You saw the title, right? What are you doing? HEY! STOP THROWING ROCKS AT ME! I’LL CRY!
Like most everyone, I have an RRSP match through work, and no, it isn’t just free bags of chips. They give me a 25% top up on every dollar I invest, up to 5% of my salary. This is good. Free money usually gets me hard in the pants area. Free money is better than a bathtub filled with naked Taylor Swift holding a basket of onion rings. Free money is better than that time I fell over and found a dime. Wait. Maybe ignore that last one.
So why am I forfeiting free money? It’s kinda complicated, but let’s take a gander, goose.
Let’s assume I make $50,000 per year. Five percent of my salary is $2500, and an additional 25% of that is $625. Let’s also assume I’ll never get another raise again, mostly because I’m a slacker who spends too much time walking around stores pantsless. Under this scenario I invest $3125 per year.
Under the other scenario, I just take my $2500 and invest it. There’s no top up.
This seems like a no-brainer, right? If I invest $3125 per year, at an 8% return, over 40 years, I’ll end up with $874,000.
If I drop that amount to $2500 per year, keeping the same 8% return, I’ll end up with $699,000.
It’s decided. I’m officially the dumbest personal finance author out there, and considering some of my peers, that’s saying something. What kind of dumbass intentionally gives up $175,000? Didn’t I just write a post on how not having an emergency fund would gain me $150,000 over my lifetime? (SHAMELESS PLUG ALERT.) You have all bought an dozen eggs, and are preparing to egg my house. I appreciate the gusto you all have to throw eggs at me. Maybe you could throw some bacon too?
Just for giggles, let’s talk a little about the funds offered by (big Canadian insurance company that I probably shouldn’t name directly, mostly to protect myself in case anyone at my job reads this, or NAMBLA for short). They’re all segregated funds. What’s a segregated fund anyway? Is it a mutual fund that has to drink from a special water fountain? THAT’S SO RACIST.
Nah, a segregated fund is a mutual fund with insurance attached to it. Depending on the fund, the insurance company guarantees either 100% or 75% of the maximum value of the fund. So assuming you buy $10,000 of a segregated fund, and it drops to $7,500. Depending on the fund, you’d either be guaranteed the full $10,000 or $7,500, when it comes to withdraw. If the fund goes up to $11,000, then the guarantee goes up accordingly.
How does the fund company pay for this guarantee? The investor pays for it. As in, I’d be paying for it, since that’s all my plan offered.
I tried and I tried, but I couldn’t find the fees on the segregated funds offered in my plan. I could find the fees on the underlying mutual funds, which were all around 2% a year. Depending on the guarantee, segregated funds can cost anything from 0.5% to 4% extra. For this example, we’ll assume the segregated part of the fund would cost me an extra 1%, bringing up the total cost of any fund I’d buy to 3% a year.
Meanwhile, if I took my $2,500 per year and invested it in the XIU, an exchange traded fund that tracks the biggest 60 stocks on the Toronto Stock Exchange, which has a management fee of 0.18%. We’ll round up a little, and assume the spread in fees is 2.75%. Suddenly, getting an 8% return all while paying a 3% management fee becomes next to impossible.
Now let’s run an updated comparable.
If I invest $3,125 per year and get a 5% return, my retirement nest egg ends up at $396,000.
If I invest my own $2,500 per year remember, I end up with $699,000.
Mutual fund fees are worse than pooping a little when you’re trying to fart. Even though I’d be investing 25% more, fees ensure that I end up with an assload less at the end of my working career. If I went with work’s RRSP match, I’d have to work even longer, and nobody wants to be that old chip guy who checks out hot young woman ass while working in a gas station.