Hello! We are Cross Border Wealth Advisors and are determined to help people simplify their financial lives when retiring abroad by offering financial solutions for wealth and portfolio management and tax preparation. I’m Victor Gersten, and I’m an expat myself. I’m a Certified Financial Planner and an Enrolled Agent with 14 years of experience in the financial services industry in San Diego, Ca. Furthermore, as an expat living in Spain, I have helped many expats to retire financially by sorting out the complicated legal, tax or investment questions that most expats have.
Investing can be intimidating for many, but the best way to invest appropriately is by understanding that your behavior at investing is as relevant as the volatility in the market. The best way of investing is by identifying your financial goal(s) and having a disciplined approach executing the following seven steps of “Getting started with investing.” Investing 101 while in Europe” will help you understand the basics of investing and will set you on the path of financial success.
How does Investing work?
Step 1 Identify a financial goal; in other words, what are you investing for? Setting a financial goal is the first step toward a successful financial future. I encourage you to set a few financial goals—for example, a short-term goal, a medium-term goal, and a long-term goal. This does not differ a lot from setting goals when you were in the United States, but it is more important when you are abroad to goals you did not have before, such as visits to family members for holidays, weddings, or special occasions. The more defined you have your goals, the easier it will be to have a clearer financial picture and cash flow for later in your planning.
Step 2 Next, determine when you want to reach your financial goal. In financial planning, we refer to this step as “Time horizon.” It is essential that a financial goal is associated with a time horizon because that will be a very important factor in determining the type of investments used for this specific goal. Time horizons usually fall under 0-3 years, “short-term,” 3-10, “medium-term,” ten, or more years, and referred to as “long-term goals.” If you are a homeowner, plan for house remodels every ten years or so, if you drive, plan to change your car every five years or so, if you traveling to every other year to the States, and leisure travel yearly.
Step 3 Understand your cash flow. In financial planning, we refer to this step as “Funding your goal.” During this step, understanding your cash flow is essential. Clients who have a clear monthly budget know precisely what amount of “money is left” after paying expenses and debt at the end of the month. It is essential to mention that often we spend money as we earn it and we do not keep very good track of it. I highly recommend being very diligent in this step. I often find ways to save my clients money by carefully analyzing certain financial behaviors. Also, this is a great time to optimize retirement distributions. Retirement distributions and other income sources such as pensions and social security are all taxes differently in various countries in Europe. As a European resident, you are required to report your income sources. However, bilateral tax treaties, foreign income exclusions, and foreign tax credits can be applied in your favor to relieve you from the double tax burden. Nonetheless, cross-border tax planning requires a unique team that can help you. If your net worth is over $500,000, you will benefit from professional advice to ensure tax optimization.
It would be best if you moved to the following step only after careful evaluation and maximization of your cash flow to know what amount you have available to fund your goals.
Step 4 Determine your “emergency fund needs”. By now, we have established your financial goals, time horizon, and available cash flow to fund your goal(s). However, prior to investing all your hard, earned money toward your financial goal(s), an evaluation of your “emergency fund needs” is essential in financial planning. In this step, one needs to determine the amount of money that must be kept in a separate account to be used in case of unexpected loss of income or increased expenses. Some professionals recommend three to six months of one’s income to be kept as emergency funds, but that is too simplistic and misses the complexity of individual situations. Thus, the evaluation of the needed amount should consider your type of employment, seniority, job market, homeownership status, and other specific variables related to your spouse, kids, and investment homes. Expats should always plan to have enough funds to travel back home in case of an emergency. I recommend at least $5,000 per person for travel-related expenses. Also, if you own rental properties, you should also have additional funds if you need to replace unexpected plumbing, roof, or repairs that might need to be covered by an insurance company down the road. Still, that one needs to have the money available to mitigate any further property damage. Also, keep in mind that you might always need to move back to your home country, and thus keeping a large emergency fund for a move back to the U.S. is essential.
Step 5 Determine your risk tolerance. As a financial advisor who has worked with hundreds of clients, I consider this step one of the most important ones for the viability of your goal(s) success. Let’s go over the following example, John is 55 years old, and his goal is to retire next year. He contributed $1,500 per month toward his IRA for 25 years, and he has determined that, based on his particular situation, an emergency fund of $15,000 is required. John has $1,000,000 saved up so far (the market has performed great in the last 15 years). He is single and always chooses an aggressive investment model for his goal. Should he continue with the same model now that he is retired? According to recent mortality tables, John might live for another 25 years, is $1,00,000 enough for John? How much can he spend every month to avoid running out of cash? How much will his retirement saving be taxed if he lives abroad? Should John wait until he reaches at least 62? But most importantly, should he keep his portfolio aggressive to beat inflation and ensure it outlives him?
Nonetheless, John has some investment experience, and he does feel comfortable with market volatility. Like many baby boomers, John has experienced a few market crashes: 1987, 1999, 2008, 2020. Indeed, an experienced financial advisor should recognize that even though John “should” have a moderately aggressive portfolio, for the plan’s viability, a lower risk is recommended to avoid sequence of return risk. Furthermore, the financial advisor should work with John over the next years to educate him about the importance of risk/ reward to be aligned to his goals and ensure that his U.S. denominated portfolio keeps up with Euro-related inflation and cost of living in his new city: Madrid, Spain.
I have seen financial plans where the advisor “tells” the client what risk tolerance they should adopt. However, when the market crashes (it eventually always does), the client may panic and sell all out despite the financial advisor’s advice of not to sell. Unfortunately, after a “panic sell,” the viability of the goal’s success is diminished. Indeed, financial planning is about working with your client to avoid expensive behavioral mistakes such as a “panic sell.” Thus, it all begins by understanding the true client’s risk tolerance, market expectations, and financial goals so they will stay with the plan during good and bad moments in the market and adjust this plan over time. Step 5 is where the advisor and client establish the highest mutual trust, which is a fundamental part of the viability of success.
Step 6 Establish the right type of investment account for your goal(s). There are taxable, non-taxable, tax-deferred, and tax-exempt accounts with various contribution limits and phase-out amounts. Choosing the correct account is essential for tax efficiency and part of the withdrawal strategy when you need to use the funds later. In addition, paying close attention to all fees associated with the account(s) is very important. Some financial institutions, also known as “custodians”, may charge administrative fees to open, close, and maintain the account(s). It’s important to understand all fees and consider them for your final return on investment (ROI). Working with a friendly Expat friendly custodian is extremely important for Americans living abroad.
Unfortunately, due to U.S. regulations such as FATCA, the U.S. and foreign financial institutions must provide financial information about their U.S. clients. Hence, this added reporting makes it more complicated for many firms’ compliance departments, and so many decide not to work with Americans living abroad. You might still have the same investment account that you had when you lived in the U.S., and maybe you have a local U.S. address registered. Still, you also run the risk of being “caught” living abroad, and thus your investment firm might give you 30 days to find another company to house your investments. Dozens of prospects have contacted me over the years because this situation can be very complex because opening new investment accounts while abroad can be challenging, and more so when you have only 30 days. I recommend establishing a trusted relationship with an expat-friendly custodian and being upfront about living abroad if you do not want to end up caught off guard when you least expect it.
At Cross Border Wealth Advisors work with pre-retirees and retirees living abroad or planning to live abroad with investment portfolios over $250,000 with American citizenship.
Step 7 Start investing. Now you choose the best investment strategy that aligns with your specific goal. In other words, the investment strategy from one goal may be very different than the investment strategy for another goal. Nonetheless, one common denominator in your investment strategy is the need for diversification. We refer to “diversification” to investing in different asset classes in financial planning. For example, there are four asset classes: equities, fixed income, cash, and alternative investments.
Furthermore, some asset classes may be broken down into domestic or global and further classified as small, medium, and large capitalization. Also, they can be classified by the type of industry to get maximum diversification. Indeed, a well-diversified portfolio is diversified across all asset classes, industries, and markets’ capitalization. It’s crucial for Expats living in Europe to know that recent EU regulations (KIDS and PRIIPS) restrict buying American investments while living in Europe. Unfortunately, the IRS classifies as PFICs (Passive Foreign Investment Corporations) investment funds with a certain percentage of investment activity outside of the U.S. How can American Expats invest? If the EU restricts them from buying non-EU investments and the IRS tax them heavily if they invest in non-US investments? This is where having a cross-border financial advisor is critical to customize a solution that works for the country in Europe where you live and remain tax-efficient in the U.S.
Suppose you have come this far doing steps 1 through 7 all by yourself. Congratulations! Most people do not feel that they have the expertise to go through all these steps on their own. Often, clients want to invest in gold, cryptocurrencies, or the best-performing stocks from the last quarter. However, those strategies may lack diversification on asset classes, market caps, industries, among others. I suggest steering clear from investing in those types of investments without the help of an expert. I highly recommend working with a Certified Financial Planner™, who is your fiduciary. Fiduciary means that your advisor works in your best interest, not in their firm’s best interest. I recommend that you ask your financial professional the following questions: How do you earn money? Are you a fiduciary? Are you a Certified Financial Planner™? Are you a Fee-only financial advisor? How many years of experience do you have? These are important questions. The Certified Financial Planner™ (CFP®) has become the golden standard of excellence in the financial services industry. CFP® professionals must participate in ongoing education, uphold strict ethical standards, and exemplify best business practices. In addition to working with a CFP®, make sure your advisor works as a “fee-only planner” this ensures that they are working in your best interest and not earning commission from third parties.
If you want to begin a conversation about investing, Cross-Border Wealth Advisors offers investment management services, among other services. We are Certified Financial Planners, fee-only, and fiduciaries.
©2022 Gersten Financial Planning Inc. All rights reserved. | 02/2022
