Tuesday, December 17, 2013

Rule #32 Take Full Advantage of Employer Matches.

"Take free money." -Suze Orman

"Free is better than cheap." -me

There are two kinds of matches that Kim and I take full advantage of when available: 1. Company Share Purchase Matching and 2. Pension/RRSP Contribution Matching.  They are a different from each other, but both involve your employer paying you more than you are already getting paid.  Sounds like a deal, doesn't it!

1. Company Share Purchase Matching: When I worked for Super-Major Oil and Gas company, they had a program that encouraged employees to become shareholders by buying company shares, with the company encouraging this through a share match program.  For every dollar I put in, up to a certain amount, the company would match twenty five cents. This meant I was essentially only paying 80% of the value of the shares that I was buying each month.  The only condition was that I had to hold the shares for 1 year, and after that I could sell them if I wanted to.  Usually I didn't sell.  I like incentives like this. I liked (and still like) the prospects of the company long-term and anytime I can get free company shares with essentially no or few strings attached, then I can't think of a good reason not to participate.  The incentive for the company to offer such a plan is two-fold.  Its part of the Employee Value Proposition... which is what attracts and keep employees working at the company.  The other reason is that it aligns the employee interests with the interests of the company.  If the company does well, the employee also does well due to share ownership.  Strangely, only about half my employee colleagues that I discussed the topic with took advantage of this plan, and many who did, didn't max-out the plan like I did.  To me, I view this as free-ish money and unless a person really has no confidence in the company (where I'd question why they were at the company in the first place), I cant think of a good reason not to participate to the maximum amount.  You essentially have a 20% hedge against the company going down in any given year before you lose money.  Even borrowing money at say 6% interest in order to get the 25% top-up would be a no-brainer.  Part of my existing portfolio is still made up of shares from this previous employer, and most of those shares were purchased initially at a "discount" by taking advantage of the Company Share Purchase Plan.

2. Pension/RRSP Contribution Matching: Both Kim and I take full advantage of this matching program, but we're baffled at the amount of people who don't.  Many employers will offer a matching program for either a Locked-in RRSP type product such as a DC Pension, or will match personal contributions to your own RRSP.  These obviously have some strings attached such as if you remove money from your RRSPs, it will be taxed at your marginal rate, and if the money is "Locked-in" such as in a pension, you will have to wait 'til you are eligible to take it out.  Either way it is a good deal.  An example would be where an employer would match dollar for dollar, up to say 4% of your salary.  So if you contributed 1% of your employment income, your employer would match it with another 1%. If you contributed 4%, your employer would kick in another 4%.  The logistics don't get much easier than this.  The contributions go straight from your paycheque to your Pension/RRSP each pay period.  Its essentially paying your future-self first.  Its a very quick way to double your contributions for only a small contribution, and as we know those contributions pile up, they can make a big difference later on.    Both Kim and I have talked to numerous co-workers who don't take advantage of this employer matching, but say they will take advantage of it in the future when they can afford to part with up to 4% of their salary.  What? 4%? Really?  If your employer offers to match your DC pension or RRSP contributions to any amount, I think you are out of your mind not to take advantage of it.  Cut back on a few dinners out each month and that 4% shouldn't be too hard to come up with.  In 25-35 years from now, you will thank yourself.

Whether it be a a share matching program through work or a pension contribution matching plan, if your employer offers these employee incentives, taking advantage of these plans as soon as possible is relatively easy and will work to pad your investment/retirement account for your future.

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