Managing currency risks when retiring overseas
If the country where you would like to retire uses a currency other than the U.S. dollar, you need to add currency risk to your list of retirement concerns. Currency exchange fluctuations can affect your retirement income. A retiree living in a foreign country on a fixed income could see his local spending power eroded by a depreciating U.S. dollar. You should be aware of this possibility, but you don't need to let it keep you from making a move to a country where you want to live. You can mitigate currency risk.
One strategy to protect yourself would be to buy a place of your own to live in the country where you want to be. Paying in full up front when you make the move or even in advance of a planned move allows you to take advantage of a favorable rate of exchange.
Housing costs, including a mortgage or rent, are generally the single biggest expense in any budget. If you own your own house or apartment, you eliminate the risk of unfavorable currency fluctuations for that part of your monthly expenses.
Taking this approach, you could buy a retirement home in Portugal, for example, while the U.S. dollar is riding strong versus the euro. Do this, and you're locking in your housing cost at today's very favorable exchange rate. A 100,000-euro condo on the beach in the Algarve would cost you close to just $100,000 at the current rate of exchange. Housing covered, you're largely insulated against negative currency fluctuations. The currency moving against you would affect only your day-to-day living costs, which you can control at least to some extent.
The dollar could continue to be strong against the euro for another 12 to 24 months or longer. This means it could be better to wait to buy in Europe. But property prices could also appreciate while you're waiting, as they are in Ireland now.
If you're retiring in the near term and dream of Europe, consider taking advantage of the current window of opportunity to own a place of your own for what can amount to a bargain and discounted rate. Prices are way down in key markets, while the U.S. dollar is up. With a European pied-à-terre of your own, you know what your retirement housing cost will be today, tomorrow and forever. If the euro continues to depreciate, great. Your day-to-day costs of living will continue to depreciate. When the euro turns up against the dollar again (or even if it disappears altogether, leaving you with a new currency to contend with), you could likely ride things out. Over the course of a 20-year retirement, you should expect to experience a slow roller coaster of exchange rates.
Another strategy for reducing your currency risk in retirement is to invest locally to earn income in the same currency as your expenses. This could be as simple as buying a local CD or as complicated as buying a rental property or starting a small business. Whatever you do to earn local currency, don't move all of your assets to your new country. Hedge things by keeping some of your investments in your home currency or another currency in addition to the currency of the country where you live.
A colleague who lived in Uruguay while the U.S. dollar-Uruguayan peso exchange rate was favorable did well on his monthly pension. When the U.S. dollar fell versus the Uruguayan peso, he used local peso income from CDs he had bought to pay local expenses. Having the local investments allowed him to supplement his pension check when he needed to.
Here's one more option for hedging your pension check against currency fluctuations: Don't put down permanent roots anywhere. Rent your residence wherever you decide to live, then pack up and head to a country with a lower cost-of-living when the local currency turns against you.
This kind of perpetual traveling can be done short- or long-term. You could make the move to Portugal today and stick around until the euro gets too expensive for you (if that happens again in our lifetime). Then you could shift your retirement to another country with a more attractive exchange rate.
You can take steps to take control of your cost of living in another currency. Don't let exchange rate fears keep you from acting on opportunities for spending time, retiring or taking investment positions overseas.
Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group.
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