Financial Independence for Newcomers to Canada

Financial Independence for Newcomers to Canada

The leap of faith it takes, to take financial matters into your own hands can be huge for some people.

I know. I’ve been there.

The leap of faith it takes to move you or your family to entirely different country, that’s next level.

With many questions, thoughts, and future aspirations from one particular new reader, I figured it was time to write this important post: financial independence for newcomers to Canada.

Let’s get right into it…and thanks to my new reader JP for asking such very important financial questions. Information adapted slightly for the site.

Hi Mark,

Thank you for your kind offer to answer my questions and point me to some great information in advance.

Apologies for the long note but I have lots of questions…and I want to share your information with others.

Here are some details for background:

• I am around 44 years old, an IT professional from India, migrating to Canada as a Permanent Resident in next few weeks.
• I have a 15-year-old child, and my spouse is a homemaker. She may take on some part-time work, but I would not include that in my financial independence calculations.
• My job and other considerations mean that I’ll be staying in a high cost of living area.
• My monthly expenses (including rent, for now) are probably going to be around $5,000 per month.
• I hope to save and to be able to invest about $20,000 per year.

I really enjoyed that case study about those millennials who want to FIRE at age 50.

Millennials want to FIRE at age 50

Based on what I’ve already read on your site, with more disciplined savings and more investing, maybe I can do the same!

Here are my objectives and general assets for consideration:

• I would like to FIRE around age 50. By that time, my son would have graduated.
• Given my work is stressful, I would like to consider even part-time work from ages 46-50 if possible but it depends on many factors I know. If required, I can continue part-time work from ages 50-55. Not a problem.
• I will have no real estate to rely on in Canada – but it would be nice to have a paid off home in Canada.
• We have been good with money, the ability to save almost $1 million but mostly in non-appreciating
  real estate in India. The plan is to sell those assets in the coming years and invest the proceeds into low-cost ETFs – like some of the ones on your site. Most FIRE-stalwarts seem to index invest and that seems smart to me.

• I expect some inheritance, maybe up to $600k (?), in next 10-15 years so while it’s part of my plan it’s a long time out.
• I will be looking to utilize the TFSA (Tax Free Savings Account) and RRSP (Registered Retirement Savings Plan) as much as I can. Again, it makes sense to me to invest in those accounts but would like your take!
• Given I am a newcomer, I understand I will have negligible CPP (Canada Pension Plan) and OAS (Old Age Security) benefits but you can help clarify. It would be nice to have some employer-provided retirement scheme, as I don’t plan to remain in active workforce for many years but it’s not critical.

My key questions for you Mark are:

1. How should I get started – meaning does my approach to look at TFSAs and RRSPs make sense?
2. Are there good low-cost brokerages to consider?
3. I’ve read about U.S.-indexed ETFs but thoughts on paying the additional MERs (Management Expense Ratios) for just owning Canadian ETFs?
4. Income-splitting would be great, can I do that?
5. I wonder if you could offer a take on real estate, as best you can. Like you, I don’t like being a landlord! I read your older post on that.
6. I would anticipate my post-retirement needs could also be around $5,000 per month – I am fully aware of Trinity Studies, etc. so thinking a safer withdrawal rate around 3% or so makes sense?

All this to say, with no long-term debt and my investable assets of $1M, along with some expected inheritance of say, >$500k in next 10-15 years to pay off any house we buy, what are your thoughts on my FI journey?

Lots of questions I know, lots of assumptions, but I appreciate anything you can share even though it’s not advice I know.

Thanks so much!

JP

Great stuff JP and lots to unpack there for sure.  And thanks for your readership, very much appreciated.

As you noted, I cannot offer direct advice whatsoever.

I can however, since it’s my blog after all, offer a personal take along with some links, tools and more to help you with your plan.

Here goes with lots of assumptions….

First of all, kudos for making the moving leap to Canada with your family. I’ve never done a HUGE move like that, so I can’t imagine how nervous you might be. That said, I believe you are moving to one of the greatest (rather, the greatest!) countries in the world.  I only wish you and your family the best.

As you know, realizing a goal requires two things: a good plan and good execution.

Question 1: How should I get started – meaning does my approach to look at TFSAs and RRSPs make sense?

Yes, it makes a LOT of sense to me.

I have believed for years that tax-free investing (TFSA) and tax-deferred investing (RRSP) is better than taxable investing. Why pay taxes on investment assets if you don’t have to?

Here is a primer about TFSAs. I own a self-directed TFSA myself so I can pick my own stocks and ETFs. That may or may not be right for you.

RRSPs are great for tax-deferred investing. I own a self-directed RRSP.

While people in Canada may focus on the “Savings” word in the TFSA name, consider investing beyond cash, beyond Guaranteed Investment Certificates (GICs) into stocks or a collection of stocks via low-cost ETFs. Seems you already know the benefits of that.

Unfortunately, the “Savings” name is also in the Registered Retirement Savings Plan (RRSP) name but unlike the TFSA, when you eventually decide to withdraw the money, withdrawals are added to taxable income the year the money is withdrawn. That said, I believe the RRSP after the TFSA is the second-best wealth generation account there is in Canada for most people.

All this to say, TFSAs and RRSPs are excellent wealth building vehicles as part of any financial plan.

Here is what a good financial plan should cover, with my friend Steve Bridge, a Certified Financial Planner (CFP®) from Vancouver who works as an advice-only financial planner with Money Coaches Canada (no affiliation with My Own Advisor).

Question 2: Are there good low-cost brokerages to consider?

Absolutely!

I haven’t put together a huge, comprehensive list of low-cost brokerages to compare in Canada (yet!) but many other finance sites have and MoneySense is one of the best at it.

MoneySense is a free site for Canadians in the personal finance and investing space, so check out their comprehensive reviews.

As part of my partnerships with many leading Canadian financial institutions, I have cash back promotions for new accounts, and much more products and services available at a discount.

Check out this dedicated Deals page for my current promotions, but of course there is never any obligation. Always do what is best for you and your family.

Question 3: I’ve read about U.S.-indexed ETFs but thoughts on paying the additional MERs (Management Expense Ratios) for just owning Canadian ETFs?

JP, really up to you!

Depending on the ETF of course, some U.S.-listed ETFs could charge higher fees than some Canadian-listed ETFs. As always in personal finance and investing, “it depends”.

You seem well-versed about my standing ETFs page so check that out again, and if you have more detailed questions, I can try and help as time permits.

Based on my personal lessons learned, don’t obsess over money management fee and/or tax decisions – don’t let those reasons trump any particular investing product. While low fees and low taxation are absolutely important, making your financial plan and securing products that match up with that financial plan is more important.

You can exchange USD <> Canadian currency for less using this approach here – Norbert’s Gambit.

Norbert’s Gambit – how to exchange Canadian to U.S. dollars – for less

Question 4: Income-splitting would be great, can I do that?

Unfortunately, not really. I mean, yes, you can income split pre-retirement while you are working but it is complex to say the least.

You could legally provide a spousal loan, then your spouse can earn investment income pre-retirement. I would suggest if you are interested in that approach, I encourage you to speak to a tax accountant after you get things settled in Canada.

Without using a tax accountant, here are the things I can think about to build on the above for income-splitting pre-retirement and in planning for retirement:

Income splitting pre-retirement
RESPs	Investment income earned within an RESP is tax-deferred, and since future withdrawals for education are taxable to the child, this means a lower tax bill for the overall family!
TFSA	Contributions from either spouse, to either TFSA, avoid messy tax attribution rules!
RRSP	The higher income spouse or partner can make a tax-deductible RRSP contribution for their spouse. This way, future withdrawals can be taxable at the spouse’s lower rate!

 

Income splitting during retirement (age 65 or higher)
Split income	You can split eligible income on your tax return with your spouse or common-law partner. Common examples include: pensions, prescribed annuities, Registered Retirement Income Funds (RRIFs), and Life Income Funds (LIFs). Any pension income that qualifies for the $2,000 federal pension income credit also qualifies to be split. Specifically, this would include annuity-type payments from a Registered Pension Plan (RPP), regardless of age, and also includes Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF) withdrawals upon reaching age 65. Income from the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) cannot be split in the same way, although there may be options (see below). If you are at least 65 years of age, you may want to consider converting a portion of your RRSP to a RRIF (if you do not already have a RRIF) so that you can benefit from pension splitting. Any withdrawals from your RRIF, whether minimum withdrawals or other amounts, would qualify for pension splitting. Note that RRSP withdrawals are not considered to be pension income. To be able to split your pension income, you and your spouse or partner must make a joint election on your income tax returns using Form T1032 ‒ Joint Election to Split Pension Income.  Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1032.html
CPP benefits	When you and your spouse are eligible for it, you can share this income from this government benefit.

Make sure you check out this well-written guideline document below where I referenced some of my information above:

https://www.cibc.com/content/dam/personal_banking/advice_centre/tax-savings/income-splitting-strategies-en.pdf

Question 5: I wonder if you could offer a take on real estate, as best you can. Like you, I don’t like being a landlord! I read your older post on that.

Gosh, I wish I could predict the future – including the real estate future!

All I can say is, if homeownership is something you aspire to have and can afford, go for it.

I can’t say whether real estate will or won’t be a great financial/investment decision in the years to come, but I can say it’s more of a lifestyle decision.

You have to live somewhere. Home ownership does come with tradeoffs as compared to renting.

All the reports of late I’ve seen, say, with interest rates being so low right now and with demand being higher than supply in many HOCL cities, house prices will continue to go up for the coming years.

Nobody knows where the “top” is right now.

Question 6: Does a 3% withdrawal rate make sense?

Also, with no long-term debt, investable assets of $1M, along with some expected inheritance in the coming 10-15 years, what are your thoughts on my FI journey?

Lots to digest but also to assume!

Well, for quick fun, I put some inputs into the calculator we have access to from our brother site Cashflows & Portfolios.

My partner and I have been using these tools for our personal FIRE journeys and now using the tools to help readers, like you, with retirement projections. We often answer key questions like, do I have enough to retire?  When can I retire with my current lifestyle?  Which account should I withdraw from (and when) to minimize taxes and maximize my retirement income?

Keeping things simple and overly conservative, I assumed, I mean lots of assumptions:

• Your salary is a very good one: just over $110,000 given “work is stressful”.
• You will save $20,000 per year, focusing on your TFSA and RRSP.
• Your assets, including what you cannot yet contribute to your TFSA and RRSP (therefore taxable investing with assets coming to Canada) will be 5.10% – a blend of stocks and bonds.
• You will work full-time until at least age 50. In fact, I’ve assumed you’ll continue to work into your 50s if you have a plan to reach age 100. (See chart below.)
• With your real estate proceeds from India, $250,000 will be used for a home down payment later this year. The rest ($750,000) is invested. I will assume you will pay off the house in the coming 10-15 years, including using any inheritance money.
• You will make contributions to CPP, given your high-salary, so for simplicity you will contribute up to the maximum for YMPE (year’s maximum pensionable earnings) for years worked.
• You will receive a partial OAS pension. So will your wife. A *partial monthly pension is earned at the rate of 1/40th of the full monthly pension for each year of residence in Canada after the age of 18. For example, if you have lived in Canada for 15 years after the age of 18, you will receive 15/40ths of the full monthly pension amount. Once a partial pension has been approved, it cannot be increased due to additional years of residency in Canada. You take OAS at age 65. *You can find more details about partial OAS here. 

Assuming you earn just over 5% annualized on your investments, before and after retirement, and want to spend about $5,000 per month/$60,000 per year after-tax rising with inflation (2%) – math says you can likely retire by age 55 for certain – with that spend including inflation to age 100 without fear. 

To do so, you’ll need to consider working full-time until at least age 50 and potentially part-time in your 50s once more clarity about debt load, income, CPP contributions, taxation, plans to invest, current expenses, and much more are factored in.

Source: Cashflows & Portfolios – sources of JP income assuming inflation over time. 

I hope this information provides some insights…but I can’t stress enough this information includes too many assumptions to be considered any sort of accurate projection. It is for educational and illustrative purposes only.

Good luck with your move, thanks very much for your readership and I hope you share this site with others!

Mark

Further Reading:

You can check out dozens of case studies, financial independence stories, retirement essays from readers and much more on my dedicated Retirement page here.

Examples:

These millennials want to FIRE at age 50. Can they do it? What will it take?

Do they have enough for FIRE at age 52?  With $800k invested and a workplace pension? Find out.

This investor retired at 32! Find out how here.

I interviewed Millennial Revolution (some of Canada’s youngest, early retirees) about their approach to ditch Toronto home ownership and becoming millionaires instead. 

Spend more or retire earlier in this bulletproof retirement plan.

Can I retire on a lower income? I only have a small pension and nowhere what other readers have. 

Disclosure: This is not direct investing advice nor should it be taken as such.  Assumptions above are for case study purposes only.  If you have specific needs, please consider consulting a fee-only financial planner to discuss any major financial decisions.