Optimizing Your Savings Through Employer Contributions
I don’t just sit around at home eating bon bons all day. I go to work like the 16.5 million full-time employees here in Canada. One of the most effective ways to boost our personal savings and overall financial security is by taking full advantage of the benefits offered by our employers. Many workplaces provide financial perks beyond just our paycheques, and these can make a big difference over time.
Whether you’re in Canada or the US, understanding these benefits and optimizing your use of them can significantly impact your long-term financial health. Here, we’ll explore different types of employer contributions, what they are, and how much they might help you save.
1. Employer Matching on Retirement Plans
What is it?
Employer matching is one of the most significant benefits employees can take advantage of when it comes to saving for retirement. In both Canada and the US, employers often offer to match a percentage of your contributions to a registered retirement savings plan (RRSP) or a 401(k) plan.
How does it work?
For example, in the US, your employer might match 50% of your contributions up to 6% of your salary. This means that if you contribute 6% of your salary, your employer will contribute an additional 3%. In Canada, the employer may match contributions to a group RRSP or a defined contribution pension plan. They might even match 100% up to a set amount. This match is essentially free money, adding to your savings at no extra cost to you.
How much could you save?
Let’s say you earn $60,000 annually and contribute 6% of your salary to your 401(k) or RRSP—this would equal $3,600. With a 50% match, your employer would contribute an additional $1,800, bringing your total annual retirement savings to $5,400. Over time, these matching contributions can substantially grow your retirement fund, especially when combined with investment returns.
If you invest your $3,600 at 7% over ten years, you’ll have $52,528.34.
If you invest with your employer’s money too your $5,400 at 7% over ten years will be $78,792.51.
Thanks boss!
2. Employer-Paid Life and Disability Insurance
What is it?
Many employers offer life and disability insurance as part of their benefits package. In most cases, this insurance is either fully or partially paid by the employer, ensuring financial protection in the event of an accident, illness, or death.
How does it work?
Life insurance policies offered by employers generally provide coverage of one to two times your annual salary. Disability insurance covers a portion of your income if you’re unable to work due to illness or injury. These policies can save you from paying out of pocket for individual plans and really save you if you find yourself sick for a long period of time.
How much could you save?
Individual life insurance policies can cost hundreds of dollars annually, while long-term disability insurance could cost between 1-3% of your salary. By utilizing employer-provided coverage, you can avoid these costs and redirect those savings towards your financial goals, such as building an emergency fund or boosting retirement contributions.
3. Employer Health Savings Accounts (HSAs)
What is it?
In the US, employers often offer Health Savings Accounts (HSAs) to employees enrolled in high-deductible health plans (HDHPs). These accounts allow employees to save pre-tax dollars to cover healthcare expenses.
How does it work?
The contributions made to an HSA are tax-deductible, and the funds grow tax-free. Employers often contribute to their employees’ HSAs, providing additional tax-advantaged savings. Any unused funds roll over year to year, making HSAs not only a tool for covering current medical expenses but also a long-term savings vehicle for future healthcare costs in retirement.
How much could you save?
In 2024, the IRS allows individuals to contribute up to $4,150 annually to an HSA, with a family limit of $8,300. If your employer contributes $500 annually to your HSA, it adds to your savings potential. The unused funds can be invested, allowing you to grow your savings over time.
4. Employee Stock Purchase Plans (ESPPs)
What is it?
An Employee Stock Purchase Plan (ESPP) allows you to purchase company stock at a discount, typically between 5-15%. The idea is that by buying stock at a lower price, you have the opportunity to earn capital gains if the stock’s value increases.
How does it work?
You can contribute a portion of your paycheque towards purchasing shares. Typically, companies offer a “look-back” period where you can buy stock at the lower of either the price at the beginning of the offering period or the purchase date.
How much could you save?
Let’s say your company offers a 15% discount and the stock price is $100. You’d only pay $85 per share. If the stock value rises to $120, your investment will grow by $35 per share. ESPPs are a great way to build wealth over time, especially if your company’s stock performs well.
5. Employer Legal Services and Employee Assistance Programs (EFAPs)
What is it?
Employers sometimes offer access to legal services or Employee and Family Assistance Programs (EFAPs) as part of their benefits package. EFAPs typically provide short-term counseling services, financial advice, and other forms of support, while legal service plans help cover the cost of legal advice or services.
How does it work?
Legal services might include estate planning, creating wills, or handling family law matters. EFAPs can also provide financial counseling, which may help you better manage your budget, reduce debt, or plan for future expenses, such as buying a house or sending your children to college.
How much could you save?
The cost of setting up a basic will through a lawyer can range from $300 to $1,000. With employer-provided legal services, you can access these services for free or at a much lower cost, freeing up more of your income to save or invest.
6. Employer-Paid Health & Dental Insurance
What is it?
In both Canada and the US, employers may offer health and dental insurance coverage, either fully or partially paid. In Canada, this often means supplementary health and dental coverage beyond provincial health plans. In the US, employer-sponsored health insurance is often the primary means of accessing affordable healthcare.
How does it work?
In the US, the employer typically pays a portion of your monthly premium, reducing the amount you pay out of pocket. In Canada, supplementary plans may cover services like dental care, prescription drugs, and vision care that aren’t covered by provincial health insurance.
How much could you save?
Without employer health insurance, a US family could pay over $20,000 annually for coverage. In Canada, while basic healthcare is covered, supplementary insurance can save you hundreds to thousands of dollars annually by covering costs that would otherwise come out of pocket.
7. Other Employer Contributions to Consider
- Tuition Reimbursement: Many employers offer tuition assistance programs that can help you pursue further education or certifications, reducing your financial burden. This benefit can add significant value if you’re looking to grow your skills and increase your earning potential.
- Commuter Benefits: Some employers offer tax-advantaged commuter benefits, allowing you to use pre-tax dollars to pay for public transportation or parking costs.
- Gym Memberships/Wellness Programs: Employers may offer subsidized gym memberships or wellness programs, promoting physical and mental well-being while saving you money on health-related expenses.
Employer contributions can provide substantial savings and help you build wealth over time. By understanding and utilizing benefits such as retirement matching, life and disability insurance, health savings accounts, ESPPs, and other options, you can optimize your financial strategy. Whether you’re in Canada or the US, it’s crucial to stay informed about what your employer offers and take full advantage of these wealth-building opportunities. Each contribution may seem small on its own, but together they can make a significant impact on your financial future.
Call your benefits office or people and culture department and find out what you’re leaving on the table.