Why Expats Are Outliving Their Money: The Retirement Risks

Retiring abroad can make your money go much further. That is one of the attractions in the first place. A pension that feels fairly ordinary in Britain, Australia, Canada or the United States can provide a considerably better lifestyle in parts of Southeast Asia or Latin America.

But there is a problem that doesn’t get nearly enough attention.

You may live longer than your retirement plan was designed to support.

A healthy person reaching their sixties today can quite reasonably expect to live well into their eighties, and some will reach their nineties or beyond. If your financial planning assumes twenty or twenty-five years of retirement but you eventually need thirty or thirty-five, the problem isn’t that you have done anything wrong. Your plan simply wasn’t built for the life you ended up living.

And living abroad creates some additional risks that are easy to overlook.

Your expenses may rise faster than expected. Your home currency can lose value against the currency you actually spend. Healthcare becomes more expensive as you get older. Investment markets can fall at precisely the wrong time. A retirement plan that looks perfectly comfortable today can look rather different ten or fifteen years down the road.

I’ve seen this happen to people who were otherwise financially sensible. They paid off their mortgage, built a pension pot, worked out their monthly income and moved somewhere where their costs were lower. On paper, everything looked fine.

Then reality started doing what reality tends to do.

Inflation moved higher. Exchange rates changed. Medical costs arrived. Their original assumptions became less useful with every passing year.

The problem wasn’t necessarily that they didn’t have enough money.

They hadn’t planned for enough time.

The First Problem: You’re Planning to Live Too Short a Life

This is where I’d start if you are already retired or planning to retire abroad.

Ask yourself a simple question: how old have you planned to be when your money runs out?

For many people, the answer is somewhere around 85. Perhaps 90 if they’ve been particularly cautious. The trouble is that an average life expectancy isn’t the same thing as a sensible planning age for a healthy person who has already reached retirement.

If you’re 60 and in reasonably good health, you don’t want your financial plan to work beautifully if you die at 82 and fall apart if you reach 92. The latter is hardly an unlikely outcome.

There is another irony here for expats.

Many people move abroad partly because they expect to live a better life. They may walk more, spend more time outdoors, eat differently, drink less, have less work-related stress and become more socially active. Those can all be positive changes.

But there’s a financial consequence nobody particularly wants to think about.

A healthier retirement can be a longer retirement.

That’s obviously a good problem to have. Being alive at 92 is preferable to not being alive at 92. But your pension pot doesn’t care about the quality of your lifestyle. If you’ve only planned financially for twenty years and end up needing thirty-five, you have a very real gap.

Imagine retiring at 60 and planning for your money to last until 85. That’s 25 years.

You reach 90.

You’ve now got another five years of rent or property costs, food, utilities, insurance, healthcare, transport and everything else. If you reach 95, the gap is ten years. And those aren’t necessarily the cheapest years of your retirement.

The later years are precisely when healthcare and support costs can become more significant.

So I’d rather see somebody build a plan that works to 95 and then discover they have money left over than build a plan that looks wonderfully efficient to 85 and leaves them wondering what happens next.

That’s not pessimism.

It’s proper planning.

Inflation Is Quietly Eating Your Retirement

Inflation is particularly dangerous because it doesn’t usually feel like a crisis.

You don’t wake up one morning and discover that your retirement has suddenly become unaffordable.

Instead, the cost of ordinary life creeps upwards.

Your rent increases. The supermarket bill gets larger. Your electricity costs more. Restaurants put their prices up. Flights become more expensive. Insurance renewals cost more than they did the previous year.

Individually, these increases can look manageable.

Over ten or twenty years, they can completely change the numbers.

This is especially important for expats because your income and your spending may be in different economic environments. Your pension might be paid in pounds, dollars or another home currency while virtually everything you buy is priced in Philippine pesos, Thai baht, Malaysian ringgit, Mexican pesos or another local currency.

Your retirement plan therefore has to deal with more than one inflation rate.

For a British expat, there is an additional issue depending on the country where you live. The UK State Pension does not receive the same annual increase in every overseas destination. Whether it is uprated depends on the country in which you are resident.

That matters because a fixed or slower-growing income is being asked to fund expenses that continue to rise.

Even where your pension does increase, that doesn’t necessarily mean your purchasing power is protected. The inflation measure affecting your income may not match the actual costs you’re facing where you live.

An American retiree faces a slightly different version of the same problem. Social Security has cost-of-living adjustments, but those adjustments are based on US inflation rather than the precise inflation experienced in the country where the retiree spends their money.

The basic principle is the same.

Your income can rise while your real purchasing power still falls.

That is why I would never build a long-term expat retirement budget using today’s prices and assume they will remain broadly similar for the next thirty years.

They won’t.

You need an inflation assumption built into the plan, and you need to test what happens if inflation is higher than you expected.

Currency Risk Can Cut Your Income Without Touching Your Pension

This is one of the risks that can really catch people out.

Suppose you’re a British retiree receiving £2,000 a month and living in the Philippines. Your pension hasn’t changed. Your spending habits haven’t changed. Nothing about your personal finances has changed.

Then the pound weakens against the peso.

Suddenly that same £2,000 buys fewer pesos.

You haven’t lost any pounds.

But you have lost purchasing power where you actually live.

That’s the important distinction.

A currency movement of 15 percent on a £2,000 monthly income represents £300 worth of local purchasing power each month. Over a year, that’s £3,600.

And you haven’t necessarily done anything wrong.

You haven’t spent more. You haven’t suddenly become extravagant. The exchange rate has simply moved against you.

Currency movements can work in your favour as well, of course. That’s precisely the point. You cannot reliably assume which way they will move over a thirty-year retirement.

This is why expats need to think differently about currency exposure.

If virtually all your income arrives in one currency while virtually all your expenses are in another, you’ve created a risk that sits quietly in the background every day.

You don’t need to become a currency trader.

You do, however, need to understand the exposure you’re carrying.

Depending on your circumstances, maintaining assets or income streams in more than one currency may provide useful diversification. You may also want enough accessible reserves to avoid being forced into an unfavourable currency conversion at precisely the wrong time.

And don’t make the mistake of looking at today’s exchange rate and assuming it tells you anything useful about the next twenty or thirty years.

It doesn’t.

The exchange rate you retire on could be dramatically different from the one you’ll be living with at 75 or 85.

The Bigger Problem Is That These Risks Compound

This is where retirement planning becomes more complicated than simply adding up your monthly expenses.

Longevity, inflation and currency risk don’t operate independently.

You could live longer than expected while your living costs increase faster than planned and the currency moves against you.

None of those events needs to be catastrophic on its own.

Together, they can materially change the financial picture.

And this is before we’ve considered healthcare, investment returns, taxation or the possibility that your circumstances change.

That’s why I don’t think the question should simply be:

“Can I afford to retire abroad today?”

The better question is:

“Can my financial plan survive the next thirty years if things don’t go exactly as expected?”

That’s a much harder question.

It’s also the one that matters.

Healthcare Is the Expense Most People Underestimate

There is another reason retirement can become more expensive as you get older, and this one is particularly important for expats.

Healthcare.

When you’re 55 or 60 and reasonably healthy, it is easy to look at your medical spending and think it is unlikely to change much. Perhaps you have private health insurance, an annual check-up and the occasional prescription. You may spend very little on healthcare for years.

Then something changes.

It might be a heart problem, cancer, diabetes, a joint replacement, a stroke or simply the accumulation of several age-related conditions. You don’t need to become seriously ill for healthcare to become a significant part of your annual budget.

And healthcare costs rarely arrive in a neat monthly package.

You might go for years without making a major claim and then suddenly face a substantial bill. If you’re uninsured or underinsured, that can put a serious hole in your retirement savings.

This is why I think international health insurance deserves much more attention from expats approaching retirement.

It isn’t simply about having somebody pay the hospital bill. A good international policy can give you access to treatment in other countries, depending on the policy, and can provide a level of financial protection that becomes increasingly valuable as you get older.

The important point is to understand the policy before you need it.

Don’t wait until you’re 72 and facing a serious diagnosis to discover that your cover has exclusions, limits or geographical restrictions you didn’t understand when you bought it.

Age also matters.

Health insurance generally becomes more expensive as you get older. Existing medical conditions can affect underwriting, exclusions and availability. Some policies become much harder to obtain later in life.

So if you’re planning to retire abroad, healthcare shouldn’t be something you sort out after you’ve moved.

It should be part of the financial plan before you go.

Your Investment Returns Won’t Arrive in a Straight Line

Then there is investment risk.

This is another area where retirement plans can look deceptively comfortable when everything is going well.

If you’ve built a diversified investment portfolio and it produces a reasonable long-term return, you might calculate how much income you can take each year and conclude that the numbers work.

The problem is that markets don’t deliver their returns neatly.

You might get several good years followed by a major fall. Or you might retire just before a prolonged period of weak investment performance.

That matters because you are no longer simply investing for growth.

You’re taking money out.

This is known as sequence of returns risk, and it can have a major effect on how long a retirement portfolio lasts. Two people can experience exactly the same average investment return over twenty years and end up in very different financial positions depending on when the good and bad years occurred.

Imagine you retire with a million pounds.

The market falls 20 percent in your first year while you’re withdrawing money to fund your lifestyle.

You’ve now got a smaller portfolio from which to fund future withdrawals. When the market eventually recovers, you’re recovering from a lower base.

That doesn’t mean you should keep all your money in cash.

Cash has its own problem.

Inflation gradually reduces its purchasing power.

The point is that retirement investing requires a different mindset from simply accumulating wealth during your working years.

You need to consider how much risk you can actually afford to take, how much income you’re withdrawing, what other income you have and how long the money needs to last.

And this is where professional financial advice can be worthwhile.

Not because somebody has a magic investment that will solve everything.

They don’t.

It’s about making sure the overall structure of your finances matches the life you’re actually trying to fund.

The Retirement Budget You Built at 60 May Be Wrong at 75

There is another trap that catches people out.

Your spending patterns change.

At 60, you may spend a lot on travel.

You might fly home regularly to see family. You may take several holidays each year. You might eat out frequently, play golf, join clubs and generally make the most of the freedom you’ve suddenly acquired.

At 75, some of that may change.

Perhaps you travel less.

But you may spend more on healthcare, medication, taxis, domestic help or other services that make everyday life easier.

At 85, the balance can change again.

You may need assistance around the home. You may require somebody to drive you to medical appointments. You may decide that living in a property with lifts, security and accessible facilities is worth paying more for.

None of this means that your later years will necessarily be miserable or expensive.

It means your retirement budget shouldn’t assume that your spending remains identical from age 60 to age 90.

It probably won’t.

This is particularly important when you’re living abroad because the support network you might have taken for granted at home may not exist.

If you’re living in a foreign country without close family nearby, you may eventually have to pay for services that family members might otherwise provide.

That needs to be part of the conversation.

What Happens If You Can No Longer Manage Your Own Affairs?

This is the bit nobody likes talking about.

You might be perfectly capable of managing your money today.

But what happens if you’re not able to do it in ten or twenty years?

Perhaps you’ve had a stroke. Perhaps you’ve developed dementia. Perhaps you’re physically capable but simply can’t manage banking, investments, property and paperwork in the same way anymore.

If you’re living abroad, the situation can become considerably more complicated.

Who can make financial decisions for you?

Who has authority over your bank accounts?

Who can deal with your investments?

Who can sell your property if necessary?

Who can make decisions about your affairs if you lose capacity?

And which country’s laws apply?

These aren’t questions you want to answer during a crisis.

This is where proper estate planning comes in.

For many expats, a will is only one part of the picture. Depending on your circumstances and the countries involved, you may also need to consider powers of attorney and how your assets are structured.

Don’t assume that a document prepared in your home country automatically gives somebody the authority they need in the country where you live.

Cross-border estate planning can be complicated.

Get proper advice while you’re still fit and able to make your own decisions.

It is much easier to put the right arrangements in place when everything is going well.

The Property Trap

Property deserves a mention because buying a home abroad can feel like the obvious solution.

Instead of paying rent indefinitely, you buy somewhere, eliminate a major monthly expense and have an asset that you can eventually leave to your children.

Sounds sensible.

Sometimes it is.

But property isn’t the same thing as cash.

If you’re 82 and suddenly need a significant amount of money for healthcare or care, you can’t eat the bricks.

Selling a property can take time. It may involve taxes, legal costs, agents’ fees and currency conversion. If you’re living in a different country from your children, dealing with the sale can become even more awkward.

There is also the question of whether the property is actually suitable for your later years.

That beautiful townhouse with three floors and a spectacular staircase might be wonderful at 62.

At 82, you may feel rather differently about those stairs.

This is why I would be cautious about putting too much of your retirement wealth into an illiquid property simply because it feels safer than renting.

A property can be an excellent part of a retirement strategy.

It shouldn’t automatically become the entire strategy.

What If Your Partner Dies First?

This becomes particularly important for couples.

You may have planned your retirement together and assumed that your combined income will continue more or less indefinitely.

But what happens when one person dies?

Some pensions provide a survivor’s benefit. Others don’t.

Some investments may transfer efficiently. Others may create tax or legal complications.

Property ownership can matter.

Wills matter.

Bank accounts matter.

And if you’re living abroad, the legal position can be very different from the one you would have at home.

A retirement that looks comfortable for two people can become much less comfortable for one.

The surviving partner may suddenly be paying the same rent, the same utility bills and many of the same living costs on a reduced income.

That possibility needs to be modelled before retirement, not discovered afterwards.

Don’t Build Your Plan Around Everything Going Right

This is probably the most important point I can make.

A retirement plan shouldn’t only answer the question:

“What happens if everything goes according to plan?”

It should answer:

“What happens if several things go wrong at the same time?”

You live to 95.

Inflation is higher than expected.

Your home currency weakens.

Your investments have a poor few years.

Your healthcare costs rise.

Your partner dies.

You need paid assistance later in life.

None of those possibilities is particularly exotic.

The mistake is assuming they will all happen independently and that you can deal with each one when it arrives.

Proper planning looks at the combination.

It asks whether you still have enough money if your assumptions prove too optimistic.

That’s the difference between a retirement plan that looks good on paper and one that has been properly stress-tested.

The Naked Expat Approach

If you’re considering retirement abroad, strip the whole thing back to basics.

Work out what you actually spend.

Then assume those costs will rise.

Work out how long you might realistically need your money.

Then assume you live longer.

Look at your pension income and ask what happens if its purchasing power falls.

Look at your investments and ask what happens if markets fall early in retirement.

Look at your health insurance and understand exactly what it does and doesn’t cover.

Look at your property and ask whether you could access the money if you needed it.

Then look at your estate planning.

Who gets what?

Who can act for you?

What happens if you lose capacity?

What happens if your partner dies first?

And which country’s laws are involved?

You don’t need to predict the future.

Nobody can.

You need a financial structure that gives you some room when the future refuses to behave as expected.

That’s the naked truth about retiring abroad.

The biggest danger isn’t necessarily spending too much money.

It is assuming you know exactly how long your retirement will last, what everything will cost and what the world will look like twenty years from now.

You don’t.

And neither does anyone else.

The sensible approach is to build enough flexibility into the plan that you don’t have to get everything right.

FAQs

International Health Insurance

International health insurance can be an important part of retirement planning for expats, particularly as healthcare needs and costs can increase with age. Naked Expat readers can find further information about international health insurance and request a confidential review here: International Health Insurance for Expats.

Wills and Estate Planning for Expats

Living abroad can create additional complications around wills, powers of attorney, property and inheritance. Proper cross-border estate planning can help ensure your affairs are dealt with according to your wishes: Wills and Lasting Powers of Attorney for Expats.

Free Expat Guides

Our free guides cover practical issues that expats need to consider before and during life abroad, including money, healthcare, relationships and protecting your assets: Browse the Free Expat Guides.

How Expats Lose Their Assets Abroad

Protecting your wealth abroad starts with understanding the ways expats can lose control of their assets. Explore our related Naked Expat resources here: How Expats Lose Their Assets Abroad.

Planning Your Life Abroad?

Before you make the move, take the time to understand the financial, healthcare and legal issues that can affect your future overseas. Start with our free expat guides and work through the areas that matter to you.

Explore the Free Expat Guides