he took a break from grappling until he was 40, when the Brazilian jujitsu bug bit him. Today, he battles opponents half his age. But that doesn't mean the Singapore-based American lives in a youthful Neverland. Jeff and his wife Nanette know the years creep up. Consequently, they are prepared for their retirement. They plan to be based in the United States.
The typical American retiree spent $31,365 in 2012. But Jeff and Nanette don't want to be average. By sidestepping expatitis, the Devenses are realistically poised to retire on $93,300 per year.
They started their expat careers in 1995, teaching at the International School of Beijing, China. “We came overseas after two years of marriage,” says Jeff, “with $25,000 of student loan debt. During our first year, we paid off our school loans and had enough money left over to put a down payment on a home in North Dakota.”
Jeff and Nanette are now mortgage free. Each June, they fly from Singapore to the United States to spend time at their lakeside home with their two children. “Purchasing the house was a lifestyle decision,” says Jeff. “It gives our family a place to spend seven weeks each summer. Paying off the mortgage also gave us peace of mind.”
The Devenses figure they'll spend most of their retirement time in North Dakota. “When we get closer to retirement, we'll likely buy or rent a second home in a warmer climate, giving us an escape from North Dakota's winter months.”
After researching medical insurance, Jeff realized it will cost them much more than it will for most stateside Americans. “We would have a high deductible because we haven't had enough years vested in any stateside school district, nor have we paid enough into Social Security to qualify for Medicare.”17
Americans are required to pay 10 years or 40 quarters in Medicare taxes to qualify.18 Career expatriates, like the Devenses, will pay higher insurance premiums if they can't accumulate the minimum requirements toward Social Security while living overseas.
Jeff and Nanette figure they can retire in 17 years. But if they want the equivalent buying power of $93,300 today, they'll need more money. If inflation averages 3.5 percent over the next 17 years, the Devenses will require $167,443 per year (see Figure 1.3).
Figure 1.3 Jeff and Nanette's Postinflation Adjustment
SOURCE: www.moneychimp.com.
Now It's Your Turn
The first step toward planning your retirement is realizing what you spend today. Every healthy business documents its income and expenditures. Those not doing so head for bankruptcy. Government assistance doesn't intervene to save the grocery store or restaurant with the unbalanced budget. But many expatriate family households come to expect just that. Unfortunately, no such crutch exists for social pension noncontributors. Many expatriates sink or swim based on their own strokes.
After figuring out what you spend each year, determine how many years from now you want financial freedom. Estimate your postinflation cost of living with the calculator at www.moneychimp.com. Retirement is a journey to a foreign city. You've never been there, so you'll need a map – and knowledge of the number of steps ahead.
Take the first step now. Plug your numbers into Figure 1.4.
Figure 1.4 Your Postinflation Adjustment
SOURCE: www.moneychimp.com.
Chapter 2
Building Your Pension
Whether you expect to retire on $25,000 or $125,000 per year, you'll need a way to generate that income. Some will earn money from real estate rentals; others will rely on the stock and bond markets. Many will depend on both. Retirees may also receive some kind of pensionable benefit to augment their investment income.
Rental real estate is a great inflation fighter. If a retiree collects enough rental revenue to cover life's expenses today, it won't be undermined by the rising cost of living. Over time, rental income and inflation ride the same chair lift.
Those paying off investment mortgages before retirement can reap much from the rental proceeds.
Stock and bond market investments work a bit differently. If a retiree has a $500,000 investment portfolio, she'll need to know how much of her portfolio she can afford to sell each year. Those selling too much could end up broke – especially if they live longer than expected.
World Health Organization director Ties Boerma suggests a typical 60-year-old in a high-income country could expect to live to 84. But you could live even longer – perhaps much longer.19
Costs of living also increase. So what percentage of your retirement portfolio can you afford to sell each year, to provide high odds you'll never run out of money?
How to Never Run Out of Money
Respected financial planner and researcher Bill Bengen suggests that retirees should be able to sell roughly 4 percent of their investment portfolios each year. He back-tested a variety of historical scenarios, reporting results in a 1994 Journal of Financial Planning issue.20
As such, 4 percent of $500,000 would be $20,000; 4 percent of a million dollars would be $40,000. If you retired today with one million dollars, you could withdraw $40,000 in the first year of retirement. In the second year, you could sell a bit more to cover rising costs of living. The 4 percent withdrawal rate considers inflation.
If inflation averaged 3.5 percent per year, Table 2.1 is how withdrawals would look for the first 15 years of retirement.
Table 2.1 Four Percent Withdrawal Rate for $1 Million Portfolio with Inflation at 3.5 Percent per Year
Some say withdrawing 4 percent after inflation may prove to be too much. Skeptics of the 4 percent rule include Michael S. Finke, Wade D. Pfau, and David M. Blanchett. In a 2013 Social Science Research Network paper, they recommend sustainable postinflation withdrawal rates closer to 3 percent (see Table 2.2). Their rationale? Interest rates for bonds and savings accounts are currently lower than usual.21
Table 2.2 Three Percent Withdrawal Rate for $1 Million Portfolio with Inflation at 3.5 Percent per Year
Don't, however, let that spook you. Interest rates might not perpetually scrape along the sea floor. Researchers supporting the sustainability of a 4 percent withdrawal rate considered a variety of back-tested conditions: double-digit inflation in the late 1970s and early 1980s, stock market returns that went essentially nowhere (for the U.S. market) between 1965 and 1982, and a series of American-led wars.
That said, there's nothing wrong with a 3 percent withdrawal rate. When it comes to money, caution is cool.
By
Interview with Jeff Devens. Interview by author, September 15, 2013.
Medicare.gov: Official U.S. Government Site for Medicare. Accessed April 28, 2014. www.medicare.gov/.
William P. Barrett, “The Retirement Spending Solution,”
