Author Topic: How to manage currency risk living abroad in retirement?  (Read 1527 times)

Reddleman

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How to manage currency risk living abroad in retirement?
« on: January 26, 2021, 02:27:18 PM »
This could probably go in the "investors" discussion, but since we've technically passed our FIRE number, currently (113% funded at 4% withdrawal rate and ~92% funded at 3.25%). I thought it might be more appropriate here.

Although we developed our FIRE calculations based on current spending, there are some issues.  Since my wife is an EU citizen from a LCOL country, we're planning on moving there full or part-time once we pull the plug.  This will help with both lifestyle we want and probably reduce withdrawal rates even further to give us even more of a cushion.  COL, healthcare costs, tax treatment (with some managing on the U.S. side), etc. will all be lower abroad at our spend rate. 

While there are many factors that we can't completely control, one thing that makes it more complicated in this scenario is currency risk.  The bulk of our investments are in U.S. indexes/dollar denominated, as well as my pension (can start collecting in 8 years) and any Social Security payments.  We technically don't "need" the pension or SS to be FI, btw even though the pension at least is very secure.  They are not factored in to the FIRE number but left as "nice to have".

We've done well so far in accumulation with "the (mostly U.S.) market will provide in the long term" strategy. We also have ~3-4 years of spending in cash equivalents to smooth out the transition instead of a CD ladder for now.   

So I'm wondering if we should just stay the course with our U.S. planned asset allocation or modify to a more global portfolio or include managed risk (like VMVFX), both for long-term security and piece of mind.  As "stay the course" as I often am, if the dollar goes down 30% to the Euro over the course of a year or two, I don't know how safe that would feel. 






reeshau

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Re: How to manage currency risk living abroad in retirement?
« Reply #1 on: January 26, 2021, 02:51:38 PM »
To start with a stupid question:  you talk about your wife being from a LCOL EU country, then talk about Euro risk.  Is her country on the euro?  I find the intersection of the two very small.  In fact, my friends in Slovakia generally lament going to the euro, as costs there took quite a jump up with the transition.

If the answer is no, then I wouldn't worry much.

If the answer is yes, then the answer as to how to hedge will depend very much on your personal risk tolerance; and you might not *really* know until your stomach has been tested through some real occurrence of the risk.  But for starters, with such a large cash cushion, I would suggest you could move that to euro-denominated instruments.  If you look at the history of US-euro trade, even going to extreme values, that length of time would generally outlast the pain period.

One note, though:  if you intend to act soon, you will be sacrificing yield (such as it is) to do so.  Many yields are negative, both in real terms and even nominal terms.  But your cushion isn't there to make you money; It's an insurance policy.  Just steel yourself for that reality for the foreseeable future, and don't let regret or resentment build up.

If you want some flexibility to do this, you might look to open a Revolut account.  Rather than move currencies between accounts, Revolut lets you hold multiple currencies.  It is widely used in Eastern Europe (and by Eastern Europeans working across Europe) and is now available in the US.  Doing so now would let you prepare by moving some or all of your money ahead of your move.

Freedomin5

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Re: How to manage currency risk living abroad in retirement?
« Reply #2 on: January 26, 2021, 03:02:21 PM »
We have a similar situation where we are planning to retire to a different country than where we are currently earning our money. I read somewhere (Andrew Hallamís Millionaire Expat book maybe?) that you should save/invest your money in the country in which you plan to retire. Example: we currently earn in RMB but convert most of our earnings to Cdn dollar and hold investment accounts in Canada because that is where we plan to retire. So Iím basically DCA-ing to reduce the currency exchange risk.

You can also open an investment account in the currency of whatever country you plan to retire to, and when rates are good, convert some of your USD to that currency. One expat friend does that. He only converts his RMB into USD when the rates are favorable.

Finally, when rates are good and youíre about to move, exchange enough to give you a safety cash cushion (1-3 years expenses). It mitigates SORR but also helps with currency exchange risk.

lutorm

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Re: How to manage currency risk living abroad in retirement?
« Reply #3 on: January 26, 2021, 05:07:32 PM »
I'm also interested in this question, as we may move to Sweden from the US after FIRE.

Reddleman

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Re: How to manage currency risk living abroad in retirement?
« Reply #4 on: January 27, 2021, 09:15:29 AM »
To start with a stupid question:  you talk about your wife being from a LCOL EU country, then talk about Euro risk.  Is her country on the euro?

Actually yes, Portugal.  One of the few places where LCOL and EU naturally go together.  That said, factoring in health insurance/property taxation/etc. many other places in the EU are very competitive with U.S. retirement depending on your preferences and situation.  They definitely are for us. 

I was considering moving investments to European accounts, but it makes it a bit more complicated in terms of both taxation, particularly for treatment of capital gains and 401k distributions.  To keep it easier, I was thinking of keeping the investments in U.S. accounts (Vanguard) and withdrawing as necessary.  But a Euro/World heavy diversified portfolio in a U.S. held account I'm assuming would be a similar end result in reducing currency risk. Unless I'm missing something.

A multi-currency account is a great suggestion.  I do have a multi-currency account through Transferwise, but want to keep it below the $10k limit for as long as possible so that I won't have to meet the reporting threshold for U.S. taxes.  I plan on moving money into Transferwise as necessary in retirement.   

reeshau

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Re: How to manage currency risk living abroad in retirement?
« Reply #5 on: January 27, 2021, 10:16:37 AM »
A multi-currency account is a great suggestion.  I do have a multi-currency account through Transferwise, but want to keep it below the $10k limit for as long as possible so that I won't have to meet the reporting threshold for U.S. taxes.  I plan on moving money into Transferwise as necessary in retirement.

I can't find a citation, but I believe Revolut would be wholly considered a US account, so you would not have to limit your holdings.  And honestly, while the penalty is frighteningly high, the reporting form is a simple affair--15 minutes.  So, not really that scary, if you make sure to set yourself a reminder to do it.

Linea_Norway

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Re: How to manage currency risk living abroad in retirement?
« Reply #6 on: January 27, 2021, 12:07:55 PM »
We live in Norway with a small valuta. Most of our money is invested in international index funds with the risk of valuta changes. So far, when the Norwegian crown made a dive towards the Euro and USD, our stock stayed high. It is a way to diversify, as our pension funds are in local valuta.
Portugal is a bit different as they are in the Euro, which is a bigger valuta.

daverobev

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Re: How to manage currency risk living abroad in retirement?
« Reply #7 on: January 28, 2021, 01:47:41 AM »
Don't confuse the value of investments (regardless of market) with value of currency - they float freely. So if you are mostly invested, you don't have USD currency risk - particularly as there are a lot of US companies that are global in nature. If you are very focussed on domestic-only (ie small cap) then it might be a bit more of an issue, but only for a short while - when the USD goes up, it changes things for those companies (cost of materials, imports) in such a way that there is in theory some reversion over time.

Now, bonds and cash are completely different, of course. For that part, I'd move a reasonable chunk into Euros, if that's the currency you need while living.

ROF Expat

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Re: How to manage currency risk living abroad in retirement?
« Reply #8 on: January 29, 2021, 01:16:53 AM »
Do you already, or are you planning to buy a home in Portugal?  If so, can you do it without a local loan? 

Housing costs are typically a large (maybe the single largest) part of your fixed expenses wherever you live.  If you own your house, you protect yourself from the possibility that a declining dollar causes your monthly rent payment to be relatively higher.  Buying with a local loan doesn't work because a declining dollar would mean a higher payment in dollar terms.  Obviously, there are a lot of other things to consider, but that should carry some weight. 

As has already been observed, a broad US Index still carries a lot of overseas exposure.  You can also weight your investments away from the dollar by shifting some of your investments into a Euro or broader international fund.  You could still do that within your own US funds. 

BTW, if you aren't already aware, you might want to start investigating the difficulties US citizens can face in getting or keeping bank and brokerage accounts. 

The Drawing Bird

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Re: How to manage currency risk living abroad in retirement?
« Reply #9 on: February 01, 2021, 10:39:39 AM »
I'd love to hear answers people have to this question, as I'm in a similar boat (recently FIRE'd, investments are in dollars, and I'll be living in the EU).

Without having done too much research into the matter, I looked at the market drawdown earlier this year.  It seems that when the correction/scare occurred in March, the strength of the dollar compared to the euro also increased.  Does anyone know if this was just a coincidence?

reeshau

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Re: How to manage currency risk living abroad in retirement?
« Reply #10 on: February 01, 2021, 11:47:17 AM »
I'd love to hear answers people have to this question, as I'm in a similar boat (recently FIRE'd, investments are in dollars, and I'll be living in the EU).

Without having done too much research into the matter, I looked at the market drawdown earlier this year.  It seems that when the correction/scare occurred in March, the strength of the dollar compared to the euro also increased.  Does anyone know if this was just a coincidence?

In March, the US had quite an advantage in fixed income / safe investments over Europe, where the safest investments are yielding nominally negative.  (Germany + Switzerland)  Not sure how the lack of tourism through the year may have impacted; I think the EU again had more to lose there.  While rates in the US have certainly dropped, the EU hasn't gotten any better.  About the time that happened, the US stock markets rallied.  Now Brexit is weighing on EU companies.  I'd say it's a race to see who will recover / open.  And while the US lagged through the summer, the EU is coming into harsh lockdowns, which it looks like the US will avoid.  (this week, anyway)

Not a coincidence.  I've been directly interested in the FX for about 4 years now.  It's now hovering where it was in early 2018--so also not far out of an "average" range.  (however you take it)

Undecided

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Re: How to manage currency risk living abroad in retirement?
« Reply #11 on: February 05, 2021, 04:09:36 PM »
I am a citizen of the US and an EU country; I have lived, worked, been paid, saved and invested in dollars, but intend to spend substantial portions of time in the EU in the near and intermediate term (the long term is mostly an unknown). I hold a mix of cash in euros (about six months spending; I hold this cash at Interactive Brokers) and dollars (two months spending, but I am still being paid in dollars). My bond fund holdings are mostly US total market, but about a year of spending in US short-term bonds and about a year in BWZ (a short-term international treasury bond ETF). I am at global capitalization in "European" stocks (which isn't quite "euro" stocks), overweighted in US stocks, and underweighted in the rest of the world.

If I could access something like BWZ that was EU-specific, I would perhaps prefer that, but I'm not aware of any such thing available in the US.

kenmoremmm

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Re: How to manage currency risk living abroad in retirement?
« Reply #12 on: March 20, 2021, 10:26:28 PM »