The difficulties faced by immigrants to Canada in planning for retirement are enormous. Given the way Canada's immigration points system works, economic immigrants are often in their 20s or early 30s—and face unique challenges:
- Finished savings: If you're a 30-year-old freshman, you've probably used most—if not all—of your savings to set up your new life in Canada. So, you're still behind in the retirement savings game. If saving for retirement were a 100-metre sprint, Canadians for life start 20 to 30 meters ahead of newcomers.
- Low income: If you are a newcomer to Canada, you may have had to restart your career slowly on the corporate ladder due to your lack of Canadian work experience. This means that you are not earning as much as others of your age with the same experience. Therefore, your ability to save for retirement is low.
- Lack of knowledge: You need to understand Canada's financial and tax systems to maximize your retirement planning opportunities, and gathering this information takes time.
- Reduced contributions: By joining the Canadian workforce later in life than their Canadian-born peers, immigrants have fewer years to contribute to the Canada Pension Plan (CPP) and build up a registered retirement savings plan (RRSP) and tax-free savings account (TFSA) contribution room. For this reason, they rely on tax-deductible unregistered savings vehicles and investments to sustain retirement to a greater extent than their neighbors.
But there is good news. As Toronto-based financial advisor Jason Pereira points out, “Canada's retirement system is not a racist newcomer. The rules are the same for everyone.” So, with the right knowledge and expertise, you can work towards building a solid retirement plan.
How to start planning for retirement as an expat
To plan for retirement, you need to know:
- How much money will you need every month when you retire? A simple way to estimate your retirement income needs is to consider it to be 70% to 80% of your current salary. For example, if you earn $75,000 a year today, 70% of that is $52,500—that's $4,375 a month—in today's dollars. Alternatively, you can estimate the amount you will need in retirement using this tool.
- How much you will get from the state pension and welfare payments: You need to estimate how much you will receive from the Canada Pension Plan (CPP) and other government programs: Old Age Security (OAS) and Guaranteed Income Supplement (GIS). The tool at this link will help you do that. Ayana Forward, an Ottawa-based financial planner, notes that “some newcomers' home countries have social security agreements with Canada, which can help newcomers meet OAS eligibility requirements.”
- How much money you will receive from your employer-sponsored retirement plan: Workplaces that don't have a defined benefit pension plan sometimes offer a registered investment account (usually a group RRSP), with contributions made only by you and your employer or employer. If you have a group RRSP from your employer, what will its estimated future value be during your retirement? You can use a compound interest calculator to find out.
- How to recover deficit: CPP, OAS, GIS and your group's RRSP probably won't be enough to pay for your retirement. You will have to cover the shortfall with your own investments or additional sources of income.
A sample retirement cash flow for a 35-year-old (retirement age 65)
This table shows the types of income you can have in retirement. The values used in the table are approximate values. (To estimate your retirement savings, try the various tools linked above.)
| Value (today's value) | Price (inflation adjusted) | ||
|---|---|---|---|
| A | The amount required | $52,500 | $127,400 |
| B | State pension and welfare payments (CPP, OAS, GIS) |
$22,000 | $53,400 |
| C | An employer-sponsored pension plan (group RRSP) |
$8,000 | $19,400 |
| D | B + C | $30,000 | $72,800 |
| E | Deficiency (A – D) | $22,500 | $54,600 |
| F | Required value of the investment in the year of retirement (E divided by 4%, based on the 4% rule) | $562,500 | $1,365,000 |
| G | A flat/continuous monthly required amount from now to retirement | $969 |
In the example above, the individual faces an annual deficit of $22,500. In other words, this person needs to generate an additional $22,500 per year to meet their retirement income needs, after accounting for regular government pension or assistance payments and their employer-sponsored retirement plan. To do this, they'll need to invest about $969 a month, which will yield an average 8% annual return from now until retirement 30 years later. How could they fill this gap and meet their deficit? Include self-directed investments, real estate and small business income.
Build it your retirement portfolioio
An obvious and tax-efficient way to cover your retirement income is to build your own investment portfolio to receive your money in your retirement years. These investments can be held in registered or non-registered accounts. Registered accounts, such as TFSAs and RRSPs, offer useful tax benefits—such as tax deductions and/or free or tax-sheltered benefits, depending on the account—but the amount you can contribute to these accounts is limited. Non-registered accounts have no contribution limits but do not offer tax benefits.
Immigrants often have less TFSA and RRSP room to contribute compared to their peers because they live and work in Canada for a shorter period of time. “TFSA contribution room begins to accumulate a year after becoming a Canadian citizen,” explains Forward. “The RRSP contribution room is based on the earnings of the previous year.”
Your TFSA and RRSP contribution room information is available in the Notice of Assessment from the Canada Revenue Agency, which you will receive after you file your tax returns. To check your TFSA limit, you can also use the TFSA contribution room calculator.
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