I have received a lot of questions about these plans from family and friends…
Usually referred to as “that thingy that my employer has that I am supposed to contribute to for retirement. I think?”
So, why not dive a bit into the nitty gritty.
Let’s talk about what they are...so you can take advantage of them.
What are they?
Group Registered Retirement Savings Plans (GRRSP) are retirement saving plans sponsored by employers.
They are similar to Registered Retirement Savings Plans (RRSP), but are administered by the employer.
The great thing about these plans is that the contributions are made through deductions to your payroll. And since the plan is similar to RRSPs, all the contributions are made before tax.
Less money from your paycheque!
How is that a good thing? But it is good, because it’s one less thing you have to think about (once actually set up, of course).
Ultimately, they’re forced savings that are automatically invested for you every time you receive a paycheque, which inherently means you’re also taking advantage of Dollar Cost Averaging (DCA) as well. Win, win, win.
But wait! Dollar Cost, whaat?
You may have heard the pretty common mantra in the media of “buy low, sell high” – but if anyone were able to actually time and predict when those times are, they would easily be the richest person in the world as everyone would want to use that ability to make money.
But since we are mere humans, and it’s NOT possible to predict when the stock market is going to experience these highs and lows…
The idea is to invest in the same fund (or stock, etc.) over a period of time.
What does this do? When you invest over a period of time, say a year, there will be times when the price is higher and times when the price is lower – but by the end of the year, the price you actually paid for the investment is the average of all those prices you paid throughout the year.
In other words, it helps reduce price volatility.
How much should I contribute?
If your employer provides a match, always always contribute enough to get the full match.
This is FREE MONEY that your employer IS THROWING AT YOU.
If you need to contribute 4% to get a 4% match, contribute the FULL 4%.
Think of it as an instant 4% pay raise, just for being you!
Or, put another way, it’s a 100% return on your money.
Hard to beat that, I assure you.
Even if your investments perform terribly, you’ll still be way ahead.
What should I invest in?
Once you move beyond the initial procrastination and actually sign up, choosing your fund allocation could prove to be the next big deterrent.
I’ve heard of people randomly choosing a selection of funds from the list that the employer provides.
Eeny Meeny Miny Moe. (Spell check that all you want; Wikipedia says its right.)
Although this could prove to be entertaining, some may prefer a more systematic approach to selecting your investment allocation.
Step 1: Take your age.
Yes, your actual age (pretending is going to hurt no one but you).
This is going to be your bond or fixed income portion.
If your employer has a decent administrator, the list of similar types of funds should be grouped together.
Go to the bond or fixed income section, and select the Canadian fund with the lowest MER.
If your employer provides a bond index mutual fund, then that’s your best option (and it will stand out as it will most likely sport the lowest MER of the offerings).
If not, you may have to settle for a higher fee bond-based mutual fund.
The one crappy thing about the GRRSP is that you don’t have a choice on the selection of funds. Although, more and more employers are starting to provide group plans that actually have an index mutual funds selection.
If not, you can make it your sole mission to advocate your employer to provide some index mutual fund options … Because those who complain the most and the loudest, win. (Those in the corporate world know what I’m talking about.)
Step 2: Subtract your age from 100.
Then take this number and divide it by 3. So we have…
(100 - Your Age) / 3
Bear with me, this elementary math will soon be over.
This number is going to be your allocation for your equities portion – and it will be split evenly amongst:
- Canadian equities,
- US equities, and
- International equities.
Once again, always look for the fund with the LOWEST MER.
That’s it. Take 5 minutes, sign up, and you will be well on your way towards a comfortable retirement.
So, for example…
If I am 30, my portfolio is going to look like this:
- 24% Canadian equities
- 23% US equities
- 23% International equities
- 30% Canadian bonds/fixed income
Yes, I rounded up my Canadian equities so it adds to 100%. Yes, if your age doesn’t result in even numbers, you will have to do this.
If you are still uneasy about calculating your own percentages, take a look at the tools that are provided by the company that is administering the GRRSP.
Many times (hopefully most) there will be a questionnaire that you will fill out to determine what your risk tolerance is.
In other words, if you were to lose say 30% of the value of your portfolio, would you lose sleep at night?
If just hearing those words makes your chest tighten up, you may be a more conservative investor.
But if you are willing to potentially lose 30% of the value of your portfolio, and are able to sit tight, keep the money invested and possibility contribute more because you know the market will eventually go up in the future, you may be a more aggressive investor – which will generally (but not always) result in higher returns for your portfolio in the long run.
Target Index Funds
If you are still uneasy about investing and are not ready to make the decisions just yet, then these will be the best thing ever.
Essentially you just choose the Target Index Fund which reflects your retirement age, and the administrator takes care of everything else.
The asset allocation for the target index fund automatically changes as you get closer to retirement as your risk tolerance changes…
So you do not have to do anything at all. (Once it is set up of course! Notice a theme yet?)
Back to you
Do you have GRRSP? If so, are you maxing out the employer match?
Also, would you say that the index mutual funds options are more common now than before?
Or, maybe you have these provided but are NOT yet participating? Well, the good news: