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.

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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.

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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.

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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.

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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.
Pensions

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.
Taxation
  • 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.

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