Investing close to retirement and reconsidering location

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DJN
Posts: 163
Joined: Mon Nov 20, 2017 12:30 am

Investing close to retirement and reconsidering location

Post by DJN » Mon Jan 08, 2018 6:34 am

Dear Bogleheads, I am fairly new to this forum and I would like to seek feedback on my proposals for my particular circumstances. I am close to completing my latest assignment and I am looking to invest for my retirement period and to allow enough for my wife to live comfortably. I will become an EU resident in January 2020 and will then start paying tax on any new earnings. Until then I am earning tax free.
My details are set out below and I would be very happy to receive some advice and suggestions.

Emergency Funds: 5 years at current expenditure levels (€100,000 pa)
Debt: zero
Tax status: offshore with zero tax on all income and existing savings apart from interest on savings onshore
Tax location on return = EU
Current residence: Middle East (tax free)
Age: 62 - Working full-time
Married
Partner age: 53 - Homemaker
Longevity of funds - 33 years
Desired asset allocation: 60% Stocks / 40% Bonds
Desired international or non US allocation: 30% of stocks
My interpretation of more detailed allocation is as follows for a European:

40% BONDS
5% Europe bonds iShares (IBGM) EMU govt bonds ex UK
20% Global bonds iShares (IGLO) G7 govt bonds incl 50% US
15% US bonds iShares (CSBGU0) 7-10 yr Treasury bonds

60% EQUITIES
18% Global stocks Vanguard FTSE all world (VWRL) Developed large cap 50% US +Euro+Asia+UK
25% US Vanguard (VUSA) Large Cap S&P
10% European stocks Vanguard (Europe) (VEUR) Europe large cap incl UK
5% Small Cap US SPDR Russell 2000 Small Cap (ZPRR) US small cap
2% Emerging Markets Vanguard (VFEM) EM with 1000+stocks
Average expense ratio for the above: 0.21%.

Current assets for investment purposes:
Cash say: €2,500,000
Existing pensions: already cashed in as part of sum above under current legislation.

thank you in advance,
kind regards,
djn
Last edited by DJN on Sat Jul 14, 2018 11:47 pm, edited 2 times in total.

Valuethinker
Posts: 36719
Joined: Fri May 11, 2007 11:07 am

Re: European expat investing close to retirement

Post by Valuethinker » Mon Jan 08, 2018 10:16 am

DJN wrote:
Mon Jan 08, 2018 6:34 am
Dear Bogleheads, I am fairly new to this forum and I would like to seek feedback on my proposals for my particular circumstances. I am close to completing my latest assignment and I am looking to invest for my retirement period and to allow enough for my wife to live comfortably. I will become an EU resident in January 2020 and will then start paying tax on any new earnings. Until then I am earning tax free.
My details are set out below and I would be very happy to receive some advice and suggestions.

Emergency Funds: 5 years at current expenditure levels (€100,000 pa)
Debt: zero
Tax status: offshore with zero tax on all income and existing savings apart from interest on savings onshore
Tax location on return = EU
Current residence: Middle East (tax free)
Age: 62 - Working full-time
Married
Partner age: 53 - Homemaker
Longevity of funds - 33 years
Desired asset allocation: 60% Stocks / 40% Bonds
Desired international or non US allocation: 30% of stocks
My interpretation of more detailed allocation is as follows for a European:
OK. And 3 years before normal retirement age, you would be OK if your equities dropped by 50%? Many of us experienced drops like that in 2008-09. Yes it recovered quickly-- but might not do so next time. I recognize you have a large emergency fund, so if that provides you with the confidence that you can "stay the course" then great.

Setting aside that we don't know where you are planning to retire? What currency will you be spending in retirement?
40% BONDS
5% Europe bonds iShares (IBGM) EMU govt bonds ex UK
20% Global bonds iShares (IGLO) G7 govt bonds incl 50% US
15% US bonds iShares (CSBGU0) 7-10 yr Treasury bonds
It is unclear what your objective is? If your currency of spending in retirement is EUR then you should hold a fund which hedges back into EUR. If it is USD, why not just hold US Treasury bond fund?

We don't know the Expense Ratios of these funds, so we also don't know if there is a cheaper way of doing this?

60% EQUITIES
18% Global stocks Vanguard FTSE all world (VWRL) Developed large cap 50% US +Euro+Asia+UK
25% US Vanguard (VUSA) Large Cap S&P
10% European stocks Vanguard (Europe) (VEUR) Europe large cap incl UK
5% Small Cap US SPDR Russell 2000 Small Cap (ZPRR) US small cap
2% Emerging Markets Vanguard (VFEM) EM with 1000+stocks
Average expense ratio for the above: 0.21%.
Again, not at all sure what you are trying to achieve?

US is 50% of world stock markets, so why not just hold VWRL and be done with it? Can't remember off hand whether that would include Emerging Markets? If not, EM should be c. 15% of your equity portfolio (i.e. 9%).

Small cap. The effect is not huge (it is Small Cap Value that has the stronger effect). 5% US Small Cap won't make a big difference to your final outcome. Why that percentage?
Current assets for investment purposes:
Cash say: €2,500,000
Existing pensions: already cashed in as part of sum above under current legislation.

thank you in advance,
kind regards,
djn
Assuming a withdrawal rate of 3% p.a. they you should be able to do 75,000 Euros p.a. over retirement. Since presumably you will have no state pension at all, there is a case for some annuitization (at a later date, perhaps-- e.g. when your spouse is over 60 or 65) to prevent outliving your assets. A 53 year old spouse could live another 50 years, and assuming female, 40 years is not at all unlikely (I have 3 female relatives alive over 90).

The "4% Safe Withdrawal Rate" sometimes quoted here is based on past capital market returns, which are not likely in the future. From a Price to Earnings ratio of over 20.0x, and bond yields of 2.5% (US 10 year), 1.2% (UK 10 year), nearly 0% (German) it's hard to see more than 2% pa from bonds, and maybe 5-6% from developed market equities.

So I would suggest that 3% is a more reasonable estimate.

ATope
Posts: 33
Joined: Tue Jan 06, 2015 7:36 am

Re: European expat investing close to retirement

Post by ATope » Mon Jan 08, 2018 11:12 am

Hi.
My circumstances are somewhat different (age, marital status etc.) but am an expat and based in EU (currently) with a very simple portfolio. Building on some of the initial advice already given you might wish to streamline everything down and go for the following, according to your % preference:

Vanguard FTSE All-World UCITS ETF Div IE00B3RBWM25 VWRD
Vanguard FTSE Emerging Markets ETF Div IE00B3VVMM84 VDEM
SPDR MSCI WORLD SMALL CAP UCITS ETF Acc IE00BCBJG560 WDSC
iShares US Aggregate Bond ETF Acc IUAA IE00BYXYYM63 IUAA

I've tried to have a global oriented portfolio. You could switch out IUAA for IGLO as you currently have.
I use TD/Internaxx and Ireland based ETFs.
The tickers/Codes might differ depending on which currency/version of ETF you go for.

An even simpler approach would just be VWRD and IGLO. Split 50/50, 60/40 or whichever. Two funds, two fees. Very simple.

DJN
Posts: 163
Joined: Mon Nov 20, 2017 12:30 am

Re: European expat investing close to retirement

Post by DJN » Mon Jan 08, 2018 11:38 am

Thanks A Tope,
sound advice, I will have another look at simplifying the portfolio proposal, this will also help my wife when she will be looking after the money in the longer term. I also use Internaxx as they are the cheapest I can access, considering my circumstances.
I appreciate the input as it is difficult to access good advice for Europeans. The ETF fund providers are very reluctant to point towards their own equivalent ETFs for Europeans from the US versions.
thank you again.
DJN

DJN
Posts: 163
Joined: Mon Nov 20, 2017 12:30 am

Re: European expat investing close to retirement

Post by DJN » Mon Jan 08, 2018 12:02 pm

Dear Valuethinker,
I replied already but it disappeared! I will try again, first of all thanks for the feedback which is much appreciated.
You make a good point about the basic allocation, I will have a careful rethink and will consider whether my risk appetite is more or less, I will look at 50 / 50 and also perhaps my age in bonds.
I will also consider increasing my emergency fund and look to extend out a few more years.
I retire at the end of 2019.
I will be based in the EU and use the Euro.
The total expense ratio for the funds is 0.21%. None are more than 0.3% with the Vanguards down well below 0.2%.
VWRL includes emerging markets (3026 securities over 47 countries), I will have a look at simplifying the number of funds.
Your observation on the small caps is worth looking at again, as above I will look at simplifying.
The point you make about duration is very relevant and I will have another look and include a worst case assumption for my wife. The size of the overall investment pot also is worth some thought.
thanks again for your observations.
DJN

ATope
Posts: 33
Joined: Tue Jan 06, 2015 7:36 am

Re: European expat investing close to retirement

Post by ATope » Mon Jan 08, 2018 12:17 pm

You’re welcome!
As a newbie, the choice overload can be daunting. And the urge to tinker and question after an initial commitment also makes things harder. But keep it simple is a great philosophy to counter these issues.
I sometimes wish I was still UK based to access the Vanguard fund-of-funds vehicles (LifeStrategy, Target Retirement) as then it’d just be 1 fund, one fee. But hey ho, you can’t have everything.
TD/Internaxx have a good range of iShares & Vanguard funds, so the simple portfolio I mentioned could be swapped with very similar low cost alternatives in GBP, EUR or USD depending on what your preference is. Mine are USD as I’m not likely to remain in EU in the long term. For you it might be wise to choose EUR denominated versiins given you’ll be spending in EUR for retirement.

Valuethinker
Posts: 36719
Joined: Fri May 11, 2007 11:07 am

Re: European expat investing close to retirement

Post by Valuethinker » Mon Jan 08, 2018 5:57 pm

DJN wrote:
Mon Jan 08, 2018 12:02 pm
Dear Valuethinker,
I replied already but it disappeared! I will try again, first of all thanks for the feedback which is much appreciated.
You make a good point about the basic allocation, I will have a careful rethink and will consider whether my risk appetite is more or less, I will look at 50 / 50 and also perhaps my age in bonds.
It's simply that 2008/9 was a searing experience for most of us. Fortunately then I wasn't on the point of retirement (although I feared for my job). We are now nearly 10 years later, and it is not always the case that Bear markets are short and swift the way 2008-09 was. 2000-03 was much longer, and had barely recovered its losses when we hit the fan again. Another bear market would significantly damage my retirement plans.
I will also consider increasing my emergency fund and look to extend out a few more years.
You probably don't need to do both. Given you were implying you have a 500k EUR emergency fund? That is 20% of total assets?

Emergency money is to replace lost income, and you only have another 2 years to work. Other than that, you can invest your emergency money as below.

If your emergency funds are not in Eurozone guaranteed institutions and within the 100k EUR limit per institution (it should be 200k for a couple-- check) then:

- you could move some or all of that money into a Short Term government bond fund. As long as it is not concentrated in Italian &/ or Spanish government bonds, then it should provide you with marginally more return. There is interest rate risk in such a fund (roughly speaking, a +1% rise in interest rates leads to a fall in the NAV of the fund by % = -1 x Duration of the Fund) but it's not huge. And higher interest rates will increase the yield on the fund so eventually you make your money back (that you lost from the interest rate rise).

The main problem is that German government bonds, which are the risk free ones in the Euro zone, pay even negative nominal yields (you lose money between investing and maturity-- the redemption + the coupons pays out less than the initial cost of the bond).

Uk gilts (govt bonds) are not much better (less than 1% yield). I have "solved" this problem by splitting my money between a Vanguard Short Term Sterling bond fund, and a Vanguard global ST bond fund, hedged back into sterling (ie GBP). Which means my expected return is more or less zero.

For someone in the Eurozone, deposits with financial institutions where we trust the national government to make good (Germany, Netherlands, France basically, Ireland now probably) are a viable alternative, as they have only zero return, rather than negative return. Otherwise, try to diversify your bond exposure (in government bonds) as widely as you can e.g. a global government bond fund, hedged back into EUR.
I retire at the end of 2019.
I will be based in the EU and use the Euro.
OK then I would probably not currency hedge my equities -- in the long run, differences in currencies should iron out (periods of EUR strength will be followed by periods of EUR weakness and USD strength, etc). But I would want to currency hedge my bonds (or the majority of my bonds + emergency cash).
The total expense ratio for the funds is 0.21%. None are more than 0.3% with the Vanguards down well below 0.2%.
VWRL includes emerging markets (3026 securities over 47 countries), I will have a look at simplifying the number of funds.
Then I think it solves your equity investment problem. Index to the world, and don't worry too much about it.
Your observation on the small caps is worth looking at again, as above I will look at simplifying.
The point you make about duration is very relevant and I will have another look and include a worst case assumption for my wife. The size of the overall investment pot also is worth some thought.
thanks again for your observations.
DJN
The trouble is we have to plan for, and forecast, the un-forecast-able (sp?). How long we will live, and what our returns are. The reality is if we have a bull market in the first 10 years of your retirement, you probably have been overly conservative. It's if we have a bear market that things get tricky aka "sequence of returns risk".

One way of looking at this is you will have c. 3 m EUR? Including emergency funds. You could probably spend 3.0-3.3% of this p.a. getting close to your income target, inflation adjusted, and be alright. Provided we don't hit a bad bear market early in your retirement. The damnable combination of very high equity markets. and very low interest rates, is playing havoc with retirement planning.

Your spending profile also changes. In the early years of your retirement, while you still have health and mobility, you probably want to travel. There are ways of doing that in more and less expensive ways, but it's one of the great privileges of retirement compared to our grandparents who just did not have such opportunities. Then, later, it becomes about having the money to buy in help in the home and those things which the state does not provide.

But it flashes my red signals, if someone has a significantly younger (female) spouse, and one doesn't think about the truly long term. Just how long term that could be.

My in laws live on much much less than 75k EUR a year, in rural England. They own a very modest home. They have had enough financial resources for their needs and to pay privately for help which has allowed them to stay in their home.

When you are in your early to mid 70s, you could consider an annuity on your life, which would pay say 75% to your spouse in the event of your demise. Thus significantly reducing the risk of her outliving your combined savings.

(a relative in Canada keeps her German citizenship. Even though she left Germany more than 50 years ago, she still qualifies for the German state pension, which is significant).

You don't mention any desire to acquire property back in the Eurozone? That's important. What most middle class people here (the UK) have is a house, and that protects them against rent increases, and allows them to sell that house to fund old age home. Or potentially to downsize. Principal residences are also capital gains tax free here, and property taxes are very low. TThose of us who bought 25 years ago in London are sitting on illiquid gold mines, but gold mines nonetheless- as long as we are prepared to downsize out of London of course.

You have to reckon your rent, if you are renting in retirement, will at least rise with inflation. On the other hand, so do the costs of maintaining, property taxes, utilities etc. for a property that one owns.

DJN
Posts: 163
Joined: Mon Nov 20, 2017 12:30 am

Re: European expat investing close to retirement reconsidering location

Post by DJN » Fri Jul 13, 2018 1:07 pm

Hi,
I have an update on my position which might be interesting to some expats from Europe who are considering their options for retirement and location.

After much investigation and a lot of angst, here is my current thinking:

I was going to locate to Ireland and was intent in the meantime on continuing to build up my portfolio. Tax residency in Ireland would have led to a serious tax liability situation on my investments where income and capital growth would be due to the tax man at a rate of 41%. No allowances are available. In addition losses on one fund would not be available for off set for tax purposes.
The additional difficulty is that the choice of funds is complex as there is a weird regime that precludes certain ETF's. This leads to having to seek advice and having to use English based funds which are more expensive. The complexity of the portfolios being suggested is also increased.
The upshot of all this is that the costs and tax would leave me with less than half of any gain or income, which in turn is leading me to reconsider tax residence. I am reviewing jurisdictions which are more amenable to retirees with their own invested funds.
The most interesting locations are:
1. Portugal - which has a 0% tax rate for non habitual residents for a period of 10 years.
2. Isle of Man - which has a 10% tax rate for residents and no wealth tax etc.
3. Cyprus
4. Malta
There are a few other locations which have favorable rates, all of which are open to EU citizens.
The effective savings over a 10 year period in option 1 in Portugal with a €3.5M portfolio could be in the region of €700,000 - €900,000. Thus making this a viable option that cannot be ignored. I wonder has anyone had to make this type of decision recently and what has influenced their thinking. (The final interesting point is that you need to spend 183 days per year in whatever tax resident location you choose).
DJN

rich126
Posts: 195
Joined: Thu Mar 01, 2018 4:56 pm

Re: European expat investing close to retirement reconsidering location

Post by rich126 » Fri Jul 13, 2018 2:08 pm

I'm just curious as to where happiness comes into this decision? Doesn't it matter where you live?

A while ago an older guy I knew was planning to retire to Costa Rico and finally took a trip there (not sure how you plan to retire somewhere w/o first checking it out!). When I saw him after the trip he said "Geez, its like a third world country". I'm thinking, "Did you really expect it to be like the US or some other countries?"

As far as taxes go are there any strategies you can use to minimize the taxes? e.g., Can you sell stocks and pocket some profits in a lower tax country and then move to another country and live there off the profits w/o paying taxes on unrealized gains?

I don't know your cost of living but $3.5M Euros should allow you a nice standard of living most places unless you are going to spend a ton on housing.

I don't have any experience in this but am curious as to the responses/advice you will get.

Good luck.

DJN
Posts: 163
Joined: Mon Nov 20, 2017 12:30 am

Re: European expat investing close to retirement reconsidering location

Post by DJN » Sat Jul 14, 2018 1:05 am

Yes, I think you have hit on one of the key issues. Its important to live somewhere you like and your partner likes. I also think it needs to suit your lifestyle, some people don't like to travel too much while others cannot stop moving!
For US tax payers moving for tax reasons is marginal due to their system. Maybe this is going to change?
For a European who is generally required to locate away from their "original" tax location to qualify under a tax treaty, the time period is 183 days per annum offshore. This can be arranged any particular way, every second day or month there and month here etc.
I am interested in the process of coming to an offshore decision.
regards,
DJN

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