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Currency Fluctuations, Inflation Rates, And Other Retire-Overseas Risk Factors

“I cannot argue with the statement from your reader, John B., regarding the infrastructure in Costa Rica,” writes Costa Rica Correspondent David Stubbs in response to one of my Mailbag postings last week.

“The infrastructure in this country is antiquated, especially the bridges and roads.

“However, the reader’s premise regarding the exchange rate between the Costa Rica colon and the U.S. dollar is not accurate.

“The reader states, ‘The exchange rate between the U.S. dollar and Costa Rica’s currency has dropped by 40% in the last four years.’

“This simply isn’t true. If you look at figures for the exchange rates between these two currencies on Oct. 1, 2006, and Oct. 1, 2010, the drop is 2.88%.

“It is true that the U.S. dollar bought as many as 585.89 colones in September 2009 and has dropped 13.8% since then. Still this is nowhere close to 40%.

”That said, the reader could be referring to something else–namely the purchasing power of the U.S. dollar in this country. This is not the same thing as the exchange rate, but it is an important issue.”

Costa Rica has experienced high single-digit or low double-digit inflation (as high as 13.8%) every year for years.

In the past four years, the cumulative inflation rate has been 48.7%. For 2010 so far, the rate is 8.3%.

As David explains, this has nothing to do with the exchange rate of the colon…but it sure has had an effect on the local purchasing power for anyone living in Costa Rica on U.S.-dollar-based income.

Add to this the 13%+ fall in value of the Greenback versus the colon in the past year, and you can understand why some U.S. dollar-holders residing in the land of the Ticos would be concerned.

Here’s a bigger point: Inflation is a risk anywhere.

You can and should research current and recent inflation rates for any country where you’re considering moving, but historic rates are no indication of what the years ahead may bring.

Bottom line, this is one of many retire-overseas risk factors completely beyond your control…as the many thousands of U.S. retirees in Costa Rica have learned the hard way these past several years.

What can you do?

Take a long-term view and diversify. These are strategies typically employed for investing, but they work bigger picture, too.

It’s referred to as “planting flags.” I call it spreading your life around.

Reside in one country, keep your money (that is, bank) in another, do business in a third, invest in others, etc.

We’ve chosen to plant our doing-business flag in Panama.

One important advantage of Panama is that it uses the U.S. dollar, meaning we’re able to avoid the exchange rate ups and downs that folks with U.S. dollars in their pocketbooks have to navigate in Costa Rica, for example…and almost everywhere else on the planet.

Furthermore, inflation in Panama has averaged 3.1% a year over the past eight years and stands at 2.3% for 2010 so far. In other words, nothing like the inflation that Costa Rica has seen in the same period.

We’re happy about this, but we also recognize that this reality could change. In fact, it likely will change, as the country continues to develop. As Panama becomes more and more “First World,” the costs for goods and services, for both personal consumption and for doing business, are likely to escalate, maybe sharply.

What will we do?

When inflation reaches unacceptable levels, we’ll make two lists, one of the advantages at the time of living and doing business in Panama…the second of the disadvantages. On this second list will go the escalating inflation rate.

We’ll compare the lists, and we’ll decide whether or not it’s time to move either ourselves or our business someplace else.

We did this in Ireland six years ago. After having enjoyed a lovely life on the Emerald Isle for seven years, we decided, for reasons both personal and business, that the timing was right for a next move.

We did this in Paris two years ago, when, after four years savoring life in the City of Light, we realized that, to accomplish the business agendas we’d set, it would be wise, again, to relocate.

Eventually, we’ll face this decision in Panama, too. We don’t intend to live the rest of our lives in this country, but we have no doubt that this continues to be the best current choice for us.

The first move is the hardest. Once you’ve got that under your belt, your mind opens to the further possibilities, more with every passing month in your new home.

So that the idea of a second move isn’t nearly as intimidating as was the idea of the first.

Here’s the real point: The resulting journey broadens your world and enriches your life in ways you can’t imagine or predict.

We have dear friends now in Waterford, Ireland, and in Paris, too, where we have also have kept our apartment, to which we intend eventually to return.

Meantime, here in Panama City, we’re making connections and building friendships that we’ll also carry with us wherever next we roam…

And so on.

Kathleen Peddicord

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