By Ray Bullock
For the past several months, this comment has been made on many occasions. Usually, it is based on waiting for the economy to turn around, for the housing market to rebound and the stock market to recover from the losses incurred over the last 18 months.
Typical comments are:
- “I can’t sell my home at a loss.”
- “My 401K is only a 201K now.”
- “The exchange rate is too low (Canadian dollar vs. U.S. dollar.)”
There are many variations in the comments, but, fundamentally, they all boil down to the impact of the current state of the economy and the financial crisis on retirement plans for many people.
The idea of waiting two years is very understandable, but is this really the best decision?
I have been trying to write this article for some time, but have kept putting it off because it is extremely personal, it is speculative, it could be seen as controversial, and I certainly do not have a crystal ball. However, I truly believe that there are some factors that are not evident or highly publicized but should be considered in the decision-making equation.
What follows may not apply in all cases and may not be significant enough to change your decision. However, if it does help a few people reevaluate their situation and decide to move ahead with their retirement plans, then it will have been worthwhile. So…here goes.
Let me start this “discussion” with a relatively simple concept (I’ll build up to the touchier issues).
Comment: “My 401K is currently a 201K.” (for those of you in the U.S., although it 
applies equally to RSP Accounts in Canada). ???
One of our guest speakers on the Focus on Mexico program (originally from Denver, CO, and a tax consultant and a Certified Financial Planner) not only does a wonderful job demonstrating the lower cost of living in Mexico, but goes further by showing the reduction in taxes by a reduction in the amount of withdrawal from your 401K account. In fact, she shows that a couple, both receiving social security, can live in Mexico with minimal withdrawal from their 401K and pay no taxes.
The second part of this “discussion” is if your “201K” will turn around and become a 401K again in the next two-three years. It will do so whether you continue to live in the U.S., Canada, in Mexico or anywhere else in the world.
The offset to this is that if your plan is to continue working through this period, then the consideration is, is the lower cost of living sufficient to allow you to get through the next few years?
Obviously, this “discussion” is dependant on your financial situation and your sources of retirement income and when you plan to make withdrawals from your 401K (RRSP). It is, however, relevant and should be considered in your planning.
The next “discussion” is for our Canadian readers although it is also applicable to our U.S. readers.
Comment: “The exchange rate is too low.”
This is very understandable when considering that not that long ago the Canadian dollar was at par with the U.S. dollar.
This “discussion” applies to two distinct and different concepts.
The first concept is “cost of living in Mexico.” As mentioned in the first discussion topic above, there is no doubt that the cost of living is lower in Mexico than in Canada (about 40% lower here—I can personally attest to that).
So, the focus becomes the exchange rate.
Before the economic downturn, the Canadian dollar was trading at between nine to 10 pesos per dollar. Currently, the exchange rate is between 10 and 11 pesos. The basic fact is that the Canadian dollar has lost ground against the U.S. dollar, but has gained ground against the peso. That means that, from a cost of living standpoint, Canadians are slightly better off today than before the economic downturn.
Where will exchange rates go from here? As I said in the introduction, I do not have a crystal ball, but if the tide changes, it should lift all boats.
The second concept is “Purchasing items priced in U.S. dollars in Mexico.”
The major item priced in U.S. dollars in Mexico is real estate (in most cases). There is no doubt that if you were to purchase a home, you would pay more in terms of Canadian dollars than in U.S. dollars.
The question then becomes…where will the Canadian dollar be versus the U.S. dollar in two to three years? Again, I don’t have a crystal ball, so I have to look at why the Canadian dollar has come down from its high several months ago.
The last time the Canadian dollar was at par with the U.S. dollar was in the mid-1970s, some 33 years ago. I can remember in 1995 when I first came to Mexico, it was trading at around 0.63 cents to 0.65 cents. However, at that time a lot of Canadians were still moving to Mexico.
Recently, when it was at par, there was a lot of talk about the negative impact on the Canadian economy and the significant effect on exports (read oil and timber). Is it a coincidence that since that time, the exchange rate has dropped? I think not, but there are much wiser people than I who can answer that question.
What remains to be seen is when the current economic situation turns around, will the Canadian dollar strengthen? Last time it took 33 years!
A consolation is that if you bought a home in U.S. dollars, when you sell it, you will also do so in U.S. dollars. What will the exchange rate be at that time? Ah! Now that is a good question!
You may notice that I have left the most difficult “discussion” to the last. If you are still with me (and don’t think that I have “lost” it!), this one could send you over the edge. 
Comment: “I can’t sell my house at a loss.”
Notice that I changed the word “home” to “house,” because I believe that it has a significant psychological difference.
Let me explain it this way: If you are a stock trader, then you understand that, in the words of Jim Cramer from CNBC’s “Mad Money,” “It does not matter where a stock has been; it only matters where it is going.”
A stock trader’s mantra is that if you own a stock that has gone down and does not look as if it will rebound in the near term, you sell it and buy something that has a better chance of going up even if you incur an initial loss.
Does the same apply to a house? Likely yes. Does it apply to a home? Thereby lies the problem. It is very difficult to look at a home as simply an asset the way you would look at a stock.
Strictly in terms of net worth, it is an asset. But it is very difficult to dismiss the fact that you put a lot into making the house you bought into your home. It is very personal.
If you could look at it as strictly an asset, then you would ask yourself some very important questions:
- Where is the housing market going?
- How long will it take to get back to the price I want?
- How long am I prepared to wait to start the next part of my life?…the time for me?
The first two questions will have different answers depending on where you live. There are areas in both the United States and Canada where the real estate market has major issues and is going to take some time to turn around. Other areas have not been affected so badly.
However, if the answer to Question 2 is longer than the answer to Question 3, then you may want to re-look at your plans.
Another question would then come into focus:
“If I did sell my house, how can I be sure I am not jumping out of the frying plan into the fire?”
This is the $64,000 question (remember those days?), and there are no guarantees. Who would have forecast the current situation three or four years ago? The Titanic was unsinkable. What happened to the once might USSR?
No, there are no guarantees, but there are some indicators. The most important in my mind is that there are 78 million Baby Boomers in the U.S., and 10.7 million in Canada.
.jpg?n=373 "Baby Boomers Retiring in Mexico")
Starting now and reaching a major milestone in 2011, the Baby Boomers are going to eligible for retirement (at the rate of 10,000 a day for the next 20 years, according to CNN and the Social Security office…and that is just the U.S.!). My advice to you is to look at where they are planning to go and get there first! There are a number of options. Make a list and choose the one that fits with your “wish list,” but do it before they do. When the herd starts to move, nothing will stand in their way.
Let me finish this “discussion” by going back to the beginning.
I kept putting off writing this article because it is personal, speculative and may be controversial. My sincere intent is to simply present some thoughts for your consideration. If they do not resonate with you or are not applicable, then please discard them. If they do have meaning, then the writing of this article was timely and worthwhile.
In closing I would like to relate a story of why Kristina (Focus on Mexico Director of Public Relations) decided to leave Colorado and move to Mexico:
“I wanted to live my life on purpose, not by default.”
And, last but certainly not least! We have many people still coming on our Focus on Mexico programs, in spite of the financial crisis. They share with us their reasons: 
- They want to get a new lease on life
- They want out of the rat race
- They want to do it now, while they still can
- They want to come to a place where the value system is still strong
Sometimes, the reasons for leaving are more powerful than the reasons to stay. We all know that life is precious and there is no tomorrow; only today.
Saludos!