Asset Allocation summary

An asset allocation plan is an important part of every financial plan. I have changed my asset allocation several times in recent years, but seem to have settled on the following for now:

  • 70% stocks, 30% fixed income
  • The 70% in stocks breaks down to 30% in US Large Cap stocks, 10% in US Small and Mid Cap stocks, 25% in Non-US stocks, and 5% in REITs
  • The 30% in fixed income breaks down to 10% in Bond funds, 10% in Inflation-indexed bonds, and 10% in Stable value funds.

I include only our investment accounts (retirement and brokerage accounts) in the allocation above.

I am not exactly sure how we ended up with these target allocations. The 70-30 split between equities and fixed income is based on my risk tolerance and in line with Ben Graham's recommendation in The Intelligent Investor that no individual investor should have more than 75% in equities. I learned almost everything about asset allocation from the book The Intelligent Asset Allocator by William Bernstein. I have also listed some of the links that I like about portfolio allocation at the end of this post.

In our case, since much of our investments are currently in our 401(k) accounts, I am restricted by the investment choices available there. We are also limited in my choices by the relatively smaller contribution limits for IRAs.

Some specific notes on our asset allocation:
  • Currently most of our holdings are in tax-deferred accounts. My plan is to "front-load" these so as to make the most of the tax deferral. At some point in the future, I plan to reduce the contributions to tax-deferred accounts, and direct them to taxable accounts instead.
  • Our college saving accounts are not included in the allocations given above. I will separately track the allocation in them since the money in these accounts will be needed sooner than the rest.
  • For tax-efficiency, the entire bond portion and the REITs are in tax-advantaged accounts. The rest is split between taxable and tax-advantaged accounts.
  • The bond funds are split equally between short-term and intermediate-term treasury and investment grade funds. We do not hold long-term or high-yield bonds. Since bonds are primarily for safety, I see no need to hold these riskier assets.
  • For Inflation indexed bonds, we hold both a Treasury Inflation-protected Securities fund, and Series I savings bonds.
  • There are several asset classes that we don't own that we probably should, most notably Emerging market stocks. I have exposure to emerging markets through the international funds we own, but I have been hesitant to allocate a fixed percentage to them. As Bernstein has explained, higher growth rates do not necessarily translate to higher returns in the long term.
Since we are planning to retire abroad, we are more concerned about a decline in the value of the US dollar than the average US retiree. The general principle is that you should hold most of your money in the currency that you plan to spend it in. We are currently doing the following to hedge the currency risk:
  • 25% of our entire portfolio is in Non-US stocks.
  • We own some property and a bank account in India. These are not included in the allocation above. We plan to increase the assets in India as we get closer to retirement.
There are two common ways to re-balance an investment portfolio: either do it annually, or do it whenever the allocation of an asset type is off by more than a certain percentage. In my case, since I am very much in the accumulation phase of my investments, I don't strictly do either of the above. Instead, I have been using new contributions to try to meet the target allocations, and it has worked out reasonably well so far.

I'd love to hear your comments or thoughts on our portfolio.

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Outsourcing Retirement to India

The idea of India as a low-cost retirement destination comes up every so often, usually in the context of medical or nursing home care in America and Europe. The notion is getting some attention in India as well. I found this article with the provocative subtitle Why not move the retirees to India? in the online version of Mint, an Indian business newspaper. Here is an excerpt:

[European retirees in India] can enjoy the standard of living they have come to know, at price levels they can afford. For India, the retirees’ spending offers another growth industry, potentially employing another several hundred thousand people working in the hospitality retirement business and all the ancillary services associated with it... If India can serve as back office to the world, why can’t we become its retirement home as well?
An earlier editorial in the Times of India discussed the same topic:
Given the high rates of rentals and medical services abroad, people are opting to move to India to lead retired lives that are comfortable and affordable. India ought to pull out all stops to attract this kind of outsourcing as it has great potential.
Unfortunately, there is currently no easy way for a non-Indian to retire in India. There is no such thing as a "retirement visa" to India (as there is for several other countries). A foreign retiree cannot stay for longer than six months in India. Unless the Indian immigration laws are liberalized, this idea is a non-starter.

On Immigrants, Kids and Money

The first generation of immigrants from India arrived in America in the 1950's, 60's and 70's. (Yes, there were earlier immigrants from India, but their numbers were very small until President Truman signed the Luce-Celler Act in 1946). Most of them were skilled professionals who established themselves in a variety of fields, especially science, engineering and health care. This generation has now reached (or is about to reach) retirement age. I have always been curious about how they are dealing with retirement.
By most statistical measures, Indian immigrants have been one of the most affluent groups in America. According to the 2000 U.S. Census, Indian Americans had the highest median income of any ethnic group in the United States. Anecdotal evidence, however, tells me that many of the older Indian immigrants who are eligible for social security are still working, and usually out of necessity. In several cases that I know of, this is because they financially supported their grown children.
While first-generation Indian immigrants were generally in well-paid, in-demand occupations, their children have taken a more mainstream American route. This should not be a surprise; a grand American tradition holds that every generation expects to have more choices than the one that came before it. As John Adams wrote:

I must study politics and war [so] that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.
To rephrase this in contemporary terms, we studied Microbiology and Mechanical engineering, so that our children could major in Journalism and Communications. Regardless of the fields they choose, the majority of second-generation Indian kids grow up to be independent, responsible adults. Unfortunately, you also find many adult children in the community who are financially dependent on their parents to varying degrees.
According to The Millionaire Next Door, one of the seven characteristics of those who successfully build wealth is that their adult children are economically self-sufficient. For me, one of the most interesting parts of this book was where it explained what the authors called Economic outpatient care, which is the financial support provided by parents to their grown children.
The first generation of immigrants never received any economic outpatient care. However, when it comes to their children, many of the same folks do not hesitate to go well beyond normal parental obligations. It is common to hear about Indian parents who pay for a brand-new car for their child upon graduating from high-school, tuition at expensive private colleges and medical and professional schools, down payment for the house or condo, and a $25,000 wedding. While the truly affluent can afford to pay for these for their children, many parents do this at the expense of endangering their own financial security.
A joke among financial planners in India is that the only retirement plan that many people have is a plan to have more children (since the traditional expectation was that the children would take care of the parents in their old age). It is truly ironic then, that it is often the children that stand in the way of their immigrant parents retiring at a reasonable age.
The authors of The Millionaire Next Door found that financial help given to adult children resulted in more consumption, rather than saving or investing. The more gifts they received, the less they accumulated. Gift receivers also did not fully distinguish between their wealth and the wealth of their gift-giving parents.
So what can parents do to raise children who are economically self-sufficient? The book gives 10 rules for affluent parents and productive children, which I have summarized below:
  1. Never tell children that their parents are wealthy
  2. Teach your children discipline and frugality, by example.
  3. Ensure that your children won't realize you're affluent until after they have established mature adult lives.
  4. Minimize discussions of the items that each child will inherit or receive as gifts.
  5. Never give cash or other significant gifts to your adult children as part of a negotiation strategy.
  6. Stay out of your adult children's family matters.
  7. Don't try to compete with your children, or compare your financial status with theirs.
  8. Remember that your children are individuals. Do not try to "fix" inequalities by providing financial help.
  9. Emphasize your children's achievements, not their symbols of success.
  10. Tell your children that there are lots of things more valuable than money.

Retirement account Contribution Limits for 2008

As I detailed in earlier posts on our Net Worth, most of our retirement savings are in tax-deferred retirement accounts, mainly 401(k) and IRA accounts. We have been able to contribute the maximum allowed amounts to these accounts for the last six years, and it has served us well. One of our goals is to continue to "max out" contributions to these accounts.

Now that we are well into the fourth quarter, it is time to look ahead to 2008. IRS has just updated the contribution limits for retirement plans for 2008.

The maximum pre-tax contribution allowed to 401(k) and 403(b) accounts for 2008 is $15,500, which is the same as for 2007. Those who are over 50 are allowed to contribute an additional $5,000 in "catch-up" contributions. This is again the same as in 2007.

Note that this is the maximum allowed by IRS. Your individual plan may have additional restrictions that prevent you from contributing the full amount. It is important to check with your plan administrator.

For IRAs (both Traditional and Roth), the contribution limit is going up in 2008 to $5,000, which is $1,000 higher than the limit for 2007. The contribution limit for those over 50 is $6,000.

The good news is that this will allow us to contribute more next year. The bad news, of course, is that we'll have to try harder to find enough money to be able to afford the higher contributions.

To be eligible to fully contribute to a Roth IRA, your adjusted gross income (AGI) must be under $159,000 (increased from $156,000 for 2007) for taxpayers filing a joint return. For single taxpayers, the AGI limit is increased from $99,000 to $101,000.

Related links:

Net Worth update - September 2007: Up 6.1%

As of the end of third quarter, 2007, our Net Worth was $650,200.

Our Net Worth increased by $37,597 (or 6.1%) in this quarter. This breaks down as follows:
  • $21,279 is new contributions we made to our accounts.
  • $1,701 is from increase in home equity due to mortgage payments we made.
  • The rest ($14,617) is due to investment income and unrealized gains in our accounts, and employer match in 401(k) accounts.

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10 Best Places to Retire in India

One question that I have received several times since I started this blog is about the best retirement destinations in India.
For most Indian retirees, the notion of finding a place to retire is a strange one. Most of them want to live close to their children and other family, and will never consider moving elsewhere. However, with an increasingly mobile and affluent population in India, more people are taking an active role in planning their retirement. Many people are buying retirement homes in desirable locations, sometimes as investment property. There are also more older people from abroad, Indians and non-Indians alike, who are considering long-term stays in India. As a result, this question is likely to come up more often.
To help answer this question, I have tried to list a number of good places for a retiree in India. Any such list is sure to be very subjective for a country as vast as India. I used the following guidelines to select places for this list:
  • Good location with interesting local activities and places to explore.
  • Good infrastructure, including medical facilities. A significant retiree population is a plus. This eliminates some of the more exotic locations.
  • Not excessively crowded. This rules out most of the bigger cities in India.
  • Safe, with a cosmopolitan outlook and open to outsiders. A sizable expatriate population is a plus.
Here's my list of best places for retirees in India, in alphabetical order:

1. Chandigarh

Chandigarh, capital of the northern Indian states of Punjab and Haryana, has always been different from most of urban India. With pedestrian plazas, fountains and streets arranged on a grid, the city always felt modern. Chandigarh today is a booming town with the country's highest per capita income, and is favored by Indian yuppies and medical tourists alike.

Comments? Share them at Retiring to Chandigarh.

2. Coimbatore

Coimbatore is located in the southern state of Tamil Nadu. It has been attracting many Indian retirees in recent years. The city is surrounded by mountains including the Nilgiris and is close to the popular hill station of Ooty. The city is also known for good hospitals.

Comments? Share them at Retiring to Coimbatore.

3. Dehradun

Dehradun is located between two of the most important rivers in India, the Ganges and Yamuna, with the Himalayan mountains in the north. It offers beautiful scenery and a moderate climate in summer. The town also serves as a convenient base for visiting the area's many tourist sites.

Neighboring towns include Haridwar and Rishikesh, known for their religious connections, and the hill station Mussoorie.

Comments? Share them at Retiring to Dehradun.

4. Goa

The former Portuguese colony of Goa is known for a fine climate and a cosmopolitan culture. Renowned for its beaches, Goa is visited by hundreds of thousands of international and domestic tourists each year. Located on the west coast of India in the region known as the Konkan coast, Goa is home to a growing number of Europeans and Indian expats from abroad.

Comments? Share them at Retiring to Goa.

5. Himachal Pradesh

Himachal Pradesh Tourist Attractions-Palampur 1Himachal Pradesh, a state in northwestern India, is known as the destination for those looking to experience the Himalayas, espcially the remote valleys of Lahaul and Spiti popular with trekkers. The state also offers much for those looking to settle down.

Popular cities and towns include Shimla, the state capital; Dalhousie, a charming resort town; Dharamsala, the exiled home of the Dalai Lama; and Manali, a ski resort.

Comments? Share them at Retiring to Himachal Pradesh.

6. Kerala

kerala backwaters house
Kerala has been a popular stop for visitors to India for many years. Located in southern India along the Arabian sea, Kerala is known for tropical forests, a fertile coastal plain, and its backwaters.

Besides the two bigger cities of Thiruvananthapuram (Trivandrum) and Kochi (Cochin), there are many other popular towns including Kozhikode (Calicut), Munnar and Varkala. A large number of people from Kerala who worked outside the country are now retiring and coming back to live in their home state.

Comments? Share them at Retiring to Kerala.

7. Mangalore

Mangalore is the main port city of the state of Karnataka. It is located on the west coast of India on the Arabian Sea.

A growing city with a diverse population, Mangalore is known for its beaches and temples, and a landscape dotted with coconut palms along rolling hills and rivers.

Nearby cities include Manipal and Udipi.

Comments? Share them at Retiring to Mangalore.

8. Mysore

Mysore has been a popular destination for travelers, particularly for its palaces and temples, and as a base to explore nearby locations.

Mysore has a reputation for being a quiet and sleepy city, but in recent years it has become an active location for IT companies employing large number of young people, while still remaining attractive for older people.

Comments? Share them at Retiring to Mysore.

9. Pondicherry

Pondicherry (Puducherry) is a former French colony, known for a laid-back lifestyle and a slow pace of life. A remarkable degree of French influence still exists here and the place has been especially popular with French-speaking visitors and expatriates.

Pondicherry is known for its spiritual connections (Auroville is a popular destination), good infrastructure and medical facilities.

Comments? Share them at Retiring to Pondicherry.

10. Pune

Pune is located in the western Indian state of Maharashtra. With a population of over 4 million, it is the largest city in this list. It is now home to many software and IT companies, and has a diverse population.

Nearby places include the popular hill stations of Lonavala, Khandala and Panchgani.

Comments? Share them at Retiring to Pune.

Have suggestions on other retirement destinations in India? Please share them at Other retirement destinations in India.

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All Flickr images used per Creative commons.

Update: Thanks for the many great comments. I have now turned off comments for this page, but added links to separate pages for popular retirement destinations in India. Please use these pages to share your comments and get in touch with others considering the same or nearby locations.

Medicare for overseas retirees

As I mentioned in an earlier post about Social security for overseas retirees, US citizens who retire abroad are fully eligible for receiving Social security payments. The situation with Medicare, however, is quite different.

Just as in the case of Social security, the rules regarding Medicare eligibility and benefits are subject to change in the coming years. It is important to understand the current regulations, however.

First, some basics about Medicare:

  • Medicare is a Federal health insurance program for those people who are 65+ years of age, or have certain disabilities. You qualify for Medicare if you are 65 years of age and if you are eligible for Social Security retirement benefits.
  • Even if you opt for Social security payments later than age 65, you are still eligible for Medicare at 65. If you opt for early Social security benefits before the age of 65, you will not be eligible for Medicare benefits until you are 65.
  • To be eligible for Medicare, you must be a legal US resident. You do not have to be a US citizen.
  • Medicare comes in three parts:
    • Part A (Hospital Insurance) covers hospital stays.
    • Part B (Medical Insurance) covers doctor bills and outpatient care.
    • Part D (Prescription Drug Coverage) covers prescription drugs
  • Part A is free (i.e. you do not pay any premiums) if you have made at least 10 years of Medicare contributions during your working years.
  • Parts B and D are not free; the amount you pay for these depends on your income at the time, and the level of benefits you choose. It does not depend on how many years you have worked (assuming a minimum of 10). Nor does it depend on your assets.
  • You must enroll for Medicare coverage when you are eligible, i.e., at 65. If you decline Medicare during the initial enrollment period, your premiums for Part B may be increased by 10% for every 12 month period that you did not have Part B. If you have coverage through an employer, you may be eligible for delaying Medicare enrollment. There's a similar rule for Part D as well.
  • To stay enrolled in Medicare you need to continue making premium payments for Part B ($93.50 monthly for 2007, for most people). Normally, Medicare premiums are deducted from your social security payments.
  • In addition to Medicare, many retirees sign up for Medigap supplemental insurance. This is health insurance sold by private insurance companies to fill the “gaps” in Medicare Plan coverage.

Here are some specifics about Medicare for those who plan to live or travel outside the US:

  • Medicare benefits are available only if you live in the US. If you currently have Medicare and you move outside the US, medical expenses outside the US will not be covered by Medicare.
  • If and when you return to the US, Medicare Part A will be available to you. For Part B coverage, you have the option to continue paying your monthly premium while living outside the US. Since Medicare benefits are only available inside the US, it is strange to have to continue to pay a monthly premium for a service not available to you.
  • If you drop your Part B coverage, then return to the US, you will be required to re-enroll and pay a premium that is 10% higher for each 12-month period that you did not have coverage. This is just as if you had declined coverage when it was first available to you.
  • If you are re-enrolling for Part B, you may only do so from January through March each year. Coverage will not resume until July of that year.

So what other options are available for overseas retirees besides Medicare?

  • The Social Security Administration recommends that those on Medicare who wish to travel abroad consider getting short-term coverage designed for travelers. There are several companies that provide such coverage, but most companies will not cover pre-existing medical conditions. Such coverage will only help for short trips abroad, not for retirees.
  • For those who travel outside the US frequently, Medigap (Medicare Supplement) provides foreign coverage, with no extra cost for eligible treatments. These are reimbursement plans, so you have to pay the bill first and then submit it for compensation. They only cover the first 60 days you're outside the US. These plans usually also have a dollar cap per trip.
  • This leaves long-term retirees overseas with only three options: buy private coverage individually or through a group, pay into the government-sponsored system or buy a private policy in the country where you live, or go without coverage.
After years of paying Medicare taxes (1.45% of the paycheck for most workers), overseas retirees gain nothing from Medicare. Not surprisingly, the lack of access to Medicare is a hot-button issue for retirees abroad.

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Early retirement planning with FIRECalc

For those thinking about retiring early, two of the most frequently asked questions are the following:

  • If I retire today with my current savings, how much can I safely withdraw each year?
  • When can I retire with $40,000 yearly income (or another desired amount) if I continue to save at the current rate?
FIRECalc is a simple web calculator that can help you answer these questions. FIRECalc makes one key assumption to answer these questions, namely, that the future can't be all that different from the past.
According to the Wall Street Journal:
To gauge your strategy's likely success, [FIRECalc] looks at investment returns since 1871. But the calculator doesn't use average historical rates of return. Instead, it analyzes what would have happened if you retired in 1871, in 1872, in 1873 and so on. It then calculates how often your strategy would have panned out historically.
In other words, it uses historical data about the US stock and bond markets to calculate your odds of not running out of money during retirement. It also adjusts for inflation automatically, so you can enter figures in today's dollars.
I will use FIRECalc to answer the two key early retirement questions below, using my own data as posted in my last Net Worth update.
If I retire today with my current savings, how much can I safely withdraw each year?
There are two versions of FIRECalc: standard and advanced. You can answer this question using FIRECalc Standard.
I plugged the following figures into FIRECalc:
  • Retirement savings: $425,736 (the portion of our Net Worth intended for retirement)
  • Asset allocation: 75% equities, 25% fixed income (our target asset allocation)
  • Number of estimated years in retirement: 60 (this assumes that we will live for 60 more years from now)
  • Investing fees: 0.5% (a rough estimate of the average expense ratio for our investments)
You can select a desired success rate, which is the chance that you will not run out of money.
For 95% success rate, I get the following result:
A withdrawal of $14,589 (3.43% of your starting portfolio) provided a success rate of 96.1% (76 total cycles, of which 3 failed).
And for 99% success rate:
A withdrawal of $13,547 (3.18% of your starting portfolio) provided a success rate of 100.0% (76 total cycles, of which 0 failed).
FIRECalc also provides the following chart of my success rate for different yearly withdrawal amounts.

For 100% success, I can withdraw no more than $13,547 (inflation-adjusted) each year. Clearly, my chances of retiring with my current savings are pretty low.
Now for the second question:
When can I retire with $40,000 yearly income if I continue to save at the current rate?
To answer this question, you need FIRECalc Advanced, which provides more options than the standard version.
I used the following figures:
  • Desired yearly income: $40,000 (in current dollars)
  • Retirement savings: $425,736 (the portion of our Net Worth intended for retirement)
  • Asset allocation: 75% equities, 25% fixed income (our target asset allocation)
  • Number of estimated years in retirement: 60 (this assumes that we will live for 60 more years from when we retire)
  • Investing fees: 0.5% (a rough estimate of the average expense ratio for our investments)
  • Total yearly contributions to our retirement savings: $53,750 (based on last year's data)
I have ignored Social security for simplicity, but FIRECalc does allow you to enter estimates for social security payments and other expected sources of retirement money, such as an inheritance.
I selected the option: "What happens if you retire in any of several years between now and 10 years from now?"
FIRECalc produces the following charts. The first one shows my success rate for each target retirement year. The second chart shows three different curves showing my best-case, average and worst-case (from top to bottom) balance at the end of retirement, for each target retirement year.

Based on the above, if we continue to save at the current rates, we have a 100% chance of retiring in 2016 with a $40,000 annual income (in current dollars).
FIRECalc does have some limitations:
  • It ignores the tax status of your accounts, i.e. whether it is taxable or non-taxable. To be on the safe side, I assume that the expected income that I enter in FIRECalc is the pre-tax amount.
  • FIRECalc only includes data for the US market. Considering that global markets are increasingly interconnected, this does not appear to be a big limitation. The data for US markets include the great depression, two world wars and periods of severe inflation, so it represents a wide variety of investment environments.
FIRECalc (both standard and advanced versions) is free for use, but a small donation is recommended.
Related links:

Book review: Cashing in on the American Dream - How to retire at 35

Cashing in on the American Dream: How to Retire at 35 by Paul Terhorst is one of the most well-known books on early retirement. I have heard about this book many times, especially on the wonderful Early Retirement forums, but never had chance to read the book until now.

This book was written in 1988 and is out-of-print, so the best way to get a copy is at the library.

Terhorst is a former accountant who retired at 35 in 1985 with a modest amount in savings and still continues to stay retired. He and wife Vicki are probably the best-known early retirees, and maintain a website that they still keep up-to-date with their latest adventures.

Terhorst's book is in many ways reminiscent of the book Your Money or Your Life, published later in 1992, which I have mentioned before. Both books emphasize frugal living, and have a healthy disregard for the traditional corporate work ethic.

Of the two books, Cashing in on the American Dream is more readable and less preachy, and contains more practical advice. Keep in mind, however, that much of the financial advice in this book is quite unconventional, such as not owning a home or cars during retirement. Like Your Money of Your Life, which recommended treasury bonds, this book also advocates risk-free investments for retirement savings. The book recommends building a ladder of 1-year CDs. Terhorst's website says that they have now switched partly to low-cost index funds after CD yields dropped.

This book was especially interesting to me because of its emphasis on retiring abroad. Terhorst and wife initially retired to Argentina and later lived in many low-cost countries during their retirement, including Mexico, Brazil, Spain, Yugoslavia and Thailand.

A nice feature of this book is a summary given at the end of the book, which lists a series of short, memorable "rules" described in more detail in earlier chapters. I have listed some that appealed to me below, with some added commentary.

About work
  • Look for meaning in yourself, not in your job. This is probably the most important advice in this book.
  • Take the two-year test ("If you had only two more years to live, would you continue to work where you work?")
  • Enjoy your career and then move on (or, "Make a clean break" from work when you retire).
About finances
  • You need $400,000-$500,000 of net worth to retire, including home equity. You need more if you have kids, about $4000 per child per year. Note that these are 1988 figures. (According to the inflation calculator, prices have increased about 75% from 1988 to 2007).
  • Turn hard assets into Cash: Convert home equity and other assets to cash.
  • Live on $50 a day. This advice is repeated in the book many times. The $50 figure, originally from 1988, is still achievable, according to the website, in many places in the world.
  • Cut down your infrastructure: Move to a low-cost area, and sell your vehicles.
  • Spend on yourself, not on your assets.
About retiring in the US
  • Go south (where it is cheaper)
  • Live where the jobs aren't. This is based on the observation that places with lots of available jobs tend to be expensive to live in.
  • Live like a student. This advice will make sense to anyone who, like me, spent many years in grad school with little income.
About retiring abroad
  • Keep calm; you can always return to the United states.
  • Live like a resident, not like a tourist.
  • Rent, don't buy.
  • Choose hotels that offer what you need, and nothing more.
About initial retirement years
  • Manage the change: Avoid too many changes at once.
  • Make a to-do list before retiring.
  • Avoid major purchases for two years.
Overall, this book is a delightful, easy read. Terhorst's website says that he has no plans to update the book ("the market for this kind of book is still small"), which is a pity.

Outsourcing Long-term care

When I listed my reasons for considering retirement to India, I mentioned the low cost of health care and long-term care in India. The situation with health care is well-known; India is one of the top destinations for health tourism where elective surgeries and other medical procedures are done at a fraction of the cost in the US or Europe. The low cost of prescription drugs is also another attraction.

The case with long-term care (nursing home care) is not so well known. I came across this article titled Made in India: Low-cost care for ailing parents in the Chicago Tribune that describes the case of an elderly American couple receiving nursing home care in India. Their son took them there after he realized that even the cheapest nursing homes in the US would bankrupt his parents.

The article describes the cost of care in India as follows:

[The total cost is] less than $2,000 a month for food, rent, utilities, medications, phones and 24-hour staffing. The plentiful drugs the couple require cost less than 20 percent of what they do in the US, and salaries for their six-person staff are so cheap that the pair now bank $1,000 a month of their $3,000 Social Security payment.
Interestingly, this is in Pondicherry which would probably rate high among desirable retirement destinations in India.
Pondicherry is a former French colony on India's southern coast. The graceful old town, with its coconut palms and orange-blooming flamboyant trees, was foreigner-friendly and on the ocean, with a weather much like Florida's.

If you think that going abroad for nursing home care sounds rather extreme, consider the options available to someone who needs nursing home care in the US.

  • You could pay for it out of your own pocket. The average cost of nursing home care in the US is more than $70,000 per year, so this option is feasible only for those with substantial assets.
  • Medicaid pays most nursing home costs for people with limited income and assets. To be eligible for Medicaid, you have to first spend down all your savings, including retirement assets. You can forget about leaving anything for your heirs if you take this route. There are also concerns about the quality of Medicaid-funded nursing home care. Nursing home residents on Medicaid tend to be treated as second-class citizens when compared to those who pay for their care.
  • The best option, for most middle-income earners, is to buy Long-term care Insurance. The average individual-policy sold in 2006 cost about $2,000 per year, with the average buyer being 59 years old. The premium can be considerably higher depending on age, health status and desired level of benefits.

This idea of "outsourcing" nursing home care is not new. As the article notes, this is one of the motivations for the increasing number of aging couples buying retirement homes in Mexico, where help is cheap and Medicare-funded health care is just across the border. Going to India is probably a logical next step.

Income taxes in India: The basics

One of the downsides of planning to retire to another country is that you need to be familiar with the tax systems of two different countries. This is especially challenging in the case of US and India, since tax regulations of the two countries are substantially different.

Since I never worked in India, I have never paid income taxes there, so I have no first-hand experience in this. I am planning a series of posts based on information that I gathered from different sources. This post explains some of the basic details regarding taxation of Indian residents.

  1. A basic difference in the Indian tax system compared to the US system is that income taxes are filed on an individual basis. In other words, there is no filing status such as "married filing jointly" etc. As a result of this, one of the basic rules of tax planning in India is that you should spread your income among different members of your family.
  2. Income tax is assessed based on the Financial Year (FY) which starts on April 1 and ends on March 31 of the following year. So you normally talk about the income taxes for FY 2005-06 and so on. However, since taxes are filed after the financial year is over, FY 2005-06 is also referred to as Assessment Year (AY) 2006-07.
  3. You are required to file income taxes only if your taxable income for the financial year exceeds the Basic Exemption Limit. For FY 2007-08 (AY 2008-09), the Basic Exemption Limit is Rs. 110,000 (about $2750).
  4. One of the interesting things about Indian income tax laws is that women and senior citizens (over 65) get some special tax breaks. For example, the Basic Exemption Limit above is increased to Rs. 145,000 (about $3625) for women and Rs. 195,000 (about $4875) for senior citizens.
  5. Another striking aspect of Indian tax law is that there are special provisions that apply based on which religion you belong to! For example, the notion of Hindu Undivided Family (HUF) is a special family entity that applies only to Hindus, Jains and Sikhs. This is an exception to item #1 in that it allows a HUF to be treated as a single unit for tax purposes.
  6. Every person who files income taxes is required to get a Permanent Account Number (PAN) from the Income tax department. This is the equivalent of the social security number in the US.
  7. Tax deadline is normally July 31. For example, tax returns for FY 2006-07 must be filed by July 31, 2007.
  8. Much like in the US, a number of deductions are available that may be excluded from your income for tax purposes. Your taxable income is computed by subtracting these deductions from your gross income.
  9. Tax rates are progressive as they are in the US. The tax rates for FY 2007-08 are as follows:
    • For taxable income from Rs. 110,001 to 150,000, the tax is 10% of the amount greater than Rs. 110,000. (Lower limit is Rs. 145,001 for women).
    • For incomes in the range Rs. 150,001-250,000, the tax rate goes up to 20% (Lower limit is Rs. 195,001 for senior citizens).
    • The highest tax bracket of 30% applies to taxable incomes above Rs. 250,000 (about $6250).
  10. There are two additional "surcharges" that apply in addition to the above. These add to your tax bill as an additional percentage of your already computed tax amount. First, a 10% surcharge applies if your income is above Rs. 1,000,000 (about $25,000). An additional education surcharge of 3% also applies to all taxpayers. After including the surcharges, the highest tax bracket is almost 34%.

One thing to keep in mind is that tax evasion is widespread in India. According to some reports, there are only 30 million taxpayers in India, which is remarkable for a country of over 1 billion people. The majority of taxpayers in India are salaried employees whose taxes are withheld from their paychecks. Many rich farmers and business owners pay little or no income taxes. The tax collection and enforcement system is long overdue an overhaul.

Related links:

Growing your Net Worth

I find it interesting to read about how ordinary working people can accumulate significant wealth over the years. I found two interesting articles about growing one's Net Worth the old-fashioned way: by saving steadily and allowing enough time for the power of compounding to work.

The first article, How to Save $1 Million for Retirement is from The Wall Street Journal Online and is written by Jonathan Clements. It says that the critical milestone is accumulating savings equal to two times your annual income. It has the following quote from a financial adviser:

What many investors fail to understand is that, once they reach a certain level of assets, most of the savings should come from investment growth. The breakthrough occurs at around two times your income. [This is] the crossover point, where the biggest driver of your portfolio's growth is now investment earnings, not the actual dollars you're socking away.

How long does it take to reach this goal? According to the article, if you have savings of two times your annual income in your early 40s, you are in pretty good shape. In my opinion, this may be appropriate for someone planning to retire at 65, but those who want to retire earlier will need to do somewhat better than that.

One of the better-known yardsticks for wealth accumulation is the one given in The Millionaire Next Door,one of my favorite personal finance books. According to this so-called MND formula, to be considered wealthy your Net Worth must be at least this: your annual income multiplied by your age, and divided by 10. This sets up a much more aggressive goal, namely, 4 times your annual income by the time you are forty.

The second article, Your First Million is the Toughest by Chuck Saletta at the Motley Fool, illustrates the power of compounding in another way. It shows that for someone who contributes $1000 every month to a retirement account, it would take about 25 years to accumulate the first million, but only 8 years for the second million, and 5 years for the third million (this assumes 8% investment returns yearly).

For someone with a target of saving $3 million, most of the effort is in getting to that first million. Once you hit that milestone, compounding really takes over to help you reach your ultimate goal. In fact, once you reach $1 million, you can scale back your monthly contributions from $1000 down to $100, and still reach the $2 million and $3 million targets in almost the same time.

Related links:

Book review: Retiring Abroad

Retiring Abroadby Ben West is a book for British retirees considering retiring abroad. I also looked at a few similar books for American retirees but decided to review this one instead, because this is the only one with any mention of retiring to India.

According to the book, about a million British retirees currently live abroad.

This book gives a good insight into the motivations and preferences of Brits retiring abroad. The top 10 destinations that they are retiring to are, in order, Spain, Australia, France, USA, Canada, South Africa, Cyprus, New Zealand, Jamaica and Italy.

An increase in affluence which enables a lot of retirees to travel and live abroad, and a desire for warmer weather appear to be the main motivations for leaving the UK. A lower cost of living is a motivation for only a fraction of the retirees. In fact, about half of the above retirement destinations are more expensive to live in than the UK.

I learned several things about retirement for Britons from this book:

  • British nationals have the right to live, work and retire in any EU country, provided that they apply for any required residence permits.
  • The UK state pension (equivalent of the US social security) is paid in full and is adjusted yearly for inflation anywhere in the EU, and in a few other selected countries. But in most other countries, including Australia, Canada, India and South Africa, they are "frozen", i.e., not adjusted for inflation. This seems like it would be a major problem for British retirees considering retiring to these countries. As I noted previously in my post on social security for overseas retirees, there are no such restrictions on social security benefits for US retirees abroad, at least under current law.
  • British expatriates in many countries find that local income taxes start at a higher income level than in the UK, so they do not pay any or much income tax. Also, UK has double taxation agreements with most countries, including India, which will prevent them from paying taxes on the same income twice.
  • EU citizens, working or retired, have the right to use the health services of other member states in the same way as local citizens.

The book provides detailed profiles of 34 countries that are apparently popular with British retirees. The only Asian country in this list is Dubai (which technically is not a country). It also has an appendix with very brief profiles of 13 more countries, including India, Thailand and Sri Lanka.

The section on India is exactly 1-page long, and not surprisingly, lists only two places: Goa and Kerala.

This is what it says about Goa (the US dollar conversions are mine):

The former Portuguese colony of Goa on India's west coast is considered a beautiful place to live. With land prices and salaries in India a fraction of their UK counterparts, you can buy a sizable land and build a luxurious residence for £50,000 (about $100,000).

The Goan resort of Candolim on the Arabian sea is popular with the British; newly-built apartments are available for around £12,000 (about $24,000). Calangute and Baga are also popular.

Browsing current property listings for Goa, these prices do not seem too far off the mark, considering the run-up in property values in many places in India in recent years. Note that this book was published in 2005.

And about Kerala, it says:

Another popular area is Kerala in southern India, which has been an increasingly popular tourist destination in recent years. A large modern villa at Ernakulam or Thiruvananthapuram costs from £35,000 (about $70,000). The cost of living is cheap too; it is possible to have a three-course meal for an amazing 50p (about $1).
Current property listings for Kerala are available here. I am planning a separate post on the accuracy of such cost-of-living comparisons for India.

Another fact mentioned is the following:

The Indian government is also considering granting citizenship to non-resident Indians, which would greatly increase the number of people who would consider investing there, further raising prices.

As I posted previously in my post on Overseas citizenship of India, this has already happened, although this so-called "overseas citizenship" is not quite the same as a full citizenship. The prediction about the increase in investments by non-resident Indians also has proved to be correct.

I have skipped over most of the material in this book and focused on what interested me; it is indeed a good resource for British and EU folks looking for a retirement destination and trying to compare the available options.

Related posts:

Net Worth update - June 2007: Up 7.4%

As of the end of second quarter, 2007, our Net Worth was $612,603.

This was a very good quarter for us. Our Net Worth increased by $41,952 (or 7.4%) in this quarter. Of this, $17,534 is new contributions we made to our accounts (including employer match in 401k accounts), $2,526 is from increase in home equity due to mortgage payments we made, and the rest ($21,892) is due to investment income and unrealized gains in our accounts.

Our Net Worth exceeded the $600K mark for the first time this quarter.

Related posts:

Book Review: Retire Early? Make the Smart Choices

I picked up a few books last week about early retirement and retiring abroad. In the next few weeks I will be posting a summary of each, with my notes on things I learned.

The first book is Retire Early? Make the SMART Choices by Steven Silbiger.

The first thing to note about this book is that "retiring early" here means electing to take social security benefits at 62 instead of waiting for full retirement benefits at the normal retirement age of 67 or later. I am always amused to see that retiring at 62 is considered "early" in most developed countries. (For comparison, retirement age in China is 50 for most women and 60 for most men. In India, 60 is the mandatory retirement age for most jobs; many state employees have to retire at 55 or 58.)

As it turns out, more than half of this book is devoted to answering a single question: Is it better to opt for "early" social security benefits at 62, or to wait till the full retirement age of 67 (for those born after 1960)? The answer to this question is extraordinarily complex and dependent on individual circumstances. This book does a great job of explaining the basic factors to consider before making this decision.

Consider the basics:

  • Those born after 1960 will be eligible for full retirement benefits at 67.
  • You are eligible for reduced benefits at 62, but if you opt for this, it will reduce the payment amount for the rest of your life. A typical person born after 1960 will lose 30% of his social security amount by opting to retire early.
  • You can also retire in the years between the earliest retirement date and full retirement, and get a bit more money with each passing year.
  • You can keep working past the full retirement age (till age 70) and get much more. A typical person born after 1960 will get a 24% increase in the payment if he opts to start social security at 70.

Based on the above, the decision on when to take social security appears to be straightforward: You calculate the "break-even point" which is the age till which you have to live in order to "break even" if you delayed starting social security payments. Based on your life expectancy, if you expect to live beyond your break-even point, it is worth delaying the start of your social security payments. The book provides charts to help with estimating your break-even point.

However, the book then goes on to explain a host of other factors to consider.

Note: In the following, I have used the terms husband and wife for simplicity. The rules are equally applicable even if the genders were reversed. The tax rules below use the 2005 figures from the book; they may have been adjusted for inflation since then.

Spousal benefits

  • A wife can collect on her own career benefits or collect 50% of her husband's benefits (provided the husband has already started collecting benefits), whichever is greater.
  • If a wife, who collects based on her husband's record, elects to retire at 62, there is a significant reduction in her benefits. A wife born after 1960 who elects to start receiving payments at 62 will typically receive only 32.5% of the benefits of the husband's full benefits, instead of the 50% that she will be eligible for at full retirement.
  • If the husband also elected for early retirement, the reduction in the benefits for the wife will be even more drastic.
Survivor benefits
  • A surviving wife who is 60 can collect about 70% of her husband's benefits, and a full 100% of the husband's benefits when she reaches full retirement (assuming that this is greater than any benefits she is eligible for on her own record, since she can take only one of the two).
  • If the husband had elected for early retirement, the surviving wife's benefits will be based on the husband's reduced benefits. The husband's electing for early retirement will then have an impact for many more years depending on the wife's life expectancy.

For workers eligible for a federal pension, there may be reductions to their social security benefits due to the federal pension payments. According to the book, many private pension plans also reduce pension benefits depending on the social security benefits that a person is eligible for. This is something I need to look into since I have a defined-benefit pension plan at work.

Working during retirement
  • If you continue to work while taking early retirement benefits, your benefits will be reduced if you earn over a certain level, a restriction known as "annual earnings test".
  • For earned incomes over $12,000, benefits will be reduced by $1 for every $2 of earnings over the limit till you reach full retirement age. Once you reach full retirement age, there is no reduction in your benefits.
  • For example, a modest part-time job that pays $25,000 held by an early retiree can completely wipe out his social security check.
  • Passive income (dividends, capital gains, rental income) is not considered for the annual earnings test.
  • IRS may tax social security benefits in both early and full retirement. IRS considers both earned and passive income in figuring your taxes.
  • To determine the taxability of social security benefits, you first calculate your "Base amount", which is your Adjusted Gross Income (AGI), plus half your social security benefits, plus any tax-exempt interest.
  • If your Base amount exceeds $32,000 (for a married couple), then 50% of the benefits are taxable.
  • If the Base amount exceeds $44,000 (for a married couple) then 85% of the benefits are taxable.
  • Taxes are not withheld from social security checks, so the fact that you may lose a significant portion of your social security benefits as tax is often a surprise to retirees.

The book covers all of the above issues in detail, devoting a chapter to each item above. The rest of the book contains advice to retirees on withdrawal strategies, investments etc., but most of it is material you can find elsewhere. The book's strength is its extensive discussion of social security.

I recommend this book for those considering opting for early social security benefits, as well as those who want to have a better understanding of how the current social security system works.

Related posts:

Related links:

Carnival of personal finance #106

My article on living on interest payments in retirement is featured in the Carnival of Personal Finance #106, now up at Digerati Life, which by the way is an excellent blog about finance and technology run by an immigrant engineer based in Silicon valley.

Here are some other articles from the carnival that interested me:

Early retirement planning: case studies

Found this excellent thread at about a 40-year old couple planning "semi-retirement" in 5-7 years and "full retirement" in 12 years. Their assets (net worth of about $1.5 M) and income ($240K-$260K) are well beyond ours, but I still found it very interesting.

Some notes:

  • They contribute an astounding 50% of their gross income to retirement and college saving accounts.
  • Their current asset allocation is 70% US equities, 15% International, 10% Bonds, 5% Cash. The suggestion from the group is to increase bond holdings gradually, leading to a 60/40 split of stocks/bonds at final retirement.
  • They use FIRECalc to do Monte Carlo simulations on their retirement withdrawals, I tool that I too have played with a bit.
  • For the semi-retirement period, they plan to allocate $10K/year for health insurance premiums. The response from the group is that this is on the low side.

Related posts:
Other early retirement case studies:

Roth IRA conversion during early retirement

Many people convert their Traditional IRAs to Roth IRAs due to the favorable tax treatment given to Roth IRAs. Under current law, money held in a Roth IRA is completely free from all future federal and state taxes. This is especially attractive if you believe that you will be in a high tax bracket during retirement, or if you expect the tax rates to go up in the future. You pay tax during the conversion process, in effect trading current tax payments for a reduction in future tax liability.

There is one group of people for whom Roth conversions are especially attractive -- early retirees who are living off the savings in their taxable accounts. This is especially true if you plan to retire abroad. Since your income is likely to be lower during early retirement years, it would be an ideal time to convert your Traditional IRAs to Roth IRAs. If planned properly, this can save a considerable amount in overall taxes.

What if your retirement savings are not in an IRA, but in another type of tax-deferred account like a 401(k) or a 403(b)? No problem -- these accounts can rolled over to a Traditional IRA using a direct rollover, and then converted to Roth.

What if your IRA was funded with non-deductible contributions? In this case, Roth conversion is even more attractive, since the portion of the converted amount that comes from nondeductible contributions is not taxed during the conversion. You will only be taxed on the earnings and on any deductible portion in your IRA.

Here are some more details about the Roth conversion process:

  • Although usually described as a "conversion", what really happens is a rollover. You are transferring money from one account to another account, usually held with the same custodian.
  • Currently, you may convert from a traditional IRA to a Roth IRA if your AGI (Adjusted Gross Income) is less than $100,000. The same limit applies to both single filers and married filers filing jointly.
  • Even the $100K income limit for converting to a Roth IRA will disappear in 2010, thanks to Tax Increase Prevention and Reconciliation Act (TIPRA) signed into law in May 2006. Unless the law is changed again, Roth conversions will then be available to all.
  • The 10% penalty for an early withdrawal from an IRA account does not apply to Roth conversions, so the conversion can be done at any age.
  • Taxes for Roth conversion are calculated by adding the converted amount to your AGI for the year in which the conversion was done, and then calculating your taxes using regular tax tables.
  • If you are living and working abroad when you do a Roth conversion, your income earned overseas will qualify for foreign earned income exclusion. For 2007, up to $82,400 can be excluded from AGI. However, due to changes introduced in TIPRA, your tax bracket may be higher than they used to be in previous years, so you need to be careful about attempting a Roth conversion.
  • The conversion can be spread out over several years (i.e., doing a partial conversion each year) so that you stay in a low enough tax bracket, taking into account your other taxable income for each year.
  • If you have multiple IRA accounts, you get to choose which ones to convert first (and whether to convert at all). For most people, the account with the most growth potential should be converted first. There are more aggressive strategies available for handling this decision, however.
  • Once the IRA has been converted, you will have to wait 5 years before the converted amount can be withdrawn penalty-free. Otherwise a 10% penalty will apply, unless you are over age 59.5.

For an extreme example, consider a retired couple living abroad with only $12,000 in taxable interest income in 2007, and taking the standard deduction.

They can deduct the standard deduction and personal exemptions from the AGI to calculate their taxable income. The 2007 standard deduction for a married couple filing jointly is $10,700 and personal exemptions are $3,400 each. So they will only owe tax on the amount by which their AGI exceeds $17,500 (= 10,700+3,400+3,400).

According to the 2007 tax schedule for a married couple filing jointly, they will be in the 10% federal bracket till their taxable income is $15,650, and in the $15% federal bracket till their taxable income is $63,700. This means that they can convert up to $5,500 (= 17,500-12,000) to a Roth IRA tax-free, another $15,650 at 10% tax rate, and up to $48,050 (=63,700-15,650) more at a 15% rate.

Related links:

Living on interest payments in retirement?

A common misconception about retirement planning is that once you have enough savings, you can "live on the interest payments" in retirement, without dipping into the principal.

For example, see the following comment by Ron Pearson, a financial planner who practices in Virginia Beach, Va., as quoted in Financial Planning magazine:

My biggest challenge is to help my clients understand the total return concept and how best to take an inflation-adjusted income stream. Many of them are still in the "spend interest, don't touch principal" mindset.

This shows that many people are not aware of the real impact of inflation over many years. I will use a simple example to illustrate this. Consider the case of someone with a $300,000 nest egg, who needs a $1000 monthly income to supplement income from other sources like pension or social security. (By the way, this also happens to be my income goal for "early retirement" as explained in an earlier post).

Let us assume that the savings are invested to give 5% investment return (close to the recent yield of 10-year treasury notes). If we go with the "spend interest, don't touch principal" strategy, and withdraw 5% every year, this would yield more than the required amount in the first year of retirement.

First, consider the case where the inflation rate is at 3%. The result will be as shown in the table below.For the first year, the monthly income is well over the $1000 target. By the 15th year however, the "real" monthly income (inflation-adjusted) has shrunk to a little over $800.

Next, consider what a 6% inflation rate can do.

By the 15th year, the income has decreased to almost half of the original target!

So, what is a better strategy? It consists of two things:

  • Start with a conservative withdrawal rate not related to the investment return rate. Most financial planners agree that this rate cannot be more than 4%.
  • Adjust the withdrawal rate in the following years so that the income remains fixed in inflation-adjusted terms.

Now let us revisit the two cases above, using the "4%-with-inflation-adjusted-increases" strategy.

First, with 3% inflation:

Next, with 6% inflation:

This strategy gives a fixed "real" income stream for many years. Exactly how long the money will last depends on the inflation rate, and your investment returns.

In the case of 6% inflation, note that the withdrawal rate has gone up to almost 11% by the 15th year. This is clearly not sustainable -- you will run out of money within a few more years. This is not a surprise, since you can't expect to survive for long on 5% investment return when inflation is at 6%.

In case you were curious, the withdrawal rate for a given year is calculated in terms of the withdrawal rate in the previous year using the following formula:

wn+1 = wn * (1 + f)/(1 + r - wn)
where wn is the withdrawal rate for year n, f is the inflation rate, and r is the investment return rate. In practice, both your investment returns and the inflation rate can fluctuate considerably during retirement, so this formula only provides a guideline.

Related links:

Book Review: In Spite of the Gods: The Strange Rise of Modern India

I just finished reading this book, published earlier this year, about contemporary India. It is written by Edward Luce, a British journalist who spent much time in India and appears to have a keen insight into the problems and potential of India.

I found it to be a fascinating read. I was amazed by the breadth and depth of the topics covered in the book. While it is a very readable introduction to the politics, culture and economy of modern India, it does not dumb down the subject for western readers as books of this sort sometimes do. It also gives a more realistic view of things compared to the portrayal in the Indian media where it is hard to tell the truth apart from the hype.

The book argues persuasively that a "triangular dance" between the United States, China and India will shape the twenty-first century economy. It is also blunt about the many serious obstacles that remain before India can be a true economic power. I recommend it for anyone interested in the current state of things in India.

Where did all the money go?

I posted our Net Worth chart for the last 10 years earlier.

When I generated this information from Quicken, I also ran a report on our income and expenses for the 10 years from 1997 to 2006. The results were quite interesting (at least for me), so I thought I will post that here as well.

This also explains the categories that I use in Quicken to itemize expenses. I never liked the default categories that came with Quicken, so I customized it till I had about a dozen categories that I really wanted to keep track of. Here they are, along with the percentage of our income over the last 10 years that went into each category:

  • Payroll taxes [24%]: Federal, state, Social security, Medicare
  • Housing [17%]: Rent, Mortgage, Property taxes, Homeowner insurance, Home improvement expenses (but not routine maintenance)
  • Merchandise [7%]: This includes all kind of "things" we buy. I used to track this in separate subcategories like books, clothes, electronics, furniture etc., but now I realize that every single item here must be sold, thrown out or given away at some point, so I just group them together.
  • Car expenses [6%]: Auto purchase costs, gas, service, auto and liability insurance, registration fees.
  • Entertainment [6%]: This is mainly vacations and dining out.
  • School and child care [4%]
  • Services [3%]: Memberships, subscriptions, Lawn care, Dry cleaning, Hair salon etc.
  • Groceries and Food [3%]: This is for groceries and other food-related expenses (but not eating out)
  • Utilities [3%]: Electricity, Gas, Phone, Cable, Internet
  • Medical and Dental expenses [2%]: Medical insurance premiums and out-of-pocket expenses. I also included disability and term life insurance payments here.
  • Gifts and charity [2%]: Charitable contributions and cash gifts (the latter mostly to family and relatives)
  • Savings [23%]: This is not a category, but is whatever is left after all expenses are subtracted from our income.
Some thoughts:
  • The amount of money we pay in payroll taxes never fails to amaze me. It is as if we worked for 2.4 years out of the last 10 just to pay taxes.
  • Overall, I am quite happy with our savings rate. Most of the savings went into our retirement accounts. We also paid for a small real estate investment out of our savings.

Switched to custom domain

I switched the blog to a custom domain today. It is still hosted at Blogger, but no longer uses the blogspot address. The new URL is

Any old links and bookmarks will continue to work, since Blogger forwards them to the new domain. I have to experiment a bit more to make sure that everything works right.

IRAs for non-citizens

I received an email from a reader about my earlier post about withdrawals from 401(k) accounts for non-citizens. I mentioned there that if a non-citizen leaves America, he/she should be able to roll over his/her 401(k) balance to an IRA. It turns out that things may be more complicated than that.

This is what I found out about IRAs for non-citizens at leading IRA providers. Since I am a customer of both Vanguard and Fidelity, I just sent emails to their customer service. For others, I have summarized what I found at their websites.

From Vanguard's email response:

Only foreign investors who have permanent residence in the United States and are not considered a nonresident alien (NRA) are able to invest in Vanguard funds.
Now, I opened an IRA with Vanguard back when I was a non-resident alien, so this response puzzled me. I checked their electronic application form, and sure enough, it allows "US citizens, Resident aliens, and Nonresident aliens" to apply. I think their customer service may be a little behind the times.

Fidelity's response was much clearer. They have no problems with non-resident aliens opening IRAs. Regarding distributions, this is what they had to say:

When a non-resident alien takes a distribution from a Fidelity Roth or Traditional IRA account, we will withhold foreign taxes in accordance with the treaty between the US and the country of residence. The highest rate of withholding for foreign taxes is 30%.
This response seems correct, except that it is not "foreign taxes" but federal taxes that are withheld.

T.Rowe Price
T.Rowe Price's application form allows only "US Citizens and US Resident Aliens" to apply. I guess they have no problems if a US Resident Alien who opens an IRA then leaves the country and stops being a Resident Alien.

TD Ameritrade
TD Ameritrade's online application form allows non-resident aliens to apply as long as they specify their "visa type".

E*Trade Financial
E*Trade allows "US residents with a Social Security Number" to open an IRA. This seems to follow IRS's definition of a US resident, so I guess most non-citizens will qualify.

If anybody has additional information about these IRA providers, or about any others, please let me know. I will add the information to this page.

Related links:

Our Net Worth over the years

I was inspired by a fascinating post by S.B. at Retire At 45, where he charts his net worth over the last ten years.

For the record, here is how our net worth has changed over the last 10 years. Like S.B., I have been using Quicken for more than 10 years now, so it was easy to generate this chart.

Some clarifications regarding this chart:

  • The net worth figure does not include cars or any other physical assets except our house.
  • For the house, I have used the value of the house as assessed by our city. In fact, the sudden jumps in our net worth in 2001 and 2005 are partly due to increases in the assessed value of our house.
  • As you can see, we started seriously paying attention to saving and investing only in 2001.
I found the following quote from the post by S.B. very inspiring:
Once the net worth begins to increase significantly, there is a tremendous temptation to alter the original plan and spend a lot of what has been accumulated. This is what all the advertisements and salespeople in life try to entice one to do. But I am sticking with the plan. I think back and remember why I started down this road. It was not to enjoy big houses and luxury vehicles and leather sofas. [But] it was about the freedom to pursue my own goals in life unshackled from the daily grind of earning a paycheck.