When I write ‘head south’ I am talking about the number 1 warm-up designation for Canadians and that is to the southern US. Many will go to Florida or course. Texas and Arizona are also very popular. I’d strongly suggest that you make your way to California as well, you many never see Florida again. Those Canadian retirees who head south on a regular basis and for an extended period are known as Canadian snowbirds. They even have their own association.
And there are many Canadians who like to head down south for a couple of weeks to get away from the ice and snow and ‘warm up’. In Central and Eastern Canada, this past Winter was particularly difficult with non-stop snow and ice and cold temperatures. But many were stuck here in the great white north thanks to this graphic …
And this chart on the Canadian vs US Dollar …
Yup, our Canadian money simply does not go far when you’re travelling to the States. Currently it cost about $1.35 to buy a US dollar. That would mean that your $3,000 condo rental might cost you over $4,000. Every time you make a purchase it costs you considerably more in Canadian dollars. You’ve recently experienced considerable lifestyle inflation if you’re a traveler.
I’ve talked to many retirees and recent retirees who did not go South this past (terrible) Winter due to the weakness of the Canadian dollar. Many working Canadians who wanted to get away also pulled the plug on vacation plans thanks to that sinking Canadian dollar.
These folks need to hedge their lifestyle. There’s no reason for a currency to hold you back. Most Canadians need to hold some US-dollar stock and bond investments as well as some US cash for the next trip or three. Most of us will hold that well-diversified portfolio that includes US assets for our longer term retirement portfolio, but we don’t apply that same strategy to our shorter-term monies that might fund special and regular events such as those trips. We can completely remove the currency risk by holding enough US dollar stock and bond assets as well as that US cash account.
If you hold US stock funds you’ll get that combination of the potential for portfolio growth in tandem with protection against a weak Canadian dollar. US based portfolio growth will hopefully pay for future trips to the US. As you may know the US stock market has been on a tear for the last decade, greatly outpacing Canadian and International markets. If you’re comfortable with ETFs (Exchange Traded Funds) there are many simple low-fee options. You might have a look at the MoneySense Best ETFs for 2019. Here’s the link to the ‘Best’ US ETFs.
Keep in mind that you do no want the CAD-hedged, or Canadian dollar hedged assets. You want US stocks with that US dollar exposure. You want the XUU and VFV not the VSP and ZSP. Keep in mind that these are ETFs that have US exposure but they are priced in Canadian dollars. You will face some currency conversion charges when you go to purchase those US dollars. But the main focus here is to eliminate that weak Canadian dollar risk.
There are a few tricks of course in the land of holding US assets and currency conversions back and forth. Here’s a great article on Norbert’s Gambit from Dan Bortolotti.
It may be more than prudent to also manage that US stock exposure volatility or risk by way of some US bonds. For US bond exposure you might look to BMO who offer a suite of bond ETFs in Canadian and US dollars. As an example here’s the BMO Mid-Term US Treasuries ETF ZTM.U. Once again you might create your own US balanced portfolio with a 20%, 30%, 40% or even 50% bonds. That will reduce the portfolio volatility and decrease the time the portfolio might need to recover in a major market correction. We don’t want markets to derail our trips. You can also go directly to iShares US and Vanguard US sites to see their full suite of US bond offerings in US dollars.
Creating US dollar accounts
Here’s a great primer from RBC on holding US assets and withdrawing US funds from their dual currency accounts. And here’s an overview from Questrade on holding US dollar accounts in RRSP and TFSA. Check in with your discount broker on their account offerings and on how you might best hold and withdraw your US dollar assets.
You can certainly hold US dollar assets in a US RRSP or RRIF account. And you should be able to transfer those US proceeds to your US dollar savings account. In that case, you can avoid any withholding taxes and currency conversion charges. Of course, you’re going to create taxable income when you remove funds from your RRSP or RRIF or LIF.
You might also go the route of opening a US dollar TFSA account. In that case you would face the 15% withholding taxes on US dividends and 10% on US bonds. It’s difficult to be ‘perfect’ at times and perhaps being perfect is not important. That was a theme of John Robertson in my recent review of The Value of Simple. A small withholding tax on a small portion of your total return might be of a minor concern compared to the greater task of hedging your US travel costs. Of course the benefit of the TFSA is that the proceeds and gains will not be taxable income or taxable in any way. To create the optimal mix of assets and funding schemes you might consult a fee-for-service advisor. You’ll find a host of links to those advisors in that Value of Simple post.
You can even access US dollar investment accounts by way of Robo Advisor Justwealth. They have many snowbird clients who cover their US travel costs by way of the US accounts that are linked to an external US savings account. Here’s the link to their US account performance page.
All said, the most advantageous way to manage those US travel costs might be with a dedicated US dollar investment account and a dedicated US dollar savings account. You might keep 2-3 years of US trip monies in the US dollar savings account. From there you might create a Balanced US Investment portfolio consisting of those US stocks and US bonds. In good years for the stock market you would harvest from the investment portfolio. In bad years for markets you would turn to the US savings account and perhaps to the bond component if they do their job and offer an inverse relationship to stocks.
The wild card is that you may not want to or have the ability to immediately move considerable sums to a US dollar account. This might be a building process where you create that US investment account and build assets over time. If you plan to travel internationally you may add those international assets as well. The key is to hedge your lifestyle, or your future retirement travel plans. Included in the mix will be a Canadian allocation. There’s the potential for Canadian dollar to outperform the US dollar moving forward.
You may not be a self-directed investor and may need some mutual fund options. I’ll be back with an article covering that space.
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Contact me, Dale @ firstname.lastname@example.org or better yet, leave a message. Did you head south? Did the Canadian dollar hold you back?