The difficulties newcomers to Canada face in planning for retirement are particularly acute. Given Canada’s points system for immigrants, economic immigrants are typically of their late 20s or early 30s – they usually face unique challenges:
- Savings used up: If you are a 30-year-old newcomer, you’ve got probably used a big portion – if not all – of your savings to construct your recent life in Canada. So you are behind within the retirement planning game. If retirement planning were a 100-meter race, Canadians who’ve lived in Canada for years would have a 20-30 meter head start over newcomers.
- Lower income: If you are recent to Canada, you’ve got probably needed to restart your profession a number of rungs down the ladder since you lack Canadian work experience. This means you will not earn as much as others your age with similar work experience. Consequently, your ability to avoid wasting for retirement is reduced.
- Lack of data: You need to grasp Canada’s financial and tax system to benefit from retirement savings opportunities, but acquiring this information takes time.
- Reduced contributions: Because immigrants enter the Canadian workforce later than their Canadian-born peers, they’ve fewer years to contribute to the Canada Pension Plan (CPP) and construct up contribution margin for registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). As a result, they rely more heavily than their neighbors on less tax-efficient, non-registered savings and investments to fund their retirement.
But there’s excellent news. As Toronto-based financial advisor Jason Pereira points out, “The Canadian pension system does not discriminate against newcomers. The rules are the same for everyone.” So with the best knowledge and expertise, you may work toward a solid retirement plan.
How to start out planning for retirement as an immigrant
To plan your retirement, you should know:
- How much money will you would like every month in retirement? The easiest method to estimate your income needs in retirement is to estimate it at 70 to 80% of your current income. For example, in the event you make $75,000 a 12 months today, 70% of that’s $52,500—that is $4,375 a month—in today’s dollars. Alternatively, you may estimate the quantity you would want in retirement by this tool.
- This is how much you’ll receive in state pension and social assistance: You must roughly estimate how much you’ll receive from the Canada Pension Plan (CPP) and other government programs: Old Age Security (OAS) and Guaranteed Income Supplement (GIS). The tool under this link will provide help to with that. Ayana Forward, an Ottawa-based financial planner, points out that “some home countries of newcomers have social security agreements with Canada that can help newcomers meet eligibility requirements for the OAS.”
- This is how much you’ll receive out of your employer-sponsored pension plan: Employers with no defined profit pension plan sometimes offer a registered investment account (often a bunch RRSP) to which you and your employer, or simply your employer, contribute. If you might have a bunch RRSP out of your employer, what is going to its estimated future value be while you retire? You can use a compound interest calculator to figure this out.
- To make up a shortfall: The CPP, OAS, GIS, and your group RRSP are probably not enough to fund your retirement. You might want to make up the shortfall through your personal investments or additional sources of income.
sample Retirement money flow for a 35-year-old (retirement age 65)
This table shows the varieties of income you might have in retirement. The amounts utilized in the table are hypothetical estimates. (To estimate your retirement income, try the assorted tools linked above.)
| Amount (today’s value) | Amount (adjusted for inflation) | ||
|---|---|---|---|
| A | Required quantity | $52,500 | 127,400 USD |
| B | State pension and aid payments (CPP, OAS, GIS) |
22,000 US dollars | $53,400 |
| C | Employer-sponsored pension plan (Group RRSP) |
$8,000 | 19,400 USD |
| D | B + C | 30,000 US dollars | $72,800 |
| E | Deficit (A – D) | $22,500 | 54,600 USD |
| F | Required value of investments within the 12 months of retirement (E divided by 4%, based on the 4% rule) | 562,500 USD | $1,365,000 |
| G | Fixed/constant monthly investment amount required from now until retirement | $969 |
In the instance above, the person has an annual deficit of $22,500. In other words, this person must generate an extra $22,500 per 12 months to fulfill their retirement income needs, after deducting standard government pension or assistance payments and the employer-sponsored retirement plan. To do that, they would want to speculate about $969 monthly, assuming an 8% annual return from now until retirement 30 years later. How could they fill this gap and make up their deficit? This is where self-directed investments, real estate, and small business income come into play.
Build Your own pension portfolioio
An obvious and tax-efficient method to cover your retirement income shortfall is to construct your individual investment portfolio from which you’ll be able to draw income during your retirement years. These investments will be held in registered or non-registered accounts. Registered accounts, corresponding to TFSA and RRSP, offer useful tax advantages – corresponding to a tax deduction and/or tax-free or tax-deferred gains, depending on the account – but there are limits on the quantity you may contribute to those accounts. Non-registered accounts haven’t any contribution limits, but additionally offer no tax advantages.
Newcomers often have less TFSA and RRSP contribution room in comparison with their peers because they’ve been living and dealing in Canada for a shorter time frame. “TFSA contribution room starts accumulating from the year you take up residency in Canada,” explains Forward. “RRSP contribution room is based on income earned in the previous year.”
Information about your TFSA and RRSP contribution room will be present in your Canada Revenue Agency tax assessment notice, which you’ll receive after filing your tax return. To check your TFSA limit, you can even use a TFSA contribution room calculator.
