The complexity is not greatly affected by whether you are living in the other country because you are working, because you are running a business or because you are retired there.
When you are based firmly in one country – you generate your income there and you spend most of your time and most of your money there – you will not usually pay much attention to international issues when deciding how and where your money should be invested. You may decide that it is prudent to have some exposure to international markets but you may equally decide that you’re more comfortable sticking with what you know and placing your investments with well-known companies in your own country.
However, this approach can be disastrous if you are making your money in one or more countries and spending it in others.
In this guide we will look at some of the issues that can arise for the four main groups of people affected by this issue.
This guide is about how to choose the types of investments best suited to you if you are an ‘international person’: a person who lives, works or spends a lot of time in more than one country.
It is not financial advice. It is a general guide to some of the issues involved and is intended to help you discuss these issues with your financial advisers.
Basic issues of international investment
There are several basic issues that apply, in slightly different ways, to each of these groups.
Adequacy of savings
In most countries in the world – and certainly in most countries in the Western world – most people are not saving enough to provide for a comfortable living on their retirement or to cater for unexpected emergencies. The savings rate varies quite a lot from country to country. For example, in 2016 the people of Switzerland saved 18.8% of their household wealth. In the US it was 5%. Germany saved 9.6%. Greece hit a rather alarming -16.9%. See the OECD’s household savings rates table.
The adequacy of the savings you have built up is important for two reasons.
First, the amount of income those savings will generate will be affected by some of the other factors mentioned in this part of the guide with the result that what you thought was going to be a comfortable income upon which to retire turns out to be pitifully inadequate.
Second, for many people the realisation that the level of their savings and the income they can derive from those savings is not going to be enough to provide for a comfortable retirement is the trigger that causes them to investigate retiring to somewhere where the cost of living is cheaper.
The cost of moving money
If your savings are in one country but you are living in another, you will need to move funds from the first country to the second in order to meet your day-to-day living expenses. Unless you’re in the happy position of being able to move the money only once or twice per year, the cost of this can build up to quite a substantial sum.
See our Global Guide to FX and our individual country guides on FX to find the best solutions to this problem.
Does it make sense to keep your current arrangements for your savings and investments? If you are living in (say) the US and you are moving to (say) France, your existing savings will probably almost all be in US dollar investments. If you had US$1million of investments and they were generating you a rock-solid 5% per year (we should be so lucky!), you would have an income of €50,000 per year.
However, you will be spending euro, not dollars. If the exchange rate changes your real income will go up and down. If it increases, you will be happy. If it goes down, you may find it impossible to live.
The problem is the uncertainty.
Do not underestimate the size of this risk.
If you were an American with a US$ income of US$100,000 and you were living in the Eurozone (let’s say in Paris) the purchasing power of your US$100k would have varied drastically over the years. In 2002 your money would have bought about €110,000 but in 2008 it would have only bought about €65,000. Clearly, this would have had the effect of halving your living standards in Paris.
On the other hand, if the same American had been based in the UK, the exchange rate would have been just as volatile but would have shown a very different pattern. However, the end result would have been much the same for the two years in question: in 2002 his US$ would have converted to £70,000 but by 2008 this would have reduced to about £50,000.
Of course, when the rate was good you would have been happy but you would have been pretty depressed when your income halved. The problem is more the uncertainty than the actual rates as this uncertainty makes it very difficult to plan your life.
Fortunately, there are ways of planning and managing your savings that can greatly ease these problems.
Working or running a business abroad
If you are working or running a business abroad you will become all too familiar with these basic problems.
You can sometimes help the situation by controlling the currency in which you are paid. For example, if you are working for a company ‘back home’ your employer may well agree to pay all or part of your salary in the local currency at a fixed rate. See our Guide to Preparing to Work in a Foreign Country for more about this. If you are working for a local company you will, of course, be paid in local currency.
Having your income in the local currency removes a large part of the day-to-day problem; but what should you do about your savings?
Most people have savings for two purposes: to deal with the unexpected and to fund themselves during their retirement.
When it comes to dealing with the unexpected, there is a lot to be said for having some of your money available instantly in the currency of the country where you’re living. This may or may not require you to transfer funds from your (say) US Dollar account into a local account or you may feel that you can deal with these unexpected emergencies from your current earnings and only transfer any extra money if it’s really necessary to do so. Because of the costs of transfer and conversion and the fact that you’re likely to want to transfer the money elsewhere – either back home or to your next posting – when your current job comes to an end, most people will simply leave their savings ‘back home’.
When it comes to providing for your long-term financial needs, your decision will mainly depend upon where you think you will retire. As you will see from the section on retirement (below) the basic principle here is that it’s usually a good idea to have all or a large part of your funds in the currency of the country where you will be living. So if working abroad is a short-term thing, you will probably continue to provide for long-term savings in your own country if that’s where you intend to return.
Of course, the whole time that you’re doing this you will probably also be building up pension entitlement. Depending upon where you’re working it’s quite likely that this pension entitlement will be accruing in the country where you are working. So, for example, if you work in that country for ten years and it takes 30 years to build up a full pension entitlement you could end up with the right to one third of the normal state pension in that country when you reach retirement age as well as whatever pension entitlement you’ve built up in any other countries or back home.
Because it is complicated and messy having your pension dealt with in this way, it is now often possible to consolidate these international pensions in one place. This is something you will have to talk to your financial or pension about. The rules can be quite complicated.
All in all, if you are working or running a business in a country and only intend to be there for a few years before returning home you may want to keep your existing savings arrangements, if only for the sake of simplicity. The main exception to this will be if your status as living in this country allows you to build up savings in ways that are very tax-efficient.
Retired permanently in a foreign country
A person who is thinking of retiring to another country faces a very different problem. Most people who retire abroad stay in the country to which they have retired until they die – though some do tire of the overseas life and return home after a number of years.
If your plan is to stay in the new country indefinitely then you will be seriously affected by the basic problems.
Most people who retire abroad will have some form of pension or social security entitlement coming from their home country or, occasionally, from other countries in which they have worked over the years. They will need to look very carefully at their rights under these pensions:
- Usually the income will be denominated in the currency of their home country. In other words, if you are British you will have a pension entitlement of £XXX per year.
- In many countries your pension entitlement will increase as the years go by but note that in some countries the value of your pension entitlement is frozen as at the date you move to live abroad. See our pension guides for your home country.
- Sometimes, the pension administration will make it easy for you to have the pension paid into a bank account in another country. Even if they do this, the amount you get will vary with the exchange rate that applies on the date when the pension is made and you may find that the exchange rate used is unfavourable to you. It can often be better to maintain a bank account ‘back home’ and pay the pension into that. You can then control how much you transfer to the country where you’re living and probably get a better exchange rate for it.
- Some countries make it very difficult to have your pension paid if you’re living overseas. This is, largely, because they’re frightened of fraud. How will they know when you have died? In these cases you will often have to prove your continuing existence from time to time.
- Sometimes you may have both a government pension and a private pension or a pension provided by your former employer. Much the same applies to these pensions.
- Depending upon the country where you built up your pension entitlement and the rules of the country where you’re living, it may be possible to convert the value of your pensions and reinvest them in another place where the underlying investments producing your income are optimised for the currency that you’re going to be spending. See below for more about this. This, again, is something you will need to talk about carefully and in detail with your financial or pension adviser. Be aware of excessive fees if you decide to do this.
The second source of your income during retirement is likely to be your portfolio of investments.
Whilst your pension may pretty much be stuck in another currency, it does not seem a great idea if your investments are also stuck in that currency.
Most people find that their investments are mainly investments in the country where they had been based. In other words, most Americans will have investments in the form of stocks in US companies, investments in US funds and special investments set up by the US government to encourage savings such as the 401K retirement account.
None of these investments may really be appropriate if you’re living in another country and spending money in another currency. Equally, these investments may no longer be tax efficient in the country where you’re going to be living.
Despite the complexity and upheaval involved, it may be a good idea to liquidate your existing investments – possibly over time to guard against the risk that you might want to return home because you decide you don’t like retirement in another country.
Each country where you’re likely to be thinking about retirement is likely to offer very tax-efficient ways of investing the savings of retired people and, in some cases, special incentives for people coming and investing money from abroad.
Thinking about such a complete financial reorganisation at a time when you are retiring and when you do not have a network of trusted advisers in the country you’re moving to may well be a little frightening but it’s certainly worth a very close look. Of course, you do need to choose a good adviser. See below.
Retired and spending part of the year in another country
A person who spends part of the time – typically four or five months – in one country and the rest of the time ‘back home’ will often do so because they want to avoid all of the complexities involved in becoming resident in the other country and having to tackle the sorts of issues we are talking about in this guide. It is therefore tempting for them simply to leave their investments as they stand.
However, this ignores two important facts.
First, they will be spending a lot of local currency and they will suffer from the same exchange rates and other risks as they would suffer from if they were in that country all year round. It may, therefore, make sense to arrange for some of their investments to be producing income in that currency – especially if they intend this arrangement to go on for many years.
The second issue is that they may well find that, in the country where they’re spending half the year, there are some superb investment opportunities available. Possibly, opportunities far better than the ones they had at home.
For these two reasons it is well worthwhile for a person who is going to be spending just part of the year retired in a foreign country to seek some advice – probably much more limited – from a good local or specialist international financial adviser.
Advice is the key to success in this area. However, this doesn’t mean that you shouldn’t do some of your own research before you take that advice. Reading and browsing the internet to see what options are available to you can clarify your thoughts, help the financial adviser to give you the best advice and help you understand the advice you’re being given.
There can be few circumstances where it is more important to make sure that you get good and reliable advice. Unfortunately, there are few situations in which it is more difficult to find good advice.
In many countries there is an extensive range of good lawyers and accountants, skilled in dealing with the affairs of foreign residents but in most countries where I have worked there are far fewer financial advisers with a truly international perspective. Sadly, while there are lots of advertisements for financial advisers in the local press, many of the advertisers may well be people of limited skill and experience or – much worse – people whose sole objective is to part you from lots of your money by way of fees and commissions.
The position is made more complicated because of the international nature of the advice required. An American will need a financial advisor familiar with the options available in the US as well as the options available in the country where he’s going to be living. A British person will need someone familiar with both the British and the local side of his plans.
If you are moving to a place where lots of your fellow countrymen have already moved this will be less of a problem but if you are going to be living somewhere relatively unknown to your fellow citizens you will find this much more difficult.
The good news here is that, once you arrive in the area, many people enjoy talking about their money and their financial planning. They can often steer you in the direction of an adviser who has a good reputation in the area and who has given them good service. Alternatively, you may be able to get recommendations from your lawyer or bank.
See our Guide to Choosing a Lawyer as most of the same principles apply when choosing a good financial adviser.
If you can’t find someone who gives you confidence that they are completely up to speed with the rules in your home country and in the place where you’re going to be living, you may want to consider taking two lots of advice. Advice from a local financial adviser in the country where you’re going to be living and covering only the options available in that country and advice from someone ‘back home’ covering your options there and the way in which the rules back home will affect what you do in the other country. Of course, this can be a lot more expensive.
Moving to another country usually marks a new stage in your life: whether you’re embarking upon a career of international placements in the oil or IT industries or retiring to somewhere relaxed and sunny, you will need to make lots of changes to your lifestyle.
These must include making decisions about how you’re going to provide for your future.
For many years, it was seen as a perk of the person working or living internationally that they are ‘off the radar’: in other words, what they do in one country may not be visible in the other. Those days are definitely over and planning your affairs on this basis is hugely risky but there remain many legitimate opportunities to arrange your finances in ways that are very efficient and give you a great lifestyle whilst you are living in the new country and if you decide to return home.