Hedging And Controlling Exchange Rate Risk In Retirement

Don’t Let Exchange Rate Risks Keep You From Realizing The Retirement Of Your Dreams Overseas

This week two different readers have written to ask about currency risk when moving overseas. One was concerned about moving to a U.S. dollar-denominated destination from the U.K.; the other was wondering about moving to Portugal from the United States.

These readers’ concerns about currency exchange fluctuations are valid. A retiree on a fixed income could see his quality of life eroded by a depreciating home currency. Don’t let this keep you from making a move to a country where you want to live. You can mitigate the currency risks.

One strategy to protect yourself would be to buy a place of your own to live in the country where you want to be, paying in full up front, when you make the move or even in advance of a planned move, to take advantage of a favorable rate of exchange.

Housing cost—a mortgage or rent—is generally the single biggest expense in any budget. If you own your own home (house, apartment, what have you), you eliminate the risk of unfavorable currency fluctuations for that part of your monthly expenses.

Taking this approach, you could buy your retirement home in Portugal, for example, today, while the U.S. dollar and the British pound, for example, are riding strong versus the euro. Do this, and you’re locking in your housing cost at today’s very favorable exchange rate. A €100,000 condo on the beach in the Algarve would cost you very close to just US$100,000 at the current rate of exchange. Housing covered, you’re largely insulated against negative currency fluctuations. The currency moving against you would affect your day-to-day living costs only, costs you can control at least to some extent.

The euro could continue to fall for some time, maybe another 12 to 24 months. On one hand, this means it could be better to wait to buy in Europe. On the other hand, while you’re waiting, property prices could be appreciating (as they are in Spain now, for example).

If you’re retiring in the near term and dream of Europe, I’d encourage you to take advantage of the current window of opportunity to own a place of your own for what can amount to a bargain and discounted rate (prices are way down in key markets, while the U.S. dollar is up). With a European pied-a-terre of your own, you know what your retirement housing cost will be today, tomorrow, and forever—zero. If the euro continues to depreciate, great. Your day-to-day costs of living continue to depreciate. When the euro turns up against the dollar again (or disappears altogether, leaving you with a new currency to contend with), you could likely ride things out. Over the course of a 20-plus-year retirement, you should expect to experience a slow roller coaster of exchange rates.

Here’s another strategy for reducing your currency risk in retirement—invest locally to earn income in the same currency as your expenses. This could be as simple as buying a local CD or more complicated—buying a rental property, for example, or starting a small business. Whatever you do to earn local currency, don’t move all of your assets to your new country. Hedge things by keeping some of your investments in your home currency… or in another currency in addition to your new one.

A colleague who lived in Uruguay while the U.S. dollar/Uruguayan peso exchange rate was favorable did well on his monthly pension. When the U.S. dollar fell versus the Uruguayan peso, he used local peso income from CDs he had bought to pay local expenses. Having the local investments allowed him to supplement his pension check when he needed to.

Here’s one more option for hedging your pension check against currency fluctuations: Don’t put down permanent roots anywhere. Rent your residence wherever you decide to live, then pack up and head to a lower-cost-of-living country that appeals when the local currency turns against you.

This kind of perpetual traveling can be done short- or long-term. You could make that move to Portugal today and stick around until the euro gets too expensive for you… if that happens again in our lifetime. Then you could shift your retirement to another country with a more attractive exchange rate.

The bottom line is that you can take steps to take control of your cost of living in another currency. Don’t let exchange rate fears keep you from realizing your dream retirement.

Lief Simon

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