In Vancouver, a scientist we'll call Claude is 44. He has a PhD in biochemistry, a solid job with the government of British Columbia, but for all his education and substantial accomplishments, he is not paid overly well. His gross income, $62,475 a year, is appropriate for lower middle managers in the private sector. Moreover, having worked abroad for a decade, he is behind his peers in building up retirement savings in the Canada Pension Plan and in registered plans.
"My primary goal is to ensure that I am doing enough to retire by the time I hit my mid-60s without compromising my present lifestyle," Claude says. "I am less interested in building up tangible assets to leave to my descendants. And I do not want to be dependent on family in my old age."
What our expert says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Claude.
"His problem is to get his pay to match his education and the contributions he makes to society," he says. "In fact, there are salary reviews under way, but the pay history of Claude's department severely lags compensation in the private sector."
Claude is not without financial resources. He has $25,000 in a retirement account in a Far Eastern nation where he once worked. If the account grows at 6 per cent a year less three percentage points for inflation, it would hold $34,600 by the time Claude turns 55. At that point, he could withdraw the funds subject only to tax in Canada. Timing the withdrawal is important. The fund guarantees a nominal return of 2.5 per cent a year, which gives it the security of a government bond.
Claude might be able to roll the Far East pension into his present pension plan in order to buy back the years he spent abroad. This enlarged pension base would enhance his retirement income. The value of the transfer will depend on the exchange rate in 11 or more years. Proceeds of Claude's pension are taxable in Canada, so contributions to the Far East pension plan should be tax deductible, Mr. Moran says.
Before tapping into his foreign retirement fund, Claude should obtain an opinion from the Canada Revenue Agency's foreign tax office or specialized foreign tax counsel. Claude adds $150 a month to his RRSP balance, which is currently $32,000. If it grows at 3 per cent a year, at 65, it would hold $111,150. If Claude lives to age 90, these funds would generate $6,385 a year at age 65. All sums are in 2008 dollars, the planner says.
Claude also has the equivalent of $14,572 (Canadian) in a U.S. 401(k) plan, which is much like a Canadian registered retirement savings plan. If it grows at a real rate of 3 per cent per year, it will have $27,110 in 2008 dollars when Claude is 65. This sum would, assuming the currencies exchange at par, provide $1,560 a year in 2008 dollars until Claude's 90th year, Mr. Moran says.
At age 65, Claude should be able to qualify for 97.5 per cent of Old Age Security, which would provide $6,049 a year of the current maximum annual OAS payout of $6,204, Mr. Moran says. If he works full time to age 65, Claude will have earned 76 per cent of the maximum CPP payout of $10,615 in 2008 dollars, or $8,067 a year.
If Claude works to age 65 at his present job, he will have 27.2 years of service. The pension plan will give him $34,000 a year. Adding up all of his entitlements - $34,000 job pension, $6,049 OAS, $8,067 CPP, $6,385 RRSP, and $1,560 401(k) - Claude should have $56,061 a year in 2008 dollars, plus whatever money he may be able to save in a Tax-Free Savings Account. These accounts, which allow tax-paid funds to be invested and grow and be paid out without further tax, go into operation in 2009. As well, money that may be rolled into his present pension plan from his former employment in the Far East would add to his retirement income, the planner says.
That income is less than he earns today but would actually be higher in disposable income - he would not make pension contributions, RRSP savings, pay support to his parents or add to his retirement savings.
As a bridge to retirement, Claude could buy a house. He currently pays $940 a month in rent. However, the present cost of renting is less than the cost of owning equivalent space in the Vancouver market. With a glut of condos for sale, many owners are forced to rent for whatever they can get. Rents could fall, Mr. Moran says.
At a 5-per-cent interest rate and assuming whatever he might buy would be paid in full by his age 65, his rent would cover a $146,000 mortgage. He could use $20,000 from his RRSP for a Home Buyers' Plan loan for a down payment. For now, Claude should be patient; condo prices may decline further. At present, condos below $200,000 are very rare in Vancouver, the planner notes.
"Claude has done a lot of things right," Mr. Moran says. "The unknowns in his plans are how his Far Eastern pension funds may translate into Canadian benefits and, of course, his investment in a potential home purchase. But he can have a secure retirement, even if his present salary is not increased."
Scientist in British Columbia planning retirement.
Foreign pensions complicate planning.
Consolidate pensions, estimate total retirement income.
A secure retirement income.
Net Monthly Income
RRSPs, $32,000; U.S. 401(k), $12,000; foreign pension, $25,000; taxable stocks, $10,500; cash, $2,000. Total: $81,500.
Rent, $940; food, $300; restaurant, $160; entertainment, $150; utilities and phone, $150; RRSP, $150; clothing, $60; car fuel and co-op fees, $50; travel, $240; investments, $100; remittances to parents, $450; charity and gifts, $35; miscellaneous, $100; savings, $315. Total: $3,200.
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