National Post Article: Snowbirds paying $15,000 a year in investment fees worry about growing their nest egg

The National Post asked me to review the finances of a newly retired couple who are snowbirds. 

They are currently paying $15,000 a year in investment fees, but feel they don’t get much tax or financial planning advice.

They are also business partners who have worked in the U.S.

One has a Canadian-United States citizenship, while the other has U.S. status. They spend 7 months a year in Canada, and would like to spend the rest of the time in the southern U.S.

In the article you’ll learn:

• How much they will need in investments to live the life they want.
• When each of them should start drawing Old Age Security (OAS) and CPP.
• Are they tax-efficient?
• Can they split income by transferring some of David’s investments to Felicia?
• Why the investment return after fees is what matters in investing, not just the fees.
• Why they need a financial plan to gain clarity on their risk tolerance, desired returns, tax efficiency, and how this will affect their lifestyle.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

Snowbirds paying $15,000 a year in investment fees worry about growing their nest egg

Financial Snapshot:

They are retired and seem happy with their existing lifestyle spending of $110,000. 

This includes $14,000/year contributions to their TFSAs, which they can do by just transferring non-registered investments, so we can exclude this from their lifestyle. 

That means they need $96,000/year after tax or $116,000/year before tax for their desired retirement lifestyle.

To live the life they want, in addition to their pensions, they need about $1.7 million in investments (based on 6% return on their investments). They have just over $3.1 million, so they are 93% ahead of their goal.

This means they can have a significant buffer in case of future expenses, or they would retire more comfortably with an extra $50,000/year before tax, or $35,000/year after tax.

In short, they can afford lifestyle expenses of $130,000/year instead of $96,000/year giving them an extra $35,000/year to enjoy life.

Knowing this number can help them think through their life. What else do they want to do that is fun or meaningful that would be the best use of their extra money for them?

Financial Planning Notes & Ed’s Insights

David also has a self-directed account in his name alone, which means he cannot share the tax liability on earnings. He recently learned he could open another self-directed account in Felicia’s name and transfer stock “in kind”. He wonders what the expert thinks?

Transferring stock “in kind” to an investment account in Felicia’s name does not allow them to split the income for tax purposes. The investments are still David’s, so the income from them would be “attributed” back (taxed to) David, unless they would be able to reasonably show the money for those investments originally came from Felicia.

David would like to know when he should start drawing Old Age Security. He had planned to start it when he turns 65 in a few months and his disability payments stop.  “My advisor suggested I delay until I get a better handle on my income. Right now, I would be in clawback range.” The couple would also like to know when Felicia should start CPP.

The general advice is that equity investors should start their OAS and CPP at age 65, while conservative investors should delay them to age 70. Delaying CPP from age 65 to 70 gives you an equivalent of a 6.8%/year return on the investments you can continue to hold, which is less than equity investors are likely to earn, but more than conservative investors.

David and Felicia have not discussed their risk tolerance or what type of investments they plan to hold, so I can’t give them specific advice.

It’s funny that David’s advisor suggested delaying OAS “until I get a better handle on my income”. He stopped working more than a year ago. The undetermined part of his income is setting up the couple’s retirement income, which is something for which an advisor should give advice.

“Are we on the right track? How can we be more tax efficient? I feel like we have a lot, but it’s all over the place,” said David. “As I age, I am also concerned about my ability to keep up and I’m starting to think about ways to set our finances up and then forget about them.  Maybe annuities would be smart? I’m paying $15,000 a year to my investment broker. The fees are tax deductible, but it seems like a lot.”

David & Felicia primarily need a financial plan to make smart decisions and be confident in their future. They can maintain their existing lifestyle assuming decent investment returns, but could choose to live on at least $35,000/year more after tax. Their investments are all over without being clear on their risk or desired return or tax efficiency.

In a financial plan, they can decide together on the lifestyle they want, how they want to invest, and how to pay the lowest lifetime tax on their desired life. Then they can be clear on exactly how to setup their retirement income.

Conservative investments fluctuate less and provide peace of mind, but equity investments generally provide a more comfortable lifestyle and a more reliable income after inflation over a 30-year retirement.

Annuities generally have a far lower return than equities and have a major long-term risk of being eaten by inflation. They are perceived as risk-free, but would have lost money after inflation for 40 years from 1940-1980.

Paying $15,000/year for an advisor can be worthwhile if they receive advice worth more than that. Effectively planning their retirement and setting up their retirement income tax-efficiently can have huge benefits, but their advisor does not seem to offer financial planning or tax advice.

The investment return after fees is what really matters in investing, not just the fees. Most investment advisors recommend more conservative investments, which makes it difficult for them to earn their fees. The advisor can be worthwhile if he can help them invest for more growth after fees than they would get on their own.

Ed