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American Women's Club Bern

To view this presentation in PDF format, click here.

The Top 10 Financial Planning Mistakes Made By Americans In Switzerland

(And how to plan around them)

September 17, 2018

Jonathan Lachowitz - CFP®, Financial Planner | Investment Advisor

This presentation is not meant as legal, tax or financial advice to any individual. You are strongly recommended to seek the advice of a professional who understands your specific circumstances before relying on any of the information in this presentation. There may be mistakes and regulations may change or not apply in some circumstances. The presentation may be circulated but should be appropriately cited if used in a professional setting.

IRS Circular 230 Disclosure: Any tax advice in this communication is not intended or written by the author to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

About White Lighthouse & Jonathan

  • Independent Financial Planner & Investment Advisor

  • White Lighthouse established by Jonathan Lachowitz in 2006

  • Board Member, Director & Volunteer – American Citizens Abroad for a decade

  • Strong local and cross-border planning expertise

  • Offices in Lausanne, Zurich and Lexington, MA

  • Experienced team of Certified Financial Planners ™

  • Working with hundreds of Americans / multi-national families on cross-border planning & investments

  • Have written on personal finance for Wall Street Journal – Expat

  • More at https://www.white-lighthouse.com/

Top 10 Financial Planning Mistakes

  1. Misunderstanding the 2nd and 3rd Pillar retirement system

  2. Not saving enough for retirement

  3. Not understanding US tax planning opportunities in investment accounts

  4. Misunderstanding the risks and opportunities in home ownership/real estate

  5. Taking too much or too little risk in their investment accounts

  6. Spending too much $ in the “wrong places” for their investments

  7. Finding professional & trustworthy financial or investment services

  8. Misunderstanding currency risk

  9. Not having an estate plan

  10. Not planning the non-financial aspects of retirement / job change

Misunderstanding the 2nd and 3rd Pillar Retirement System

Contributions

  • 2nd Pillar is a great savings vehicle, not necessarily the best long-term investment choice

  • Tax-deferred in Switzerland, not the US

  • Are excess contributions a good idea? Not really.

  • Are you reporting contributions correctly on your US tax return? How about earnings?

  • Do you have any investment flexibility?

  • Are you tracking your US tax basis?

Distributions

  • Should I take a lump sum or annuity or both? Do I understand the tax and risk implications?

  • Is the choice important if I am planning to stay in Switzerland or leave?

  • How does each Canton & the US tax the lump sum distribution versus the annuity?

  • Am I taking a currency risk with my choice?

3rd Pillars

  • Does it make sense to reduce Swiss taxes only to increase US taxes?

  • Most investment choices are PFICs (bad US tax treatment) and some choices are not open to US persons.

  • Many funds have high hidden fees.

  • Limited choices.

  • Consider a US IRA instead.

Not Saving Enough for Retirement

  • Switzerland is an expensive country

  • Switzerland can seem even more expensive if you are not working/earning a salary

  • Most people who “over-spend” do it on the “right” things: children, family, housing, etc, as opposed to the “wrong things”…fancy vacations, cars, vacation homes, etc.

  • Do you know how much you spend/save per year or month?

  • It is hard to “predict” how much you may need for a retirement that could last several decades…

  • A Financial Planner or Retirement Calculator can help you determine if you are on the right track

  • Many tools available online. WLIM has a simple calculator at this link.

  • What do you need:

    • A reasonable estimate of your annual expenses - Annual Income Goal

    • How much your target income is covered by fixed pensions (social security in all countries), annuities, pensions, etc.

    • How many years until target retirement

    • How many years to plan for in retirement

    • Estimated inflation rate of expenses

    • Estimated investment yield

    • Estimated tax rate

    • Total current retirement savings

  • Retirement savings does not have to be in a “retirement” account

Not Understanding US Tax Planning Opportunities In Investment Accounts

  • Contributing to a US IRA account

  • Not investing in non-US investment funds (PFICs)

  • Investment location (IRA versus after-tax account)

  • Tax loss harvesting

  • Gifting

  • Charity

  • Children

Misunderstanding the Risks and Opportunities of Home Ownership / Real Estate

  • Can you afford to buy a home? Can you still afford it if interest rates go to 4% or 5%?

  • Are you paying off enough principle before retirement? Use low interest rates as an opportunity to pay down debt.

  • When you have a mortgage you don’t “own” the home, the bank co-owns, but you have the most risk.

  • Debt is a magnifying glass for grains…and losses.

  • Re-financing / paying off a mortgage in CHF can cost you in US taxes.

  • Selling real estate has potential capital gains taxes (US and CH) and taxes on exchange rate gains on paying off the mortgage

  • When deciding rent versus buy: Focus on both affordability & time horizon

Taking Too Much Or Too Little Risk In Their Investment Accounts

  • What should I be invested in? Stocks, bonds, funds, cash, metals, real estate, hedge funds, private equity, other?

  • Diversification is critical.

  • Every investment has risk, even cash.

  • Your advisor should not make investment that you don’t understand.

  • If you don’t understand what an investment is, you should ask. Get educated - Stay educated.

Spending Too Much $ In The “Wrong Places” For Their Investments

  • Do you know how much your investment choices cost?

  • US brokerage firms typically are much less expensive for the same services (custody and trading)

  • Mutual funds versus ETFs

  • Index funds versus Actively Managed Funds

  • Exchange Rate Fees

  • Advisory Fees

Finding Professional & Trustworthy Financial or Investment Services

  • Do you need a financial advisor, investment professional or planner? Why?

  • What is a financial advisory?

  • Whose interests do they put first? Are they a fiduciary, employee, salesperson?

  • What are you looking for and what do you think you need? A financial plan? Investment advice? Retirement advice?

  • Get references from people you trust – Ask the one thing your reference does not like.

  • What licenses, education, registrations do they hold? CFA, CFP®, CHFc, or PFS (for CPAs) are some of the most respected.

  • What experience do they have? Would you be a typical client?

  • How does the advisor get paid?

  • Is their advice objective? How do you know? Are they paid more to sell their company’s products? Can they choose any type of investment for your account?

  • Will they consider or advise on assets not under their management?

  • Ask them if they can beat the market?

  • Have they or their firm been involved in any lawsuits, consumer complaints, or other disciplinary action?

  • What kind of firm do they work for?

    • Employee of a large firm

    • Employee of an Independent Advisory firm

  • How was the first contact made: Did they call you first?

  • Are they “selling” a tax efficient or offshore product?

  • Where are your assets held in custody?

  • Who has the ability to remove assets from your account?

  • What is the firm’s cybersecurity policy?

  • Would you be a typical client of the firm?

  • Try this quiz at the Wall Street Journal: http://blogs.wsj.com/expat/2015/05/03/attention-u-s-expats-take-this-quiz-and-see-how-your-financial-adviser-scores/

Evaluating an SEC Registered Firm

  • For US Registered Advisors

    • Very easy for a company to register with the SEC – It is all about disclosure

    • Individual has to pass the Series 65 Exam (relatively easy 3-hour exam requiring 72% correct)

    • Investment advisor search: https://adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx

      • Check out the firm and the individuals

    • They should offer a copy of their ADV 2 (Firm and Individual)

  • To verify CFP® certification - http://www.cfp.net/ (not required for SEC registration)

Misunderstanding Currency Risk

  • Exchange rates are volatile

  • Cash in currency you need to spend in is safer than cash in other currencies

  • Exchange rate fees can be very high and easily hidden or ignored

  • Very important when it comes to choices of fixed income living and investing in more than one currency

  • “Swiss Stocks” are not safer than stocks in any other country compared to the Swiss franc.

Not Having an Estate Plan

  • What happens if I die without a will?

  • What if I have a US will but die while living in Switzerland?

  • Who will take care of my children?

  • Who will make medical and financial decisions for me if I cannot?

  • Do I need estate planning documents (Will, Advanced Medical Directives, Power of Attorney in case of incapacity, Trust)

  • How do I organize non-legal aspects of my estate?

Not Planning for Non-Financial Aspects of Retirement / Job or Other Lifestyle Changes

  • Should I retire in Switzerland, US or elsewhere?

  • Where are my friends and family?

  • Taxes and finances should support life choices, not vice-versa

  • Crossing borders presents opportunities and challenges

  • Flexibility is valuable

  • Cost of living: Matching income to expenses - currency

  • Health benefits

  • Language

  • Financial & tax system

Concluding Thoughts

  • Time and education are your best assets

  • Are you passionate about what you are doing? If not, what are you doing about it?

  • Are you saving enough? Save early and often – Time value of money is a miracle

  • Are your expectations realistic?

  • Remember Risk vs Reward – There is no such thing as a free lunch

  • Keep fees and expenses low – but not too low

  • Find professional help when you need it. Hire people who are more qualified than you: A financial planner can help you stick to your plan!

  • Don’t expect government, company, family, or children to take care of you. If they do, that’s a bonus. You are in the driver’s seat.

  • Don’t look at your portfolio too often.

  • Things change, be prepared!

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