SmartMoney magazine dubbed Paul and Vicki Terhorst the “George and Martha Washington of cashing out.” Paul and Vicki retired in Argentina in 1984 at the very early retirement age of 35.
In 1988, Bantam Books published their book “Cashing In on the American Dream: How to Retire at 35,” now a classic.
In other words, Paul (a CPA in his previous life) and Vicki know more about living as overseas retirees than anyone else you’re ever likely to come across.
Every month, Paul shares personal financial planning wisdom for the expat retiree in the virtual pages of our Overseas Retirement Letter.
His ORL contribution this month (in the issue published April 15) is so timely that I want you to read it, too…
“I believe every investor needs a personal financial model…a way of looking at the world that proves useful when making investment decisions. More than anyone, we overseas retirees need perspective on the many games in the global playpen. The model should give long-term guidance that requires little or no day-to-day tweaking. After all, we retired to enjoy the good life rather than to spend hours at our computers trying to find the next best moneymaking deal.
“Our model should help ensure there’s enough money in retirement, no matter what happens.
“In the past, I used a libertarian, capitalist, market-oriented model to help me make decisions. Maybe you did, too. The model gave simple, direct answers that kept us firmly in the private sector. Government or corporate bonds? Corporate. Social Security or private pensions schemes like IRAs and 401Ks? Private. Invest in socialist or capitalist countries?
“Capitalist. Like I said, simple.
“Unfortunately, that model no longer works. Read a newspaper from almost any day of 2008 to see how the private sector helped collapse the American economy.
“The least regulated and unregulated sectors of our economy–derivatives, CDOs (collateralized debt obligations), hedge funds, credit default swaps–were the first to get into trouble. Refusing to recognize their mistakes, Lehman Brothers, AIG, Bear Stearns, Citibank, GMAC and other market players sunk us deeper into the quagmire.
“Government had to step in, not to right the system but to dominate. Anything short of a massive government intervention risked dropping the world economy into a hole and closing the hole over.
“Those of us who believed in private enterprise, who invested in American capitalism, lost half of our net worth. Today, as we look out toward the end of the tunnel, we see huge fiscal deficits, continuing unemployment, more deleveraging, and a government involved in nearly every sector of our economy.
“We Americans have never done business this way before; we have little idea how things will turn out.
“I’m reminded of my good friend Thor, a Norwegian socialist economist. When the Berlin wall fell and the socialist world from Eastern Germany to the Soviet Union collapsed, I told Thor his career was over.
“‘Socialism has failed. What are you going to do now?’ I asked him.
“He said: ‘I’m going to stick with the socialist model. I’m a researcher after all. Maybe I can do valuable work explaining how we can do better. Anyway, my whole life has been wrapped up in socialism. I’m too old to learn anything new.’
“In my case, my studies, career, retirement–my whole life–has been wrapped up in capitalism. I want to stick with what I know, and, like Thor, I need to adapt to the new. I think it’s premature to throw out capitalism and markets altogether. In spite of the 2008 failure, these ideas still make a lot of sense.
“In the interim–say for the next decade–I want to propose a new model. Call it a libertarian, capitalist, market-oriented model with the edges knocked off. In the new model, we conceive of business, labor, and government as working together to make our economy grow.
“We reject Adam Smith’s notion of the hidden hand. We reject capitalism’s view that self-interest, or even enlightened self-interest, always serves as a basis for suitable behavior.
“But we still believe that markets best determine what should be produced and that government does a pretty bad job of running businesses.
“I got the idea of this new model from my friend Carl, a physicist who lives and does research in Paris. I told Carl my old model had failed, that I was looking for a new view of the world. Carl said: ‘Your old model is fine, but it was carried to extremes that were unwise. The key is to avoid extremes.’
“Carl is a physicist, and physicists always take things to extremes, to infinity. Einstein’s theories of relativity, in fact, only work in extremes. So when a physicist tells me I need to pay less attention to extremes, I listen.
“With my new model, bailing out the United Auto workers makes sense. Sure, these workers may be overpaid, but today’s workers and retirees, with all those benefits, are plowing nearly every penny back into the economy.
“Bailing out Citibank makes sense, too. Besides, Citibank got to be so big the place looked more like a government than a private sector player. When the government took over, it simply pushed out some of the middlemen–in this case, overpaid executives who endangered the worldwide financial system with their shenanigans.
“With my new model, we accept government solutions to resolve at least some of the financial meltdown problems. The government has a huge role to play in getting us out of this mess. At the same time, we remember that governments tend to be inefficient, bureaucratic, legalistic, and inept. Over time, we count on a better balance between private and public sectors.
“How does this less-extreme capitalist model guide our financial planning in retirement?
“For one thing, we might invest more in socialist economies. For example, I’ve always resisted buying euros, figuring Europe’s socialist system would eventually lead to collapse. But capitalism, not socialism, collapsed in 2008.
“We need to take another look at how socialist economies operate and, in particular, the role the euro can play in our portfolios.
“We might include Social Security payouts in our retirement planning. At this point, many of us need Social Security more than ever. Or we might consider more government bonds in our portfolios. I’ve been partial to corporate stocks and bonds, figuring that’s where I’d get better yields. But government bonds look pretty good today, especially after those 50% losses in stocks.
“With my new model, we can continue to look for capitalist success stories.
“I still like investing in China, for example, as a purely capitalist play. I reject investing in India; their socialist system maintains the bureaucracy and inefficiency but without the social safety net.
“I’m still working on this revised model. I consider it a work in progress. But that’s probably part of the new paradigm, too–constant tinkering in place of the secure, easy-answer model that failed so catastrophically last year.”