This is part of a series of portfolio makeovers that focus on the issues of investors who are in the 50-plus age range.
Many Canadians dream of spending winters in warmer climes during their retirement. Others, like Glen and Scott, a couple from Halifax, are determined to make it a reality.
"We're really into swimming, snorkelling, and ocean sports, so being in close proximity to the beaches somewhere south is a priority," says Glen, 55, a recently retired corporate manager. "We're going to start stand-up paddle boarding this summer as it seems to be the board sport of choice these days."
The question isn't whether Glen and his 56-year-old partner Scott, a provincial-government employee, will become snowbirds but rather how. Specifically, should they rent or buy a property south of the border?
"I'm a little hung up on buying instead of renting and would like to do so in the next 12 months," Glen says. "We travel south yearly to various islands. We've looked at the Turks and Caicos Islands and Barbados, but for more practical reasons we're now considering Florida and going there for five to six months a year.
"Scott will retire in a little over a year," he adds. "I'm trying to determine how much we can safely afford to make this happen and timing of the plan."
Glen and Scott have a lot working in their favour. The two have made maximum RRSP contributions over the years and have no debt. The mortgages on both their principal residence and a summer cottage are paid off. Scott, who will have a pension of approximately $39,000 a year before taxes, will receive a $40,000 service award when he retires in 2015.
Combined, the two have more than $1.3-million in investments and savings. They have no plans to leave a significant estate upon their deaths, other than a few charitable bequests.
However, even with a robust financial picture, the prospect of buying property outside of Canada is complicated. Is it even a good idea to start with? Should they wait to sell their city home first or get in while the getting is good? And if they do buy, will they still have enough funds to sustain their target after-tax annual income of about $80,000?
"I'm concerned with the falling dollar and rising U.S. real estate prices," Glen says. "The opportunity to buy may be now."
To help Glen and Scott paint a clearer picture of what their retirement years could look like, we consulted Jolene Laing, fellow of the Canadian Securities Institute and associate director of global wealth management at ScotiaMcLeod in White Rock, B.C., and Lise Andreana, a certified financial planner at Continuum II in Burlington, Ont., and the author of two financial planning books.
– Cash: $50,000
– Non-registered assets: $662,129
– Tax-free savings accounts: $70,256
– Self-directed RRSPs: $516,975
– LIRA: $59,196
(The couple's registered and non-registered assets consist of about 95 per cent equities, mainly Canadian common shares and equivalents and some foreign equity mutual funds. Approximately 5 per cent of their portfolio allocation is made up of fixed income, mainly Canadian preferred shares, and cash and cash equivalents.)
– Halifax home: valued at about $300,000
– Beach-front recreational home: valued at about $400,000
Both advisers say that Glen and Scott will be able to comfortably meet their target after-tax yearly income of $80,000 throughout retirement. They also urge the couple to consult a tax specialist who is well-versed in Canadian and U.S. tax laws.
Ms. Laing's tips
1. Put both names on the non-registered investment account.
Currently, this account is in Glen's name only. "Given how estate law works, these assets would be subject to probate fees at Glen's death and would then be forced to go through his will," Ms. Laing says. "If the account was put into joint names, it would be done at market value, which means that there would be an immediate crystallization of any capital gains and losses that could trigger a tax bill. However, the assets would then continue to grow in joint names, which means that if one of the spouses passed away, the assets would move to the other spouse without any probate, tax, or estate implications."
2. Understand clearly the ramifications of buying real estate in the United States.
Ms. Laing doesn't doubt the pair's ability to afford such a move, but purchasing down south is complex. Aside from considerations such as foreign exchange, property taxes, and property-management and maintenance costs, there are myriad others.
"The couple needs to be aware of possible tax and estate complications that might arise from owning foreign property," she says. For instance, the Foreign Investment in Real Property Tax Act authorizes the United States to tax foreigners on dispositions of U.S. real property interests. A U.S. estate tax and filing requirement may arise as well. "Plus, if they plan on renting out the property down south, this means they will be forced to file tax returns," she adds. "The risks are worth evaluating before jumping into a dream property, which may at some point become a nightmare. I generally recommend that clients stick to renting. That way they aren't compelled to go to the same place each year, they avoid all of the ongoing costs and responsibilities of owning, and they generally they save a ton of money and headache."
3. Overhaul the portfolio, first by ramping up fixed-income holdings.
Ms. Laing notes that each of the pair's accounts consists of at least 85 per cent equities, with one containing nearly 100 per cent.
"Given that Glen just retired and Scott is retiring in 18 months, I would absolutely recommend that they start to increase their fixed- income holdings to ensure that the portfolio is appropriately diversified in case of a market correction," she says. "Their equity positions are largely Canadian, and I would also recommend that they consider rebalancing to a minimum of 15 per cent U.S.-global equity exposure, but it could reasonably go much higher than that."
Ms. Laing also suggests the two hold onto more cash or money-market positions than they have in the past.
Ms. Andreana's tips
1. Ensure that any time spent as snowbirds doesn't exceed allowable limits.
"Care must be taken to not overstay your welcome," Ms. Andreana says. Under current rules, those who spend more than 182 days out of 365 days in the calendar year, or more than 120 days per year on average over a three-year period, may be considered a U.S. resident for tax purposes.
"Staying longer may mean Glen and Scott will be required to file a U.S tax return," she says. "To avoid this, each year they stay in the United States they'll need to complete an IRS form 8840 (Closer Connection Exemption Statement for Aliens) claiming their closer connection to Canada." Not filing can result in fines.
2. Don't rush a purchase.
There's more to buying (and possibly selling) a winter vacation property than the timing of the real-estate market (both at home and abroad) and currency differentials, according to Ms. Andreana.
"I recommend inspecting between 75 and 100 properties in person," she says. "Real-estate values, compared to stock market and currency values, move slowly. They should take their time to ensure they're buying in the best location their dollars can afford and that they do not overspend.
"Once they're both confident that they've found the dream property, I would advise them to take the plunge," she adds. "In the long run, the timing of now or 18 months from now will have little impact on their financial security."
3. Rebalance the portfolio and diversify.
"The current portfolio may be suitable for a very aggressive investor of age 55 who is planning to retire in 10 years, but for Glen, who is already retired and must draw income from his investments, I shudder," Ms. Andreana says. "Where are the bonds? This portfolio of 95-per-cent equities is approximately 35 per cent top-heavy in favour of equities for investors of their ages. At this time in their lives the most important aspect of retirement assets is sustainability of income."
Ms. Andreana suggests increasing the fixed-income allocation over time, with consideration to taxation and fees, and says Glen may want to consider placing some of his non-registered portfolio in a variable annuity.
The two also need to assess their risk tolerance.
"Glen and Scott should ask themselves what they would do if we went through another market correction the magnitude of the one seen in 2008," Ms. Andreana says. "They should ask, 'What would I do if my portfolio dropped in value by 20, 30 or 50 per cent?'"