Blas, from IT management positions. Both have extensive experience in personal development and life skills programs. Heather remains engaged in financial and lifestyle issues in her roles as presenter and facilitator of pre-retirement and financial literacy programs; Dennis continues to use his talents as technical guru in supporting Heather’s work. They are co-authors of “Retirement Still Rocks – Canadian Boomers Invest in Life” available from Amazon.ca. See their website at www.retirementrocks.ca
