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By ANDREW ALLENTUCK
Special to The Globe and Mail
Report on Business
Saturday, November 15, 2008
In Halifax, a couple we'll call Richard, 53, and Wendy, 48, have built independent careers in business. They have over a million dollars in net worth, including a $650,000 house clear of debt. They hope to sell it and retire to Latin America.
Adrian Mastracci, “fee-only” portfolio manager at
KCM Wealth Management in Vancouver, says, “They have the resources, to do it.”
"We want to stop working and move south," Richard explains. "We want to live on our savings and investments. We'll have my wife's pension, as well as Canada Pension Plan payments, Old Age Security and some U.S. pension income and the proceeds of the sale of our Halifax house. We will give up incomes that total $200,000 a year, but does it make sense?"
WHAT OUR EXPERT SAYS
Facelift asked Adrian Mastracci, a fee-only portfolio manager and financial planner who heads KCM Wealth Management Inc., to work with the couple. The goal: assess their retirement income and the costs of the move. "There are problems, but they can afford it," he says.
There are distinctive risks in retiring to another country: The costs of replacing Canadian provincial health insurance will climb as Richard and Wendy get older, exchange-rate variation will add uncertainty to cost-of-living projections and they will have to ensure that they do not get trapped in foreign tax systems. Most countries in the region tax only incomes from domestic employment or investment, but if Richard and Wendy keep their money outside of their country of residence and do not work, they should have no tax problems, Mr. Mastracci says.
Richard and Wendy are in the process of purchasing their retirement house with a $360,000 cost in Canadian dollars. They have made a deposit of $100,000 on the home. Once they complete the purchase and move, their incomes will be based on their savings until they reach age 60.
At age 60, Wendy will receive a defined benefit pension of $40,000 a year. At age 62, she will qualify for $812 a year in U.S. Social Security Benefits. At age 65, she will also qualify for another pension of $10,000 a year from a former job. Richard, who is self-employed, can expect a base of 85 per cent of Canada Pension Plan benefits - currently a maximum of $10,615 a year - or $9,022 annually. Wendy can expect 55 per cent of those benefits or $5,328, Mr. Mastracci estimates. Richard will also be able to receive approximately $5,600 in annual Old Age Security benefits, currently a maximum of $6,204 a year, and Wendy half of those benefits, the planner adds. Canada would impose a 15-per-cent withholding tax on CPP and OAS payments paid to non-residents in the country they have chosen.
Assuming that neither takes early CPP benefits, then from age 65 onward, the couple will have total pension income of $73,562. They can also generate income from their $811,425 of net financial assets. If those assets grow at a rate of 3.5 per cent a year after inflation estimated to average 2.5 per cent a year, they will yield $28,400 annually, the planner estimates. That sum would be added to their other pension income for a potential total annual income of $101,962 a year, twice their goal of $50,000 a year in pretax retirement income. If the couple want to draw on assets so that their capital declines to zero by the time Wendy reaches age 88, then their investments would produce $38,000 a year for total income of $111,562 in 2008 dollars. In reality, they have no plan to spend at this level, so they could leave a substantial estate for charity or perhaps for their relatives. They have no children.
Becoming non-residents of Canada involves a good deal of tax complexity. On the day of departure from Canada, they will be deemed to have disposed of their taxable financial assets. That triggers a realization of gains and losses. Gains on their house, a primary residence, would be free of tax. Shares in public companies present no valuation problem, for markets set their prices. But sales of shares in Richard's private company need to be assessed. Capital gains taxes may be triggered. It will be necessary to pay them or to post security for taxes due. Richard may need to do planning with a tax counsel and perhaps a lawyer to secure his interests.
Living in another jurisdiction poses problems of unknown costs. Richard and Wendy have to estimate currency moves of the loonie compared with their local currency and the U.S. dollar, the currency used by most expatriates in the region. For now, the U.S. dollar is ascendant. They would do well to diversify their currencies into various investment accounts held, for example, in U.S. dollars and perhaps euros, Mr. Mastracci suggests. They can also buy bonds and mutual funds denominated in or hedged into a variety of currencies, for example, greenbacks, euros and British pounds. Currency diversification will average out purchasing power. Major global banks offer these products, but they may need an adviser familiar with expatriate finance to make appropriate choices, Mr. Mastracci notes.
"Richard and Wendy are prepared to give up what could be the best years of their working lives for life in a warm place," Mr. Mastracci says. "They have the resources, to do it."
"We'll have more money than we expected, "Wendy says. "We can afford it, so we are going," Richard adds.
Client situation
THE PEOPLE
Couple planning to retire in Latin America.
THE PROBLEM
Budgeting for retirement to a foreign country.
THE PLAN
Estimate income and ensure Canadian taxes are paid.
THE PAYOFF
A financially secure retirement.
NET MONTHLY INCOME
$11,250.
ASSETS
Halifax house, $650,000; taxable stocks, $305,500; RRSPs, $270,000; retirement house, $360,000. Total: $1,585,500.
MONTHLY EXPENSES
Food, $1,200; property taxes, $375; restaurants, $250; clothing, $300; entertainment, $200; RRSP, $1,500; car loan, $400; investment loan, $735; car, gas and repairs, $300; travel, $2,000; car and home insurance, $325; charity and gifts, $125; miscellaneous, $540; savings, $3,000. Total: $11,250
LIABILITIES
Investment loan, $135,000; auto loan, $19,500; vacation property purchase agreement, $260,000. Total: $414,500
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