The Portfolio Doctor

By David Cruise and Alison Griffiths
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Patients: Charles and Frances Highbury, 50.

Situation: Married, no children, both employed as teachers.

Income: $120,000

Assets: Vacant land, valued at $100,000

Debts: None

Investments: Non-registered - $140,000 mostly US stocks of small and mid-sized companies.

Concern: Recently we learned of an opportunity to work in Bahrain, which would enable us save about $60,000 annually. We could work there five years, maybe even 10. I can't figure out if it is better to stay here and continue contributing to the teacher's pension plan, or go away and come back $600,000 richer, but with no pension plan.

Doctor: Michael Hill, DeThomas Financial in Windsor.

Ah, the old work-abroad-and-come-back-with-a-fortune ploy. We've fantasized about it ourselves a few times! But will it work for our patients who just last year started working for the public school system?

"It's a big depends," says former teacher and our doctor this week, Michael Hill of deThomas Financial. "Using their assumptions, it looks like it could work pretty well. But there are a lot of 'what ifs'."

Right off the top, Hill points out that at least one of the Highbury's assumptions is faulty. They believe that they can work as teachers in Ontario for 16 years, then retire and receive 70 per cent of their salary. "The teacher's pension plan is based on years of service (times 2) and the average income from your best five years, usually the last five years," Hill notes.

Taking inflation into account, Hill estimates that if the Highburys teach until they are 65, the average of their best five earning years would be around $87,000 each. Their years of service would be 16 (this year plus 15 until retirement) times 2, which equals 32, a figure that is converted to per cent for the pension equation. Using the teacher's pension formula, the calculation for each of them would be 32 per cent of $87,500, for an annual pension of $28,000 at age 65. If they worked only for 10 years Hill estimates that their pension would be somewhere in the $15,500 range each.

"Don't forget," he emphasizes, "the teacher's pension is indexed to inflation and guaranteed by the Government of Ontario. And it never runs out, you collect it as long as you live."

Let's see how the numbers work out if they choose, instead, to move to Bahrain and teach. Let's say the Highburys can, indeed, put away $60,000 annually. Assuming an average return of 7.5 per cent annually, they would have approximately $850,000 at the end of 10 years, which is the maximum time they are considering for this adventure. Hill does caution that their savings goal is one of his "what ifs."

"I think they're right that they'd have a hard time getting a teaching job if they came back after 10 years, so that $850,000 represents their pension," Hill concludes. "If they withdraw 6.5 per cent a year to live on ($55,250) their money will last at least 15 years, which really isn't long enough." The 6.5 per cent withdrawal rate is a general rule of thumb for retirement planning.

If the Highburys choose to teach in Ontario for just 10 years their joint pensions will total around $31,000. If that's all they took out of the $850,000 they had saved from Bahrain, it would easily last them into their late eighties, which makes things look a little better. But hang on just a minute before packing the bags.

"When they move away, they're 100 per cent responsible for their own money and their own future," Hill emphasizes. "They can't send their money back for investment and I have no idea what mechanisms for investment are there. There's certainly Merrill Lynch and other firms there, but will they be interested in people who only make $60,000 a year each? If they're managing their own money in a foreign country, it certainly adds to the risk."

To complicate matters, you can't just casually up and move to another country to work. If the Highburys decide to leave, and want to avoid paying Canadian taxes, which is part of the idea, they basically have to sever their financial and social ties with this country. That involves selling their land, a house if they had one, cars and personal possessions and giving up their drivers licenses, golf club memberships and so on. Naturally there are more complexities, but that's the crux of it.

If you want more info, go to the Revenue Canada website www.cra-arc.gc.ca. Find the search function. Enter IT-221R3 in the Search for a Form or Publication by It's Title and you should bring up (Consolidated) Determination of an Individual's Residency Status.

The good news is that the Highburys can bring back their new money back without tax and resume their Canadian citizenship. But there's also the issue of tax in Bahrain, which has no tax agreement with Canada, nor is there any in the process of negotiation. The whole tax issue should be carefully examined by the Highburys. The last thing they want to do is create tax problems for themselves.

"There are other factors greater than just money," Hill emphasizes. "Friends, family, standard of living, familiarity, security, cultural and political stability, language barriers and religious issues should be all considered in their decision."

Also as part of their decision making, the Hillburys should try to assess what sort of people they are. Are they adventuresome? Do they have a history of taking risks, especially with their money? And how do they cope when things don't turn out as well as they hope?

If they should decide to stay at home, because they are renters with no dependents they should easily be able to save an additional $2,000 each monthly from their salary over the next 15 years of work. With an average 7.5 per cent return they will have something approaching $750,000, not factoring in inflation. That seems like a pretty good chunk of cash, on top of a pretty good pension!

"At the end of the day, it's really got to be what they want," Hill sums up. "I had three clients, all doctors, who went down to the States back when there was a big exodus, because of income. They definitively made more money but every one of them was back within 18 months because they hated it!"