In speaking with my friends still living in the U.S., many have now started to consider retiring abroad sooner, rather than later. They have done the traditional retirement math and it doesn’t work. However, today there is a little different notion of “retirement”.
People don’t want to scrimp today for something so far in the future. They don’t want to sacrifice their current quality of life. They want to better balance current sacrifices and their future life.
Saving enough to fully fund a retirement income stream is the last generation’s strategy. They also had pensions to help them.
A 60-year-old today has a 50% chance of living past 90. Three of my grandparents died in their sixties, right around 65. In their final years, they were also worn out from a hard life.
People today accept that they will work longer. They want to figure out how to do it where it’s not the 9-to-5 grind that is part of the corporate culture. It’s leveraging the advancement in technologies to work but still keep some of the freedom they really care about.
As early as they can, they are trying to figure out what they can do that will give them this “time freedom” while they earn an income doing something they enjoy. Others want to create a life they won’t want to retire from. This is the new definition of retirement.
Three Common Variables
Three variables are coming up repeatedly when I talk to people about retirement.
1. First, they are looking hard at where they live and where they might retire to. The usual retirement spots don’t stack up well. The traditional choice of Florida vs. Arizona for retirement has been replaced with places like Mexico and Thailand—and for good reason.
While Florida and Arizona are great places to live, they come with a pretty hefty cost if you intend to earn even a modest taxable income. A couple living in Arizona and earning even $100,000 would pay about 21% of this in federal income taxes, FICA, and local income taxes. The same couple living in Florida would avoid the Arizona state income tax and pay only 18.75% in total taxes.
For a couple living as permanent residents overseas, they could immediately get about a 25% increase in after-tax income by doing some planning. Living as permanent residents overseas, a couple can utilize the Foreign Earned Income Exclusion (FEIE) and pay no income taxes on the first $204,200 of income in 2017. All they would need to do is avoid payroll tax as Escape Artist has described.
Saving money on income taxes is an absolute no-brainer when you engineer the use of technology and continue to earn money.
2. The second major reason people want to retire early overseas is the magnificent strength of the U.S. dollar. Moving abroad today is very cheap.
My favorite tool to start an analysis is Numbeo’s Cost of Living Comparison. In Numbeo’s analysis, a $7200 budget in New York is compared to other cities. Numbeo estimates it would cost about $3659 to live per month in Phoenix. The cost to live per month in Fort Lauderdale is $4835. These U.S. cities are 49% and 33% cheaper than New York, respectively. They offer a pretty good savings from expensive cities in the U.S.
The big news is how exceptionally cheap it’s gotten when you use strong dollars to live abroad.
In Mexico you can live in colonial Merida for $1435 per month and be 30 minutes from great beaches on the Yucatan Peninsula. Merida has an international airport with direct flights to the U.S. It’s also a good-sized city of around 1 million people.
You can also live in the northern Thailand hotspot of Chiang Mai for $2047. Chiang Mai is full of expats and has a vibrant young tech-oriented group living there. I was there the last two summers and this estimate even looks generous to me, especially if you like local Thai food.
So, with the Mexican Peso trading 50% cheaper than where it was only two years ago, you can live there for over 60% cheaper than Phoenix and 75% cheaper than Fort Lauderdale. If you prefer an Asian destination, Chiang Mai is 44% cheaper than Phoenix and 57% cheaper than Fort Lauderdale.
Saving money on income taxes gives you more to spend, while living cheaper abroad makes the good life very affordable, another no-brainer.
3. The third reason people are choosing to leave the U.S. now is they can’t afford decent healthcare. The healthcare system in the U.S. is just broken. Things are very different overseas.
As an expat worker, I enjoy a great medical and dental insurance package. Most everything my family needs is covered and we rarely come out of pocket. Our coverage is also worldwide, except for one country – the United States.
We are not allowed any elective care in the U.S. It’s so stringent that a colleague was forced to sue the insurer when his wife became ill and was hospitalized while visiting home. The insurer finally relented, but not without a fight.
The math from a U.S. insurer’s perspective is very simple. A major study of seven developed countries showed both elevated costs in the U.S. and a wide variation within the U.S. A standard MRI was $1119 in the U.S., but $215 in Australia and $181 in Spain. However, some places in the U.S. were charging over $3000 for an MRI.
The same is true for a standard hip replacement. This costs an average of just over $29,000 in the U.S., but runs as high as $57,000. The same operation can be had for just over $7000 in South Africa and just over $16,000 in the UK.
Experienced travelers know the real deals are found in developing countries with Western-trained doctors. For example, Mexico, Thailand, and Hungary ranked best for getting good but cheap dental care. I have also received excellent service from dental hygienists from the Philippines.
If you are working today outside of a corporate insurance plan, you are forced to take risks you don’t need to take if you live abroad. You do this just to stay in the U.S., and this is not very appealing. High quality medical and dental care is widely available abroad.
While it’s expensive now, most people are concerned about the future. Fidelity’s annual study projected a 65-year-old couple retiring in 2016 will need $260,000 to cover healthcare costs in retirement, up from $240,000 in 2015. This figure applies to retirees with traditional Medicare insurance and includes relevant deductions, co-payments, and expenses. No middle-class people I know have this problem solved. It’s a truly enormous cost.
Most also believe this is only going to get worse as their career prospects dim and they lose corporate medical plans. I have not seen a single forecast of a declining rate of healthcare cost increases.
Eliminating expensive healthcare costs can add up to an enormous savings over the longer life expectancy today. This too is a no-brainer.
Retiring early to someplace overseas, combined with finding a meaningful way to work longer, saves taxes and stretches buying power. This can immediately fund a great lifestyle. The enormous added benefit of cheaper high-quality healthcare just turbo-charges the whole equation.
It’s easy to see why so many are talking about “retiring” early and that heading abroad makes it not just possible, but very enticing.
Ian Bond is a private banking senior executive with over three decades of experience in wealth and asset management with Goldman Sachs, Credit Suisse, and Citigroup. He has built major businesses on four continents. Ian is also the founder of MyRetirementRehab.me, created to help other executives and professionals rehabilitate their finances and make a prosperous, enduring retirement a reality.