Reader Case Study - Critique my overseas FIRE plan

[Zummbot]

Hello Mustachians,

So I am trying to plan an early retirement in Brazil, and am still new to the MMM concepts and would appreciate some help. I am a complete math noob, so I need the help of the senior mustachians, if you would be so kind.

Some background: I am 30, married to a Brazilian, also 30, and we want to be FIRE'd (is that a verb?) sipping caipirinhas on the beach in Brazil before we're 40. That's the goal, anyway. We currently live and work in the US, saving our stash in USD. We are committed to living a mustachian frugal lifestyle and will be for the rest of our lives.

Our expenses are down to about $2k a month, so we're pretty good there. In the very near future we will have some job changes that will put our combined yearly income (before taxes) in the $95 - $110k range. We will probably have a baby in the next couple years, but are currently childless. We have about 75k to our name currently, though a chunk of that will soon be going to a down payment on a modest house (in the 180 - 195k range).

We have made a budget for living in Brazil and determined that we will need about R$2,500 (<-- that's Brazilian reals) a month to meet our basic expenses (assuming a house is paid off and we own 1 modest used car, both of which we plan to buy in cash when we move). So, how then do we determine how many dollars are necessary to translate into R$2,500 a month (adjusted for inflation) for the next 60 years?

At the current exchange rate of 2.58, R$2,500 = $966 USD. Sweet! But the exchange rate has been on a wild ride in the past few years.

The Brazilian Real is a new currency, not introduced until the mid-90's after a couple previous currencies were washed away by soaring inflation. Since then it's done better, but inflation is still high, like in the 6% range. It started as pegged at 1 to 1 with the USD, so since it began at an artificial position I only pay attention to the rate since 2000. If you're interested here is a chart of historical exchange rates: http://www.tradingeconomics.com/brazil/currency If you change the dates to reflect 2000 - 2014 it will show you the wild swings the real has taken in that time. During that time it has gone as low as 3.95 and as high as 1.56 to the USD.

Originally I thought ok, I'll plan conservatively and pretend like the exchange rate will always be 1.56. Therefore a 500k USD stash will allow me to take out 20k USD a year (by virtue of the 4% rule) which would translate to R$31,200 a year or R$2,600 a month at an exchange rate of 1.56. Anytime the exchange rate is above 1.56 (which has been the vast majority of the time) I will only withdraw R$2,500 per month and the extra stays in the investment accounts to marinate. With favorable exchange rates my SWR is quite a bit below 4%.

Now, I really like caipirinhas, and I don't want to spend more time working if I don't have to. Maybe the assumption that the exchange rate will always be 1.56 is too conservative. I'm a mustachian after all, I'm flexible and I can deal with change. My wife wants to keep working after we go to Brazil, so there's money coming in. I'm a graphic designer and will almost certainly continue doing some freelance here or there. After all the average exchange rate has been around the 2.21 level, so if we go by that then we only need $13,500 USD per year x 25 = $337,500 USD stash.

However 14 years is a very small sample size, and I obviously don't have a crystal ball. For all I know in 20 years 1 Brazilian real could be worth MORE than a dollar. How do you account for that uncertainty?

In terms of strategies for saving our dollars, I am maxing out our 401k's, and I think I will let those marinate for 30 years until we hit our 60's. By then SS kicks in (estimated at around $700 per month if I retire in my late 30's per the SS calculator) so SS + 401k + any leftover money from our pre-60's stash means we should be made in the shade after 65. But I also gotta get from late 30's to then.

Can anybody shed some light on this situation? Is my math completely off? Is there something I'm missing. I don't see much info on the forum about managing an exchange rate on top of investment returns. Help please.

[expatartist]

You're in an unusual position for this board. There are a few of us in Asia, or who plan to retire here, but  few(er) who are looking at Latin America, especially S. America's 'economic powerhouse'. However we all share some of the same challenges related to currency fluctuations. Brazil remains an emerging economy with good prospects for the future. I would expect over the next 60 years its currency will increase relative to the US$, but who knows?

We currently earn salaries in Chinese Yuan, own a couple of low-cost properties in Euro, will eventually invest in ETFs in US$ and UK Pounds, and may buy an inexpensive property or 2 in Japan and/or the US in the next year. Our approach is to diversify our currency investments, to provide a hedge and flexibility for our home base(s). During retirement our plan is to mainly be spending Euro, a currency which may not even exist in a couple decades.

You may want to diversify your currencies with whatever investment vehicles you prefer.

[john c]

A couple of points:

-Inflation almost always goes one way, up.  If the real were to start appreciating against other currencies, the Brazilian Central Bank would take steps to halt the rise.  Otherwise, Brazilian exports would become more expensive, and it would it would tank exports, and thus the economy. 

-You are probably safe keeping your assets in US dollars and taking out what you need when you need it.  All international commodities are priced in dollars, so you would be insulated somewhat from local currency variations of the stuff you consume.  Since you're buying your fixed assets outright, this will limit the currency exposure.

-It doesn't really matter how many Reals to the dollar in 60 years.  On a basic level, currencies rise and fall based on expected inflation.  If the dollar continues to have low inflation and Real high inflation, a dollar will still buy what a dollar buys, with little impact of how many Reals you need to pull out of your pocket to buy it.  Check out the Big Mac Index for more information.

-There are exceptions to this, but mostly from hard commodity producing countries during commodity booms.  Brazil doesn't fit into this category.

[Zummbot]

A couple of points:

-Inflation almost always goes one way, up.  If the real were to start appreciating against other currencies, the Brazilian Central Bank would take steps to halt the rise.  Otherwise, Brazilian exports would become more expensive, and it would it would tank exports, and thus the economy. 

-You are probably safe keeping your assets in US dollars and taking out what you need when you need it.  All international commodities are priced in dollars, so you would be insulated somewhat from local currency variations of the stuff you consume.  Since you're buying your fixed assets outright, this will limit the currency exposure.

-It doesn't really matter how many Reals to the dollar in 60 years.  On a basic level, currencies rise and fall based on expected inflation.  If the dollar continues to have low inflation and Real high inflation, a dollar will still buy what a dollar buys, with little impact of how many Reals you need to pull out of your pocket to buy it.  Check out the Big Mac Index for more information.

-There are exceptions to this, but mostly from hard commodity producing countries during commodity booms.  Brazil doesn't fit into this category.

Thanks for chiming in! To your points:

- Inflation has been a problem in Brazil for a long time. It's gotten better in recent years, but will most likely be a big issue going into the future. Even now the Brazilian Central Bank is taking steps to halt the rise of inflation, but it's still hovering around 6 - 6.5%. Keeping our assets in dollars should shield us from this, however. Any reals we earn while living in Brazil will be spent before any dollars are touched.

- That's a good point, we will work to limit our currency exposure as much as possible.

- An excellent point. Maybe I am sweating the exchange rate too much. The future could change, but I feel safe making the bet that the real will have more inflation than the dollar long into the future. At any rate, remaining flexible and adapting to change will be crucial to a long successful retirement.

For now we are focusing on maxing out 401k's and putting any remaining savings in taxable accounts. Doing that until I'm in my late 30's I should have $125,000+ in there that can marinate and grow until we can tap into it at 59.5. Then SS kicks in at 62, so 401k's + SS + any leftovers from our pre-62 taxable accounts stash should mean we're good to go for the rest of our lives. Prior to 59.5 we will have about 25 years to make due on taxable accounts income and anything extra we make while working in Brazil.

I'm surprised there is not more discussion on this forum about retiring overseas, especially since in many places the exchange rate can act like a bonus money multiplier if your stash is in USD. It seems like the low cost of living overseas relative to the value of a USD would be a very mustachian move.

[Scandium]

I read a special report on the Brazilian economy in The Economist a few months back that I remember didn't paint a particularity rosy picture. Might be worth it to at least take a look at that. Higher inflation seems like a possibility. Of course nobody can know, but reading some of the other articles here can't hurt:
http://www.economist.com/topics/brazil
(Economist are one of the few news outlets I trust at all)

[Zummbot]

I read a special report on the Brazilian economy in The Economist a few months back that I remember didn't paint a particularity rosy picture. Might be worth it to at least take a look at that. Higher inflation seems like a possibility. Of course nobody can know, but reading some of the other articles here can't hurt:
http://www.economist.com/topics/brazil
(Economist are one of the few news outlets I trust at all)

Hey thanks for the link! Will definitely read the article. The near future definitely does not look good for the Brazilian economy. The silver lining is that the worse the economy is doing there, the more valuable our dollars are while we're living there. That's a prime reason why we want our stash in dollars. I do think the value of the real will continue to fall in the next few years.

[Gimesalot]

Hubby and I are planning on FIRE to Argentina within 5 to 7 years.  We are going to do some things differently than your plan.  First, we are not going ot purchase property in Argentina.  I don't know about Brazil, but in Argentina, the buying and selling of property is extremely expensive.  I believe there is a 40% tax on the transfer of property.  Also, taking money from the country can become imposible.  Therefore, we are expecting to lose all money we invest in Argentina.  Another plus for renting, is that we are going to do an all inclusive apartment.  I am not sure about how Brazil works, but in Argentina you have to pay bills in person at a bank.  It recently took my friend 5 hours to pay her water bill.  We don't want to deal with paying bills so we are skipping owenership.  Third, I am not sure how easy it is to get money into Brazil.  Have you looked at how you would transfer from US banks to Brazilian banks?  What about the fees they charge? 

I understand that Brazil is not in the same position as Argentina, however, their histories are similar.  If I were you, I would be a lot more worried about political fluctuations than exchange rates.  Protect yourself from both.

[Zummbot]

Hubby and I are planning on FIRE to Argentina within 5 to 7 years.  We are going to do some things differently than your plan.  First, we are not going ot purchase property in Argentina.  I don't know about Brazil, but in Argentina, the buying and selling of property is extremely expensive.  I believe there is a 40% tax on the transfer of property.  Also, taking money from the country can become imposible.  Therefore, we are expecting to lose all money we invest in Argentina.  Another plus for renting, is that we are going to do an all inclusive apartment.  I am not sure about how Brazil works, but in Argentina you have to pay bills in person at a bank.  It recently took my friend 5 hours to pay her water bill.  We don't want to deal with paying bills so we are skipping owenership.  Third, I am not sure how easy it is to get money into Brazil.  Have you looked at how you would transfer from US banks to Brazilian banks?  What about the fees they charge? 

I understand that Brazil is not in the same position as Argentina, however, their histories are similar.  If I were you, I would be a lot more worried about political fluctuations than exchange rates.  Protect yourself from both.

Hi Gimesalot,

I am not familiar with the situation in Argentina, but I have done my homework for Brazil. Upon buying a house/property there is the same closing costs you'd find in the US, but nothing like a 40% tax on property transfers. We anticipate being able to buy a hectare with a modest house for around R$350k ($135k USD) near my wife's hometown. Bringing our car with us is against the law, so we will have to pony up for a car there. A decent used car might go for $R15 - 20k.

There are similar issues with getting money out of Brazil, though I don't think it's quite as difficult as Argentina. Our plan centers around NOT having money in Brazil. For general day to day spending we are going to leave our money in our US investment accounts, and transfer money to our US bank account as needed. Then we will use our bank cards in Brazil. There are a handful of bank accounts that allow you to use your card in a foreign country, do not charge foreign transaction fees or atm fees, give you the exchange rate set by Visa that day (which is only a small fraction above the actual rate) and REFUND any fees charged to you by other banks for using their atm's. Schwab has one: http://www.schwab.com/public/schwab/banking_lending/checking_account and Fidelity has a similar one, among others.

Keeping our money in USD will shield us from the inflation of the Brazilian Real, not to mention I am familiar with investing in the US and wouldn't even know where to begin in Brazil. Inflation of the Real only increases our buying power in Brazil, so that is a strong position to be in going forward.

I do anticipate having to make a large wire transfer initially to purchase property and a car, and that may have some fees attached to it, but it's a one time thing so not a big deal. I need to do some research and see if I can get the money into Brazil without it being taxed as income by Brazil (since it was taxed previously by the US) but I don't have all the answers to that yet.

I know a lot of people in Brazil do pay bills at banks/atm's, but it's not mandatory. Some companies have online payment options, and some don't. Also something I need to do some more research on, but it's not at the top of my priority list. We'll figure it out.

I frequent the Brazil expat forum at gringoes.com. Between that and MMM I am figuring out how to apply MMM concepts in a foreign country. I would recommend finding a similar forum focused on Argentina that will be able to provide some more answers, especially in the area of taxes, money transfers, etc.

[Scandium]

Interesting, sounds like you have done your research. So I'm curious; do you know how income/capital gains taxation would work? The US does global taxation so you'd have to pay taxes on your 401k money. If any, but seems like you should be able to get that to zero.

How will Brazil view US tax deferred accounts? Do they acknowledge this at all, or just tax it as regular investments? You'd have to file tax returns in both countries, but that shouldn't be that big a deal.

There are no problems maintaining a US bank account when you're not a resident? You could run into issues with money-laundering laws regarding large international transfers, maybe look into that..? Although I've done it a few times without problems.

I'm pretty sure that if I move back to the "old country" they'd happily tax my 401k at at least 27% as capital gains, and probably a wealth tax as well. So I've kinda written that idea off, but interesting to hear how you can make it work.

[Zummbot]

Interesting, sounds like you have done your research. So I'm curious; do you know how income/capital gains taxation would work? The US does global taxation so you'd have to pay taxes on your 401k money. If any, but seems like you should be able to get that to zero.

How will Brazil view US tax deferred accounts? Do they acknowledge this at all, or just tax it as regular investments? You'd have to file tax returns in both countries, but that shouldn't be that big a deal.

There are no problems maintaining a US bank account when you're not a resident? You could run into issues with money-laundering laws regarding large international transfers, maybe look into that..? Although I've done it a few times without problems.

I'm pretty sure that if I move back to the "old country" they'd happily tax my 401k at at least 27% as capital gains, and probably a wealth tax as well. So I've kinda written that idea off, but interesting to hear how you can make it work.

Yes, taxes will have to be paid to the US when we take out 401k money, but our living expenses will be so low it will be very small, if any. See MMM and the Mad FIentist have great articles on 401k withdrawals.

How Brazil will view tax deferred accounts is a good question. That's another area I am still researching. I'm not planning on telling them about our US assets if I can help it. Technically that money will never be entering Brazil, it will stay in the US while I use my card to make purchases in Brazil. I am hoping to work out a situation where I am only paying taxes on my Brazilian income to Brazil (wife still wants to work after the move, I'm sure I'll do something part time too).

Maintaining a US bank account as a non-resident is not an issue. Change the address the bank has on file to the address of a friend or relative, and have the bank send you online statements. Just make sure you don't move directly overseas from one of the 4 unfavorable states (Virginia, New Mexico, South Carolina, or California) as these states will still tax you if you still maintain "ties" to the state (like a bank account registered with an address from one of those states). You can read more about that here: http://www.taxesforexpats.com/articles/expat-tax-rules/state-taxes-expat-tax-return.html

Like you said about the "old country", it's very place specific in terms of what you can expect tax wise. We still have at least 6 years before we would make the move, so we still have time to figure out all the particulars.

[Gimesalot]

To me it sounds like you have done a lot of research and will be ready to go as soon as you get the funds together.

You will have to report your Brazilian income on your federal taxes in the US.  You can use Form 1116 to claim a credit for taxes paid to a foreign country.  Also read publication 514 for more info.

[former player]

You mention buying a house in the near future: if this is in the USA is it intended to be a rental in due course?  I don't quite understand why you would otherwise be buying a house in the USA.

[Scandium]

Yes, taxes will have to be paid to the US when we take out 401k money, but our living expenses will be so low it will be very small, if any. See MMM and the Mad FIentist have great articles on 401k withdrawals.

How Brazil will view tax deferred accounts is a good question. That's another area I am still researching. I'm not planning on telling them about our US assets if I can help it. Technically that money will never be entering Brazil, it will stay in the US while I use my card to make purchases in Brazil. I am hoping to work out a situation where I am only paying taxes on my Brazilian income to Brazil (wife still wants to work after the move, I'm sure I'll do something part time too).

Not telling brazil about your US assets might work fine, but probably illegal and considers tax evasion. A choice you have to make I guess.

Did a quick search
http://www.kpmg.com/global/en/issuesandinsights/articlespublications/taxation-international-executives/brazil/pages/income-tax.aspx
"Investment income from sources outside Brazil is subject to tax at ordinary rates and the tax is required to be paid by the last day of the month following the month of receipt of the income."
But looks like income tax in brazil is 0% below $68K or so? So maybe you're ok anyway?

[rubybeth]

You mention buying a house in the near future: if this is in the USA is it intended to be a rental in due course?  I don't quite understand why you would otherwise be buying a house in the USA.

He says the house will be in Brazil and be their residence.

[Zummbot]

You mention buying a house in the near future: if this is in the USA is it intended to be a rental in due course?  I don't quite understand why you would otherwise be buying a house in the USA.

Perhaps we shouldn't? I anticipate being here for 6 - 8 years. Since we are residents of one of the bad 4 states (from article above on state taxation) I'd sell before we leave the US. And I'm not interested in being an absentee landlord. The cost of a mortgage vs. the cost of a rental is skewed heavily in favor of buying in my area.

I'd say a down payment would be around $35k, but we'd probably save $200 a month buying vs. renting. Think we should invest the down payment and keep renting instead? What do you think?

[Zummbot]

Yes, taxes will have to be paid to the US when we take out 401k money, but our living expenses will be so low it will be very small, if any. See MMM and the Mad FIentist have great articles on 401k withdrawals.

How Brazil will view tax deferred accounts is a good question. That's another area I am still researching. I'm not planning on telling them about our US assets if I can help it. Technically that money will never be entering Brazil, it will stay in the US while I use my card to make purchases in Brazil. I am hoping to work out a situation where I am only paying taxes on my Brazilian income to Brazil (wife still wants to work after the move, I'm sure I'll do something part time too).

Not telling brazil about your US assets might work fine, but probably illegal and considers tax evasion. A choice you have to make I guess.

Did a quick search
http://www.kpmg.com/global/en/issuesandinsights/articlespublications/taxation-international-executives/brazil/pages/income-tax.aspx
"Investment income from sources outside Brazil is subject to tax at ordinary rates and the tax is required to be paid by the last day of the month following the month of receipt of the income."
But looks like income tax in brazil is 0% below $68K or so? So maybe you're ok anyway?

Hey thanks! I'll read through that link. Brazil is a funny place, very different from the US. There are laws, but a lot of the laws are unenforced. Judging by the amount of corruption in the government I'd say not reporting foreign bank accounts is endemic. I'll have a talk with my wife's family and get their opinions on reporting vs. not reporting after I've got the facts straight. We'd be living on way less than 68k (Real or USD) per year anyway, so it may be a mute point if the tax rate at that level really is 0%.

[former player]

You mention buying a house in the near future: if this is in the USA is it intended to be a rental in due course?  I don't quite understand why you would otherwise be buying a house in the USA.

Perhaps we shouldn't? I anticipate being here for 6 - 8 years. Since we are residents of one of the bad 4 states (from article above on state taxation) I'd sell before we leave the US. And I'm not interested in being an absentee landlord. The cost of a mortgage vs. the cost of a rental is skewed heavily in favor of buying in my area.

I'd say a down payment would be around $35k, but we'd probably save $200 a month buying vs. renting. Think we should invest the down payment and keep renting instead? What do you think?

You need to do the figures.  What would an investment of $35k in the stock market earn you over those 6 - 8 years?  Set it against that the costs of buying and selling less the $200 per month saved over renting.  If you can rely on some appreciation (e.g. you will be putting sweat equity into the house and you can be sure the neighbourhood is not going to go downhill/get flooded, etc.) you could add that in to your figures. 

Mostly people buy houses as a principal home because they are looking to stay for the long term and/or they value the emotional return of owning over the financial one, neither of which seem to apply to you, which is why I asked the question.  Also, remember that a house is a large and illiquid investment and it may not be a great time to sell it at the exact moment you want to FIRE.

I'm not saying don't buy, just that you shouldn't be buying just because it seems the obvious next step.  Think about it: the finances, the emotion, the convenience, etc.  Buy if you think it will come out positive for you.

[Zummbot]

You mention buying a house in the near future: if this is in the USA is it intended to be a rental in due course?  I don't quite understand why you would otherwise be buying a house in the USA.

Perhaps we shouldn't? I anticipate being here for 6 - 8 years. Since we are residents of one of the bad 4 states (from article above on state taxation) I'd sell before we leave the US. And I'm not interested in being an absentee landlord. The cost of a mortgage vs. the cost of a rental is skewed heavily in favor of buying in my area.

I'd say a down payment would be around $35k, but we'd probably save $200 a month buying vs. renting. Think we should invest the down payment and keep renting instead? What do you think?

You need to do the figures.  What would an investment of $35k in the stock market earn you over those 6 - 8 years?  Set it against that the costs of buying and selling less the $200 per month saved over renting.  If you can rely on some appreciation (e.g. you will be putting sweat equity into the house and you can be sure the neighbourhood is not going to go downhill/get flooded, etc.) you could add that in to your figures. 

Mostly people buy houses as a principal home because they are looking to stay for the long term and/or they value the emotional return of owning over the financial one, neither of which seem to apply to you, which is why I asked the question.  Also, remember that a house is a large and illiquid investment and it may not be a great time to sell it at the exact moment you want to FIRE.

I'm not saying don't buy, just that you shouldn't be buying just because it seems the obvious next step.  Think about it: the finances, the emotion, the convenience, etc.  Buy if you think it will come out positive for you.

Using the NY Times rent vs buy calculator it's a slam dunk for buying: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=0

Based on this we'd have to be able to rent a $185k home for $784 a month to make renting better, and everything in our area is at least $1.4k a month. I didn't even realize the difference was that large. Even just to get a 1 BR rental apartment the cheapest I'm finding is $1,054/month.