New to Canada and no pension: How to save for your retirement

The difficulties facing newcomers to Canada with respect to retirement planning are particularly acute. Given how Canada’s immigration points system works, economic immigrants are usually in their late 20s or early 30s—and they face unique challenges:

1. Depleted savings: If you’re a 30-year-old newcomer, chances are you’ve used a large portion—if not all—of your savings to set up your new life in Canada. So, you’re behind in the retirement savings game. If retirement savings were a 100-metre race, lifelong Canadians have a 20- to 30-metre head start over newcomers.
2. Lower income: If you’re a newcomer to Canada, you’ve probably had to restart your career a few rungs lower on the corporate ladder because of your lack of Canadian work experience. This means you’re not earning as much as others your age who have similar experience. Consequently, your ability to save for retirement is lower.
3. Lack of knowledge: You need to understand Canada’s financial and tax systems to maximize its retirement planning opportunities, and gathering this knowledge takes time.
4. Reduced contributions: 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 registered retirement savings plan (RRSP) and tax-free savings account (TFSA) contribution room. For this reason, they rely on less tax-efficient unregistered savings and investment vehicles to sustain their retirements to a greater degree than their neighbours.

But there’s good news. As Toronto-based financial advisor Jason Pereira points out, “Canada’s retirement system does not discriminate against newcomers. The rules are the same for everybody.” So, with the right knowledge and expertise, you can work towards building a strong retirement plan. 

How to start retirement planning as an immigrant

To plan for retirement, you need to know:

• How much money will you need each month in retirement? The simplest method to estimate your income requirement in retirement is to consider it to be 70% to 80% of your current income. For example, if you earn $75,000 a year today, 70% of that is $52,500—that’s $4,375 per month—in today’s dollars. Alternatively, you could estimate the amount you’d need in retirement using this tool.
• How much you’ll receive from government pension and aid payments: You need to estimate approximately how much you’ll get from the Canada Pension Plan (CPP) and other government programs: Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The tool at this link will help you do so. Ayana Forward, an Ottawa-based financial planner, notes that “some home countries for newcomers have social-security agreements with Canada, which can help newcomers reach the eligibility requirements for OAS.”
• How much you’ll receive from your employer-sponsored retirement plan: Workplaces without a defined benefit pension plan sometimes offer a registered investment account (usually a group RRSP), with contributions made by you and your employer or only your employer. If you have a group RRSP from your employer, what will its estimated future value be at the time of your retirement? You could use a compound interest calculator to find out.
• How to make up for a shortfall: The CPP, OAS, GIS and your group RRSP likely won’t be enough to fund your retirement. You’ll need to make up for the shortfall through your personal investments or additional sources of income.

Sample retirement cash flow for a 35-year-old (retirement age 65)

This table illustrates the types of income you could have in retirement. The amounts used in the table are hypothetical estimates. (To estimate your retirement income, try the various tools linked to above.)

In the example above, the person faces an annual shortfall 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 the typical government pension or aid payouts and their employer-sponsored retirement plan. To do this, they’d need to invest about $969 per month, assuming an 8% annual rate of return from now to retirement 30 years later. How could they fill this gap and meet their shortfall? Enter self-directed investments, real estate and small-business income.

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Build your own retirement portfolio

An obvious and tax-efficient way to cover your retirement income shortfall is to build your own investment portfolio from which to draw income in your retirement years. These investments can be held in registered or non-registered accounts. Registered accounts, such as the TFSA and RRSP, offer useful tax advantages—such as a tax deduction and/or tax-free or tax-sheltered gains, depending on the account—but the amount you can contribute to these accounts is limited. Non-registered accounts have no contribution limits but offer no tax advantages. 

Newcomers often have lower TFSA and RRSP contribution room compared to their peers because they’ve lived and worked in Canada for a shorter period. “TFSA contribution room starts accruing the year of becoming a resident of Canada,” Forward explains. “RRSP contribution room is based on earned income in the previous year.”

Your TFSA and RRSP contribution room information is available on your Notice of Assessment from the Canada Revenue Agency, which you’ll receive after you file your tax return. To check your TFSA limit, you can also use a TFSA contribution room calculator.

Once you’ve covered any retirement income shortfall using registered and non-registered accounts, you could consider additional avenues of income, including rental or small-business income.

Consider establishing other income sources

1. Rental income: If you invest in a second home (for example, a house or condo), you could get rental income from it, which could be a sizable portion of your income in retirement. A major advantage of rental income is that it’s shielded from the corrosive effect of inflation, because rents usually rise with inflation. While buying an investment property sounds like a great idea, newcomers should note that real estate prices in Canada’s largest cities, such as Toronto and Vancouver, are some of the world’s most expensive compared to average incomes. Consequently, as Pereira notes, “Newcomers will face the same issue facing all Canadians—the high cost of living and housing affordability issues.”
2. Small-business income: Secondary sources of income through small businesses—for example, consulting, freelancing or a home-based food business—could increase your RRSP contribution room since, as Forward points out, it is determined by “both employment or self-employment income.” Coupled with a good succession plan, the business may provide income or a lump-sum retirement bonus even after you stop working. (Read more about self-employment in Canada.)

For newcomers to Canada, retirement planning is about taking advantage of all the sources of income available to you, including from the government, your employer and your investments. Equipped with the right knowledge, newcomers can do much to secure their financial well-being in retirement.

More on retiring without a pension:

• 30 and no pension
• 40 and no pension
• Single parent and no pension
• Not enough pension

About Aditya Nain

Aditya Nain is an author, speaker and educator who writes about Canadian investments, personal finance and crypto. He has co-authored two books and taught at universities for 12 years.

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