Posts Tagged ‘registered retirement saving plan’

Why are employees leaving free pension money on the table? – The Globe and Mail.

Fred Vettese is the chief actuary at Morneau Shepell, a human resources and actuarial consulting services firm.

Canadians are forgoing as much as $3-billion annually by not taking full advantage of employer matching contributions within their company defined contribution (DC) pension plans, according to a recent Sun Life Financial report. One has to wonder why employees would pass up free money when there are no strings attached.

Employees in most DC plans have the option of contributing extra, and if they do, the employer makes a matching contribution on their behalf. Sometimes it is a partial match, such as 50 cents for every dollar contributed by the employee, and sometimes it is a full match. Employers offer contribution matching to encourage employees to save more for retirement.

To gain some insight into why a significant percentage of DC participants balk at contributing more, I analyzed data from a number of DC pension plans for which Morneau Shepell does record-keeping. My investigation, which encompassed tens of thousands of employee records, turned up the following:

  • About one third of participants in a given plan do not make an optional contribution, even if it is 100 per cent matched by the employer.
  • Up to two thirds will not make an optional contribution if the basic required contribution they are already making is high, such as 4 per cent of pay or more.
  • One would expect older employees to contribute more since they will get their hands on the employer’s money sooner. But it turns out the impact of age is quite minimal, especially if we correct for salary differences. In some groups, a fifth of the employees in their 50s do not make optional contributions.
  • Salary level has a big impact on optional contribution rates but only up to the average national wage level – the low $50,000s. In one case, nearly half of employees in their mid-40s who were earning under $50,000 opted not to contribute versus only 18 per cent of employees in the same age group who were earning over $50,000.
  • In plans where the range of optional contribution rates is limited, the employee’s decision is practically binary. The vast majority either contribute enough to earn the maximum employer matching or they contribute nothing. This suggests that deciding how much to contribute is not based on ability to pay or on perceived retirement income needs, but rather on whether or not one understands the idea behind the optional matching.

What is noteworthy is that many of the employees who elect not to make optional contributions to their DC plans still contribute to their own Registered Retirement Savings Plans (RRSPs). According to Statistics Canada data, over half of the participants in pension plans, including DC plans, also contribute to RRSPs. A rough estimate is that several hundred thousand DC plan participants are forgoing employer matching contributions in their DC plans and instead make personal RRSP contributions that are not matched.

Read the rest of the article here…

Why are employees leaving free pension money on the table? – The Globe and Mail.

Dollar cost averaging

Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts. Many successful investors already practice without realizing it. If you participate in a regular savings plan, you are already using this tool. Many others could save themselves alot of time, effort and money by beginning such a plan.

 Dollar cost averaging can lower an investor’s cost of investment and reduce his risk of investing at the top of a market cycle.

The beauty of dollar cost averaging is that you buy more shares when prices are low and fewer shares when prices are higher. The result is an average cost that is better than trying to time the market with your investments.

What is Dollar Cost Averaging

Instead of investing all his money at one go, the investor gradually builds up a position by purchasing smaller amounts over a period of time. This spreads the average cost over the period, therefore providing a buffer against market volatility.

In order to begin a dollar cost averaging plan, you must do three things:

  1. Decide exactly how much money you can invest each month. To be effective, you should have sufficient funds to continue investing through the market cycle.
  2. Select an investment (index funds are particularly appropriate) that you want to hold for the long term, preferably five to ten years or longer.
  3. At regular intervals, weekly, monthly or quarterly, invest that money into the security chosen.

An example of a Dollar Cost Averaging Plan

Here’s how it works. The principle is simple: Invest a fixed amount of money in the market at regular intervals, such as every month, regardless of whether the market is up or down.

Let’s assume you have $12,000 and you want to invest in a stock. You have two options: you can invest the money as a lump sum now, walk away and forget about it, or you can set up a dollar cost averaging plan and ease your way into the stock.

You opt for the latter and decide to invest $1,000 each month for one year. Assume further that the stock started at $10 per unit and reaches $16 per unit a year later.

Had you invested your $12,000 at the beginning, you would have purchased 1,200 shares at $10 each. When the stock closed for the year in December at $16, your holdings would only be worth $19,200!

Had you dollar cost averaged into the stock over the year, however, you would own 1,643 shares as shown in Table 1; at the closing price, this gives your holdings a market value of $26,228.

 

Why Dollar Cost Averaging Works

The system works because it takes the emotion and temptation to time the market out of the process. You establish an amount that is comfortable for you to invest and let the market work for you. The system takes the decision-making elements of how much to invest and when to invest out of your hands. Dollar cost averaging solves this problem by eliminating the need to predict an entry point.

Chart 1 shows what happens when you invest $1,000 per month for twelve months in an investment that fluctuates in price. The average market price per unit is $8.08. Look at Table 1, your average cost per unit = $12,000/1,643 which is approximately $7.30. Thus, the example shows that you don’t have to guess when to purchase shares to get a better price.

Will dollar cost averaging guarantee you a profit? No system can do that. However, if you buy quality investments and continue dollar cost averaging over a long period, you will have a much better chance of success than trying to get in and out of the market at the right times.

Buy Low, Sell High

For long-term investors, dollar cost averaging is a powerful tool that takes much of the emotion out of investing and lets the market work for you. One of the major problems facing individual and professional investors alike is determining when to buy a particular stock or, in other words, how to find the bottom of a price swing. The problem is that no one is consistently correct in calling this point on individual stocks and certainly not on the whole market. If you miss this point and the stock begins to move up, you have lost some of the potential gain by not buying at the right point. Very few people buy at the bottom. Those who do, typically happen to have been averaging all the way down.

Market timing is a dangerous game, especially when practiced by beginners, who typically tend to over expose themselves to the market. Market timing is an attempt to predict future price movements through use of various fundamental and technical analysis tools. The real benefit of knowing what is going to happen is that your return from buying a stock before it takes off is better than if you had bought the stock on its way up.

Market timers are the ultimate “buy low and sell high” traders. Day traders, who move in and out of positions in minutes or hours, are the extreme market timers. They look for small profits by the dozens each day by capitalizing on swings in a stock’s price.Most market timers operate on a longer time-line, but may move in and out of a stock quickly if they perceive an opportunity.

There is some controversy about market timing. Many investors believe that over time you cannot successfully predict market movements. Market timing becomes more of a gamble in their opinion than a legitimate investing strategy.
Market Timers and the Next Big Thing

Some investors argue that it is possible to spot situations where the market has over or under valued a stock. They use a variety of tools to help them predict when a stock is ready to break out of a trading range. Usually, the market proves them wrong. Stock prices do not always move for the most logical or easily predictable of reasons.

An unexpected event can send a stock’s price up or down and you cannot predict those movements with charts. The Internet stock bull market of the late 1990s was a good example of what happens when investors in the excitement of the moment, consciously or not, overpay for their investments. Those who bought then are not likely to have made much money.

Everyone has a hot tip about the next “big thing” and investors are always jumping on stocks as they shoot up. Unfortunately, most of these collapse just as quickly as many investors typically hold on way too long. The disastrous result is usually the exact opposite of what they were hoping for. In the end, it is usually a case of “buying high and selling low”. For most investors, the safer path is sticking to investing in solid, well-researched companies that fit their requirements for growth, earnings, income, and so on.

In conclusion, dollar cost averaging takes the emotion out of decision-making and is a useful tool for the individual investor who wants to buy and hold a stock for the long term. Over time, it will usually result in a better entry price than timing when to buy.

If you look for undervalued stocks, you may find one that is poised for moving up sharply given the right circumstances. This is as close to market timing as most investors should get.

Five Risks to Future Income

Longer life spans mean cash flow assumptions need to change

Filed by Staff, editor@Advisor.ca , Aug 7, 2012

In a recent speech at the Canadian Institute of Financial Planners annual conference in Ottawa, Peter Drake, vice president, Retirement and Economic Research, Fidelity Investments Canada ULC called attention to the new retirement realities facing Canada’s baby boomer generation and highlighted the importance of taking account of the five key risks to retirement income as part of the retirement planning process.

Drake emphasized that the conventional wisdom about retirement planning needs to be adapted to suit the new environment faced by today’s Canadians who are retired or about to retire. He pointed out that financial advisors can play a crucial role in helping Canadians understand that their retirement planning choices must not only reflect the longer lives we are now living and the volatility of capital markets, but also changes to Canada’s retirement income system.

via Five Risks to Future Income | Canadian Capital.