Registered Investment Advisor specializing in Model Portfolios

Nav
ASep 17, 2012

Perks and Perils of Greener Pastures

Andrew Hallam

When billionaire Facebook co-founder Eduardo Saverin relinquished his U.S. citizenship in 2011, the media jumped.   Bloomberg news reported that there were 1,781 citizen-ship jumpers in 2011, up seven fold since 2008.   It’s a drop in the ocean, however, compared to the millions of Americans who work overseas—many for the lower tax incentives. 

Excluding military families, roughly six million U.S. citizens are expatriates, according to the American Association of Residents Overseas.  That equals the combined populations of Nashville, Seattle, Boston, Austin, Milwaukee, Sacramento and San Diego.  Are there greener foreign financial pastures?  Many people seem to think so.

At Singapore American School, where I teach Personal Finance, there are roughly 300 U.S. expatriate teachers.  Despite being middle class professionals (and I’m embarrassed to admit this) most of us live like royalty.   While the costs of many goods can be high, the cost of services is low.  Even teachers can afford to have full-time maids.  For $300 per month, you can hire a maid to cook every meal, clean the house, wash the car… even babysit the kids.

Cheap manicures, pedicures and massages add to the lifestyle.  My wife and I hire a masseuse every Wednesday.  She comes to our home, where we enjoy hour-long treatments for $50 each.  As cheap as it sounds, expatriates in China, Indonesia, Thailand or the Philippines pay less than a quarter of that.

Lower income taxes can also mean higher disposable income for travel.  My colleagues commonly take three weeks at Christmas for African safaris, European ski holidays, or fully catered excursions to Bali or Borneo.

 According to the IRS, if American expatriate salary packages (including housing and/or educational benefits) are below $92,900 a year, Uncle Sam gets nothing.  It sounds like a sweet deal, and it is.  My American wife pays just 12 percent tax, with the majority going to the Singapore government.  Some U.S. expatriates do even better.  In Bermuda, The Cayman Islands, Oman and Qatar, for example, an American wouldn’t pay local taxes.  If their compensation package were less than $92,900 per year they would avoid income taxes completely.

Before crying foul or jumping on the next tax haven plane, consider the drawbacks.  Many expatriates are bound by golden handcuffs.  Unwilling to give up the perks, they often work their entire careers overseas. Whether social security exists in its present form over the next twenty years is debatable.  But one thing’s for certain.  Non-contributors receive nothing.

According to the Social Security Administration  the average U.S. retiree, as of early 2012, reaps $1,230 per month.  Two U.S. retirees in the same household could earn a combined $2,460 per month or $29,520 per year. 

If Social Security benefits increase just 1 percent per year–well below the historical rate of inflation–a retired American household could earn $35,310 in 2030.  For the equivalent income, an expatriate who spent their career overseas would require an investment portfolio of nearly $900,000.  Withdrawing 4 percent per year from a $900,000 portfolio (with upward increases to cover inflation) would provide similar payouts to a couple’s social security.  Withdraw more than 4 percent per year, and they would risk running out of money. 

Career expatriates, however, with $900,000 portfolios would repatriate to the back of the middle class pack.  Not only will the average stateside American have Social Security benefits, but they have other investments as well.  Fidelity reports that the average combined balance in its IRA and 401K plans was $212,600 in 2011.  At a 6% rate of return, this could top $600,000 by 2030. 

What does this mean for the retiree hoping to repatriate in 2030 after a career overseas?

If they want to keep up with the Jones’s, they could face an uphill battle.  They’d need a mortgage-free home (64 percent of retirees are mortgage free) and at least $1.5 million in investments to equal the combined benefits of social security and Fidelity’s average IRA/401K plan. That means expats need to do a lot of saving. And they will probably have to do it entirely on their own.  
If they relinquished defined-benefit pensions to work overseas (as many teachers do) they could be among the poorest in their class.

What’s worse, America’s largest low cost investment company, Vanguard, won’t open accounts for expatriates.  As a result, high cost investment salespeople hit the international road like bandits, selling products that slowly shred a quarter (or more) off a portfolio’s potential value.

Of course, not every expatriate eventually suffers.  Some of those enjoying lower taxes and higher salaries do extremely well.  If you’re a disciplined saver with a sense of adventure, the lifestyle might suit you.

But you would have to save–a lot. Not everybody is Eduardo Saverin.    

Filed Under: Foreign Perspectives