Wednesday, February 27, 2008

free money? no thanks

I think I've mentioned before that I participate in my company's defined contribution pension plan. The way the plan works is outlined below:

My Company
  • 2% of my salary regardless of my contribution
  • 4% of my salary matched to my contribution

What this means is that even if I didn't contribute anything to my Registered Retirement Savings Plan (RRSP) my company would kick in 2% of my salary. My company will also match the contributions that I do make up to 4% of my salary.

For example if I decide to contribute 5% of my salary into my RRSP out of my own pocket, my company will then contribute 2% (automatically), and 4% to match me. Therefore I'll end up with a contribution of 11% of my salary. Since my company is kicking in 6% out of this 11%, I am essentially starting out of the gate with an investment return of a whopping 120%

A recent survey by Sun Life Financial found that 1 in 5 people who have access to this type of program don't participate. About 40% of employed Canadians have access to this type of program, but only 80% participate. What that means essentially is that 1 in 5 people are saying 'no' to free money. Reasons for this varied from no desire to, to no money to spare, but the weirdest reason was the following "they preferred to invest on their own". I would be interested to know what these folks were investing in on their own that was worth passing up a guaranteed return of 25% to 150%, before the money is even invested.


Traciatim said...

I really don't understand people in my work who use these same excuses. Things like 'it's too expensive to put 6% away'. I tell them to start at 1% just to get it going so that when they move up 1% a quarter later it's already set up and ready to go. After the tax adjustment they will only be down like 0.8% on their actual take home pay . . . if you can't afford that you have severe problems.

Our work does a nice simple 100% match up to 6% of your pay. After tax it works out to about 5% of your pay in 'real cost to you' and you are putting away 12% of your salary. Most finance books recommend you put away at least 10% and you'll do OK, at 12% you'll probably be comfortable for a long long time in your retirement if you start early enough. Since where I work the majority of people are younger (< 30 crowd) most of them just don't get it.

These are the people that the tax dollars from my RRSP withdrawals will be paying GIS benefits to later in life, and it makes me sick to my stomach that they can just sit there and do nothing about their lives and we all get to pay for it when the opportunity to not leech off society is right in front of them.

Anonymous said...

Where I used to work, they had a pretty generous system like this. I took advantage as soon as I was eligible. Since I had loads of contribution room, I also added 1-2% from each pay increase which made the "loss of income" quite painless.

I also find it hard to understand why someone would turn down this kind of opportunity.

Mrs. Pillars

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MG said...

Matching plans are great, and people should put a very high priority on utilizing them to the fullest. There are not many 'free lunches' out there in life...

Canadian Capitalist said...

Funny I should write about the same topic and mention the same points. Turns out I was subscribed to your old Atom feed and I hadn't updated to your new Feedburner feed. Thanks for the comment.