6 Components of Expat Retirement Planning
Do you have a high net worth but aren't sure how to make the most of it? Are you worried about outliving your retirement savings or managing your wealth to create a lifetime of sustainable income while also keeping your taxes low? You can breathe a sigh of relief because you are in the right place. At expatwealthatwork, we specialise in expat retirement planning and wealth management. Our approach to personal finance seeks to help pre-retirees find their financial footing before diving into this new season. Whether retirement is still a few years away or you are already enjoying your golden years, it is important to have a plan to monitor and adapt as needed. What are the key areas of focus for expat retirement planning? Let's take a look.
What is the purpose of retirement planning?
First, many expats find it beneficial to entrust their plan with a financial advisor. He can provide the guidance, support, and strategies you need to reach your goals. Before we look at specific elements of a retirement plan, let's first think about the purpose of your retirement plan. The broad purpose of retirement planning is to ensure you can live the life you want without worrying about running out of money. The end result will look different from person to person, which means that how you approach certain elements of retirement planning might not be the same as your neighbour, best friend, or co-worker. As an expat, your needs are unique and building a tailored retirement plan to suit them is the best way to reach your long-term goals. Maybe you want to travel worldwide and therefore need to spend more than someone who doesn't have significant travel ambitions. Or perhaps you have an underlying health condition, so you'll need more comprehensive medical coverage (and likely higher expenses). Everyone's financial situation is different, and your retirement plan should reflect your personal circumstances.
What should a comprehensive retirement plan look like?
Regardless of how you envision living your life in retirement, these are the critical components of an expat retirement plan:
1. Your spending goals
If the purpose of a plan is to support your lifestyle, you need to translate that lifestyle into spending goals. If you already track your budget, this part will be a little easier. If you don't, start by thinking about what you spend in a typical month. Account for the everyday living expenses like food, utilities, housing, insurance, taxes, etc., but don't forget to include what you might spend on "non-essentials" that are a regular part of your life like weekend trips, tickets to shows or sporting events, and gifts for family. The idea here isn't to start by thinking about what you can do to trim your budget. That part can come next if it's necessary.
2. Cash flow projections with appropriate inflation adjustments
Once you establish a benchmark for your annual funding needs, you need to project that into the future using reasonable assumptions for inflation. Historically, inflation has averaged around 2.5% per year, but as you know, the scales are a bit off balance presently. You can use that as a starting point and may want to adjust depending on the main categories you spend on.
3. Tax reduction strategies in retirement
So here's the thing: we really like tax planning at expatwealthatwork because so many of our expat clients are high-net-worth. Proactive tax planning is critical for high-net-worth expats and families in retirement because it helps keep more of your hard-earned money working for you. Many families aren't quite sure how to manage their new tax situation in retirement, but we offer unique strategies that can help bring confidence and control back into this vital area of your financial life. With proper tax management, you can stretch your retirement savings even further by actively considering ways to reduce taxes in retirement. The following few points will illustrate a few of these tax-savers!
4. Account drawdown strategy
A withdrawal strategy goes beyond considering how much you will withdraw from your retirement accounts. Conventional wisdom has pointed people toward taking roughly 4% from their accounts in the first year, and then increasing withdrawals at the rate of inflation - but your retirement plan shouldn't be cookie-cutter conventional. How you drawn down your accounts in retirement can have a major impact (good or bad) on your ability to maintain your preferred lifestyle. A deliberate withdrawal strategy considers the amount of money to remove from each account and establishes a plan for how to do so effectively.
- Will you take simple inflation-adjusted distributions each year?
- Will you use a guardrail strategy?
- What about the timing of withdrawals?
- From which accounts will you withdraw first?
This decision is personal to you, and it depends on your income needs, tax bracket, income sources, and more. We can help you craft a dynamic withdrawal strategy that maximises the longevity of your investments.
5. Healthcare in retirement
Health care is a significant component of any retirement plan. Healthcare will take up about 15% of someone's retirement budget. You'll have to consider out-of-pocket costs, long-term care, and more. No matter how you look at it, health care expenses will be a major part of your retirement budget. But it doesn't have to be scary! You need to make sure you choose the right medical coverage. Don't rely on rules of thumb or go with a particular plan just because your friend did. Analyse the coverage options and consider your own needs, resources, and lifestyle. It's also important to actively save for your future healthcare costs.
6. Stress test your plan with Monte Carlo analysis.
Now you have all the pieces of your retirement plan, it's time to put them together! Ask yourself, how well does your plan hold up when tested against future probabilities? To help answer this question, we can run a Monte Carlo simulation. Since we can't know for sure what investment returns/stock market performance will be going forward, we need to test our plans against a range of possible outcomes. Doing so gives confidence and financial security in the plan and identifies areas of weakness to address now before they become a significant problem and possibly derail retirement.
For example, Monte Carlo can help you determine if $2 million, $5 million, or $10 million is enough to retire with a high degree of confidence. In addition to ensuring your nest egg will be in strong supply throughout retirement, there are some additional risk management elements to consider like:
- Insurance policy needs (life insurance, long-term care insurance, etc.)
- Risk tolerance heading into retirement. If this changes, it may impact your investment strategy.
- Investment fees (now could be a good time to consider a rollover).
and additional liabilities.
Bonus: Estate Planning
An expat retirement plan wouldn't be complete without a thoughtful and thorough estate plan. expatwealthatwork can play a big role in helping you craft an estate plan that maximises your assets and honours your legacy. We can help you analyse,
- The wealth transfer process (like using a trust to protect your wealth)
- The pros and cons of using individual retirement accounts as an inheritance plan.
- Your beneficiaries
- Properly titling your assets and accounts
- Tax considerations
- Cultivating a robust, lasting legacy
Expat financial planning and retirement planning at expatwealthatwork
Each retirement is different, so each plan needs to be different. Regardless of the detail, any retirement plan needs to account for these components to be as effective as possible. Otherwise, you risk throwing hundreds of thousands of euros away in taxes and poor returns. Even worse, retirement could end up being full of anxiety and concern. We have tailored our financial services to best accommodate expat pre-retirees and retirees every day to ensure they don't miss a step and we would be happy to speak with you.