CHAPTER 5

Retirement Tool Kit

Assuming your personal retirement goals fall in line with what Professors
Ho and Robinson suggest in the illustration we saw in Chapter 2, action on
your part is critical towards building upon the basic safety net. There are
plenty of things you can do to start building a retirement plan and fund and
you don’t have to delay because you feel your plan is not perfect or exotic.
It all starts with the decision to start saving in a disciplined way. As you get
more comfortable and feel you need help, that will be the time to seek
advice. Many of you have or are starting which is why you are clients or
soon to be clients but it all starts with the basics and a decision to ACT.
Years ago, a major Canadian financial institution rolled out a television
marketing campaign designed to encourage Canadians to save.

The Pay Yourself slogan was aimed at illustrating the power and benefits of putting a
small amount of money aside every month and to think of it as just another
monthly bill to pay. The idea here of course, was to build the habit of
having another bill to pay. But in fact, you were paying yourself and likely
not putting off starting to save for any future need or goal.
The marketing campaign was quite successful and when you think of it,
encouraging yourself to save for near term things made it easier to start
saving for more serious things like a home or retirement.
In my Dad’s day Canada Savings Bonds were a popular method of forced
savings for many Canadians. These simple investments could be bought for
cash and held to maturity or you could enroll in a monthly savings plan
where an employer or bank would deduct an installment amount from your
pay or a bank account. While the bonds are no longer available, the product
opened the door to creating a savings habit amongst Canadians and today
there are a number of vehicle or plans like company share purchase plans,
company pension plans, Registered Retirement Savings Plans, Tax Free
Savings Accounts, Corporate Class Funds and self-directed retirement plans
that let you hold financial and fixed assets.

When I meet with clients, we talk about the Bucket Plan. As seen in the
next page, you can save for near term goals like a vacation, medium term
goals like university tuition for a child or a new car or longer-term goals
like retirement. Because the anticipated need for these savings are quite
different the form these savings and investments take will also be different.
For example, you would not want to invest in a 5 year fixed term GIC for
your emergency fund because if you suddenly experience a leaky roof, you
would need to get at the money immediately. Some of the basic savings
accounts mentioned above are excellent ways to start enforcing a savings
habit aimed at short term goals like a vacation, new furniture or maybe a
new automobile.

The “soon bucket” can be structured to look after goals 3-5 years down the
line, like a new cottage, university tuition or some other special project. It is
often useful to have investments in this bucket that will reasonably secure
and produce a level of income if possible, like dividends or interest
payments. After all, if you are going to make the effort to put money away
for some 5 years or so, you want to make sure you are getting some “rent”
on that nest egg.
The “later bucket” is really where and how you would invest for your
retirement plan or in some cases legacy planning for estate purposes. You
would be looking for longer term growth because that money may not be
needed for some 10 years or more in the future.
Now at this point, you may be thinking, “this is getting complicated. I have
to think about emergencies, goals, timelines and long term retirement needs
not to mention the various kinds of investments and plans available. If this
is the case, you are not alone and this is where a trusted advisor can help
you make the most sense out of the many options available to you. As I said
at the very beginning, this book is about retirement by design-your design.
But let’s face it, we simply don’t know what we don’t know.
Fortunately, I am here to help, whether you elect to become a new client or
whether you need to re-evaluate your retirement plan because of unforeseen
life events or even changes in retirement products or taxation of your
money.
Source: Collison, The Financial Advisors’ Guide to Excellence, Thomson Reuters, 2015

I use the Personal CFO approach with my clients because it places you,
the client in the role of Chief Executive Officer (CEO) of your retirement
plan. As your Chief Financial Officer (CFO) it is my job, my responsibility
to firstly understand your needs and goals and work with you to achieve
those needs and goals. The job is not about selling or recommending
financial products. It is about recommending and helping you reach your
objectives and providing you with all the information and support you need
to piece together your retirement plan. As your CFO it is also my job to
engage every appropriate professional whether it be a lender, insurance
specialist, lawyer or accountant to assist in crafting your retirement plan. In
the end as CEO, you are the designer and author of your plan.
With this in mind, let’s review some of these accounts and products to
understand how they work. Once you become familiar with the types of
investment choices you have, I will talk about the impacts these can have on
the amount of taxes you may have to pay and better, I will outline some
strategies you can look at to achieve the retirement goals I outlined at the
start of this chapter.
I know this will do more than get you started and I know this will convince
you to sit down with me and develop a retirement plan that will give you
the peace of mind you deserve.

REGISTERED PENSION PLANS (RPP)
Not to be confused with the RRSP, a registered pension plan is an
arrangement by an employer or a union to provide a pension to a retired
employee in the form of periodic payments. The Income Tax Act allow the
contributions made by an employer and an employee and any investment
earnings in the pension plan to remain tax exempt until you retire and start
drawing your regular pension payments.
If you are fortunate enough to be enrolled in a Defined Benefit Pension
Plan (DBPP) you are in an ever-declining group of people in Canada. In
the case of a DBPP your employer agrees to pay you a pre-determined
monthly income when you retire for as long as you live. The amount you
will receive is usually based on a formula that includes your years of
service and your average highest earnings.
For example, a popular formula for Annual Pension = 2% X average
yearly pensionable earnings during the highest five earning years X
years of pensionable service. Employers offering their employees defined
benefit pensions are required to provide their employees with an annual
pension statement. Most statements show the pension to be earned at the
employee’s regular (age 65) or early retirement ages if such a benefit is
applicable.
With a few exceptions, it is the plan sponsor who assumes all the risk. This
is precisely why such plans are dying in the private sector; so, few
employers are still willing or able to stomach that much risk or the high cost
as baby boomers start retiring in large numbers. If you are the recipient of a
DBPP, congratulations. You know exactly how much you will earn when
you retire. This level of certainty is priceless.
The second most popular kind of registered pension plan in Canada is the
Defined Contribution Pension Plan (DCPP). Normally when enrolled in
this plan you, the employee, know how much you will contribute to the plan
each month (usually a fixed percentage of your salary) but not how much
you will be able to draw out when you retire. That is because your employer
also contributes to the plan based on some kind of formula. The funds in the
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plan are then typically invested in things like mutual funds, stocks and
bonds.

You will usually have to choose where to put the money in your defined
contribution pension plan when you retire. Your options may be to put your
money in:
an annuity
a locked-in registered retirement savings plan or locked-in registered
retirement income fund
a combination of these two options

You may be able to take the money from your pension plan in cash if it is
below a specific amount. Depending on your age and the terms of your
pension plan, you may also be able to reinvest some of this money in
another financial plan, such as a Registered Retirement Savings Plan
(RRSP) or Registered Retirement Income Fund (RRIF) that is not lockedin.
Your pension plan administrator will usually communicate to you what your
options are when you retire. Speaking with a trusted financial advisor for
help deciding how to manage the money from your defined contribution
pension plan would certainly be worth considering. Such an important
decision, you should discuss this with a professional.

A Deferred Profit Sharing Plan (DPSP) is structured to be a combination
of a pension and retirement plan. Contributions are made to the plan by an
employer by distributing a portion of company profits to the plan to
encourage employees to save for retirement. Only the employer can
contribute and the contributions are tax deductible to the employer. An
employee cannot contribute to the plan. Employees do not have to pay tax
on the contributions until they withdraw funds from the DPSP. Normally
DPSPs contribute a small measure to overall retirement income.

REGISTERED RETIREMENT SAVINGS PLANS (RRSP)
An RRSP is probably the most well known retirement savings vehicle
available to Canadians. We saw earlier that 14 million households, 65.2 per
cen made a contribution to either a registered pension plan, an RRSP or a
tax-free savings account (TFSA) in 2015, according to a statement by
Statistics Canada and reported in a CBC news article dated Sept 13, 2017.
With a growing population of tax filers, you’d expect RRSP contributions
to be on the increase. But the total number of people putting money into
RRSPs fell from 2000 to 2018. That’s a drop to six million from 6.3 million
according to a Rob Carrick article in the Globe and Mail dated March 1,
2020.23 The 2009 launch of the Tax Free Savings Account is likely
responsible in part for the decline. The number of people using TFSAs
climbed from 56% of Canadians in 2017 to 69% in 2018 according to
results of a Bank of Montreal study reported in the December 18, 2018
issue of MoneySense.

An RRSP is a retirement savings and investment vehicle for employees or
self employed people in Canada. Your pre-tax money is placed into the plan
and grows tax free until withdrawn. At that time amounts withdrawn are
taxed at your marginal tax rate. The growth of the contributions in the plan
is determined by the contents (assets) in the RRSP. While having money in
an RRSP is no guarantee that you will achieve a comfortable retirement, it
is pretty much a guarantee that the amounts in a plan will grow and
compound without being taxed.
These plans are registered with the Canadian government and are overseen
by the Canada Revenue Agency (CRA) as to the rules governing annual
contribution limits, contribution timing and what assets you are allowed to
hold in a plan.
RRSPs have two main tax advantages. First you can deduct allowable
contributions against your income. For example, if your tax rate is 40%, for
every $100 you invest in the plan up to your contribution limit, you will
reduce your tax bill by $40. Second, the money in the plan as well as the
growth of the investments in your plan remain tax sheltered. This feature
can be extremely beneficial because unlike non RRSP investments, returns
are exempt from any capital gains tax, dividend tax or income tax. Being
able to have investments in the plan compound at a pre-tax rate and
allowing contributors to delay paying taxes on contents of the RRSP until
retirement means the tax you will pay when you withdraw amounts from
your RRSP will likely be based on a marginal tax rate that is lower than the
rate was when you were working.
Let’s look at a simple example of the tax sheltering and deferral features of
an RRSP. Assume, Bob a salaried employee with a marginal tax rate of 40%
buys 100 shares of a tech stock at $100. He holds the stock for 3 months
then sells the shares for $200. Also let’s assume the shares were not
purchased from cash in an RRSP and held in the plan. Upon the sale, Bob’s
capital gain would be $10,000. At the time this was written, the capital
gains tax Bob would have to pay on the gain would be 50% of $10,000 at
his 40% tax rate, or $2,000.
Now let’s assume the shares were held in the RRSP and Bob sells the shares
for the same price after he retired, he withdrew the proceeds and his
marginal tax rate fell to 29%. Using the same math, Bob’s tax liability
would be $1,450.
You can see how the Government of Canada’s RRSP tax deferral for
contributors is an encouragement to save for retirement while at the same
time, a good bet that more Canadians will not have to rely as much on
Canada Pension Plan benefits for a comfortable retirement.
There are a number of types of RRSPs but generally they are registered in
the names of an individual or a spouse. For an individual RRSP the owner
of the plan is also the contributor. For a spousal plan RRSP, the plan is
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opened in the name of the spouse and contributions to the plan are owned
by the spouse. You as the contributor make the contributions to the plan and
benefit from the tax deduction. Also, since in many cases, you can split
your retirement income with your spouse for tax purposes, when it comes
time to make withdrawals, these normally will attract a lower marginal tax
rate.
Group RRSPs can be established by an employer for employees and is
funded through payroll deductions, much like the 401K plans work in the
United States. These plans are administered by an investment manager and
afford contributors with immediate tax savings.
A Pooled Retirement Savings Plan (PRPP) is a retirement savings option
for self-employed individuals.
A PRPP enables its members to benefit from lower administration costs that
result from participating in a large, pooled pension plan. It’s also portable,
so it moves with its members from job to job.
Since the investment options within a PRPP are similar to those for other
registered pension plans, its members can benefit from greater flexibility in
managing their savings and meeting their retirement objectives.
So just what can I put into my RRSP? In addition to cash balances the
allowable assets that can be held in an RRSP are several including:
mutual funds
exchange traded funds
equities
bonds
mortgage loans
income trusts
guaranteed investment certificates
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foreign currency
labor sponsored funds
I mentioned a contribution limit earlier. For the year 2020 the limit is 18%
of earned income you would have reported on your 2019 tax return, up to a
maximum of $27,230 according to the Canada Revenue Agency. You can in
effect contribute more than the limit however additional contributions of
$2,000 or more will attract penalties.
Finally, while you must collapse your RRSPs by the end of the year you
turn 71, you can make withdrawals at any age. Any withdrawals get
included in your overall taxable income for that year, unless the money is to
be used for a first time home purchase or for continuing education and these
elections are subject to some conditions.

REGISTERED RETIREMENT INCOME FUND (RRIF)
A Registered Retirement Income Fund is a tax-deferred tax plan registered
with the Canada Revenue Agency. As I noted above, you are required to
collapse all of your RRSPs by the end of the year you turn 71 years of age.
The option exists to convert a RRSP into a RRIF anytime on or before an
individual reaches their 71st year. Before the end of the year in which you
turn 71, it is mandatory to either withdraw all funds from a RRSP plan or
convert the RRSP to a RRIF or life annuity. If funds are simply withdrawn
from a RRSP, the entire amount is fully taxable as ordinary income. You
can defer this taxation by transferring investments in a RRSP into a RRIF.
Your investments in a RRIF can continue to grow in a tax deferred manner
but unlike an RRSP, you can no longer make contributions to a RRIF and
you will be required to receive a regular payment from the RRIF subject to
an annual minimum RRIF payment. The minimum RRIF withdrawal is an
annual obligatory amount which is cashed out of a RRIF and paid to you
without withholding tax. The withdrawal remains taxable Canadian
income, but is eligible for a tax credit to reduce federal income tax by 15%
of the first $2,000 withdrawn, if you are 65 years or older. In most
provinces, a tax credit is also available to reduce provincial income tax.
The minimum RRIF withdrawal each year is based on a percentage that is
calculated by your age and the total value of the plan on January 1 each
year. An interesting benefit to having a RRIF is that if you have a spouse
who is younger than you, you can base the minimum annual withdrawal
you must receive on their age. You can elect to withdraw an amount greater
than the minimum RRIF amount for that year, though withholding tax will
apply to this supplementary amount.
An interesting change was introduced by the federal government in March
2020 as a result of the Covid19 pandemic. Legislation was passed that
lowered the minimum amount that must be withdrawn from a RRIF in 2020
by 25%. This was done in recognition of volatile market conditions and the
impact of this on many seniors’ retirement savings. This is no doubt being
viewed by a number of seniors with RRIFs as a relief because the value of
holdings in their RRIFs may have declined significantly. This change
enables RRIF holders to withdraw a lesser amount and preserve more of
their savings until market conditions improve and the value of their
holdings in the RRIF improve. This being said, with ongoing uncertainty
surrounding Covid19, this temporary arrangement may well extend into the
2021 tax year or longer.
This is a lot to digest and RRIFs may sound complicated so let’s look at an
example based on the annual minimum RRIF withdrawal factors that came
into effect with the 2015 federal government budget.
Suppose you have a total of $350,000 in your RRIF, you converted all of
your RRSPs to a RRIF at the end of the year you turned 71. According to
current minimum RRIF minimum withdrawal requirements, based on your
current age of 72, the minimum annual amount you would be required to
receive from your RRIF would be $18,900 ($350,000 x 5.4%). Prior to the
2015 budget the factor would have been 7.38%.
Here is a table showing you the current minimum withdrawal factors as
posted in the Canada Revenue Agency website as at September 14, 2020.25
AGE (AT START OF YEAR) PREVIOUS FACTOR (%) NEW FACTOR (%)
71 7.38 5.28
72 7.48 5.40
73 7.59 5.53
74 7.71 5.67
75 7.85 5.82
76 7.99 5.98
77 8.15 6.17
78 8.33 6.36
79 8.53 6.58
80 8.75 6.82
81 8.99 7.08
82 9.27 7.38
83 9.58 7.71
84 9.93 8.08
85 10.33 8.51
86 10.79 8.99
87 11.33 9.55
88 11.96 10.21
89 12.71 10.99
90 13.62 11.92
91 14.73 13.06
92 16.12 14.49
93 17.92 16.34
94 20 18.79
95 and over 20 20
Using the same example shown on page 30, under the 2020 legislation at
age 72 for a RRIF valued at $350,000 the minimum withdrawal would be
$14,175 or $4,725 less than RRIF minimum withdrawals would normally
require you to withdraw.

TAX FREE SAVINGS ACCOUNT (TFSA)
I spent some time on RRSPs and RRIFs because these are the most popular
and used retirement investment vehicles for Canadians. There however is
another savings vehicle that was introduced in 2009 that has captured
Canadians’ attention and is experiencing steady growth and that is the Tax
Free Savings Account. In fact, two thirds of Canadians have a TFSA
according to a Bank of Montreal study reported on in the December 18,
2019 issue of Investment Executive. We saw in Chapter 2 that much
misunderstanding exists amongst Canadians between the RRSP and TFSA
products so let’s add some clarity to the picture.
Unlike the savings accounts of old where you would earn interest at a low
rate and have these interest earnings taxed at a higher rate than say dividend
income, you can deposit cash into a TFSA as well as a number of assets like
stocks, bonds, exchange traded funds and guaranteed investment
certificates. Since you already paid tax on the money you put into your
TFSA you will not have to pay tax again when you make withdrawals even
when the value of assets in the TFSA grow exponentially.
The flexibility of the TFSA is probably its best feature. Unlike an RRSP
you can withdraw from your TFSA at any time and without any penalty.
There is a government mandated maximum that you can contribute to your
TFSA and you need to check every year to see what the new contribution
limits are because over-contributing to a TFSA comes with a nasty penalty
of 1% of the over contribution for every month until that amount is
withdrawn. Because the maximum contribution limit is set annually and can
change every year it is best to consult your advisor or the Canada Revenue
Agency website for this information.
Nonetheless, when you do withdraw money from your TFSA, that amount
is added to how much you can withdraw the following tax year and if you
think you are late to the party, you are not. If you have never opened a
TFSA you are allowed to contribute an amount equal to the cumulative
annual contribution maximums set by the government since 2009 when
TFSAs were introduced so long as you had reached the minimum age
required in 2009.
As it stands today, the cumulative contribution room in a TFSA is $69,500.
Also, if you are not able to contribute in a given year, that contribution
room just rolls over to the next year so you never lose out on being able to
maximize contributions to the plan.
As I mentioned earlier many TFSA holders misunderstand the product or
are not maximizing it to its full potential. First, contributions to a TFSA do
not get you a tax deduction like an RRSP because the money you contribute
to a TFSA was already taxed.
Second, many TFSA holders use a TFSA as a savings account with cash
either sitting in the plan and attracting little or no interest.
As mentioned over contributions can be costly because of the penalties but
also transferring a TFSA between financial institutions incorrectly an also
cause you grief. By initiating a withdrawal from one financial institution
and contributing to new plan at another you might think this is simply
moving the money from one place to another without changing your overall
TFSA picture. Without ensuring the new institution files the government
T2033 form as part of that process, the Canadian Revenue Agency will not
see this transaction as a desired transfer but rather a withdrawal and
subsequent contribution in the same year, this could attract that nasty
overcontribution penalty and because by the time you receive the CRA
notice to this effect, that penalty will have already cost you money.
You might also want to be careful when investing in U.S. dividend stocks.
U.S. assets that generate income in a Canadian TFSA are subject to a 15%
withholding tax.
The TFSA is certainly producing the results intended by the government to
have Canadians increase their savings, especially for younger Canadians
who are now able to build a nest egg sooner by placing growth assets in the
plan and not having to worry about paying any tax on the increase in value
of these assets.

ANNUITIES
An annuity is a financial product that you can buy with a lump sum of
money, with funds from an RRSP or a RRIF. The amount is returned to you
with interest in regular payments. You can choose to receive the payments
for a set number of years or for the rest of your life and these payments can
be paid to you anywhere from monthly, quarterly, semi-annually or once a
year. There are two types of annuities: term certain or life.
If you believe an annuity is the right product for you, it is important that
you think seriously about the choice and fully understand how the plan will
work because once you buy an annuity you cannot make any changes to the
contract. The amounts you will receive will be locked in for the duration of
the contract. How much you will be paid from an annuity will depend on
your age when you buy it and on other factors like current interest rates and
your life expectancy.
One thing to also keep in mind is that if you are over age 65 and do not
have a company pension plan you may be able to claim the pension income
credit, meaning you will not be taxed on the first $2,000 of annuity income
every year.

TERM CERTAIN ANNUITY
A term certain annuity will pay you a guaranteed regular income for a set
number of years (the term). You need to be aware however that if this kind
of annuity is bought with funds from an RRSP or RRIF, the term certain
annuity must extend until age 90. If you die before the end of the contract,
your payments will continue to go to your estate or to a beneficiary if you
designated one.
How your annuity is taxed will depend on where the funds came from to
buy the annuity. Income from an annuity purchased with registered funds is
fully taxable to the policyholder in the year it’s received. Only a portion of
the income from an annuity purchased with non-registered funds is taxable.
The amount of tax and when it is payable depends on the tax treatment the
annuity qualifies for. Canadian withholding tax is mandatory for annuities
purchased with RPP (locked-in and non-locked-in), LIF or DPSP
premiums.

LIFE ANNUITY
As the product name implies this kind of annuity pays you a regular income
for life. Payments normally stop when you die and no funds go to your
estate however you can choose to add an option to the annuity that would
allow your spouse or beneficiary to continue to receive your payments after
your death.
I should add that how a life annuity is taxed is the same as I outlined above
for term certain annuities. Also, most annuities offer various kinds of
regular payments. You can choose to receive a level payment where the
amounts you receive remain the same throughout the life of the contract. An
indexed payment is often available where the income you receive increases
by a certain percentage every year. Finally, there are integrated payments
where your annuity payments would decrease once you start drawing CPP
or OAS benefits. This of course assumes you started your annuity before
the minimum age to draw from these benefits or you started your annuity
prior to choosing to apply for CPP and OAS.
Choosing an annuity is really something you should only consider after
obtaining the appropriate investment and tax advice as there is a lot to
consider and the rules can change without much media fanfare. For
example, the tax rules generally require an annuity purchased with
registered funds to commence by the end of the year in which the annuitant
attains 71 years of age.
A change in the 2019 federal government budget proposes to amend the tax
rules to permit an advanced life deferred annuity (ALDA) to be a qualifying
annuity purchase, or a qualified investment, under certain registered plans.
An ALDA will be a life annuity the commencement of which may be
deferred until the end of the year in which the annuitant attains 85 years of
age.

NON–REGISTERED INVESTMENTS
Unlike Registered Retirement Plans (RPP), Registered Retirement Savings
Plans (RRSP) and Registered Retirement Income Funds (RRIF) where the
plan is registered with the federal government for certain tax deferrals and
treatment, or the Tax Free Savings Account (TFSA) where there is no tax
liability on what is earned in the plan, there are non-registered investments
and plans that are essentially “pay as you go” investment vehicles. These
accounts enable you to invest in a number of types of assets (cash balances,
stocks Guaranteed Investment Certificates), some that can allow you to add
exposure to international markets. Non-registered plans are not tax sheltered
so the gains or losses you incur are declared in that year for income tax
purposes. Now, you might view having these as shorter term investment
choices to say, save for a new car or buying a house.
The choice between a registered account vs. a non-registered one can
depend on a host of factors including your marginal tax rate now and in
retirement, the types of assets you plan to invest in, nature of returns
(dividends, capital gains, interest income), amount you plan to invest,
investing purpose (retirement savings, short-term project funding, kid’s
college tuition), whether you have maxed out your registered plans, and age
limits. Having a source of non-registered savings can also prove to be very
beneficial in an emergency where your money can be easily and quickly
accessed. This is often not the case if the assets in your registered
investment accounts are tied up in stocks or investments with a fixed term.
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REGISTERED DISABILITY SAVINGS PLAN (RDSP)
The RDSP is a long term investment plan to help Canadians with
disabilities and their families save for the future. Contributions that you
make to the plan can be supplemented by a matching Canada Disability
Savings Grant of up to $3,500 of contributions made to the plan and a
Canada Disability Savings Bond of up to $1,000 for lower income plan
holders even if no contributions were made during the year. If you are
eligible to receive the Disability Tax Credit, are under age 59 you can open
an RDSP. A parent or guardian can open a plan for a minor.
There is a lifetime contribution limit of $200,000 but there is no annual
limit and you can contribute until the year you turn 59. What is important to
know here is that contributions to the plan are not tax deductible and are not
included in income when paid out of the RDSP. The investments in the plan
accumulate tax free. However, grants, bonds, and investment income earned
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in the plan are included in the beneficiary’s income for tax purposes when
paid out of the RDSP. Another unusual feature of the plan is that with the
written permission of the RDSP holder, anyone can contribute to the plan.

EMPLOYEE SHARE PURCHASE PLANS (ESPP)
An employee stock purchase plan (ESPP) is a lucrative benefit– it’s
essentially free money and who doesn’t like free money? ESPPs aren’t
available to everyone, but if your company does offer one as a benefit, it’s a
great way to build your wealth.
As an employee you can purchase company stock up to a certain percentage
of your salary. Your employer in turn will match your purchase up to a
certain amount.
For example, you might be allowed to purchase up to 10% of your salary in
company stock. Your employer might match that by 25-50%. So, if you
maxed out at 10% of your salary, and your employer matched you 50%–
that’s basically a 5% raise you’re getting every year. Even if you did not
join your ESPP early in your work career and the plan allows, it would still
be beneficial to join just to benefit from the matching contribution feature.
Some employers even allow employees to buy their stock at a discounted
price.
Let’s take a look at how valuable an employee stock purchase plan can be
when the company matches their contributions.

Employee annual salary = $60,000 (gross)
ESPP allows 1-10% (gross) in contributions
Employer matches 50%
The basic example shown above also excludes any dividend payments you
may earn from the stock or any appreciation in stock value. Now, the value
of the stock could also decrease but the matching funds already received
would likely mean that you could still be ahead of the game.
EMPLOYEE PERCENTAGE EMPLOYEE CONTRIBUTION EMPLOYEE MATCH
1% $50 $25
5% $250 $125
10% $500 $250
*Don’t Ignore your Employee Stock Purchase PlanMoneyweHave.com, Aug. 20, 2015
Finally, there are other income sources such as real estate rental income or
the sale of a business. I have elected not to focus on these sources but it
does not mean that these could not form part of a well balanced retirement
and savings strategy.