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Adjusting my Defined Contribution Plan

Golf - RetirementAs I have been hinting to from time to time in my posts, I have a defined contribution plan which is really good at accelerating my retirement :) The plan has a matching contribution based on the performance of the company to a minimum of 50%. That means I can get at least 50% of my RRSP contribution through the office and at times the match is even 100%. Due to this benefit, I never miss on those contribution and it’s a priority over my other investments, even my dividend investments.

What is a Defined Contribution Plan?

It’s not a pension plan and there are no income guarantees from it. It is simply an RRSP account whereby your employer can contribute to it based on some guidelines set forth by the company – usually a percentage of your salary. One caveat is that you need to have contribution room in your RRSP as the employer contribution takes away from your RRSP limit and you don’t get the tax credit for it.

Examples, assume that you contribute $10,000 to your RRSP through the program and at year end, the company matches at 100% and contributes another $10,000. You have a total of $20,000 contributed in your RRSP for that year but you only get a tax credit on YOUR contribution of $10,000. Usually, there is a vesting period before you are allowed to keep the employer contribution and for us it was 2 years.

Adjustment to my Defined Contribution Plan

Unfortunately, dividend investing is not an option with the plan. Only mutual funds are offered and since the inception of the program I invested safely in fixed income with some exposure to equities. However, the plan recently added some extra investment options that made me re-adjust my contribution. The newly offered mutual funds are in fact index funds. I was quite glad for the index funds as I believe it is a sound strategy if I can’t execute a dividend investing strategy. I have absolutely no love for actively managed mutual funds as they go no where and that’s why my investments were geared towards fixed income.

My defined contribution “couch potato” plan is now the following:

  • 15% Fixed Income
  • 15% Canadian Bonds
  • 30% U.S. S&P Index
  • 40% Canadian S&P/TSX Index
As you can see, I am applying an index investing strategy and it`s important to assess your investing options in all the accounts you have. I am in the process of adjusting my kids` RESP account as well and it too requires some thinking due to the limited investment timeline we have with an RESP.
Readers: Do you have multiple investing strategies?

Image: Sura Nualpradid / FreeDigitalPhotos.net

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7 Responses to "Adjusting my Defined Contribution Plan"

  1. Liquid says:

    Looks like you have a pretty good balance of stocks/bonds. My only investing strategy right now is to maximize returns when I retire. We don’t have index funds in our company’s DC plan. So instead I chose a North American equity mutual fund and a Canadian resources mutual fund. I’m a little younger than most of my co-workers so I think I can be a little more aggressive right now. But when I start a family later on I’m thinking about doing your couch potato method.

  2. Bernie says:

    Why not some Int’l ex US exposure?

    • The Passive Income Earner says:

      @Bernie,

      I am not a fan of international because I don’t understand it enough and I prefer to stick to what I know. Even with books and theories out there about what one should do with respect to diversification, I like to stick to what I understand – especially when it comes to geo-political situations. I have the US and CDN indexes and through the US, I get the international conglomerates.

      What I am willing to contemplate is to flip my percentage towards the US since it’s a much bigger economy.

  3. Johnx says:

    Hi…….great post and so fortunate that you can avoid the actively managed money syphons.

    A question comes to mind……..how do you adjust your investments outside you defined plan to
    work synchronously with those inside the plan yet still maintain an appropriate indexed asset
    allocation? Would you treat the in/out as part of one whole or balance each as separate accounts?
    If a spouse is involved then the entire process becomes much more complex if you include a
    TFSA and RRSP for each.

    Any feedback would be appreciated
    Regards John

    • The Passive Income Earner says:

      @Johnx
      I keep the defined plan separate from my dividend investments. For my dividend investments, I take into consideration all accounts with the dividend strategy. Essentially, I manage by strategy and not by accounts.

  4. Bernard says:

    Hi again!

    It is definitely a priority to max out on the company rrsp!
    It’s basically guaranteed free money:)
    My company does the same thing and we are basically restricted to mutual funds and index funds.
    Transactions on the market will apparently cost 100$ a trade if you have less than 100k in the rrsp account!

    I have my RRSP money in mutal funds right now and am planning to switch to index funds.

    To my knowledge, the TD e-series are best, but only if you have your rrsp account with TD waterhouse. If you have your rrsp account with other brokerages, the MER is almost 0.5% higher.

    I am stuck with high MER index funds (~0.8%) or paying 100$ to transfer my money from scotiamcleod to TD waterhouse to pay a MER of (~0.3%)

    I was just wondering which index funds did u invest in?
    and if you are in my situation, what would you do?

  5. Great Article.

    Conventional wisdom would have you believe that investing during times when
    real estate is rapidly appreciating is the best way to accumulate wealth.
    I disagree. I think that when real estate is rapidly appreciating, it is a
    sign that there is a great disequilibrium in the market. Investing for
    appreciating is a double edged sword because you have no control over the
    market and therefore, you can not rely on the returns generated by your
    investment. I believe that investing for reliable cash-flow in
    non-volatile markets is the best way to accumulate wealth. After all, if
    you have $20,000 invested at 11% for 22 years and only let your initial
    deposit compound, the ending result is staggering: $222,451.24. Why is it
    that less than 10% of all americans have this amount in their retirement
    account? Because they invest for appreciation, whether it be stocks or real
    estate.

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