Financial stress is universal. It affects college grads struggling to pay for rent, as well as those approaching retirement with scanty savings.
In fact, 56% of employees in all age brackets are stressed about their personal finances, while 67% of millennials are less focused and productive at work because they're worried about money.
Proactive employers can help employees take charge of their finances through education on financial wellness basics—and through a range of employee retirement benefits. The upshot? Less stressed and more productive employees—and the ability to attract and retain the best employees.
Retirement Benefits for Employees: Strategies to Help Them Save
Put bonuses into RRSPs
Give employees the option to pay part or all of their bonuses directly into a RRSP plan. This not only helps them save money for retirement, it also allows them to contribute more. A major benefit of this strategy is that these retirement contributions reduce income taxes, while at the same time building a retirement nest egg.
However, it’s important that the contribution tax receipt is applied to the bonus income in the same year. If employees make the contribution in the first 60 days of the year, and the tax deduction is applied to the previous year, there will be a mismatch if the employer reports the bonus in the current year.
This is because, when an employer transfers a bonus amount to an RRSP, the gross amount of the bonus is reported as earnings in the year of transfer.
However, an employee may still choose to use their RRSP receipt against the previous year’s income. But they should know this could lead to an unexpected tax bill for the current year.
In addition to helping with RRSP contributions, encourage employees to commit to investing all bonuses in a variety of savings vehicles. If they use their regular salary for immediate expenses, they won't miss the bonus funds.
Finally, remind your employees that they must keep track of their total RRSP contributions to ensure tax compliance. Over contributing to an RRSP carries a penalty of 1% per month for each dollar over an individual’s contribution room, once the $2000 lifetime exemption is used.
The good news is, keeping track of allowable contribution room is easy. Simply direct employees to their most recent Notice of Assessment (NOA) received after their income tax return is assessed. The NOA is also available through the Canada Revenue Agency website.
Consider dollar-cost averaging
Some employees might be leery of stock-market fluctuations. Remind them that contributing regular amounts on a monthly or bi-weekly basis —starting sooner rather than later—is a wise investment strategy.
Making regular contributions helps smooth out the highs and lows of the stock market. Employees get to take advantage of the sale prices when stock markets fall, and avoid magnifying losses caused by investing large sums at the peak of the market.
Dollar cost averaging also prevents savings sitting in cash, resulting in potential loses out on the market’s biggest gain days.
Since stock markets are constantly fluctuating, dollar-cost averaging is a lower risk strategy than trying to time the market. If employees establish an automatic-investment plan—contributing a set amount each month—they avoid the question, “Is this the right time to buy?”
Start investing in January, not in December
For those wondering when to start investing in stock mutual funds, the best time is now!
Many people wait until the last minute to contribute to TFSAs and RRSPs—and ultimately miss out on the full benefits of tax-free compounding. Although many people invest money into retirement vehicles in January and February, they are planning to use the tax savings for the previous year, not the current year.
This means they are actually a year behind.
Therefore, investing at the beginning of the year will ensure employees maximize the value of these investments, particularly if they contribute regularly, year after year.
Start saving early in life
Why should younger employees care about retirement benefits? Even though retirement might seem far away to them, the benefits of long-term investing are significant. The longer an investment is kept, the more money it will accrue.
If finances are tight, people can still budget to save. Cutting small incremental expenses—such as takeout meals, throwaway magazines, and daily coffee from that trendy cafe—can add up.
Contributing as little as 1% of income into a TFSA can grow into substantial savings for those in their 20s. Employees in their 30s should start investing more, at least 5% to 10% of gross family income, in RRSPs or TFSAs.
Participate in a group plan
An employer-sponsored group retirement savings plan makes investing easy for employees. If they agree to have you deduct a set amount from their salaries each month, they're guaranteed to stick to investing.
A group plan is open to all income levels. Employees can start small and need not invest a lot of money up front. Remind employees that contributions are tax deferred. They don’t pay tax on contributions until they withdraw them during retirement.
A group plan is a great way to help direct bonuses into retirement plans and it also provides dollar cost averaging.
Start investing and stay invested
Some employees might need additional encouragement to "save for a rainy day." This is a great opportunity for you to bring in a financial expert, like Montridge, to educate them on the basics of financial planning.
They should understand how investing works, how to decide which investments are appropriate for themselves, and how they can become successful lifelong investors. Investing -- (with the exception of true investment experts) -- should always be a function of individual risk tolerance and life stage. It should not be based on the latest trend or what is happening in the market.
It can be transformative for employees to take control of their finances (and to see their money grow). They will alleviate a major stressor in their lives—and ultimately be happier and more productive on the job.