by Jeff Thomas, International Man:

There are a growing number of websites out there that deal with the prospect of internationalisation. Many of these offer advice on destinations for those considering expatriation. This is a predictable and welcome development that reflects the times that we are in – times when some of the countries that were once regarded as “the best place in the world” are proving to be otherwise.

Any advice to those who hope to expatriate must carry the assumption that the reader is actually able to pay for his internationalisation. But within that framework there is a great deal of diversity as to level of wealth. This may mean the difference between relocating to a relatively expensive jurisdiction, such as Hong Kong, and relocating to a relatively inexpensive jurisdiction, such as Belize.

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In examining the advisory websites that are aimed more at the latter group, there tends to be significant emphasis on retirement income. Sites frequently target US-based individuals who are finding that their retirement plans have proven insufficient. The focus of the advisories is often based upon what a retiree can afford in a given country, based (primarily or entirely) upon his IRA and/or his Social Security.

If the living costs in Quito, Ecuador are described as, say, 50% of the costs in the US, the retiree may feel encouraged to relocate to Quito. And, in fact, after making the move, he might find that things seem to be working out rather well. But this situation may change and change rather dramatically. Not because Quito suddenly is becoming more upscale, but because the US-based income may not remain static.

Funding One’s Retirement

Let’s begin with the retiree’s IRA. At one time, Americans were encourage to save – to put their money in banks, receive interest on their savings, and build up their initial deposits into something greater over time. They were further encouraged to study investment opportunities, such as the stock market, to invest in it and collect dividends that would either be re-invested or go into the bank account.

This worked fairly well. But the key here was that the onus was on the individual to make his own decisions on his savings and investment. However, in recent decades, there has been a trend to move away from this principle. First, interest on savings has steadily diminished, due, in part, to government control. Second, people have been encouraged to place their money in Individual Retirement Accounts (IRAs) that were managed by financial institutions. They have a new incentive to do so – a tax break. It seemed good on the surface, but what was lost was the individual’s control of his savings. The control switched to financial institutions, insurance companies, and the central government.

The present economy has resulted in the retirement payout being far lower than was anticipated, making many Americans realise that they could no longer retire – or at least not in the US. At this point, it would have been beneficial to exit the IRA account. However, the accounts were set up in such a way that a significant penalty existed for exiting. So, the retiree has worked and saved all his life, only to have his expectations diminished significantly. But worse, he cannot exit the system. He must rely on those who are in charge (and have failed him) to make sure that what he has remaining will not diminish further. Not very promising.

The US government has suggested that, as IRAs have not been as successful as planned, it may have to intervene – to require that IRAs invest in government bonds. If this is implemented and the US dollar subsequently crashes, it’s reasonable to expect that those bonds will never deliver on their promise. Once again, the value of the IRA payouts will decline.

And that leaves Social Security. When Social Security was first created, the number of working individuals far exceeded the number of retired individuals, and the idea of the present generation funding the retirements of the previous generation was workable. However, that changed with the baby-boomer generation, an 18 year anomaly that created the largest workforce in US history and would also be responsible for creating the greatest bubble of retirees in US history. The US government will simply be unable to cover the unfunded liability of Social Security when they retire.

So, would the US government cut Social Security benefits? Not when an easier solution exists. The benefits could remain the same or even increase, whilst dramatic inflation would simply erode the purchasing power of those benefits. Inflation is easy to create, as all a government need do is print more money.

Retirement Options

Considering each of the above, our retiree who has moved to Ecuador may very well have done so assuming his IRA and Social Security would be enough to cover his cost of living there. Should he find that both of these government-inspired boondoggles will ultimately fail to provide him with sufficient funds on which to live (even in an inexpensive jurisdiction like Ecuador), our retiree would then discover that, in order to eat, he must go back to work.

He would then encounter a basic truth – that a primary reason Ecuador is inexpensive is that wages are low. Many people live at a bare subsistence level. The retiree would realise that he must find employment that will provide him with more than what a Quito waiter generally earns. He would then find himself as an outsider attempting to start over and hoping to receive more than the locals.

So, does this mean that those who presently rely on their governments to ensure their retirements should give up on the idea of expatriating to “someplace cheaper”? Not necessarily, but it most certainly means that the move must be well thought through.

For a start, it would be wise to treat the present level of retirement funds as “temporary,” realising that they may diminish or even disappear entirely. Based upon this assumption, the retiree would be compelled to create a more pro-active plan, such as actually buying a café in Quito, or setting up an internet-based business. Such a business could be as simple as an advisory to those in a similar situation who have not yet made the move, or it could be something else entirely. The essential key is to recommit to the concept of relying on ourselves and our own actions in order to pay our way, not relying on our government.

Moving to a new jurisdiction can be one of the most interesting and rewarding experiences of a lifetime, but only if it is adequately funded.

Editor’s Note: For a desperate government, retirement savings are juicy targets that are often too hard to resist. They find one way or another to siphon off the purchasing power of the people’s retirement savings.

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