Recent immigrants bring foreign pensions but worry how to build retirement security in Canada
“What will our retirement look like?” Burt asks, reflecting a degree of bewilderment about the alphabet soup of RRSPs, RRIFs, TFSAs and many other abbreviated plans. “What do we have to do to build security? ”
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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Burt and Ethel. “If they can use their cash flow more efficiently to reduce taxes and cut borrowing costs on their $325,000 of liabilities (and) invest their financial assets more effectively, they should be fine,” he says.
To start with, Moran outlines four things they can do right now:
2. Beef up RRSPs. Burt has $16,800 of contribution room. He can use $13,140 of cash to top up current monthly contributions. He will get a 36 per cent tax refund — $4,730 based on his taxable income of $98,000 a year. Ethel has $47,730 of unused RRSP space. Her income, though fluctuating, has recently been about $70,000 a year. If she contributes $12,300, she can get a refund of about $4,000, Moran estimates. These catch ups total $25,440.
3. Prepay 20 per cent of their original $360,000 mortgage without penalty, as their bank allows. That’s $72,000. That will reduce the present mortgage balance of $320,000 to $248,000 and reduce amortization from 20 years to 14 years, 8 months, saving them $64,420 of interest. In this plan, when the mortgage is paid off, Burt and Ethel will be 62 and 59.
4. Reserve remaining savings of $46,060 to add to RRSPs over time, pay down the remaining mortgage under the 20 per cent annual penalty-free prepayment or to add to their present $10,500 TFSA balances. They have a total of $71,500 of available TFSA space. All are good choices, Moran says.
Situation: In their 40s, a couple who emigrated to Canada wants to know if they can pay for kids’ educations, then retire in their mid-60s
Looking ahead to retirement at a tentative age of 65, the couple should be able to generate about $10,000 of RRSP annual space to add to their present $523,912 of RRSP balances, most of which were transferred in from tax-deferred accounts from employment prior to immigration to Canada. If they fill this space, plus the catch-ups of $25,440, and if the sums grow at three per cent a year after inflation, their RRSPs will become $1,132,000 in 17 years when Burt is about to turn 65. If they can sustain the same three per cent after inflation growth rate, this capital could support annual payouts of $58,600 in 2016 dollars until Ethel is 90.
Burt can expect a pension from his present employer of $41,450 at 65. They will also have a foreign pension transferrable to Canada that will be worth as much as $20,000 a year by the time Burt retires. Their CPP contributions based on 26 years of total work for Burt and 23 for Ethel should give 65 per cent of the present $13,110 maximum benefit, or $9,950. Ethel’s CPP pension is less certain, since she works on renewable contracts. Assuming she maintains her employment, she would have a benefit of $8,300 if she retires at the same time as Burt.
Their TFSAs, with a current balance of $10,500 and present contributions of $11,000 total a year could grow in 17 years to Burt’s age 65 to $283,000 with three per cent growth after inflation, and support payouts of $13,231 a year for 33 years to Ethel’s age 95.
Burt and Ethel will have 25 and 18 years, respectively, of the 40 years needed to qualify for OAS. Using the 2016 OAS base payment, $6,846, at age 65 Burt would get $4,243 a year and Ethel $4,792 a year, assuming the new government returns the OAS start age to 65.
Adding up their pension components, they would have RRSP income of $58,600, foreign pension income of $20,000, a Canadian company pension of $41,450, combined CPP benefits of $18,250 and combined OAS benefits of $9,035. TFSA payments would add $13,231. Their total retirement income would then be $160,566 before tax. TFSA payouts included in the sum would not be considered income and thus not taxable, and would leave their taxable income below the OAS clawback trigger point of about $73,000 per person. If the couple splits pension income, they would pay average income tax in Alberta of 18 per cent using 2015 rates and thus have disposable income of $10,970 a month, more than enough to cover their present allocations of $6,054 a month, after savings for kids and retirement end, Moran says.