Finance: Making realistic retirement assumptions

PHUKET: The first step when making a retirement plan is to have realistic assumptions about your retirement.

Unfortunately, I have found that many of my clients, regardless of whether or not they are expatriates – still working or already retired – have at least one or more of the following unrealistic retirement assumptions:

I will retire some place cheaper: Retiring to an emerging market may seem affordable right now, but such countries may not remain affordable in the future. After all, inflation is usually much higher in emerging markets than developed countries and then you will have to contend with fluctuating exchange rates which may make your intended destination more expensive. Finally, retiring some place cheaper may depend upon selling the home you live in right now and getting what you paid for it back – something many retirees will be unable to do.

My living expenses will go down in retirement: You can’t automatically assume your living expenses will go down in retirement – especially if you retire abroad and/or intend to have an active retirement (eg recreational travel, trips to see family, an active social life, or regular visits to the golf course). Moreover, you may have to deal with unexpected expenses such as high health care costs, or the need to provide so-called “economic outpatient care” for adult children or grandchildren who are struggling financially.

My taxes will go down: You may think your taxes will go down when you stop working or retire abroad. However, politicians in western countries are increasingly hard pressed to pay for spending with offshore expatriates and retirement plans you thought were tax free or tax deferred being potentially good targets for so-called “tax reforms” that inevitably raise your taxes.

I can rely on my spouse/family/children for support: Don’t assume your family will be in any position to help you financially or provide you with other types of support. For example: You and/or your spouse could suffer a stroke or otherwise become disabled and require expensive round the clock nursing care from a professional care giver for a long period of time.

I can rely on my defined pension plan: If you still receive or will receive a payment from an old-fashion defined pension every month, congratulations for being lucky as most private-sector employers have long since ditched such plans because they are to expensive to maintain. And if your defined pension plan comes from working for a government, its probably underfunded and may not be completely safe given what happened in Greece, and what is starting to happen with the various municipal bankruptcies in the United States.

I can assume a high rate of return on my investments: With interest rates near record lows in many countries, you will need to be very realistic about investment returns. In fact, John Bogle, the founder of Vanguard, the world’s largest mutual fund company, told filmmakers of a documentary called the Retirement Gamble that the American retirement system is headed for a train wreck because too many defined retirement plans assume an unrealistic 8% per year return when a conservative 5% annual return is more realistic.

I can retire when I choose to: You may intend to retire at age 65, but your employer may decide to lay you off at age 62 or worst, go completely out of business. Likewise, you could suffer a debilitating injury or something that prevents you from working (and saving) until the age you intend to retire.

I can work to supplement my retirement income: Retiring overseas to an emerging market like Thailand will probably eliminate any opportunity to supplement your income with paid work. Moreover and even if you have the opportunity to work, you may not be physically or mentally capable of doing so.

I won’t live to a very old age: Don’t assume that just because various family members did not live until a certain age that you won’t live well past that age. In fact, health care advances mean that living past the age of 80, 90 or even 100 will increasingly become common place – meaning your retirement investments and income will need to last just as long.

Don Freeman,BSME is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket. He has over 15 years experience working with expatriates, specializing in portfolio management, US tax preparation, financial planning and UK pension transfers. Don can be reached at 089-970-5795 or email: freemancapital@gmail.com.