Life in Central America is hard for a Canadian couple approaching retirement. They have had prosperous lives in Guatemala where Roberto, 65, a naturalized Canadian, was born. Years ago, working in Toronto, he met his Ontario-born wife, Flora, 61, and became a mid-level engineering manager for a major Canadian manufacturing company. Flora worked as an accountant.
'Murders are not even headlines anymore. And there are kidnappings not just of the wealthy but anyone who has some money'
Moved by the company back to his country of birth, he opened his own profitable consulting business when the manufacturer ran into trouble. Flora found work as a translator for a major accounting firm. But life in Guatemala is not all tropical breezes. With one of the highest murder rates in the western hemisphere, though reportedly falling, it has recently averaged 15 per day in a country of 14 million people.
"The problem is safety for me and especially for my wife," Roberto explains. "Murders are not even headlines anymore. And there are kidnappings not just of the wealthy but anyone who has some money. When you may not come home after work or shopping, crime is not just a statistic. It is as personal as it gets. But is it financially feasible for us to live in Toronto and to have enough money to support ourselves in retirement?"
Roberto and Flora bring home $4,880 a month after taxes, a grand sum where they live but not in Toronto. They have total assets of $1,224,704. That sum is made up of a $550,000 rental condo in Toronto and financial assets of $654,704. Their money will have to supplement modest Canada Pension Plan benefits generated during their time working in Canada and limited Old Age Security benefits.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with the couple.
"These people are realists," he says. "They have examined alternative ways of financing their lives in Canada. What I have to do is to evaluate the plans, measure the pension income, and offer ideas on how to make the best of what they have."
The couple's largest single asset is their $550,000 rental condo, which yields $1,880 a month after expenses. That's $22,560 a year or, divided by the $550,000 price, a 4.1% yield. That's not a bad return, but it comes with the risk of vacancy, the potential expense of repairs, likely condo assessments and, of course, property taxes. They could boost the return and lose the management headaches by selling it.
If Roberto and Flora get $530,000 after costs and get a 6% return from any number of diversified real estate investment trusts, they would receive $31,800 a year before tax, less a small capital gains tax, likely less than $30,000, on a $130,000 gain. This income could pay the cost of renting an apartment at perhaps $2,000 a month. They would have sold at what many regard as the top of an overheated market. They will have converted the wild and woolly Toronto real estate market to simple rental cost with no condo assessments.
On top of this rental and investment income, the couple could obtain a 6% pre-tax return on their present investment assets of $609,704 (not counting cash). If these funds were to generate a 6% return less 3% for inflation, and if the money is spent by Flora's age 90, it would generate an annual indexed return of $32,493 in 2012 dollars.
The couple's annual retirement income would therefore consist of $31,800 from the sale and investment of the $530,000 proceeds of the condo and $32,493 from present investments. Annual CPP benefits will be $4,200 for Roberto and $360 for Flora when she is 65. Roberto, who has spent less than 10 years in Canada, the minimum needed to qualify for Old Age Security, will get no benefits, but Flora, who will have 40 years of Canadian residence needed for full benefits, will get $6,481 a year. Add $12,000 potential business income from Roberto's consulting, which he would resume in Toronto, and they will have $87,334 annual income before tax.
Assuming they split the income and pay tax at an average 15% rate, they will have $74,235 a year after tax, or $6,190 a month, for life in an expensive city. That will pay rent of $2,000 a month, leaving $4,190 for everything else. There will be no cushy expatriate life in the tropics, but they will have the comparative safety of Canada and be near their children.
The transition to life in Toronto would be costly. Roberto and Flora would have to buy furniture because the cost of shipping a truckload of goods from Central America to Toronto would be prohibitive. They would have to buy travel medical insurance to cover their own medical costs for three months until the provincial medical plan takes over their bills, and pay various expenses to bring in and license their car. Their present $45,000 of cash, which has not been counted in estimating investment returns, would cover those costs.
The challenge of living in Canada once again will be to stretch their limited income. Fortunately, they have the intellectual skills and experience to become active investors. Roberto can apply his engineering discipline to stock and bond evaluation.
Flora, with years of experience in accounting, can winnow income statements and balance sheets. As retirees, they will want to hold relatively low-risk investments that produce dependable and hopefully rising income. They need not depend only on mutual fund managers to find those investments, Mr. Moran suggests. They will have to put up with the volatility of capital markets and see beyond the storms that often ravage them.
"With little pension income, they will be almost completely dependent on investment returns," Mr. Moran says. "They will have to hone their investment skills and have thick skins to cope with the volatility that goes with managing financial assets."
(C) 2012 The Financial Post, used By Permission