What expenses am I thinking of? Trips back to the United States and U.S. health insurance.
We recently heard from a Seattle couple planning to retire to a tropical climate. They're on a budget and are thinking of Ecuador, which they know to be a good low-cost choice. They're interested in Ecuador rather than one of the tropical countries in Southeast Asia (which could, in fact, be more affordable than Ecuador) because they want to be closer to "home." They plan to make "frequent" trips back to Seattle.
I told them to forget about saving money. If they make frequent trips to Seattle their cost of living, all in, after moving to Ecuador will almost certainly exceed what they spend now.
Let's run some numbers for this couple. A quick check on Expedia shows fares from Guayaquil, Ecuador, to Seattle at about US$1,300, or US2,600 for two. Those are the deep-discount, advance-purchase, come-hell-or-high-water fares, non-refundable, non-changeable. In many cases, the couple will have to pay more.
But airfares are only the beginning. The couple will have to get from their overseas home to Guayaquil, in a bus, car, or taxi, maybe spending a night in a hotel. Once in Seattle they may need a hotel, too, and a rental car. They'll need presents for the grandchildren, and they'll want to have dinners out with family, including a few splurges.
We have to make some guesses, about total trip costs and what the word "frequent" means. For the sake of argument, let's put the trip costs at US$5,000 per and figure on three trips a year. That totals US$15,000, easily more than the couple might spend annually on rent, food and entertainment, or any other cost category living in Ecuador.
The couple faces a second major expense, tooâ€”health insurance back in the United States. Many expats keep their U.S. insurance just in case, especially if they plan to visit the United States from time to time. Let's say U.S. health insurance for a couple in their 50s comes to US$500 each per month, or US$1,000 monthly for the two of them. In addition, they'll have to come up with co-pays, deductibles, and other health-related out-of-pocket costs.
Again, we're making assumptions, but it's easy to imagine this couple's medical costs associated with their time in the United States exceeding US$15,000 a year.
Those medical costs will likely go up under Obamacare. Insurance companies already predict big increases, especially for individuals (as opposed to groups). And Obamacare requires minimum standards of coverage, co-pays, deductibles, and so on, depending on the plan you choose. The low-cost, high-deductible plan that costs only $500 a month might disappear.
Note that we're assuming this couple of retirees is younger than 65. After age 65 most Americans would be covered by Medicare during trips back to the United States. (Medicare doesn't cover medical costs overseas, but I recommend keeping it even if you do retire overseas as a back-up.)
What's the bottom line of all this? Every year our Seattle couple might spend US$15,000 or more on travel to the United States, plus US$15,000 or more on U.S. health insurance (at least until they reach Medicare age). They could easily find that these costs, US$30,000 in total, exceed the cost savings of moving to Ecuador in the first place.
So what to do? Expats and retirees overseas can easily get around these two big costs by skipping those trips back home and by opting for medical care abroad, which can be significantly, dramatically less expensive than coverage in the States.
We know retired expats on strict budgets who do exactly that.
Many of us, though, want the freedom to travel back to the United States to see the grandkids, attend a wedding or two, visit the old neighborhood and friends, whatever. In that case we should be realistic about what we'll spend on travel and, if we're under age 65, on health insurance. Otherwise, travel to the States and health insurance while in the United States could easily be the two biggest costs in an overseas retirement.
This isn't a reason not to retire overseas, of course. It's a reality check to help with your retire overseas budget planning.
If your Social Security income is less than US$1,200 a month, however, or if you're not of the age yet to collect it, and you have no other pension to count on, what option do you have?
Sell everything. Or nearly everything.
Think about it this way. If you were to liquidate every asset you own, where would that leave you? What lump sum of capital would you net? Then, next step, invested, what level of yields and dividends might that capital throw off on a monthly basis?
That's how much money you have to retire.
Friends Vicki and Paul Terhorst retired in 1984 with only US$500,000. That was their total net worth, as Paul explains it, including house, cars, investments, pension funds, and so on. Considering inflation, Paul and Vicki's US$500,000 in 1984 would be about US$1 million today
No, I'm not suggesting that you need US$1 million to retire overseas. But, if you don't have Social Security or pension income to support you, you need to be prepared to adjust your expectations according to the nest egg you do have.
As Paul Terhorst explains it, back in the mid-1980s, he and Vicki had it easy. At that time, CDs paid 16% interest. Paul and Vicki cut their money into chunks and put it into one-year CDs, with a couple of CDs maturing every month or two. They lived well on US$40,000 a year, which was 50% of their interest income of US$80,000 (a 16% return on their US$500,000). Reagan was president, inflation was low, the dollar strong.
More important, Paul and Vicki had arranged their lives so that they had virtually no fixed costs.
A decade later, interest rates fell, and they had to diversify their portfolio into stocks and bonds, foreign currencies, and natural resources.
As Paul explains, "Though we cried a lot along the way--especially beginning in March 2000, when the stock market tanked--our investments have performed very well, providing us with a much larger stash.
"However, that stash shrank again in the 2007/2008 bear market, one of the worst ever."
But Paul is not worried. As he puts it:
"You quickly catch on that, to succeed at this, you're going to have to assume some risk. You're going to have to withstand market ups and downs."
As you work through your own financial planning for your retirement overseas, here's a useful resource, a retirement calculator called Firecalc on the website fireseeker.com.
Firecalc can help you answer this most fundamental retirement planning question of all: Will you have enough money at the end of your life? It uses a database of stock and bond returns over the past century to find an answer. You plug in how much money you have, how long you expect to live, and how much you'll be spending every year.
The calculator assumes your spending will increase by inflation, and then it gives you the result--that is, whether or not, based on your given circumstances, your money will run out.
Say you've saved up the US$1 million nest egg I mentioned above. You're 50 years old. And you expect to live until age 90 (so you plug 40 years into the calculator). Your cost of living is US$30,000 a year, adjusted for inflation over 40 years.
That's probably less than you're spending now but more than you'll need to live on in many of the places I report on in these dispatches. The key, again, is not to load up on fixed assets with carrying costs.
The result, according to Firecalc? You have a 100% chance of making your overseas retirement work.
However, again, not everyone has US$1 million worth of assets. If you have less, you'll have to plan to live on less. It's very possible.
For my first Firecalc calculation, I used annual living costs of US$30,000. And I explained that that is more than you'd need to live many of the places I recommend regularly. Again, I'd say that a minimum amount for a comfortable retirement in a number of beautiful, safe, and appealing places might be US$1,200 a month. In some places, you could live on less, and, anywhere in the world, you certainly could spend more if you wanted to. But US$1,200 a month is a good benchmark. That's US$14,400 a year, about half the US$30,000 I used in my first Firecalc example.
Assuming the other variables are unchanged (you're 50 years old, projecting your retirement to age 90), Firecalc projects that, spending US$14,400 a year, you've got an 86.1% chance of not outliving your retirement nest egg.
How much capital would you need to generate interest and dividend income of US$14,400 a year? About US$360,000.
But, in fact, you could make this work with a bit less. I'm assuming that you're 50 years old right now. Perhaps you're older. And, regardless of your current age, at some point in the future, Social Security should kick in, taking the pressure off your monthly interest and dividend requirements.
Kathleen PeddicordContinue Reading:
Image source: Firecalc results
As with any budget, there's no one-size-fits-all live-overseas capital budget. The variables are great. Bottom line, though, your up-front investment in a new life overseas can be very controlled.
If you know you want to move full-time, you'll have to invest in a residency visa. This can cost US$1,000 to US$2,500 per person, depending on the country and whether or not you engage the help of an attorney or manage the process yourself. Note that, in some countries, Panama, for example, an attorney is required. You can't submit a residency visa application without one.
If, though, you want only to dip a toe...to take living overseas for a test run before you commit...you can forgo both the cost and the hassle of the visa application process. Spend only up to six months in your overseas retirement Shangri-la and no need to invest in formalizing your residency status.
I recommend always that you rent first. To do this most places in the world, you'll need your first month's rent and another month's rent for a security deposit. Some places may ask for a third month's rent (the final month) in advance, as well. You can figure this expense, depending on how much it's going to cost you to rent the kind of place you want in the neighborhood where you want to be living in the country where you're looking to move.
If you want to bring all the comforts of home with you, you'll have to pay for shipping. This can be a big expense (shipping a container-load of furniture across the Atlantic costs about US$10,000, for example)...or a small one (if you simply check two or three extra suitcases or packed boxes on the plane with you).
Rent furnished, however, and you can avoid this expense, perhaps indefinitely but for sure at least until you're certain you're ready to settle in long term.
I don't recommend shipping a car with you wherever you're going. Often, you'll find that the car you've shipped is inappropriate for use in your new home. Friends years ago shipped a van from Canada to Nicaragua and regretted the decision almost immediately. Nicaragua's roadways chewed that van up and spit it out in pieces in a matter of months.
You might also find that it's hard to find parts or experienced labor for repairs and maintenance for your imported vehicle, depending what you import where. And, depending on the country and your residency (or non-residency) status, the import duty for a car can be significant. Better, if you need a car in your new home, to buy it locally.
We lived in Panama City for a year before investing in a car here. When we finally did, we bought a four-year-old Toyota Prado. Our experience in Panama has taught us two things related to owning a vehicle in this country:
First, any car you drive here is going to sustain regular damage. Traffic on the crowded streets of Panama City is a free-for-all, and fender-benders are everyday occurrences. We have been involved in seven. You can't avoid them, because, frankly, Panamanians drive like lunatics.
Second, if you intend to travel in Panama beyond the capital, you need a four-wheel-drive SUV. Anything else is silly. Thus the pre-owned Prado. Buying new seemed foolish, as no vehicle stays like-new for long. Buying Prado made sense, as they're common. Any guy in any garage across the country can manage a repair in an emergency.
Best case, of course, if possible, would be to avoid car ownership altogether.
In that case--assuming you're relocating part-time at first, to try a place on for size...renting rather than investing in the purchase of a new home of your own...not bothering to import anything other than what you can carry in your checked luggage...and moving someplace where you won't have to invest in a car--what does your total Getting Started Overseas budget amount to?
Your rental deposit...and your plane ticket. A matter of a few thousand dollars.
You can keep this really simple.
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Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 25 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring, and investing overseas in her free e-letter.
Her book, How To Retire Overseas—Everything You Need To Know To Live Well Abroad For Less, was recently released by Penguin Books.
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