Juggling personal and group RRSPs

Q: I am turning 30 this year. I am married and I have one kid with plans for another in the near future. I just changed jobs and was maxing out a good RRSP program at my old job and I have about $50,000 in that RRSP. I am not a fan of the company and rates my new job has for an RRSP program. So I am doing the minimum 3% just to get their matching funds. But I want to do something with another 10% of my pay for retirement. Where is the best place to put this for long term, low maintenance, low fee future growth? I have around $4,000 only to start this and want to make bi-weekly payments after it’s set up and this would make around $5,000-6,000 a year for total contributions.

—Jay

A: It sounds like you’ve done a good job of saving in your 20s, Jay, as a $50,000 RRSP balance at 29 is very good compared to most millennials. I can understand your motivation to keep the ball rolling.

One thing I will say is that going all in on retirement might seem good in theory, but in practice, it can backfire. What I mean is that with a second child, a second maternity or paternity leave, double child care costs, children’s activities, that roof replacement, a new car (maybe a minivan!) and so on, cash flow can get really tight in the early years of having a family.

On that basis, I’d be cautious about dumping every available penny of extra savings into RRSPs. It might not be a bad idea to consider Registered Education Savings Plan (RESP) savings if helping your kids with their education is important to you. But also Tax Free Savings Account (TFSA) contributions that can be withdrawn for multiple purposes in the medium term – like tight cash flow years, extraordinary expenses or a lump-sum RRSP contribution when you’re in a higher tax bracket.

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Just be cautious of focusing so much on your RRSP that you are “retirement savings rich” and “cash flow poor.” There’s nothing worse than a massive RRSP when you’re 35 and high-interest consumer debt weighing you down, Jay.

It’s unfortunate that your new group RRSP is so poor in comparison to your previous plan. I’m very surprised myself at the difference between various plans I see as far as investment options and most importantly, fees. You might use it as an opportunity to speak to whoever oversees your new group plan and bring it to their attention. It could be a good way to make a good impression on management in your new company as well. Sometimes these decision-makers are not that well-versed in investments and don’t realize the plan is sub-par.

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Regardless, I’d make the contributions required for the full company match – 3% from the sounds of it – and get that free matching money from your employer, Jay, as you suggested.

You might try to pick the least bad of the bad investment options in the new plan and use it as a placeholder for the account and then manage the rest of your RRSP investments in the old plan and your personal RRSP accordingly. In other words, maybe there’s a decent, low-cost U.S. equity index fund that you can direct your contributions to and then have a Canadian equity, international equity and fixed income focus with your other investments in the other accounts. Don’t think that you need to have a certain asset allocation within each account. Worry about your overall asset allocation and then figure out where it’s best to hold which investments, Jay.

Make sure your old group RRSP still benefits from the same discounted fees now that you are no longer an employee. Sometimes you are moved into “personal plan” with less competitive fees.

If that’s the case, or even if you want to have less accounts to manage, you might consider moving your old group RRSP (tax-deferred) to a new personal RRSP plan. A group RRSP can be moved into a personal RRSP after you leave your employer and sometimes, your vested contributions can even be transferred to your personal RRSP while you are still with that employer.

Where you open your personal RRSP kind of depends. If you’ll manage it yourself as a DIY investor, the discount brokerages are pretty competitive these days in my experience, but if you want some input, check out MoneySense‘s annual survey of Canada’s Best Online Brokers 2016. One may be better than another depending on your priorities, Jay.

If you decide you want to invest in actively managed mutual funds, a couple good options if you’re looking for a modest amount of support from an investment advisor include Steadyhand and Mawer Direct Investing.

Steadyhand offers concentrated, low-fee mutual funds managed by a quality group of third party managers. They have six funds with fees that are about 25%-50% cheaper than most retail mutual funds. Their in-house advisors can help you build a custom portfolio or you can use their tools to build your own.

Mawer has a team of advisors who can help you choose from Mawer’s own short list of 12 diverse, low-cost, well-managed mutual funds, but you need to meet their $50,000 minimum investment threshold. 8 of their 9 funds that have Morningstar Ratings were rated 5 stars out of 5 as of March 31, 2016 (and the 9th was 4 stars out of 5). See more details here.

David Aston wrote a great MoneySense article on robo-advisors or online advisors, who build and manage predominantly exchange-traded fund (ETF) portfolios for investors. If you lean towards passive investing, Jay, but don’t want to do it yourself, a robo-advisor could be a good option as well.

There are lots of other investment options available, though many cannot or should not be considered until you have a larger amount of money to invest. The bad news is some investment options are limited to investors with portfolios of more than $150,000, $500,000 or even $1,000,000. The good news is the investment options for investors with more modest accounts have never been better.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.