to determine how much money you'll need to retire. You'll also know how much money you should be investing each year to reach your goal. Meet some expats who figured it out.
The Man with Nothing But a Backpack
Profile 1: Lindell Lucy
Nationality: American
Residency: Hong Kong
Current Age: 29
Plans to Retire in: 41 years (at age 70)
Retirement Income Goal: $40,000 (U.S. dollars) per year
Postinflation Retirement Income Goal: $163,917 per year
Combined Investments in Stock/Bond Markets: $18,500
Current Real Estate Income: $0
Twenty-nine-year-old Lindell Lucy claims to own nothing but a backpack. The Arkansas-raised American went to Stanford University before catching wanderlust. “After leaving university, there was one six-month period,” he says, “when I lived on the streets in five different countries – Japan, South Korea, China, Hong Kong, and Taiwan.” He taught part-time while traveling, earning just enough money for food and shelter.
His entrepreneurial spirit led to a few additional work projects. One was spawned by his trouble finding adequately priced gyms to use while traveling. “Day passes are outrageously expensive,” he says. He created Gymsurfer.com, a social network and marketplace for gyms. “I wanted to make it easy for people to find gyms and compare prices, which I hoped would spur competition and drive down prices [for day passes]. I also wanted to make it possible for people to meet at gyms, socialize, and stay in touch.”
He also started a few writing projects before settling into his current job as a kindergarten teacher. “I ran out of money a few times on my travels and had to get bailed out by family. That was part of the reason I decided to get a full-time job in Hong Kong.”
Lindell says he could live on $6,000 (U.S.) a year in rural China. But a couple of years ago, he was bit by something stronger than his lust to wander. He met his girlfriend Yan, who worked as a music teacher. She changed schools shortly after they met and Lindell followed her. He jokes about never retiring. “My body will wear out long before then.” But he admits, “Retirement planning is a good thing.”
Lindell figures he could retire at 70 on a shoestring, but that wouldn't please Yan. “She'll want some money to enjoy a more comfortable lifestyle than I could tolerate,” he says, “so we'll probably need about $40,000 a year.”2223 Based on calculations described in Chapter 1, Lindell would be spending $163,913 per year upon retirement, if he wants the same buying power that $40,000 would purchase today – assuming annual inflation of 3.5 percent.
Lindell won't be eligible for a defined benefit pension or U.S. Social Security if he remains overseas. Nor does he plan to purchase real estate for income purposes. So determining how much money he needs in a retirement portfolio is simple. The $163,913 he hopes to spend each year upon retirement must be 4 percent of a much larger sum. Studies suggest retirees can sell 4 percent of their portfolio each year without running out of money. In Lindell's case, $163,913 is 4 percent of $4,097,825.
To figure that out, he could do one of two things: multiply $163,913 by 25 or divide $163,913 by 0.04.
It looks like a massive sum. But Lindell and Yan can reach it.
So far, they've accumulated $18,500 (U.S.) in an investment account. If they work 41 more years, they could reach their retirement portfolio goal size by investing $16,555 per year in the account, if their investments average 7 percent (see Figure 2.1).
Figure 2.1 Determining How Much Lindell and Yan Need to Save
SOURCE: www.moneychimp.com.
Lindell and Yan can't control the stock market's return. It could earn more than 7 percent or it could earn less. Using the same Moneychimp.com compound interest calculator, Table 2.3 shows how much they would need to invest per year and per month, based on different stock and bond market scenarios.
Table 2.3 How Much Would Lindell and Yan Need to Save?
So what investment return should Lindell and Yan bank on? Nobody knows. Historically, stock and bond market combinations have exceeded 8 percent annually: not every year, but during most 30-year durations. Prudence suggests it's better to expect lower than average returns.
But what if real estate were part of your investment plan? And what if (unlike Lindell) you'll receive some kind of government retirement payment or a defined benefit pension? How do such calculations apply then? Meet Keith Ferrell and Annika Dahlgren-Ferrell.
The Couple with Swedish-American Dreams
Profile 2: Keith Ferrell and Annika Dahlgren-Ferrell
Nationality: American/Swedish-American
Plan to Retire in: 10 years
Retirement Income Goal: $75,000 (U.S. dollars) per year Postinflation Retirement Income Goal: $105,794 per year
Combined Investments in Stock/Bond Markets: $300,000
Current Real Estate Income (not including future primary residence): $25,000 per year
Keith and Annika met in 1994 while attending San Diego State University. They married in 1999, after teaching a handful of years in the United States. Seeking adventure and more disposable income, they moved to Venezuela, where they taught for two years. “When we first arrived,” says Annika, “the school administrator handed us an envelope with a large lump of cash as a ‘settling in’ allowance. It reminded us of a Mafia payment.”
“We've always been careful with money,” says Keith. By the time they were in their early 30s, they had a completely paid off home in California. Moving to Singapore juiced their savings. Today Keith, aged 42, and Annika, 39, own three California homes. Two are completely paid off, and the third has $78,000 owed on the mortgage. “We'll definitely have the third house paid off before we retire,” says Annika. They each enjoy their Singapore teaching jobs, but would like the option of retiring in 10 years. “We'll probably keep working,” says Keith, “but if we decide to quit in a decade, we want the resources to do that.”
Besides his teaching salary, Keith plans to tutor. He'll file the additional money as self-employed income reportable to the U.S. Internal Revenue Service (IRS). Doing so allows him to earn Social Security credits, ensuring he's eligible for a smidge of government retirement income. He's not counting on it, however, preferring that he and Annika be fully self-sustaining.
From 2006 to 2013, they lived in Singapore on a single salary. Annika gave birth to their two children, Kaidan and Kiana (ages 6 and 8), after which Annika stayed
Interview with Lindell Lucy. E-mail interview by author, June 20, 2013.
Interview with Keith Ferrell and Annika Dahlgren-Ferrell. Telephone interview by author, April 30, 2014.
