Living overseas: how to hedge inflation risk?

[FIREdToBeExpat]

Some background: We have moved to Istanbul, Turkey from New York, US about a year ago. We operate an LLC based in New York, therefore all of our income is in US Dollars. We don’t earn any money in Turkey and all of our financials (retirement accounts, checking accounts, credit cards, etc.) are based in New York, US. We also own a home on Long Island, New York, which is paid for and it has been rented.

Inflation in the US is in the 2-3% range. In Turkey, it is about 9-10% range and I expect it to continue that way for a foreseeable future.

We are planning to live in Turkey long term and there is currently no intention of moving back to US anytime soon. Also, I don’t think we will generate any local income either. What would be the best way to hedge the local inflation risk? Any ideas?

[Animorph]

Quote:

Originally Posted by FIREdWannaBe Some background: We have moved to Istanbul, Turkey from New York, US about a year ago. We operate an LLC based in New York, therefore all of our income is in US Dollars. We don’t earn any money in Turkey and all of our financials (retirement accounts, checking accounts, credit cards, etc.) are based in New York, US. We also own a home on Long Island, New York, which is paid for and it has been rented. Inflation in the US is in the 2-3% range. In Turkey, it is about 9-10% range and I expect it to continue that way for a foreseeable future. We are planning to live in Turkey long term and there is currently no intention of moving back to US anytime soon. Also, I don’t think we will generate any local income either. What would be the best way to hedge the local inflation risk? Any ideas?

I assume your 9-10% inflation is in local currency, not USD. So number one hedge is to stay in dollars as long as possible. After that, buy now!

I'll let someone who knows what they're talking about come up with something fancier.

[FIREdToBeExpat]

Quote:

Originally Posted by Animorph I assume your 9-10% inflation is in local currency, not USD. So number one hedge is to stay in dollars as long as possible. After that, buy now!

Yes, you are correct. 9-10% inflation is in local currency. Real estate is a little crazy with 15-20% annual price increases for the past 5 years+ so I am a little afraid that it may already be in the bubble territory. That being said, I also own the condo I am living in free and clear as well.

[MichaelB]

This is a tough challenge. If the country standard of living rises along with the inflation the currency will might also appreciate over time (or devalue more slowly) and US$ assets will lose purchasing power, perhaps permanently. Having all your assets in US$ could be painful.

You may need to move a large portion of your assets onshore into local currency investments that produce income, then rebalance carefully. Real estate tends to do well in developing economies that are growing, providing both real income and asset growth.

Economic cycles in developing countries are volatile and frequent. This can be an advantage but rebalancing is a must and greed can be punished harshly.

[NYEXPAT]

I would sell the rental on LI and buy ST rentals in Istanbul as you have a great tourist market and can manage it easily (look into local Tax laws). In times when the Lira is depreciating, always buy on credit to get the float. Buy large quantities of non-perishables on credit (when on sale). If property is bought and sold in Lira, buy your rental properties with a Lira based mortgage. Your portfolio's can be structured to give you more exposure to Europe (If that is your desire). You may want to consider a US based currency trading account for the LLC to quickly convert income into Euro's/Lira/etc.

[FIREdToBeExpat]

Quote:

Originally Posted by MichaelB This is a tough challenge. If the country standard of living rises along with the inflation the currency will might also appreciate over time (or devalue more slowly) and US$ assets will lose purchasing power, perhaps permanently. Having all your assets in US$ could be painful. You may need to move a large portion of your assets onshore into local currency investments that produce income, then rebalance carefully. Real estate tends to do well in developing economies that are growing, providing both real income and asset growth. Economic cycles in developing countries are volatile and frequent. This can be an advantage but rebalancing is a must and greed can be punished harshly.

I agree 100%. I intend NOT to do anything major for another year or two. After that, I know that something must be done. Time will tell what that might be, I guess.

[FIREdToBeExpat]

Quote:

Originally Posted by NYEXPAT I would sell the rental on LI and buy ST rentals in Istanbul as you have a great tourist market and can manage it easily (look into local Tax laws). In times when the Lira is depreciating, always buy on credit to get the float. Buy large quantities of non-perishables on credit (when on sale). If property is bought and sold in Lira, buy your rental properties with a Lira based mortgage. Your portfolio's can be structured to give you more exposure to Europe (If that is your desire). You may want to consider a US based currency trading account for the LLC to quickly convert income into Euro's/Lira/etc.

Thanks for the practical advice. I have two kids (10 &1) so I have kept the LI house for "what if" scenarios. My older son doesn't want to go back to US (for now?), so I think selling the house would make the most sense but I still want to wait another year or two before I do that. Istanbul is nice but I think it is not what I really want, so we intend to move to a sea town in the South. Buying rental is an option but I am not sure about getting a local mortgage since I don't have any local income. In addition, local banks mortgage rates are quite high, 13% for 10 year mortgage. Transferring money is not a problem for the time being, but would look into currency trading account.

[Ed_The_Gypsy]

Check out the HSBC Premier account. If you can get one. Americans outside the US seem to be excluded.

Sent from my GT-I9100 using Tapatalk 2

[Surewhitey]

Insert Mexico and that's my story. Looking at the past years of the currency there, the Lira has gone from 1.2 in 09 to 2.1 Friday. That gives you a lot of inflation protection (10-12% annually).

We pull out cash (atm fees refunded) and do so when the spikes happen. Not that it always works, but it's one of the biggest helps to use here.

Also, food is one of our biggest expenses here. We eat more veggies and shop where the locals shop for more expensive items. E.g. Filet Mignon @ grocery chains, $290 kilo, my local butcher, & $155 kilo ($5-6/lb).

Here's a link to your currency / USD... https://www.google.com/finance?q=Usd...BYicsQeVmICQAQ

[nun]

The approaches I'd recommend would be buying local real estate, investing in US based mutual funds that own companies in Turkey (that might be tricky), buying shares in Turkish companies and keeping some money in the local equivalent of CDs. Of course there might be some political/socio-economical issues with Turkey right now. I certainly would not feel comfortable investing in Turkey right now.

I've looked at this for the UK as I might move there and have all my assets in the US. But buying real estate and having a UK focus in US based mutual funds is pretty easy to achieve. Also building a ladder of UK based long term savings accounts is quite easy.

I assume that you have researched your tax situation as a resident of Turkey and US citizen. As a Turkish resident Turkey has the primary taxation authority and you will certainly have both Turkish and US tax liabilities.

[CaliforniaMan]

If you don't mind me asking, a little off thread I know, but I was wondering what drew you to decide to settle in Turkey. Work, family, etc? I was there about 10 years ago, flew into Istanbul and saw the amazing historical sites there, and rented a car to travel south along the coast, Kusadasi, Pergammon, Ephesis, Troy. Was just amazed by the place, the climate, geography, culture, the archeological sites. They seem to be at the crossroads of history, the cusp of two cultures and an amazing place with so much potential. Saw many tourists from around Europe and Japan, but saw almost nobody from the U.S. They don't know what they are missing. Would love to go back there again and spend more time. Just wondering what it was that drove you to decide on Turkey.

[Cool_Sparrow]

Quote:

Originally Posted by FIREdWannaBe Some background: We have moved to Istanbul, Turkey from New York, US about a year ago. We operate an LLC based in New York, therefore all of our income is in US Dollars. We don’t earn any money in Turkey and all of our financials (retirement accounts, checking accounts, credit cards, etc.) are based in New York, US. We also own a home on Long Island, New York, which is paid for and it has been rented. Inflation in the US is in the 2-3% range. In Turkey, it is about 9-10% range and I expect it to continue that way for a foreseeable future. We are planning to live in Turkey long term and there is currently no intention of moving back to US anytime soon. Also, I don’t think we will generate any local income either. What would be the best way to hedge the local inflation risk? Any ideas?

Given your situation, I would recommend that you have about 20-30% of your retirement assets invested in Turkey, especially rental real estate or home sites (land) in economically developing or developed parts of the country. Ideally, it should be multiple small sites, so that each can be liquidated periodically (once every few years, say) depending on inflation situation. Land appreciates more than houses in developing markets. The reason I feel bulk of the assets should still be in US is because of the Global, transparent, stable and low cost investment opportunities available in USA that most countries simply cannot match. Moreover, the exchange rate-interest rate parity principle works, so Turkish Lira - USD rate will reflect the underlying differences in US and Turkish inflation rates. This correlation is not mathematically precise or instantaneous, of course, but in the long run, works reasonably well, because arbitrage is minimized in the globally mobile investment pools of big money. Best wishes.

[haha]

Essentially it seems that you are being advised to retire and become a speculator. Is it absolutely impossible that certain classes of humans will one day become quite unwelcome in Turkey? It does not appear that Turkish politics are getting more cosmopolitan and tolerant.

IMO, these places are really for rich people who can make a fast and not terribly financially injurious exit when needed.

This board is interesting- individual stocks, too risky, almost foolhardy. Rental property in Turkey for expat retirees? Why not?

Best of luck!

Ha

[FIREdToBeExpat]

Quote:

Originally Posted by Surewhitey Insert Mexico and that's my story. Looking at the past years of the currency there, the Lira has gone from 1.2 in 09 to 2.1 Friday. That gives you a lot of inflation protection (10-12% annually).

Yes, I have been lucky so far Recent devaluation of Lira has worked perfectly for me since I had to set up a brand new home from scratch; new furniture, appliances, etc.... No complain there. I also use Fidelity Debit card so there is no ATM fees either.

[FIREdToBeExpat]

Quote:

Originally Posted by CaliforniaMan If you don't mind me asking, a little off thread I know, but I was wondering what drew you to decide to settle in Turkey. Work, family, etc? I was there about 10 years ago, flew into Istanbul and saw the amazing historical sites there, and rented a car to travel south along the coast, Kusadasi, Pergammon, Ephesis, Troy. Was just amazed by the place, the climate, geography, culture, the archeological sites. They seem to be at the crossroads of history, the cusp of two cultures and an amazing place with so much potential. Saw many tourists from around Europe and Japan, but saw almost nobody from the U.S. They don't know what they are missing. Would love to go back there again and spend more time. Just wondering what it was that drove you to decide on Turkey.

I am not sure about the exact numbers of Americans visiting Turkey, but it is a beautiful country. Why Turkey? It was an easy choice; my two boys and I are dual citizens of Turkey and US, my wife is a US citizen only. My older boy is 9 turning 10 soon. So, I wanted to give him a chance to live/experience his heritage before he is too old to care about it. While at it, we had the second son so we can kill two birds with one stone

[FIREdToBeExpat]

Quote:

Originally Posted by haha Essentially it seems that you are being advised to retire and become a speculator. Is it absolutely impossible that certain classes of humans will one day become quite unwelcome in Turkey? It does not appear that Turkish politics are getting more cosmopolitan and tolerant. IMO, these places are really for rich people who can make a fast and not terribly financially injurious exit when needed. This board is interesting- individual stocks, too risky, almost foolhardy. Rental property in Turkey for expat retirees? Why not? Best of luck! Ha

You made me smile, ha! Well, I am an expat, yes but I am also a dual citizen of US & Turkey. Joke a side, real estate has done well in Turkey for the past 10-12 years.

On the other hand, don't trust everything you read about Turkey. It is a far better place than most of the world IMHO.

[haha]

Quote:

Originally Posted by FIREdWannaBe You made me smile, ha! Well, I am an expat, yes but I am also a dual citizen of US & Turkey. Joke a side, real estate has done well in Turkey for the past 10-12 years. On the other hand, don't trust everything you read about Turkey. It is a far better place than most of the world IMHO.

Yes, I see that from your above posts. A Turkish woman lives across the hall from my GF, she is a very urbane, cosmopolitan person.

It sounds very good for someone with your qualifications.

Ha

[nun]

Quote:

Originally Posted by FIREdWannaBe I am not sure about the exact numbers of Americans visiting Turkey, but it is a beautiful country. Why Turkey? It was an easy choice; my two boys and I are dual citizens of Turkey and US, my wife is a US citizen only. My older boy is 9 turning 10 soon. So, I wanted to give him a chance to live/experience his heritage before he is too old to care about it. While at it, we had the second son so we can kill two birds with one stone

I assume you are filing US as well as Turkish taxes and sending in any required informational forms like FBAR and 8938

[FIREdToBeExpat]

Quote:

Originally Posted by nun I assume you are filing US as well as Turkish taxes and sending in any required informational forms like FBAR and 8938

I am currently just a tourist living in here for now; haven't done anything to require these just yet. When I do, I will have to.

[nun]

Quote:

Originally Posted by FIREdWannaBe I am currently just a tourist living in here for now; haven't done anything to require these just yet. When I do, I will have to.

You said that you moved to Turkey "almost a year ago", so I would double check on your Turkish residency status. Also being a Turkish citizen and moving with your family would not exactly support a non-resident status. If you entered Turkey on your Turkish passport and reside there for longer than 6 months I think you are resident. Did you come in on a US passport on some long term tourist visa?

If you are operating your New York LLC from Turkey you might be liable for Turkish tax on that.

You and your wife obviously still have to file US and NY taxes and the FBARs and 8938s might be required if you have foreign accounts.