Reader Case: Retiring Earlier as an Expat

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A few days ago Canada recently announced that they’re removing quarantine restrictions for fully vaccinated travellers. We aren’t fully vaccinated yet (FIRECracker and I both have received only 1 shot), but that development has awoken the traveller part of our brain that has been basically lying dormant for the past year. FIRECracker is already back to furiously checking flights that we might be able to get on once we get our second dose. Dare we dream? Could our nomadic life be on the verge of coming back?

Which fits in nicely with today’s reader case, who is also eyeing the world beyond our borders and daring to dream about something that just a few months ago would have been seen as a laughably impossible idea: retiring overseas.


Dear FIRECRACKER and WANDERER,

You guys have been a huge inspiration to me and my partner. We devoured Quit Like a Millionaire and have been following in your footsteps towards FI for the last few years. My partner is Colombian and as a result I also have Colombian citizenship.

We currently both live in Calgary and work in the public sector in Alberta. We have been saving  diligently and recently crossed the $800,000 threshold.  Our dream is to move to Medellin Colombia, where we have purchased a small condo (we still owe about $34,000 on it).  The condo will be fully built by the end of this year 2021.

When we first developed our FIRE plans the goal was to save $1,000,000. However after doing more research and learning that we only need about $1,000 to $1,500 per month to live in Medellin Colombia, we have considered pulling the trigger out about 850,000 or 900,000  so long as we have completely paid off our condo in Medellin Colombia.

We also own a condo, which is currently rented out, and Edmonton. Unfortunately, the condo has lost value. We purchased it at $260,000, now estimated to be worth $220,000. This is, of course, due to the economic downturn in Alberta. We hope to sell this property before we pull the trigger, but aren’t sure if we’ll be able to sell it given how soft a market is in Edmonton. We will be lucky to walk away with the down payment we put down to purchase the condo of about $60,000. We are doing the smith maneuver – I think we have about 103,000 left on the mortgage (2.05% interest rate), but have borrowed about 90,000 from the HELOC to invest in XEQT. Given that I have such a high tax bracket, it makes sense to try to make some of my income tax deductible…

We have both been accumulating defined-benefit pensions. According to the latest statement, if we were to stop working today,  I would receive $2,280 and my wife would receive $550 per month once we retire at the age of 65 ( 2045 for me and 2047 from my wife/partner).

My annual income is $165,000 and my wife’s is $69,000. My job is quite stressful and takes a toll, so we are keen to hit our number so that we can move to Medellin, Colombia (assuming we can get vaccinated by the end of the year, of course).

We spend about 2,400 to 2,600 a month on rent, bills (internet, hydro etc), food, car insurance etc. Looking to sell our old car and start using a car share service in the neighbourhood instead, would save us a good 130-180 per month. The car can’t be worth more than $4,000.

Which strategy should we choose?

  1. Split our time between Canada and Colombia 50/50, which would require us to maintain a residence in Canada?
  2.  Live in Colombia full time with a lower cost of living?

The benefits of maintaining residence in Canada is that we can mention our health care coverage but also continue to accumulate TFSA room every year.  

If we were to take option 2, we’re not so sure what that would mean for our investment accounts with questrade, especially if we’re living outside of Canada for a prolonged time. Does the government force you to “ sell your” non-registered accounts and tax you on this? I seem to think I heard this somewhere but would be curious to hear what your experience has been given your nomad lifestyles and you likely not living in Canada anymore ( notwithstanding the pandemic of course).

I’ve also started to focus on the Yield Shield strategy by starting to purchase dividend ETFs. The idea is that we can generate monthly income of about 1,500 to $2,000 a month from the portfolio and therefore not have to sell our positions, especially if there is a downturn.

Our questions to you are as follows:

  • Are we able to pull the trigger when we hit 850,000 or $900,000 in our portfolios  living 50% of the time in Canada and the other 50% in Colombia?
  •  If we are to attempt the Colombia 100% time option, what is the best strategy or approach to ensure we are managing the tax implications of living in Colombia while maintaining our portfolios that generate income in Canada?
  • After having a look through our numbers, do you have any recommendations or suggestions for us in terms of tweaking our portfolio, or preparing a portfolio to pull the trigger at the end of 2021 or perhaps mid 2022?

Appreciate your analysis and response in advance!!

You guys rock!!

Warm regards,

Colombia-bound


Ah, the thought of travelling again warms my heart. As we discovered, travelling is not only a great way to spend your hard-earned retirement, if done right it can actually reduce your post-retirement living expenses and help you get to your FIRE goal sooner to boot. You can’t afford not to travel!

Colombia-bound has definitely got the right idea. Retiring to South America is a great way to reduce your expenses, and pretty much every country on the continent will cost a fraction of what it costs to live in Canada or the US. Granted, your Spanish/Portuguese is going to have to be pretty solid, but I’m going to assume that’s not a problem for our couple since they’re, you know, Colombian citizens.

The numbers are actually pretty stark. Staying in Canada where their expenses range from $2400 to $2600 a month means that their FIRE target will be $2600 (to be conservative) x 12 x 25 = $780,000. They have $800,000 saved so it works, but just barely.

But in Colombia, their expenses will be a fraction of this, coming in around $1000 to $1500 a month by their estimates. At that spend level, their FIRE target is only $1500 x 12 x 25 = $450,000. They have nearly double that. Not only does that makes their retirement way more stable, they don’t have to deal with another Edmonton winter ever again!

And of course a 50/50 Canada/Colombia split is somewhere between those two numbers. A year spent like this would cost them $2600 x 6 + $1500 x 6 = $24,600 for living expenses. A round trip flight from Edmonton to Medellin costs about $1200 according to Google Flights, so we tack on two of those for a budget of $24,600 + $2400 = $27,000, which requires a portfolio of $27,000 x 25 = $675,000 to support.

So from a mathematical perspective, all 3 options work because our reader has done such a great job saving and investing (despite the non-performing rental). So this isn’t so much a math issue, it’s more of a lifestyle question of which option is the best fit for them.

The Tax Residency Trap

One really important thing to consider when choosing where to live is where do you want to be tax resident. Because becoming a tax non-resident of Canada is a pain in the ass.

First of all, you get dinged with a potentially huge departure tax. At the moment you become an emigrant, the CRA (our version of the IRS) assumes you’ve sold everything in your taxable account at fair market value and charges you capital gains tax on that make-believe sale. This is called a deemed disposition and if you have a lot of investments, this could be very expensive.

Secondly, you start getting charged withholding tax on dividends since you’re now a foreigner. As a Canadian tax resident dividends are taxed at extremely favourable rates (often 0% if you’re retired) but once you become non-resident you start getting hit with a non-refundable 25% tax on all Canadian-sourced income going forward.

And thirdly, you lose the ability to make free RRSP withdrawals. As a Canadian tax resident with no other income, if you make RRSP withdrawals equal to your personal exemption, you won’t have to pay tax on it, but once you’re a non-resident RRSP withdrawals get hit with a 25% flat tax rate no matter what your income level is.

So with these fairly big drawbacks, does it ever make sense to choose to become tax resident in another country if you have a lot of investments in Canada?

Sure, if the financial benefit of doing so outweighs the tax hits you’ll take when you leave. Generally, this happens because of 3 factors:

  1. The tax rates of the new country are much lower than your old one
  2. The new country has a territorial taxation system which doesn’t tax offshore income
  3. The cost of living is lower in the new country

For Columbia, the tax rates are comparable to Canada, so scenario #1 doesn’t really make sense. And Columbia doesn’t use a territorial taxation, so scenario #2 doesn’t apply either.

Scenario #3 might apply since Columbia does have a lower cost of living than Canada, but I’d argue that there’s a way to get most of the benefit of Columbia’s lower cost of living without becoming a tax resident there.

Taking Advantage of the 183 Day Rule

How each country determines tax residency is up to them, but generally if you spend more than 183 days somewhere, you become tax resident there.

That limit is what Colombia-Bound is referring to in his 50/50 plan. However, just because you’re trying to avoid that 183 day limit, that doesn’t actually mean you have to return home. You can hop into a plane and go visit another country! You could theoretically spend 6 months in Colombia, then 3 months in Ecuador, then 3 months in Peru, and your cost of living will be just as low for the entire year without triggering tax implications. Just as long as you don’t spend 183 days in any one country, you won’t become tax resident anywhere else and will therefore retain your Canadian tax residency.

This is what we did when we were travelling the world before the pandemic hit. Because we didn’t spend enough time in any one country to become tax residents there, we fell under the CRA’s classification of a “factual resident,” which is someone travelling outside Canada on a temporary basis. And for tax purposes, a factual resident is treated the same as a normal resident, so I had to file and pay Canadian taxes every year, but it made sense for me considering the massive departure tax I would have to pay if I ever officially “left.”

Note, however, that even if you retain Canadian tax residency by hopping around different countries, if you’re not physically present in Canada for at least 5 months, you will lose your Canadian health insurance coverage and will need to purchase expat insurance (like we did), so that’s another thing to be aware of.

Conclusion

Permanently moving and becoming tax resident in a new country can have major financial consequences, and is not a decision to be taken lightly. While it might make financial sense for some, the downsides of becoming tax non-resident don’t appear to be worth the upside for our reader, especially if they can simply hop around South America continuously and get the benefit of a lower cost of living without getting hit with a massive departure tax bill.

What would you do? Would you consider moving permanently to another country to make your retirement come faster? Let’s hear it in the comments below!


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24 thoughts on “Reader Case: Retiring Earlier as an Expat”

  1. According to the latest statement, if we were to stop working today, I would receive $2,280 and my wife would receive $550 per month once we retire at the age of 65 ( 2045 for me and 2047 from my wife/partner).
    ————

    So how does it work? If you retire early and stop working today, then you’re retired from the government.

    Those numbers ($2280, $550) are assuming you stop working for the government at age 65.

    You would get much less. No?

    1. No, you don’t have to keep working, but you won’t get your retirement checks until you reach the age of 65.

    2. Or seeing they both have “Defined-Benefits”…

      Maybe another option to consider is taking their “cumulative value”. Not sure, what the figures looks like but it is definitely something to take into account if it is available. I am assuming it is NOT.

      The 50/50 scenario only comes into the main focus if they WANT to retain “provincial health benefits” (and maybe the occasional family visits once back home) but if that is NOT an important factor to our couple, then 100% hopping nomadically would be the optimal way to go – post C19 of course.

      I can sincerely appreciate and relate to this post. Personally, and collectively as a family, the 50/50 route is our optimal option (for the time being) seeing we also have a 13-year old accompanying us for the journey. Hence, for us, the possibility of a re-entry back to society HAS to be one of the options for our teen and thus, the justification for keeping the “provincial health benefits” in play till deemed no longer needed.

      ImmigrantOnFIRE

  2. If you are going to do the 6 months in columbia and 6 months in 2 or more other places, make sure that you always hit the 6 months in columbia cut-off on the last day of the year.

    That way, if you get sick and can’t leave columbia when you planned to on day 178, you aren’t sick in bed (or the hospital) while that 183 day mark overtakes you. Plus, of course, a pandemic could get you stuck somewhere with drastic financial consequences.
    (Are they permanent consequences or just for that unlucky year?)

    Personally, I would find it very tiring and annoying to HAVE to travel that much. Travelling is fun when you’re in the mood to do it and just plain isn’t when you’re not.

  3. Great post. As a fellow Colombian citizen, can totally relate.

    PS: please fix the spelling of the country throughout the post. Is not ColUmbia. Is spelled with an O: ColOmbia. Gracias!

  4. Surpised that Wanderer didn’t mention this… but commuted value of your pension could be worth alot, espcially in low interest rate environments. (I’ve heard it could be a factor of 15-20x of the annual pension amount).

    1. Good point. My commuted value (had I opted to take it) was 26.9x the annual pension. I had, however, reached the point of being able to receive an unreduced pension. My wife took her commuted value some 15 years early, and her commuted value was 25x the projected earned pension. So, for sure, they have a decent sum of money tied up in those pension plans.

      Late last year, changes were made to pension legislation that will, where implemented, reduce commuted values.

  5. It’s great to read a case study about my fellow Calgarians. I’m learning something new from future expats like the 183 day rule.

    My other concern is also about maintaining health insurance in Alberta. If that’s not possible maybe I could check the rate of World Nomads which I used when I travel to Philippines and Cambodia before Covid.

    I have to be serious in learning Spanish though because I want to travel is South America and maybe have a permanent residency in Spain as someone with dual citizenship: Filipino-Canadian.

    Medellin, Colombia will be definitely on my list. First stop would be Mexico to see the pyramids.

    Have a safe trip everyone.

  6. You’re set. Quit and go. Colombia is Cheap.

    whoa… everybody is running over each other to the Vacxx… crazy!

  7. The writer would only have the minimum needs met…or LEAN FIRE… the blogger gocurrycracker has somewhere around 2.5 to 3 million usd with 2 kids and globe trots with a base in Taiwan … or FAT FIRE… we live in Beijing… so this is of more interest to me…. 850 Canadian in AMERICAN DOLLARS isn’t much to early retire on … hmmmm

  8. great timing for me

    i am considering returning to UK … leaving my investments here . doing very well in Questrade etc

    age 60 . want to be near my MUM in her last years and travel much more to europe etc .

    i have dual citizenship .. i was hoping i could file a canadian tax return every year

    does UK have an agreement so i can do this ?

  9. red flag for me is owning … . i would rent .. you could find amazing deals and be stress free

    your investments cover this easily

  10. Hey fellow Calgarians! I’d personally choose the 50/50 option. That allows you to keep your connections with your friends/family up here and to just be here from May-Oct while it amazing here and escape the winters. With your numbers + your pensions which were highlighted in the post, I think you’re more than set. Then of course there’s the health insurance side too. I’d likely rent while up here those months for a bit of flexibility. One year in the Maritimes, one year in Quebec, one year Vancouver Island. It allows you to enjoy Colombia while also having the opportunity to explore more of Canada if you’d like to. But of course, if you’re over Canada then just move down full time! Totally a personal preference but I wouldn’t let the money make the decision as it looks like you’ll be fine either way. Cheers!

    Ps are you a part of the “ChooseFI Alberta” FB page? The FIRE group in Calgary is pretty awesome and has meetups quite regularly (pre-Covid).

    1. Thanks Court, appreciate the suggestions and will definitely consider the 50-50 option across Canada. I’m part of the Canada, Alberta and Calgary choose FI groups on FB (my FB name is pacho boyaco)… Would love to attend Calgary FI meet up once they start up again.

  11. Here is a solid FIRE goal for your readers…

    It really does not matter much where you live in the world as long as…

    1. You have your family with you.
    2. You have a solid health.
    3. TheEngineer 30% rule – minimally, you must be able to afford the LOCAL median lifestyle with the additional 30% cushion.
    4. Have a compassion for the LOCAL population.

    Good luck!

  12. If they become non residents of Canada and move to a country that has a tax treaty with Canada, how does that impact the 25% flat tax rate? Wouldn’t they be able to get a tax return on at least a portion of that when they file taxes in the country of residence?

    Also interested to know more about the departure tax. If they were to close the taxable accounts before becoming non-residents, and transfer that money to the new country of residence, could they avoid that departure tax?

    1. what i am trying to figure out . contemplating moving back to UK to be with Mum

      but should i do it full time
      i was going to leave my funds here in canada and use divs to live off and file a canada tax return

  13. Thanks Wanderer! Appreciate the analysis and the third party perspective on our situation. You have given me a lot ot think about. Very much looking forward to moving into my transition to FI phase as the pandemic abates.

  14. Hi, I loved the post. Great analysis of some tax and legal details that are often overlooked. But it is also obviously very Canadian-specific. How about a US example using a hypothetical couple, but with the same savings amounts, concerns and goals, but with US tax and legal considerations discussed? It’d be very helpful for US citizen fans of the site and also offer an intriguing side by side comparison, I think. What do you say Wanderer? Firecracker?

  15. While I don’t see us pursuing the idea of moving abroad in order to reach FI faster, I definitely see us entertaining the notion of relocating to another country once we’ve reached FI here in the US. I also don’t see us leveraging geographic arbitrage, but rather using FI as a tool to alleviate some of the things that would hold us back from moving to another country while working (primarily worrying about finding a job and navigation a new employer-sponsored retirement system).

  16. does anyone have any real life experience of the departure tax application?

    i ask as i have a canadian citizen contact who moved to the uk ~2005 and was NOT charged this upon departure (since returned after around 10 years). i moved to Canada ~2014 and was lucky to have PWC help with my taxes who said they had limited experience with this in practice but it should only be expected to be charged if i was to exit canada as a non citizen 5 years+ after entry (“the five year rule” i believe it was referred to as). I have since become a citizen and understood that as long as i left with the intention to return this tax would not apply however have found no real life applications.

    Useful as a double check in this scenario but also interesting if anyone has real life experiences to share?

    thanks

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