A couple we’ll call Richard, 50, and Marianne, 51, live in B.C. with their two children ages seven and nine. Richard handles transport tasks in the oil and gas industry. Marianne is a homemaker. Their combined annual after tax income has recently been $96,000.
Richard and Marianne look forward to retirement within a year, but their cash and investment savings in RRSPs total just $187,000. A few years ago, they made a big bet on property, improving their home to make it a showplace. The result: their residence has soared in value. Now they want to cash in their wealth in B.C. property to finance a retirement under the palms. As we’ll see, it is a complex and risky venture.
They consider selling their B.C. home and its rental unit and moving far south. They think of countries where everything is cheap by Canadian standards. The incentive is wealth they have built in B.C. property. The cost, if their move is permanent, will be curtailment of OAS benefits — one needs 40 years after age 18 for the maximum, and cessation of accumulation of CPP benefits, though what has accumulated in both plans will still be payable subject to withholding.
Their house has recently been appraised at $2.4 million. They owe $820,934 on their mortgage, leaving their equity at $1.58 million, which is 87 per cent of their net worth. They figure that if they sell the house and move south, they could live as a family on $60,000 per year including $12,000 for private schools in their new country.
Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based investment advisory firm Exponent Investment Management Inc., to work with Richard and Marianne. “It’s feasible, he explains, but the length of time and the costs of shifting their lives to a different country add risk to their plan.”
A life of warm beaches under the palms has costly downsides. It is true that their heating bills will be less than in Canadian winters, but they will give up the medical and social services that their Canadian taxes buy. Some warm countries have advanced medical and hospital services, some do not. Some are politically stable with safe streets. In some, foreigners are well advised to live in gated communities and pay for their own security. They would probably have to allocate money for medical care, buy an insurance-based pension plan and save diligently if state-paid plans are thin or unavailable.
At present, they spend all of the $8,000 in after-tax income from Richard’s job. There is nothing left for savings. Their house, $175,000 in RRSPs, $12,000 cash on hand, $26,000 worth of vehicles and $58,500 in RESPs, total $2,671,500 of assets. When it comes to debt, they have the mortgage, $15,000 on credit cards and $15,000 on a line of credit for their home renovations: total $850,934. Their net worth is thus $1,820,566. That is a fortune in some warm places.
Richard and Marianne figure they could find $1,435,000 for investment after selling their home and paying closing costs and the mortgage penalty. They could add $26,000 by selling their vehicles. That’s a total of $1,461,000. If that theoretical capital were invested to generate three per cent after inflation for the 39 years to Marianne’s age 90, it would pay them $62,190 per year, assuming consumption of all income and capital. Added to their RRSPs, from which they could conservatively withdraw $7,500 per year, they would have total pre-tax income of $69,690 per year. After splits of eligible income and 10 per cent average tax in their choice of jurisdiction, they would have $5,227 per month to spend. In some countries of their choosing, that would buy splendid accommodation.
Far from Canada, education is problematic. They are contributing nothing to RESPs at present. However, if the $58,500 in the accounts is left to grow at three per cent per year after inflation, it will rise to $74,115 in eight years at three per cent and then support distributions of $9,265 per child per year for four years for post-secondary education. In countries where university education is paid by government, that would be sufficient, Einarson estimates. If the kids physically attend a Canadian institution, living at a foreign home would be impossible. Supplemental summer employment would be essential.
A balance of benefits
There would be other costs such as airfares back to Canada for the family once or twice a year, a good car refreshed every five to eight years, and health insurance for services at a Canadian level. On the other hand, Richard could work a few months a year to bring in $10,000 to $15,000 to ensure costs are covered. Even that, given that he is in a licensed profession, could require continuing work or refresher courses.
The strategy of selling the house in Canada and then living abroad is feasible. But it is risky over the four decades Richard and Marianne would have up to their respective age 90s. Living abroad, they would have at most 80 per cent of the 40 years residence in Canada after age 18 required for full OAS. They could get CPP, but skipping 1.5 decades of contributions before 65 would cut benefits drastically. They would stop contributing to their own TFSAs and RRSP plans. Whether they could replace any government pensions in a tropical country is questionable. Few countries provide them for foreigners, even those that set up long-term residence. Lack of these resources would mean the couple and their kids would be entirely on their own in a financial sense.
“The plan is plausible, but awfully risky, even if we include Richard’s potential part-time income,” Einarson explains. “That they could do it does not mean they should do it. Staying in Canada, saving aggressively and planning long stays abroad in retirement after their kids complete post-secondary education, which is a Canadian norm, is the safer and perhaps wiser course.”
Retirement stars: 3 *** out of 5