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How To Retire Sooner Than Never

“My 40-year-old friend Bill told me that he believes he needs US$5 million to retire,” writes Overseas Retirement Planning Guru Paul Terhorst.

“‘Part of that will be equity in my home,’ my friend explained. ‘But I’d like to have US$4 million invested. With today’s low interest rates, even with US$4 million I’ll barely have enough to live.’

“Bill figures that, even if he can earn 5% on his US$4 million stash–tough to do these days–that’s still only US$200,000 a year. If he pays half that in taxes, he’ll have to live on US$100,000 a year, in an expensive house, in the fast lane he’s used to. Also tough to do.

“Bill ran some more numbers by me and asked me how soon I thought he’d be able to retire.

“‘That’s easy,’ I said. ‘Never.’

“Bill makes a lot of money. But he faces both low investment returns and the progressive tax system in the United States.

“Low returns. When Vicki and I retired in 1984, we earned 16% and more on our CDs. Our modest savings threw off a huge amount of income. But today, interest rates on CDs, bonds, treasury bills, money markets, and so on approach zero, lower than the rate of inflation. Even with riskier investments, such as stocks, returns have been so low in recent years that we’re left scratching our heads. The crash in March 2000, then the second crash in late 2007 and on into early 2009, combined to wipe out longer-term returns on the S&P 500.

“Progressive tax. The more money Bill makes, the more he pays in taxes. With his salary and bonus on top of investment income, he’ll hit tax brackets of 70% or more (thanks to federal income tax, the Alternative Minimum Tax, state income tax, property tax, sales tax, gas tax, car and license fees, and so on).

“The more money you make, whether through work or investments, the higher your marginal tax rate.

“Conclusion: Bill will never reach his US$5 million goal, almost no matter how much he makes. His stash compounds at a miserably low rate. And the closer he gets to his goal, the higher his tax rate becomes. Like Zeno’s paradox, Bill can get closer and closer to his goal but never actually reach it.

“Zeno’s Paradox goes like this: Suppose I wish to cross the room. First, of course, I must cover half the distance. Then I must cover half the remaining distance. Then I must cover half the remaining distance. Then I must cover half the remaining distance…and so on, forever. The consequence is that I can never get to the other side of the room.

“What to do? You (and Bill and Zeno) have to think more creatively. “First, forget US$5 million or whatever other goal you have in your head. You’ll never make it if you approach things that way. Instead, ask yourself how you could retire right now, or in a year or two, with the money you already have.

“In 1984, Vicki and I figured US$500,000 was enough. I suspect that might be enough for many people today, too, if you change your lifestyle. But only you know the number, and only you know the changes you’re willing to make.

“Second, move. You have to remove yourself from your high-cost, high-tax lifestyle. You could sell the big house and move to a cheaper community in the United States or Canada. You could move to your cottage on the lake and travel during the winter. However, because you’re reading this, you probably recognize that you have another, often more interesting option: You could retire overseas.

“Start with our top overseas retirement picks for 2012–Panama, Belize, Uruguay, Nicaragua, Ecuador, France, Ireland, Croatia, Spain, Thailand, Vietnam, Malaysia…the places we introduce you to in these daily dispatches.

“Third, put the numbers together. Figure what the cost of living will be in your new life abroad…”

That is, get your arms around a realistic budget for taking up residence in the overseas Shangri-la with your name on it.

I’ll walk you through it tomorrow…

Kathleen Peddicord


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