Having once surged to relative parity with the U.S. dollar, the loonie has headed south again. It was riding high for a few years between 2010 and 2013, but now the Canadian dollar sits at 69 cents U.S. and it might not stop there. How will you help your clients navigate currency rate fluctuations and preserve their retirement plans?
If your clients own vacation property in the U.S. or travel across the border frequently, they may need to take a closer look at how the rising costs might set a vulnerable retirement plan adrift.
CHECKING THE FORECAST
Currently the Canadian dollar is worth about 69 cents U.S.1 The loonie hasn’t been pulled down by such strong economic currents since 2002 when it dipped below 62 cents.2 For vacationing snowbirds, cross-border shoppers and investors, the plunge could stall travel plans and challenge people to consider the impact it’ll have on their retirement.
PREPARING FOR THE CONDITIONS
Michele and Gary live in Hamilton, Ontario and also own vacation property in Clearwater, Florida. For them, the decision to pack a few bags and head to the airport isn’t as simple as it used to be. A trip south means they have to plan ahead. They make the usual arrangements – holding mail delivery, setting up a kennel stay for the dog and getting someone to water the plants. But preparing for financial conditions is also important.
Every year, Michele and Gary spend about 8 weeks in Florida and allotting that vacation time is a major priority for them. “Vacationing in Clearwater is a lifestyle choice for us. We enjoy it; even with a fluctuating exchange rate, we make it work in a way that keeps our retirement plan in focus,” Michele says.
According to Gary, it’s all about budgeting. Keeping track of dollar values is a good idea, but knowing the costs of goods and services can also help people make educated spending decisions. “We make a point of recognizing the distinctions between Canadian and American prices; we calculate comparable values and note the differences. Fuel is a great example. It’s much cheaper to fill up the car in Florida so we capitalize on the opportunity to take scenic excursions for a lot less than we’d spend in Canada,” Gary explains. When there’s a significant gap between U.S. and Canadian currency, they resist spending money on restaurants or recreational events. By scaling back expenses, it can help offset the higher costs from currency fluctuations and keep their savings plans intact.
For savvy Canadian travellers like Michele and Gary, rough water isn’t enough to turn them away from their retirement dreams. Staying on a course toward lifetime financial security might involve some skilled manoeuvering so clients can see the bigger picture. Gary relies on his advisor to point him in the right direction. He keeps Gary informed and educated about dollar values, market trends and where to invest.
GOING FURTHER WITH LESS — WHAT’S ON THE HORIZON?
Currency is a risk — one that people need to understand and fit into their overall plans. We can’t escape the consequences or benefits of that risk whether it translates into goods purchased in or outside Canada. But like any other risk, if clients don’t plan for it, they won’t be as equipped to handle the fluctuations.
Stuart Dollar, Sun Life Financial’s Director of Tax and Insurance Planning, suggests clients stop worrying about the things they can’t control and start focusing on what they can do to work through the challenges. The declining value of the dollar can be troublesome, but we can take steps to lessen its impact, he says. There are a few options that clients like Michele and Gary might consider. Whenever currency rates improve, they could buy U.S. dollars. They can also use the U.S. dollar credit cards issued by their credit card company. That would allow them to avoid the higher foreign currency charges and conversion fees that a credit card charges versus what their bank charges.
TO OWN OR TO RENT — THAT IS THE QUESTION
Amidst an unstable currency environment, it makes sense to revisit the owner versus renter scenarios. As the Canadian dollar weakens, it becomes more expensive for snowbirds to purchase a home in the U.S. And in contrast, it could also bring higher revenues for those who’re ready to sell their vacation property. Stuart Dollar reminds us there are some tax implications to keep in mind too. For example, if a client dies owning a U.S. vacation property, the property may be subject to U.S. estate tax. The Canada–U.S. Tax Treaty may provide some relief from this tax, but getting that relief will require the assistance of tax and legal professionals. And even if the estate avoids U.S. estate tax, there may still be Canadian capital gains tax to pay at death.
Typically, renters don’t get the stability, appreciation of long-term ownership or consistency in accommodation. But in a fluctuating exchange-rate market, the rental option might become more attractive — especially when longevity and health factors come into play. As people get older, their health might decline. If that happens, they’ll want reassurance they have access to their money if they need it to fund additional health-care services. Tying up their capital in foreign property ownership can limit clients’ financial flexibility especially when the return on investment is lowered by the currency rates.
For owners, however, there’s a comfort in knowing what to expect. They’re familiar with the landscape, weather, neighbours, the cost of local services and products, recreational attractions, and more. Clearly, decisions aren’t easy in the shadow of a fluctuating exchange rate, but to invest time and money across the border, clients need to think about their retirement plans and defining them further. What are the costs of buying a house in the U.S.? How much time would they be spending there? Is a vacation lifestyle in the U.S. a major priority? Can clients realistically afford it? Have they been contributing aggressively to their registered retirement savings plans?
TAKE THE GLOBAL ROUTE
You may have clients that are in or approaching retirement. They’ll want to know how to protect their investments and minimize the risk associated with a weak Canadian dollar. We can’t do anything to correct where the dollar is. But we can address the fluctuations better in the longer term. That means investing globally where clients’ sources of income and assets aren’t limited to Canadian dollars.
This is where a tactical investment strategy can be useful, as Chhad Aul, a Portfolio Manager with Sun Life Global Investments (SLGI) explains. “From an investment perspective, as the horizon gets shorter, a solution that’s tactical in its hedging policies can allow an investment portfolio to participate in the gains of an appreciating currency, while immunizing against the risks of a falling currency when market conditions begin to turn,” he says. SLGI’s Granite Portfolios are a good example. “We’ve made an active decision to keep the U.S. dollar exposure in these funds unhedged,” Aul explains. “The portfolio isn’t fixed so we can decide when it becomes prudent to neutralize this exposure to the U.S. dollar.” The best advice is to go global. Recommend clients consider a solution that includes top down, tactical management. SLGI’s Granite Portfolio gives clients that global exposure to preserve purchasing power in multiple currencies.
JOIN THE CONVERSATION
Whether your clients are crossing the border for an extended stay or a quick shopping excursion, get to know how they spend their time. It’s who they are. A discussion about lifestyle priorities is part of a larger conversation that can help determine the best way to protect retirement plans. Understanding your clients, acknowledging their goals and appreciating their vision of retirement will make it easier to plan for exchange rate fluctuations. You can help put plans in place to diversify your clients’ risk and reduce the impact of U.S. spending. Remember there’s also help from the Canadian Association for Retired Persons (CARP) and the Canadian Automobile Association (CAA). They offer useful travel tips and advice for snowbirds looking to get the most out of their Canadian dollar.
1 The Canadian dollar value reflects the current exchange rate as of January 20, 2015.
2 J. Powell, A History of the Canadian Dollar, www.bankofcanada.ca/wp-content/uploads/2010/07/dollar_book.pdf, 2005.