Day 03: Step #2, Preparing Your Budget

What Does Your Live-Overseas Nest Egg Amount To On A Monthly Basis?

Dear Student,

Yesterday, we figured your total potential retirement nest egg, the total amount of capital you could have to put toward funding your overseas-retirement adventures.

Now we need to convert that lump-sum nut into a monthly overseas-living budget.

The easiest way to think through a budget for a new life in a new country is on a monthly basis. In Step #3 of this program, we’re going to consider the world’s top retirement havens with an eye toward connecting the dots between the best places on Earth to plan for a new life right now… and your personal circumstances, priorities, and preferences. I’m going to help you to identify the handful of places that might suit you best for this next phase of your life, based on who you are (as you identified in Step #1 with the help of my “Know Yourself Questionnaire”) and, critically, of course, on what your retirement budget amounts to.

So, today, let’s figure out exactly what that is.

Yesterday, you worked through the theoretical exercise of liquidating all your assets—selling any real estate you own, any vehicles, any collectibles, antiques, coins, jewelry, etc. You projected what all your various assets might yield as cash at current market values, and you tallied those figures up to arrive at a lump sum of potential overseas-living capital.

Now we’ll take the next step—to think through what level of yields and dividends that capital, once invested, might throw off on a monthly basis.

We’ll add in whatever Social Security or other pension income you maybe expecting.

And that will give you your answer to the question: How much money do you have to go overseas?

As I mentioned yesterday, longtime friends Vicki and Paul Terhorst retired in 1984 with only US$500,000. That was their total net worth, as Paul explains it, including house, cars, investments, pension funds, and so on. Considering inflation, Paul and Vicki’s US$500,000 in 1984 would be about US$2 million today.

As Paul admits, back in the mid-1980s, he and Vicki had it easy. At that time, CDs paid 16% interest. Paul and Vicki cut their money into chunks and put it into one-year CDs, with a couple of CDs maturing every month or two. They lived well on US$40,000 a year, which was 50% of their interest income of US$80,000 (a 16% return on their US$500,000). Reagan was president, inflation was low, the dollar strong.

More important, Paul and Vicki had arranged their lives so that they had virtually no fixed costs. This is a critical point. As I mentioned yesterday, part of your challenge at this getting-started budget planning phase is to eliminate your debt. All of it, if possible. Debt and carrying costs.

Competing agendas come into play, I understand. Perhaps you’ve built up a real estate investment portfolio that includes several properties, including some rental investment units. If those rentals are yielding positive cash flow (that is, covering their related carrying costs and, as well, throwing off positive cash for you), then you might hold on to them. The yields they generate add to your monthly income.

If, however, your property holdings include raw land or maybe a second home that isn’t very rentable (at least not for a reliable positive cash flow), then I’d recommend you consider liquidating those assets if possible. Even raw land can come with a cost. Maybe you owe annual property taxes on it. Maybe you have to pay a guard or a caretaker to watch over it for you. Maybe it’s part of a private development community where you have to pay monthly homeowners’ association (HOA) fees.

Same with a second or holiday home. If it doesn’t rent for reliable positive cash flow, think about off-loading it. Let the taxes, the upkeep, the repairs, and the security become someone else’s hassle as you downsize and liquidate to prepare for this next phase of your life.

As you embark on this adventure, you want as little liability as possible.

Back to my friends Paul and Vicki Terhorst. As I explained, they retired in 1984 with a half-million dollars, and, for a while, they were golden. That nut generated interest income of US$80,000 a year. They lived very comfortably, in Paris and elsewhere, on half that amount, reinvesting the rest, year after year.

A decade later, interest rates fell, and they had to diversify their portfolio into stocks and bonds, foreign currencies, and natural resources.

As Paul explains, “Though we cried a lot along the way—especially beginning in March 2000, when the stock market tanked—our investments have performed very well, providing us with a much larger stash over time.

“Of course, that stash shrank again in the recent (2007 to 2008) bear market, one of the worst ever.”

Paul continues:

“You quickly catch on that, to succeed at this, you’re going to have to assume some risk. You’re going to have to learn to withstand market ups and downs.”

I’m not an investment adviser, and I’m certainly not going to try to offer you investment management advice here now. You’ll want to seek professional counsel elsewhere to help you determine where and how to place your money. Generally speaking, your objective is to follow Paul Terhorst’s model of a diversified portfolio throwing off enough interest and dividend income to allow you to afford your overseas lifestyle while (best case, if possible) continuing to build up your nest-egg stash.

If you’re in your retirement years or planning for a retirement overseas, there’s a useful financial planning tool to help you figure your retirement budget: a retirement calculator called Firecalc.

Firecalc can help you answer the most fundamental retirement planning question of all: Will you have enough money at the end of your life? It uses a database of stock and bond returns over the past century to find an answer. You plug in how much money you have, how long you expect to live, and how much you’ll be spending every year.

The calculator assumes your spending will increase by inflation, and then it gives you the result—that is, whether or not, based on your given circumstances, your money will run out.

Say that, once you liquidate your current assets, as I’ve been suggesting, you arrive at a retirement nest egg of US$1 million. You’re 50 years old. And you expect to live until age 90.

Plug 40 years into the calculator. And assume an annual cost of living of US$30,000, adjusted for inflation over 40 years. That works out to a retire-overseas budget of US$2,500 a month.

That’s probably less than you’re spending now but more than you’ll need to live on in many of the places I’m going to suggest that you consider in Step #3. In fact, on a budget of US$2,500 per month, you could live almost anywhere in the world that strikes your fancy. One key, again, is to rid yourself as much as possible of both debt and fixed assets with carrying costs.

The result, according to Firecalc? You have a 100% chance of making your move-overseas plan work.

Of course, I understand, not everyone has US$1 million worth of assets. If you have less, you’ll have to plan to live on less. It’s very possible.

For my first Firecalc calculation, I used annual living costs of US$30,000. And I explained that that is more than you’d need to live in many of the places I’m going to recommend to you (in fact, it’s probably enough to live almost anywhere on Earth, depending on what kind of lifestyle you want to support… more on this in a later lesson).

However, I’d say that a minimum amount for a comfortable expat life (in retirement or otherwise) in a number of beautiful, safe, and appealing places would be US$1,200 a month. In some places, you could live on less, and, anywhere in the world, you certainly could spend more if you wanted to. But US$1,200 a month is a good benchmark. That’s US$14,400 a year, about half the US$30,000 I used in my first Firecalc example.

Assuming the other variables are unchanged (you’re 50 years old, projecting your retirement to age 90), Firecalc projects that, spending US$14,400 a year (or US$1,200 per month), you’ve got an 86.9% chance of not outliving your nest egg.

How much capital would you need to generate interest and dividend income of US$14,400 a year? About US$360,000.

Note that I’m assuming that you’re 50 years old right now. Perhaps you’re older, meaning you don’t need as big a nest egg to carry you through.

In addition, remember that, regardless of your current age, at some point in the future, Social Security should kick in, taking pressure off your monthly interest and dividend requirements.