Foreign Exchange Moves- how do you deal with them?

[Saver]

I plan to retire overseas and have been wondering: How much of a retirement portfolio cushion is required to account for potentially-negative foreign exchange fluctuations? I am assuming that ones portfolio is in US dollars and must be converted into the local currency. I am also talking about a developed foreign country.

Some ideas I have include: 1) Buying foreign exchange contracts so that I know what to expect in the near-term. 2) Investing a portion of my assets in the stock/bond market of the foreign country in question and not hedging the currency exposure.

Just to be clear - lets assume a 4% withdrawal rate and a need to withdraw $40K/year from my retirement portfolio. Assume there are no fluctuations in my portfolio returns, so the foreign exchange factor is the only issue here. $1mm would be the base portfolio. To be relatively safe would any of you expats (or others) suggest a retirement portfolio of $1.2mm? $1.3mm? Of course to a certain extent it will depend on the foreign country in question, but I would like to hear some thoughts/see examples of how people handle this issue.

Thanks, Saver

 

[brewer12345]

Re: Foreign Exchange Moves- how do you deal with t

Probably the simplest solution is simply to have a portfolio in foreign currency-denominated assets. If we are talking about, say, Euro-zone retirement, it shouldn't be tough to get a reasonably diversified equity portfolio plus a euro-denominated bond portfolio/fund. If you try doing currency contracts, you will have a constant job of keeping up with the currency markets and hedging your portfolio, which strikes me as time consuming and expensive.

 

[Lancelot]

Re: Foreign Exchange Moves- how do you deal with t

Hi Saver,

I ER'd in Thailand since Jamuary 2003 and I can understand your currency worries. However, one of the benifits of ER abroad is the low cost of living. In Thailand, you can have a very nice lifestyle on 18k/$50 per day. That can significantly reduce your SWR. That in it's self is a very nice cushion.

You can invest some of your portfolio in foreign stocks, like a Total International Stock Fund that can offset some of the currency risk.

I think the key is being mobile. If the cost of living rises(dollar weakens against the Thai Baht), I will just go somewhere else. I always rent and don't see myself buying property abroad-too many pitfalls.


Enjoy your retirement!

Lance

 

[Saver]

Re: Foreign Exchange Moves- how do you deal with t

Thanks for the responses. You both make very good points. I have never seriously considered having a portfolio that was not heavily invested in the US. That would be a huge mental shift - different risk reward scenarios for both the stock and bond markets. I know a good deal about the history and workings of the US markets, but my knowledge of foreign markets is thin. Come to think of it .. assuming one is retiring to a foreign contry that is developed and stable, is it even rational to have a retirement portfolio that is 60% or more US-based?

Saver

 

[ESRBob]

Re: Foreign Exchange Moves- how do you deal with t

Saver,
for reference, the global capitalization of stock markets is about 60% non-US. A true 'market' allocation would have all of us only 40% in the US. (I think bonds may be about the same). But you spend the currency of the place you live to the tune of 4% a year. If you are in the US, that seems easy -- there are plenty of dollar-based assets to choose from, and anything north of 50% dollar allocations seems like it would be more than enough for the dollar liabilities you'd face. With a third world country, it seems much harder, so I understand your dilemma but don't know how to handle it long term, short of Lance's under-draw your SWR as a cushion, or move. Maybe just getting proxies for your currency from a relatively stable fund of nearby economies (eg. tiger funds if you live in Southeast Asia). If you are committed to the country, you might consider beefing up your rental real estate there as a way to ensure cashflow in the home currency.

ESRBob

 

[brewer12345]

Re: Foreign Exchange Moves- how do you deal with t

No doubt a trawl of the right database will get you some excellent academic papers to read. However, the short version is that international indexes are becoming more and more correlated over time as the global economy becomes more integrated. As such, if you are planning on living in a developed economy with relatively open flows of goods and capital, it will make less and less difference where you invest.

Care to tell us which country or zone you are thinking about?

 

[Saver]

Re: Foreign Exchange Moves- how do you deal with t

Brewer,

I haven't decided on a country yet (I have a number of years to think about it), but Japan and Spain are at the top of my list. As far as currencies are concerned, Japan would have been tough in the recent past - its stock market was weak for many years, and if I am not mistaken, bond yields are/were significantly lower than they are in the US right now. Spain might be easier to handle as far as currencies are concerned because the Euro is used by so many countries (this allows investors to spread their risk among many countries while getting the same currency exposure in each of those countries).

Saver

 

[SDY888]

Re: Foreign Exchange Moves- how do you deal with t

I was wondering whether you had previously lived in either Spain or Japan and what is drawing you too them??

Simon888

 

[Saver]

Re: Foreign Exchange Moves- how do you deal with t

Simon,

I did not mention specific countries in my original post because I have not done enough work on the topic of choosing a country to merit a robust list of potential locations.

Having said that, I have not lived in either place. I have travelled to Spain and lived in Asia, but I have not been to Japan yet. Why did I mention these two countries - a combination of having enjoyed my time there (Spain), and liking what I hear and read about each place.

Saver

 

[SDY888]

Re: Foreign Exchange Moves- how do you deal with t

Do you speak Japanese (or have partner that does)?? I say that because few Japanese speak English, so that may be a consideration.

I have lived and worked in the UK, parts of Europe (2 years), the Middle East (2 years) and Asia (7 years) and my current plan is a retirement consisting of summers in Europe (probably Southern France) and winters in Asia with Hong Kong as our base and vacations in Thailand/China and elsewhere in the region.

Still a few years away for us though.

Simon888

 

[Saver]

Re: Foreign Exchange Moves- how do you deal with t

Simon

Thanks very much for the information. You make a good point ... I have heard that before. I speak some Spanish but not Japanese. I plan to learn the language of the country I move to once I retire.

Saver

 

[Hyperborea]

Re: Foreign Exchange Moves- how do you deal with t

Another point is no matter what country it is you decide to retire in (or live a long time in) be prepared to live as much like the locals as possible. You can't live well for a reasonable price by expecting to have everything just like where ever you are from. In Japan be prepared for more fish in your meals and smaller apartments. In Spain have wine more often than Coke and don't be driving an SUV. It really comes to why are you living in that other country? If it's to live just like in the US but for less money then Japan and Spain are not good choices.

I would highly recommend that you spend a considerable amount of time in your intended country before making any long term commitments.

As for the foreign exchange have you considered keeping the "standard" fixed income buffer (that most put in front of their equities portfolio) in the currency of the country that you are living in? Or at least a good portion of it?

I plan to spend a good number of years travelling in retirement so I won't be in one currency location for the long term. I'm planning on keeping about half of the 5 year fixed income buffer in Euros and half in US dollars. Perhaps a bit less than half of each with maybe up to 6 months in the currency of where I will be staying for the next ~6 month block of time.

 

[Cal]

Re: Foreign Exchange Moves- how do you deal with t

I'm considering a European retirement (a ways off and like Saver still have a lot of research to do). But, I have been very interested in keeping a portion of my retirement assets in Euro denominated vehicles as I think the purchase power of the dollar will decline in the future (we owe too much money to other countries! ).

I know I can purchase Euro denominated CDs from Everbank, but does anyone know how I can invest in mutual funds in Euros? I already have a mutual fund that focuses on European companies, but it is thru Vanguard and thus held in US dollars.

Thanks.

 

[charlie]

Re: Foreign Exchange Moves- how do you deal with t

I may be a victim of fuzzy or wrong thinking, but it seems to me that if you invested in a fund that holds
non-US stocks or bonds, and does no currency hedging, then you would have the same benefit as owning the foreign stocks directly if you converted the returns back to local currency. Correct?

Cheers,

Charlie

 

[Cal]

Re: Foreign Exchange Moves- how do you deal with t

if you invested in a fund that holds non-US stocks or bonds, and does no currency hedging, then you would have the same benefit as owning the foreign stocks directly if you converted the returns back to local currency. Correct?

Charlie thanks for responding-
That's what I was thinking. My thought is that if I purchased foreign stocks (via mutual fund that was in Euros) that when I liquidated the position, I wouldn't have to worry about the strength/weakness of the dollar at that time. I'm just not sure how to go about doing that.

Cal

 

[charlie]

Re: Foreign Exchange Moves- how do you deal with t

Cal,

My thought was that you could buy a foreign bond
fund whose NAV is in US dollars. If the fund did no
currency hedging, then you could convert the distributions into Euros, for example, if the fund
bought European bonds, and be somewhat protected
against income fluctuations. Of course you would be
be exposed to the currency ratio if you sold the fund.

I suspect that there are rules against US residents
buying foreign bonds directly. In the US, for example,
you need to have a US social security number and be
a resident to buy I-bonds.

Cheers,

Charlie

 

[unclemick]

Re: Foreign Exchange Moves- how do you deal with t

I have no idea - but back in the 80's when dinking around with an eight asset class portfolio (Harry Browne?) - my foreign bonds were via a Putnam closed end fund - so I just paid U.S. taxes at the end of the year - ?? dollar rose up to 85? and then fell somewhat after.

 

[Q_T]

Re: Foreign Exchange Moves- how do you deal with t

Am curious:

How's does a person just start living in a different country permanently?

Do you need a Visa, or a job, or a spouse from that country, or what?

CFCF

 

[Hyperborea]

Re: Foreign Exchange Moves- how do you deal with t

How's does a person just start living in a different country permanently?

Do you need a Visa, or a job, or a spouse from that country, or what?

Most countries will require an immigration status of some sort to allow you to live there long term. A visa is document that allows one entry to a country and usually sets what status you will have. A visa isn't always necessary to have a status that allows long or short term residence in a country. These terms are often confused by many but there are differences.

How you get that status will vary by country. Some will give out visas that admit one to the country for stay in retirement status. In some cases you will need to immigrate using whatever rules that country has for immigration. You can often get long term resident status from being married to a national of that country. Of course, you can always use other nationalities that you have due to the nationality of your parents, etc.