- Receita Federal declaration
- Banco Central declaration
- Brazilian investment platforms
- International account consolidation
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.
Disclaimer: We are providing guidance and personal opinions which should not be interpreted as specific investment advice!
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!
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.
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 8th 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.
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…
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…
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:
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:
Cashflow image by rawpixel.com
Business meeting and presentation by rawpixel.com
New Year post art – artistic celebration from Pixabay.com
A client was recently offered pension options by his former employer, a US energy multinational.
He had worked in the company for over a decade whilst contributing into the pension scheme. Currently 57, he would start receiving income in 8 years, when he is 65. The options were:
Keeping the calculations simple, I used www.mycalculators.com for the withdrawal schedule and impact of inflation. The withdrawal schedules are attached below for options 2 and 3.
For a long-serving employee of a multinational, 65 is a realistic retirement age and it’s reassuring to have a core source of stable income from the pension scheme of an international company.
To obtain this income stream as a private investor, one would require $825K of capital which would generate $33K in the first year, assuming a 4% withdrawal rate. At 3% inflation, his income at 70 would be $38,256 and at 80, $51,412, before the capital is fully depleted when the client turns 90.
An IRA would allow the client more control of his asset allocation. Assuming a 3% net growth rate over 8 years, the migrated $390K would grow to $494K.
Assuming a 4% withdrawal rate, the pension income in the first year (at 65) would be $19,760. With inflation at 3%, the income at 70 would be $22,240 and at 80, $29,889. The capital would be depleted by his 90th birthday in which the final income payment would be $40,168. These figures are well-below option 1 and with much less stability.
If the client opted to take the cash and place it into an investment, let’s assume a net growth rate of 3% on $273K, holding for 8 years until his 65th birthday.
1.038 x 273K = $346K
Assuming a 4% withdrawal rate, income in the first year would be $13,840 hence we can see that there is no point comparing this to options 1 and 2.
The required growth rate to reach the IRA’s future projected value, as per option 2 (at 65th birthday), of $494K is an unrealistic 7.85% *
* This is even less likely with a 50-50 equity-bond portfolio and let’s consider that we are in the latter stages of a long bull cycle at the time of writing this article.
This would only be worth considering if the client had a specific business opportunity or the were desperate to place a deposit on his dream home. Even in such scenarios, this would only be recommendable if he had another sufficient and stable source of pension income.
We chose Option 1: To remain in the scheme and receive benefits at the likely retirement age. This is by far, the most secure option.
Given the above scenario, the company pension scheme may be underfunded in the long-term and they are trying to reduce the liabilities by incentivising early cash pay-outs and migrations – at the expense of the financial well-being of some of their employees. Just because some are engineers and PhD holders, it does not infer they are experienced in making financial planning decisions especially when the employer is encouraging Option 3.
Some employees may be tempted to take a cash pay-out to cover current needs or because they believe they can obtain a better return elsewhere. The decision to take the cash is irreversible and may result in financial hardship later in life when other income sources are unavailable.
When a large lump sum of cash is available and the company are trying to steer employees towards this decision, we encourage them to seek financial advice to and ensure they protect the long-term financial security of their family.
Being a personal financial planner for expatriates and international executives is a vocation rather than a job for a couple of years on an overseas stint. It’s a way of life – let’s be really clear about that!
We have enjoyed successful relationships with many of our clients for over a decade and these relationships have been seamless even when our clients have moved to other countries.
After an introductory call or meeting, the next step would normally be to conduct a robust and meaningful fact-find to discuss the financial circumstances and objectives of the client.
A ‘meaningful’ fact-find is not a personal audit in which the advisor merely records facts and figures. A good advisor builds a clear financial picture of the client based on her family situation and dependents – and if appropriate, advises the family together. What are her income sources from employment and investments e.g. rental income and how is a potential surplus being allocated?
We require an understanding of her assets and liabilities to calculate any shortfalls in retirement or children’s education planning. What is the worst-case scenario if the client passes away or were unable to work due to illness or injury? These are tough conversations but we are in the business of providing security and peace of mind! A good advisor seeks to understand all key risks facing the client and how to address them.
“Our interactive fact-find is a solid foundation for understanding our clients’ objectives and defining their priorities.” – Maria Fernanda Cordoba, Consultant
Some of us have completed multiple-choice risk questionnaires, which can be rather mundane, knowing that you will receive a computer-generated score which in turn, determines a ‘model portfolio’, suitable for your risk tolerance.
This is a useful opportunity to discuss the questions in more detail and understand a little more about the psychology of your client. In theory, an investor in their 30s should adopt a higher risk strategy whilst accumulating capital. But what’s the point if she is risk-averse and loses sleep during periods of higher market volatility?
On the other side of the risk spectrum, if an older client, approaching retirement, is overexposed to emerging markets and commodities, it would be prudent to manage the client’s expectations and explain why such an asset allocation may not be suitable. However, if the client is comfortable with the associated volatility and potential for capital loss in the short-term, our job as advisor is to keep a record of the dialogue and revisit it in future reviews.
The client should also be advised to ensure sufficient liquidity is held in near-cash to serve as an emergency fund instead of being forced to make partial withdrawals, from an investment during a downturn thus crystallising losses
Allow the conversation to flow and ask open questions without judging your client or pushing the theory of risk and return! Adjustments can be made over the course of the relationship based on changing circumstances and personal views on risk and return.
“It is important for advisors to develop an understanding of their clients’ risk profiles and manage their expectations accordingly” – Martin Fuchs, Advisor
A financial advisor should understand the reasoning behind a client’s objectives and challenge her if they believe that these financial planning goals should be adjusted or reprioritised.
Is her desire to retire early at say, 55 realistic or based on her perception of what her peers have achieved or even partly influenced by social media? What if she is aiming for an arbitrary level of capital and is prepared to invest most surplus income towards achieving this – when in fact, she has young children hence a greater priority would be insuring her life to protect the financial well-being of her children and partner.
We have met several clients who have started the meeting with a pre-conceived idea about the level of capital they require to achieve financial independence and often, the figure substantially falls short or is excessive and unattainable. Capital targets should be sensible and indeed, they can be aspirational without being unrealistic.
A good advisor should never appease his client i.e. taking the convenient path of least resistance to offer a particular product to his client. Our job is to provide holistic advice and deliver solutions in an ethical manner and logical order to increase the financial security and well-being of our clients.
When advising clients of different nationalities across several jurisdictions, there is no standardised package of financial advice. Some cases are more complex than others involving financial and tax advice in say, Brazil and the UK.
Some clients only seek advice on one specific issue without the need for ongoing advice. Some enquiries can be answered fully in-house whilst others may need to be referred to our network of international and domestic partners.
Therefore, it is important for advisors to discuss each component of pricing whether it is a time-based fee, an all-inclusive fee for a package of services or an ongoing % charge based on assets under advice. It may be a combination of nominal time-based fees and % based fees.
In the US and EU, advisors are required to disclose the components of AUM-based charging i.e. the custodian, the funds and the advisor charges. We expect such disclosure rules to eventually be applied in the Mercosul/Latam region.
This is a two-way street between client and advisor to enhance timely and efficient decision-making. Is it any wonder that our happiest clients are those who reply to our calls/emails promptly and communicate with us proactively whenever they have a question or concern?
Indeed, it the advisor’s responsibility to provide the client with timely information and service, however, we encourage clients to keep us informed of events in the horizon, for example, relocation, a possible redundancy or receipt of a bonus.
Relocation means that the client will need to prepare for reporting in a new tax regime and we may recommend alternative asset structures in advance of a move including the full or partial realisation of gains.
In Brazil, many oil expats were made redundant between 2014 and 2016 and we advised several clients on managing this transition which was challenging both financially and emotionally given family upheaval. Many oil expats were offered local contracts whereby some benefits were withdrawn and they started earning in local currency (BRL), having to meet accommodation and schooling costs from their lower take-home pay. We advised some clients on budgeting and cashflow management to ensure a smooth transition.
If a client wishes to invest her bonus, advance notice would allow the advisor to prepare the paperwork, KYC (know your customer) and asset allocation to enable efficient processing instead of cash sitting in a current account for longer than necessary.
“A successful client-adviser relationship requires frequent and open dialogue between both parties.” – Amit Ramnani, Advisor
Many expat advisors gloss over the T-word by saying something along the lines of “the investment offers tax-free growth”. That may be the case for the taxation of the investment within its jurisdiction – but how will the client be taxed in her country of residence and for some nationalities, their countries of citizenship regardless of their current residency status? This means understanding the impact of income tax, gains tax and estate tax.
In some cases, it is a simple answer and in other cases, the client should be referred to an accountant in her country of citizenship especially in the case of American nationals who are required to file tax returns on global income/assets even when living overseas.
More to follow on taxation for specific nationalities in future articles.
This is not an exhaustive list of guidelines but we hope they provide some tips for successful and lasting relationships between clients and advisors.
To book a meeting or an introductory call, please contact us here.
Disclaimer: Ipanema Wealth provides an advisory service and does not engage in capital markets or the selection of financial instruments.