November 2019

Welcome to the first part of our early Christmas present for our readers.  We have compiled some practical and actionable tips for expats and long-term foreign residents in Brazil which are all based on a variety of client cases and feedback.   Much of the content also applies to Brazilian nationals.

Feel free to comment below or write to me directly.  We cover all of these topics and more in our monthly breakfast and networking events – ‘Financial Markets Café’ – in Rio de Janeiro.

Thanks for your support in 2019.

Amit

Disclaimer:  We are providing guidance and personal opinions which should not be interpreted as specific investment advice!

1. Prepare an effective budget

2. Aim to save more

3. Use available Private Pension benefits

4. Review your banking costs

5. Use a specialist International Money Transfer company

1. Prepare an effective budget

Many of us make a New Year’s resolution to be more organised with our personal finances.  Just like old favourites such as promising to visit the gym more often, these new-found habits mysteriously fade away before the end of January!

Have you ever drawn up a budget with your expected income and expenses?  If so, what usually happens is that you prepare a complex spreadsheet with multiple categories.  This will only serve its purpose if you review it at the beginning of every month.  If you are new to this, I recommend you set your primary objectives as keeping costs under control and ensuring that you are saving in a more structured manner for the future e.g. to build up emergency savings, a retirement fund and if you have children or other dependents, a fund to cover education and/or care costs.

I will address the technical aspects of preparing spreadsheets in a future article.  Believe me, I regularly meet accountants and CFOs who manage complex, multi-currency corporate budgets but some of them have never reviewed their own family finances which tend to remain on the back-burner.  Some expats receive their salary in two currencies and have a disorganised trail of accounts in different countries from previous assignments.  People tend to get busy and defer their financial housekeeping.  Get into the habit, set aside some time every month and it will become second nature just like going for a run or taking up yoga!

• Break down all income (salary, expected bonus, rent…) and costs (mortgage rent, utility bills, entertainment…). To start with, the more sub-categories, the better.
• Make conscious decisions e.g. which costs can be reduced or reallocated? If you can save $1,000, would you invest it into a pension or redirect it into leisure or education?  
• Separate out the currencies and make allowances for fluctuations especially given the volatility of the Brazilian Real which we have observed over the last two decades. If you receive an income stream in USD, for planning purposes, it may be safer to assume a USD/BRL rate of 3.8 than the current position of 4.21 (as per 21/11/2019) which could be a short-term spike. 
• Discuss the figures and spending priorities with your family and agree what you can afford to spend on necessities and other items like leisure and travel. Discussing family finances should never be awkward. It will be more awkward if expectations are not managed and  financial difficulties arise in the future. 
• Set aside 30 minutes on the first Monday of every month with a checklist and work through your finances to have an approximate idea of how much you have spent – no need to tally up the smaller receipts once you have more practice. Log into pension accounts and long-term deposits on a less frequent basis, say quarterly, otherwise this exercise can become more tedious.

As an advisor, I find it refreshing when clients have a fairly accurate idea about the balances of their accounts and investments and how much they are earning and spending.  Based on our experience, such individuals are likelier to define and achieve their longer-term financial goals.

2. Aim to save more

I cannot emphasise how important this is.  Regular saving is important to build up a pension fund or target level of capital in the future.  Life goals such as a comfortable retirement and providing for children’s education require long-term planning.  Many people with well-paying jobs still incur financial hardship later in life due to the lack of long-term planning. Reconsider how much you are able to save from your salary and bonuses and take financial advice regarding the most suitable investment plans.

We tend to think of retirement as being distant, but it does eventually creep up on us.  Personally, I cannot believe how time has flown by since my university days, graduating from Bristol when I was 23.  Now, in my early forties, I am half-way to my likely retirement age.  Let’s use the term ‘financial independence‘ instead of retirement given that many people are eternal entrepreneurs or simply enjoy practising their vocation for as long as possible.  Imagine that you are financially independent and have the luxury of deciding when to stop without depleting your capital over the next 10-20-30 years of retirement, a phase during which, your healthcare costs and desired leisure/travel costs may increase significantly. 

Remember, you’re doing this for your future self.  Will your future self be grateful to your present self?

If you are a freelancer with irregular income, set a quarterly savings target otherwise it simply will not happen if you rely on investing the annual equivalent at year-end.  How many people ensure there is a significant amount left over at year-end to invest especially when most self-employed individuals are focused on the daily pressures and unexpected costs of running a business?  Hence the years roll by without building up a nest egg and then people end up working into old age or facing financial hardship.

It’s human nature to keep deferring it, but we need to take some advice from our friend, Mr. Einstein, about the importance of starting our retirement planning earlier in life.

“Compound interest is the 8^th wonder of the world. He who understands it, earns it; he who doesn’t, pays it”

Let’s work with this example here to reinforce the importance of compound interest. 6% p.a. is a reasonable proxy for growth, net of investment fees, for a 60/40 equity-bond portfolio based on the past 50+ years of stock/bond market data.

Let’s assume a single contribution of $10K at the beginning of each year; after 10 years, your investment will reach $139K and after 20 years, it will reach $388K. Keep doing that for another 5 years, your investment will be worth $579K after 25 years.  The investment in year 25 is about 49% higher than in year 20.

A sum of $579K can provide an inflation adjusted income of $23K for 19 years as per the calculations here.  More examples are discussed in our article here about an executive pension decision

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3. Use available Private Pension (Previdência Privada) benefits

In Brazil, the private pension is a popular method of saving in a tax-efficient manner.  There are two types of personal tax-return (IRPF) – the declaração completa and declaração simplificada.  The complete declaration allows for deductibles such as school fees and health costs up to 20% of taxable income with a limit of R$16.754.

You may also take advantage of a private pension – PGBL (Plano Gerador de Beneficio Livre) whereby you can contribute up to 12% of your taxable income

If your taxable income is R$100K, you may contribute R$12K and be taxed on R$88K, as long as R$12K is contributed before 31 December, 2019.

If you already have a PGBL, it is worth considering portabilidade (portability) – meaning that plans can be easily migrated to alternative providers without cashing out, incurring penalties and reinvesting. Portabilidade is a simply transfer of custody with minimal paperwork and it is becoming popular in Brazil as plan holders are increasingly aware of better options, seeking enhanced performance.

The rules changed recently allowing a higher limit of equity funds within private pensions. This equity limit was raised from 50% to 70%.  Up to 100% may be held in fixed income funds but we recommend plan holders to review their objectives and the available options, which have expanded in recent years. This is even more timely in a period of economic reforms, a more buoyant stock market and a lower Central bank base rate (Selic) hence lower returns across most fixed income funds.

Some of our expat clients have migrated their PGBLs from traditional banks to alternative providers, advised by consultants who provide greater expertise and bespoke portfolios.  I have seen cases of younger investors, with a more adventurous risk profile, being placed in conservative portfolios because they were offered a standard over-the-counter product by their bank.  With alternative providers and tailor-made recommendations, you can expect lower charges and higher long-term returns *for your investor profile*.

Consider the effect of compounding these differences in annual gains.  For example, a mere 3% p.a. enhancement over 10 years will compound to 34.4% total.  On R$500K, that is R$172K extra for taking these efficient steps to review your private pension provider and the funds.

Previdência Privada also offers estate planning benefits – let’s discuss that in a future article… 

4. Review your banking costs

I always take a few deep breaths before visiting my bank.  Firstly you get stuck in the revolving door for having your phone in your pocket as they are screening you for weapons.  That’s why the 007 classic, Moonraker never had a scene with Jaws visiting the bank when he was in Rio – in fact it was more viable for Jaws to travel to a space station hassle-free.

Then after walking past armed security, you end up wasting precious time in a long queue only to face sub-standard customer service and inefficient procedures.  This is generally not the staff’s fault, who in my experience, are exceptionally polite and try hard within their limitations. For this joyous experience, banks charge exorbitant fees and it is no wonder that even during the recession, the top five Brazilian banks were highly profitable, mainly due to the sheer lack of competition.  Lending rates continue to be amongst the highest in the world and have not decreased in line with the falling Selic base rate.  I’ll stop my rant here and focus on the monthly banking fees.

Standard current accounts have a monthly fee of R$20-30 (R$360 p.a.) while premium accounts run at about R$80-100 per month (R$1,200 p.a.).  When I speak to foreigners in Brazil, most of them hold premium accounts when in fact, they don’t actually have any requirement whatsoever for the so-called benefits like frequent domestic money transfers, unlimited paper statements and ‘cheque especial’.  Would you pay R$1,200 p.a. ($300 or £250) in the US or UK?  Some expats have premium accounts in several different banks; surely worth streamlining here?  There are a number of online banks which have arrived on the scene in recent years, without the physical branch network and revolving door drama, which offer free banking or at least, a lower monthly fee.

When your bank manager tells you that monthly fees are waived if you invest R$100K in one of their funds, the annual management charge (taxa de administração) will be at least 1% p.a. (R$1,000) and in most cases, you will find a better fund in the given risk category via a fund platform with more options.

One of my favourite words in Portuguese is desbancarização and I try and use it at dinner parties to mask over my shortcomings in Portuguese grammar (especially the subjunctive!). Desbancarização (‘de-banking’) is the growing trend of people using alternative financial service providers such as digital banks, fund platforms, insurance providers and money transfer companies which offer better value for money and more efficient service.  Which brings us on to the final part of this article…

5. Use a specialist International Money Transfer company

If I had a Pound or Real for every time someone has asked me whether it’s the “right time” to transfer funds from the UK/US/Europe to Brazil or vice versa…

See the graphs below which show the volatility in the USD/BRL and GBP/BRL pairings from 2009 to 2019.

USD/BRL is at a record high of R$4.21 (21/11/19) – few predicted this at the beginning of 2019.

GBP/BRL is near its record high, currently at R$5.44 (21/11/19) – what impact will Brexit have on this pairing?

Based on the above data, it would appear to be a good time to bring money into Brazil i.e. converting hard currency into Reals for foreign investors and expats purchasing a property in Brazil or boosting cashflow to cover expenses.  This could all change in a matter of days and depends on multiple global financial and geopolitical factors, for example:

• The economic outlook in Brazil and how foreign investors perceive the momentum of the recovery after the pension and tax reforms
• The outcome of the UK General Election and its impact on Brexit and GBP.
• The ongoing US impeachment case and its impact on the presidency and 2020 elections.
• Tensions in the Middle-East and the price of oil.

We recommend international money transfer companies who provide a more favourable exchange rate, often a few percentage points better, than traditional banks.  Based on client feedback, the levels of service and efficiency are much better.  If you can provide the required documents (ID, proof of address, tax return receipt), it is straightforward to open a money transfer account which you can use for the immediate transfer and leave open for future foreign exchange transactions.

I hope that was a useful read.  Please contact us if you have any queries.

More tips to follow shortly in Part 2 which will cover the following:

6. Receita Federal declaration
7. Banco Central declaration
8. Brazilian investment platforms
9. International account consolidation
10. Insurance

Image credits

Image by mohamed Hassan from Pixabay.com

Cashflow image by rawpixel.com 

Business meeting and presentation by rawpixel.com

You can buy Einstein if you pay for it,  by Ugur Peker on Unsplash

Away from the crowded beach by Nad Hemnani at Unsplash.com 

New Year post art – artistic celebration from Pixabay.com