5 Obstacles to Effective Expat Retirement Planning
By Chad Creveling, CFA, and Peggy Creveling, CFA
It's not news that we're facing a retirement crisis. According to a retirement security report by the U.S. Government Accountability Agency, "About half of (U.S.) households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA)…Many older households without retirement savings have few other resources, such as a defined benefit (DB) plan or nonretirement savings, to draw on in retirement." A number of structural issues—a shift away from corporate pensions, spiraling health care costs, lack of job stability, greater longevity, and the demise of the nuclear family—have contributed to the coming crisis.
A lack of planning also plays a big role. A recent Northwest Mutual survey shows that 34% of pre-retirees did not have a formal retirement plan, and 58% thought their efforts needed improvement. Other studies indicate that these percentages increase sharply for those more than 15 years from retirement.
For those planning to retire in emerging and developing markets, planning is even more important as retirees have to deal with rapid inflation, increased currency volatility, and the absence of the social safety nets available back in home countries.
Unfortunately, a number of issues related to inertia, misguided assumptions, and a lack of focused planning can result in expats who are inadequately prepared for retirement. Here are some of the biggest obstacles to coming up with an effective retirement plan.
Key Impediments to Effective Retirement Planning
1. Not knowing how much is needed for retirement: According to the results of a recent survey by the Society of Actuaries, "half of pre-retirees and retirees said they do not consult with a professional financial planner or advisor. About one in 10 indicated they consult a financial professional less than once a year. " One consequence is that most people underestimate the amount of savings required to fund a comfortable retirement. They would be surprised to know that it takes about $250,000 in savings to safely provide $10,000 in inflation-adjusted income each year over a 30-year retirement.
2. Not knowing how much to save: Closely linked to knowing how much is needed to fund a comfortable retirement is knowing how much to save each year to get there. Just the act of saving in itself is not sufficient (and many are not saving at all). Those who are, are not saving nearly enough to reach their retirement goals. It's critical to calculate how much you'll need to save each year to reach your retirement goals. One thing is for sure: The earlier you start, the easier it is.
3. Assuming expenses will go down in retirement: Conventional wisdom has it that expenses in retirement will go down. Recent studies, however, show this may not be the case. Better health, active lifestyles, spiraling health care costs, caring for elderly parents, supporting children, etc., all result in higher-than-expected spending in retirement. A good rule of thumb is to take what you're currently spending as your baseline retirement spending. Of course, this number is highly individualistic, and you should carefully work through your expenses to determine your actual spending in retirement. For those who plan to retire to "cheaper" emerging markets, you need to consider that these countries tend to have higher inflation and substantially higher currency volatility, which can quickly erode the "cheapness" factor.
4. Unrealistic expectations for investment returns: Many people have very unrealistic expectations of what they can earn on their investments over the long run. Many expect they will be able to earn double-digit returns year in and year out on their portfolios. This is far from reality. You may earn a double-digit return in some years, but over the long run, most properly constructed investment portfolios will earn a real rate of return (minus inflation) of just 3–5%. When calculating the annual savings required to reach your retirement goals, it's important to use realistic rates of return or you risk coming up short.
5. Assuming the ability to work in retirement: According to an Associated Press poll, 73% of baby boomers plan to work in retirement. Unfortunately, the reality doesn't match the optimism. Only about 25% of those between the ages of 65 and 74 were still working in 2008. This falls to about 9% for those aged 75 to 84. After age 85, only 3% are still working. Most workers past normal retirement age have little control over when they stop working. Health issues, disability, downsizing, and the need to care for a family member cause many to leave the workforce earlier than desired. For those still able to work, salaries may be only a fraction of what they were in their peak earning years.
A Little Planning Goes a Long Way
Saving for retirement can seem daunting, but a little planning can go a long way to ensuring a comfortable retirement. Starting with some concrete goals and working from realistic assumptions will help produce an effective plan. Plenty of research shows that those who establish formal plans engage in behaviors that help them achieve their goals. According to a Deloitte survey, those with a formal plan felt four times more secure about their financial future than those without one. Whether you work with a financial planner or do it yourself, the trick is to get started.
GAO Retirement Security Report: Most Households Approaching Retirement Have Low Savings
Society of Actuaries: 2015 Risks and Process of Retirement Survey
Expat Financial Planning: Overcome Mental Roadblocks and Get Started Saving
Expat Investing: Are Unrealistic Expectations Derailing Your Investment Plan?
This article is a revised and updated version of an article that originally appeared on www.crevelingandcreveling.com on 10 June 2013.