Cost of Living in Goa

I found this interesting post by Chris at nomad4ever about the cost of living in Goa. Chris is a European who leads a "nomadic lifetstyle" in Asia after quitting the rat race. He has posted previously about the cost of living in the Philippines and Bali, so it is interesting to read his travel notes from Goa.

Chris's choice of items for comparing the cost of living (cigarettes, clothes and alcohol) may not be of interest to everybody, but it is no less relevant than the well-known Big Mac Index.

Related links:

  • Mercer cost of living survey of world cities.

Retirement account contribution limits for 2009

IRS has published the following contribution limits to retirement plans for 2009.

The maximum pre-tax contribution allowed to 401(k) and 403(b) accounts for 2009 is $16,500, which is $1000 more than it was for 2008. Those who are over 50 are allowed to contribute an additional $5,500 in "catch-up" contributions. This is $500 more than it was for 2008.

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 the same as for 2008 ($5,000). The contribution limit for those over 50 is also the same as before ($6,000).

To be eligible to fully contribute to a Roth IRA, your adjusted gross income (AGI) must be under $166,000 (increased from $159,000 for 2008) for taxpayers filing a joint return. For single taxpayers, the AGI limit is increased from $101,000 to $105,000.

Related links:

Related posts:

Net Worth Update - 2008 Third quarter: Down 5.7%

It is probably unwise to post a Net Worth Update with the daily fluctuations in the market right now, but our Net Worth at the third quarter of 2008 was $622,297.

Our Net worth decreased by $37,837 (or 5.7%) this quarter. The return on our overall portfolio for the quarter was a negative 8.7%. I calculated our portfolio return using a formula for calculating portfolio return I mentioned in a previous post.

As I mentioned in a previous post on our target asset allocation, we aim for a 75/25 portfolio (75% Equities, 25% Fixed income). The current downturn in the stock markets has tilted the balance to about 67/33. This provides a good opportunity to re-balance, so I will be doing that over the next couple of months, mainly by selling bond funds in our retirement accounts and buying stock funds instead.

I also intend to sell some of the funds in our taxable accounts before the end of the year to claim capital losses in this year's tax return. You can deduct up to $3,000 in losses against your income, and carry over any remaining losses to future years. You can buy back the same funds after 30 days, to avoid running into the wash sale rule.

Related posts:

Posts from recent blog carnivals

My post on 10 Alternatives to Retiring Abroad is featured in the 143rd Festival of Frugality at Living Almost Large. My post on Retirement milestones by Age is featured in the Carnival of Personal Finance #170 at The Personal Financier.

Here are some articles from the two carnivals that I found interesting:

10 Alternatives to Retiring Abroad

The premise of my site is that moving to a low-cost country like India will allow you to retire earlier than you could otherwise. This is a straightforward case of cost-of-living arbitrage, which is the idea that differences in cost-of-living between different places can be exploited to one's advantage.

Now, moving to another country to retire is no simple matter, and is certainly not for everyone. This got me thinking about some of the other non-traditional living options that can help with the goal of retiring early. If moving outright to another country seems too radical to you, you may like to consider one of the following options (or maybe not!).

1. Roaming ("Perpetual traveler")
For those with an adventurous streak, one possibility is not to settle down anywhere, but to keep moving from place to place. This requires you to downsize aggressively, selling everything that you really don't need. Not having to maintain a permanent home cuts down significantly on costs (no mortgage, property taxes or home insurance to worry about).

Some perpetual travelers prefer to travel abroad, living primarily in low-cost countries, and occasionally returning home. There are several well-known early retirees who followed this model, such as Billy & Akaisha Kaderli and Paul & Vicki Terhorst (I reviewed Paul Terhorst's book Cashing in on the American Dream: How to retire at 35 in an earlier post). Some others prefer to stay in the US, preferring low-cost areas of the country. When you are no longer limited by your employment options, you have a lot more places to choose from.

2. Home exchange
If you own a home in a desirable location that many others want to visit, this is an attractive option to consider. You can exchange your home for someone else's whenever you feel like. This allows you to live in many other locations at low or no cost. There are sites like Home Exchange and Invented City that cater to this interest.

3. Owning two homes
In this option, you own a low-maintenance vacation home (typically a condo or apartment) in a low-cost country, in addition to your primary home in the US. You live in your vacation home for part of the year, and return to the US for the rest of the year. You may choose to rent out your primary home when you are not around.

For example, there are many older Indian immigrants in the US who are now trying out different variations of this model. Many of them describe this "six months in India, six months in the US" lifestyle as their ideal retirement goal.

4. Living in a hotel
How about never having to worry about home maintenance, yard work, housecleaning, paying utility bills or even making your bed? You can then stay in a hotel or motel, especially in one that offers attractive weekly or monthly rates. Here is a story about a British couple who stayed in a Travelodge for over 20 years.

Mr and Mrs Davidson book 12 months in advance to get the cheapest rates, paying an average of £90 a week which includes electricity and heating bills, laundry and bedmaking.

For meals, the couple walk across the car park to the service station's Little Chef or visit nearby restaurants.

Mr Davidson, a former second world war Royal Navy sailor, said: "We get great rates because we book well in advance and we even have our own personal housekeeper. It doesn't get much better than that, does it?"

5. Living in a resort
This is one step up from living in a motel. If you are lucky enough to find a resort that allows long-term rentals, you may find yourself with a good deal. Millionaire Mommy Next Door swears it can be done.
We've decided to ditch suburbia and live in a "resort style" community. Our total monthly housing expense (rent and utilities) will drop from ~$1,565 to ~$1,225, saving us about $4,000 annually. We're adding extra recreational opportunities - while decreasing our maintenance requirements and monthly expenses in the process.

Imagine living as if on vacation every day. You'll likely be trading your current square-footage for resort-like amenities. Sell or give away many of your furnishings and all of your yard-work implements. You won't need them. Pare down and simplify your life.
6. Living on a boat
Bill Dietrich's Retire Onto A Sailboat site provides extensive information on living on a sailboat and is fascinating to read. He quit his job, sold all his stuff and bought a sailboat in 2001. He has been living aboard and sailing the Florida coast, along the Mississippi and to the Bahamas, Dominican Republic, Puerto Rico and the Virgin Islands.

You could go one step further, and retire on a cruise ship! Why not? After all, snopes.com says that the story about retiring on a cruise ship is NOT an urban legend.

9. Living in an RV
Jacob at Early Retirement Extreme is planning to cut his expenses in half by living in a 34′ RV (equipped with a kitchen, a bedroom, a bathroom, a couch, an easy chair, and a table).
We bought an RV and have found a place to park it. Only about two miles from where I work too and within biking distance of the mainstay supermarket. Rent is reduced to 1/3. Incidentally this is less than either of us has ever paid in rent. There are no more water bills and no more trash bills.

We are going to reduce monthly outlays in half. We’ll free up almost $1000 a month. This means that we will be living on somewhat less than half of [wife's] paychecks, or a little over a quarter of mine. I would almost be able to support both of us out of my retirement “fund”.
8. Volunteering
If you like the idea of making a difference in other people's lives, but do not have large sums of money to donate to charities, volunteering may be for you.

The best known organization for volunteers in the US is the Peace Corps. The mission of the Peace Corps is to serve the country in the cause of peace by living and working in developing countries. If you always wanted to travel overseas after retiring, this is an option to consider.

Peace Corps volunteers have to commit to 27 months of training and service on each assignment. Peace Corps welcomes older people, both singles and couples. For a volunteer organization, it provides generous benefits.
The Peace Corps provides Volunteers with a living allowance that enables them to live in a manner similar to the local people in their community. The Peace Corps covers the cost of transportation to and from your country of service. When you return from your 27 months of service, you will receive just over $6,000 toward your transition to life back home.

All Volunteers receive comprehensive medical and dental benefits during service. Additionally, Volunteers can obtain affordable health insurance for up to 18 months following service through an assistance program. The Peace Corps pays the first month's premium and you then have the option to purchase a reasonably priced, comprehensive insurance policy to cover you and qualified dependents.
9. Joining a commune
If you like the idea of living in a community where neighbors are like an extended family, perhaps you should consider cohousing. If you are a hippie at heart, and feel that you missed out on the idealism of the 1960's, it is not too late to re-discover the idea of communal living.
With living costs spiraling upward and empty-nesters feeling a need for a greater sense of community in their lives, some baby boomers are reconsidering the concept of group living. This time around, the idea holds appeal as a cost-efficient, socially engaging way to spend their golden years.
Communes are based on sharing of income and expenses among members. This ranges from monasteries and similar faith-based communities to communal farming co-ops, group homes and collectives of varying sizes where residents pool at least a portion of their incomes.

As Scott Burns describes in an MSN money article, there are big economic advantages to this kind of shared living.
Imagine a single retiree living in a 55-and-over trailer park. She has a monthly net Social Security benefit of $1,000. From that she has to pay $400 for land rent and $300 for the loan payment on the manufactured home. That leaves only $300 a month for food, clothing, transportation and everything else.

[Now imagine her sharing her 1,400-square-foot 4-bedroom double-wide trailer with three roommates]. Income quadruples to $4,000. This leaves $3,300 after shelter expenses. With this much shared income, each person has $825 a month.
10. Slacking off
If none of this excites you, you could just decide to quit work, adopt a college student's lifestyle (except for having to attend classes!), and support yourself by taking up a temp job whenever you run out of money.

As a confirmed member of Generation X ("Slacker" is an all-time favorite movie of mine), I have to admit that the notion has a certain appeal to me. While practical considerations (such as a wife, kid and a mortgage) prevent me from adopting this path, there is nothing stopping me from enjoying the wonderful Why Work? forum and support group:
We're a pro-leisure and anti-wage-slavery group of people dedicated to exploring the question: why work?

We actively promote alternatives to the wage slavery mindset and what we call "The Cult of the Job" which automatically equates having a job with making a living. Our main purpose is to encourage people to value leisure, re-think the Puritan work ethic and its derivatives, and critically examine other work-related legacies of industrial capitalism.
There, that sounds much better than "slacking off", doesn't it?

If you liked this article, you may wish to check out some of my other posts:

Retirement milestones by Age

There are a number of age milestones on the road to retirement. These are points in your life at which you become eligible for a special status or privilege which you were not entitled to until then.

I have tried to list all age milestones that apply to typical American retirees below. Even if you are not close to retiring, it is good to know what lies ahead. It is also interesting to see what the implication of these milestones are for someone who wants to retire early.

Age 50:
At 50, you are eligible to start making "catch-up" contributions to 401(k) and IRA accounts. For IRAs, in 2008, you can invest an additional $1,000 over the $5,000 limit. For 401(k) and 403(b) plans, you can contribute $5,000 above the $15,500 limit in 2008.

One way to look at this milestone is that if you haven't saved a significant amount for retirement by age 50, this should serve as a wake-up call. Even the IRS thinks that it is time for you to get your act together. For those who are on track with their retirement savings, this is still a great opportunity since you get to deduct eligible contributions including catch-up contributions from your taxable income. At 50, you are likely to be in your peak earning years, so this tax savings could be significant.

50 is also the earliest age a disabled spouse can collect survivor's retirement benefits from Social Security.

Age 55
:
If you have assets in an employer’s retirement plan such as a 401(k) or 403(b) and leave work after age 55, you may take a distribution without facing the 10% early withdrawal tax penalty. This provision does not apply to traditional IRAs.

As I mentioned in an earlier post on early withdrawals from retirement accounts, If you are 55 or older, and considering retirement, this is a good option if you have a significant amount in your current employer's plan and you do not wish to roll it over to an IRA. This needs to be planned carefully to meet all IRS requirements to avoid the penalty.

Age 59.5
:
Now you become eligible to start taking withdrawals from your employers' retirement accounts and from your IRAs without penalty. You will have to pay taxes on any withdrawals.

This is not applicable to Roth IRAs. You may withdraw from your Roth IRA contributions without facing taxes or penalties, and if you have held the account for at least five years, you may withdraw any earnings as well.

If you have saved enough money for retirement, and have no major financial commitments left (such as mortgage payments or children in school), this is a good age to hang it up.

Health care is the biggest hurdle to retirement for many people at this age. If you are lucky to receive retiree health benefits, or qualify for an affordable private policy, you are in good shape. Otherwise, you may be forced to work until 65 when you become eligible for Medicare. For those with preexisting medical conditions, this is often the only option.

Age 60
:
If you are a widow or widower, you can begin collecting Social Security at 60. The payments will be reduced if you claim them this early, however. If you remarry before age 60, you permanently lose survivor benefits.

Some companies that provide traditional defined-benefit pension plans or cash balance pension plans allow withdrawals at 60.

Age 62
:
This is the earliest age for receiving regular Social Security benefits, though it will pay to wait until your Full Retirement Age. Your Full Retirement Age depends on when you were born. If you start collecting earlier than your Full Retirement Age, your payments will be permanently reduced.

At 62, you can also collect your share (50%) of the amount being received or eligible to be received by a current or former spouse. These benefits will also be reduced permanently from what you would be entitled to at full retirement.

Some companies that have pension plans allow retirement at this age with full pension benefits.

62 is also the minimum age at which you can get an FHA reverse mortgage, where you receive money from a lender in exchange for the equity in your home. Most commercial lenders also require a minimum age of 62 for reverse mortgages.

Age 63.5
:
This is an interesting milestone for those who are financially ready for retirement but do not qualify for private medical insurance. This is the earliest age at which you can leave work, and continue your coverage under COBRA (which may last up to 18 months) until you become eligible for Medicare. According to some financial planners, this is an increasingly popular retirement age for many baby boomers.

The way the American health care system is tied to one's employment would be unbelievable to people in most other countries. It is almost like there is a conspiracy to keep you in the workforce for as long as possible. I can't wait for health care reform in some form to arrive that will require insurance companies to cover everyone regardless of preexisting conditions.

Age 65
:
Medicare eligibility finally arrives at 65. You can begin receiving Medicare on the first day of the month in which you turn 65. Most company pension plans also provide full benefits at 65.

Those born in 1937 and earlier are eligible for full Social Security benefits at 65. However, Full Retirement Age for younger workers is higher.

Age 67
:
This is the Full Retirement Age for Social Security benefits for those born in 1960 and later. Even this is likely to go up under some of the proposals being considered for reforming the Social Security program.

Age 70
:
If you did not start receiving Social security payments at Full Retirement Age, the benefit you will receive will increase until 70. After 70, you get no additional benefit just for waiting, so you might as well claim your Social Security benefits if you haven't done so already.

Age 70.5
:
When you turn 70½, you are required to take distributions from qualified employer retirement plans and traditional IRAs, also known as required minimum distributions (RMD). You must start making required minimum withdrawals no later than April 1 of the calendar year following the year in which you reach age 70½. There is a stiff tax penalty if you fail to start taking RMD when required.

If you continue working beyond age 70½, you don't have to make minimum withdrawals from a qualified retirement plan until you actually retire. However, you must begin withdrawals from any IRAs by 70½.

Roth IRAs are not subject to the age 70½ mandatory distribution rules.

Did I miss any other milestones? Please leave a comment.

If you liked this post, you may wish to check out some of my other posts:

Net Worth update - 2008 Second quarter: Down 1.1%

As of the end of the second quarter of 2008, our Net Worth was $660,134.

Our Net worth decreased by $7,514 (or 1.1%) this quarter. The return on our overall portfolio for the quarter was a negative 4.5%. I calculated our portfolio return using a formula for calculating portfolio return I mentioned in a previous post.

Considering the performance of the stock markets in the last quarter, I am not too disappointed with the performance of our portfolio. The bond portion of our portfolio (all in retirement accounts) held up as expected. Like everyone else, I am hoping for a better second half of the year.

Related posts:

Retiring to India at 37

I found an interesting post recently on the Early Retirement forum by an Indian immigrant who is considering retiring in India at age 37. The poster asked several interesting questions, so I thought I would reproduce the post here (edited for clarity), and attempt to answer some of his questions.

I am a 37 year old immigrant and naturalized US citizen. I am married, and have a 2-year old child. We have about $600,000 saved for retirement, with two-thirds of it in taxable accounts (tax-efficient index funds and low turnover funds), with roughly 75% equities and the rest in bonds/cash. About 34% of my investment portfolio is international. In addition, we have about $100K for our child’s college education, all in index stock funds, 65% US, 35% international. We hope to retire to India by end of this year. We don’t own a home anywhere in the world. However, we have investment real estate in India, which serves as a hedge against our purchase cost of a future home there.
My first reaction was that $600K sounded too low to be able to retire at the relatively young age of 37. But the poster provides more details about his plans.
1. Are my retirement assets sufficient to support $2000/month in India, which should give us a comfortable, but certainly not luxurious, lifestyle once the home is fully paid for? I am worried that if the inflation rate in India is higher than in the US I may be forced to withdraw more from my asset base, especially in later years when gainful employment becomes difficult.
Clearly, he is planning to withdraw 4% a year from the $600K portfolio, which yields the projected $2K/month income in India. I assume that he is not just expecting to earn a 4% yield on the account, and then hoping to live on the generated income. As I illustrated in an earlier post on Living on interest payments in retirement, this strategy won't work, since even a modest increase in inflation can wipe out much of the purchasing power of his interest/dividend income.

Instead, I assume that he plans to start with a 4% withdrawal rate, and then adjust it upward in future years depending on the inflation rate. This is a sound plan, but even the "safe withdrawal rate" of 4% is intended for those who retire at a normal retirement age, such as 65. Someone retiring at 37 has to be prepared for 60 or more years of retirement, and a 4% withdrawal rate could exhaust his portfolio sooner than planned.

I used FIRECalc to do a quick estimate of how much he can expect to withdraw per year if he expects the money to last 60 years, with a 75/25 stocks/bonds split and a 0.5% expense ratio. According to FIRECalc, he can withdraw 3.43% initially ($1713/month) for a 95% chance of not running out of money. For a near-100% chance of not running out of money, he can only withdraw 3.18% initially ($1591/month).

Conservatively then, assuming no other sources of income, he should withdraw no more than 3% of his portfolio ($1500/month) in the first year of retirement. Now, even $1500/month could buy a decent lifestyle for a retired couple in many places in India, but since he is planning to retire with a young child, his projected expenses could exceed this.

2. What percentage of my retirement assets should I keep in Indian rupees from next year?
This is a very interesting question. A US citizen retiring to India will need to have a 3-part asset allocation: US, India, and International, where international means non-India, non-US assets. The normal rule of thumb is that one should keep most of one's assets in the currency that one intends to spend in. However, as a US citizen (and presumably parent of a US citizen), he is likely to have close ties to the US, and much of his income may come from assets held in US dollars. The differing rates of inflation in the US and India, and the fluctuations of the currency exchange rate make this a hard problem to tackle.

I suggest that he keep at least 10 years worth of expenses in Indian currency to protect him from a further devaluation of the US dollar. This should be kept in fairly liquid investments, so as to protect him from a downturn in the Indian equity or real-estate markets. For subsequent years, he could use a managed payout fund, or a "buckets of money" approach to generate a relatively stable income as I mentioned in an earlier post on generating income in early retirement. He can be more aggressive with money in his long-term investments, especially in the tax-deferred accounts in the US, since he won't be able to access these till he is 59 1/2 years old.

3. Should I include Social Security in the above calculation? My wife and I both are vested at the minimum (40 quarters), and projections indicate that even if we don’t contribute a penny from 2009 into SSA, our monthly benefits at age 62 are $600 for me and $500 for my wife (present dollars) . Given that this represents a sizable chunk of my retirement expenses, I am eager to know if I can count on SS coming through in my later years. My wife and I are 25+ years away for early eligibility at 62.
Although the rules for social security payouts are likely to change in the future, I expect that the benefits they have already earned are not likely to be affected. However, the value of a $600 social security payout to someone living in India 25 years from now is very hard to estimate, due to the potential changes in cost-of-living in the two countries, and the currency exchange rate, both of which are near-impossible to predict for such a long time frame.

To be on the safe side, I would not count on any social security payments in their plan. Any payments that they receive should really be considered a bonus. Also, it is possible that there could be changes in the future that affect how social security payments are calculated for overseas retirees. For example, in the British state pension system, retirees living in many non-EU countries do not receive cost-of-living adjustments in their pension payments. Since Americans living overseas do not constitute a politically powerful lobby, it is not inconceivable for them to get the short end of the stick when social security reform finally happens.

4. Have we saved enough for college education for our child? Not knowing what our child will do when he grows up, we would like these funds to cover either his 4-year undergrad education in U.S. or 2-year U.S. graduate education, assuming he does undergrad in a low cost but decent school in India, which we can cover within our monthly expense budget.
I will restrict myself to the undergraduate education here, because I believe that parents shouldn't be expected to contribute to graduate school for their children. The rapid year-to-year increases in college costs are finally starting to level off, so I expect that $100K saved in today's dollars would be sufficient to cover a 4-year degree, including room and board, at a public college 16 years from now.

In their case, one problem may be that since they will not be residents of any US state when their child enters college, their child will not qualify for in-state tuition rates. Out-of-state tuition is much higher in many public colleges, and tuition at many private colleges can easily exceed the amount that they have allocated. I would not worry about this too much, since they seem to have saved far more than most parents in their situation.

5. Health care is inexpensive in India so we are less concerned about it, but we have earmarked a modest $10K for it so we don’t dip into the retirement asset base. This will be invested along with my retirement funds for future growth. We intend to purchase health insurance in India for major illnesses, which is covered within my $2K monthly budget.

$10K for total health care expenses for a family of 3 sounds very low, even in India. I am not familiar with how private health insurance in India works. Even if the premiums are affordable, I wonder what the deductibles and expense limits are. Will the insurance allow them to choose the best hospitals and clinics in case they need specialty care? From what I hear, while health care expenses in India are cheap compared to the west, they are increasing at a high rate, especially at premium institutions where you can expect personalized care.

If anyone has information about actual health insurance premiums and expense limits in India, please leave a comment.


Related posts:

Generating income in early retirement

One of the two major concerns for early retirees is how to generate enough income to live on until you are eligible to receive retirement income such as social security, pension or 401(k)/IRA distributions (The other major concern is health insurance, which I will cover in a separate post).
As I show in my earlier posts on our Net worth, most of our savings are in tax-deferred retirement accounts. This is intentional, since we want to contribute as much as we can to tax-deferred accounts, to take advantage of the tax deferred growth and the tax deductions where possible. But this causes a problem: if we want to retire early, say at age 50, we have to have enough money in taxable accounts to live for at least 9.5 years, until we become eligible to take distributions from 401(k) and IRA accounts at age 59 1/2.
As I mentioned in an earlier post, it is possible to make early withdrawals from retirement accounts without penalty. But clearly this is something you want to avoid, unless you really have to. Making withdrawals from retirement accounts reduces the tax-deferred growth potential of assets held in these accounts. During early retirement years, I would like to think of money in retirement accounts as a safety net that we would rather not have to depend on. It would be preferable to have enough money in taxable accounts to cover these early retirement years.
So what is the best way to invest money in your taxable accounts so as to generate enough income during early retirement?
Clearly, you want to use only relatively safe investments, since this is money that you would need in the short term. You can be aggressive with investments in retirement accounts, but stick to more conservative options for money earmarked for early retirement.
Also, it pays to minimize your expenses during early retirement years, so that you can keep your withdrawals to a minimum. These are the best years to consider moving to a low-cost country, for instance. You may be able to keep your income low enough that you pay little or no taxes. As I explained in an older post on our financial goals for retirement, a modest $300K in taxable accounts could generate $1000/month, which may pay for a decent living in many parts of the world. These years could also be a good time to consider converting your tax-deferred accounts to Roth IRAs to minimize future tax liability.
What are some specific investment options for money in taxable accounts intended for early retirement?

  • Bank CDs are simple and safe. 10-year CDs are currently available at 5.35% interest. With $300K of principal, this yields about $1338 per month. FDIC insurance covers only $100K per account, so it may make sense to hold them at different institutions.
  • Treasury bonds are the safest investments of all. 10-year treasury notes currently yield 3.875% and 10-year treasury inflation-indexed notes (TIPS) 1.625% over inflation.
  • A common approach to holding CDs and bonds is to ladder them, where you hold a portfolio of CDs or bonds with different maturities. This reduces risk, and frees up money for spending as you need them.
  • A popular strategy for allocating money in retirement is the buckets of money approach where you preallocate money into different buckets depending when you intend to use them, and invest them accordingly.
  • Immediate annuities (such as the Vanguard Lifetime Income program) have traditionally been used to generate guaranteed lifetime income for retirees, but most early retirees may be too young to gain much from these.
  • Mutual funds that generate income, such as bond funds and some balanced funds, are sometimes recommended for retirees who need income. These are riskier, since it is possible to lose your principal, and your income may vary considerably. A popular option is the Vanguard Wellesley Income fund (VWINX), which holds 60% bonds and 40% equities.
  • Recently, some fund companies have introduced funds specifically intended for income generation. These are relatively new, and they may be intended for retirement accounts, but they appear to be suited for early retirees as well. I will mention two of these below.
  • Vanguard Managed Payout funds are intended to preserve the initial investment and make monthly payouts. This is a perpetual investment with no preset maturity, and the investor may make new deposits or withdraw capital (in part or full) at anytime. The fund plans to pay 7% per year interest, and it currently pays $1,751 per month for the year 2008 for an investment of $300K. Payout rates are fixed for a calendar year and then updated based on fund performance over the previous three years. Rates are not guaranteed; they can go up or down.
  • Fidelity Income Replacement Funds use part of the invested capital for making the monthly payouts. As a result, the capital is not preserved and it goes to zero at maturity. According to the website, a $300,000 investment for 10 years pays $2,739 per month in year 2008. These payouts are so attractive because of the depreciation of the initial capital.

Related posts:

Related links:
  • Discussion from Fatwallet forum on Regular Monthly Income by Investing Savings
  • Morningstar article on Vanguard managed payout funds

Net Worth update - 2008 First quarter: Up 1.4%

At the of the first quarter of 2008, our Net Worth was $667,648.

Our Net worth increased by $9288 (or 1.4%) this quarter. The return on our overall portfolio for the quarter was a negative 1.9%, however.

I calculated our portfolio return using a neat formula that I first came across in the book The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William Bernstein. It goes like this:

First find the portfolio value at the start and at the end of the period. Next, calculate the Net inflow for the period which is total amount of money you added to the portfolio during the period minus any money you took out. The Net inflow may be positive or negative. Then,
Portfolio return = (Ending value-Net inflow/2)/(Starting value+Net inflow/2) - 1.

Related posts:


Social security/Medicare Watch: 2008

Social Security and Medicare trustees' 2008 annual report was released recently. See here for news coverage of the report, and here for the full report.

There are no big surprises in the report, but I find it fascinating to read about the projections for Social security and Medicare for the future. It is true that both programs are in financial trouble, but the situation is not anywhere as bad as some people think. Especially among 20 and 30 somethings, it has become fashionable to dismiss these "government programs".

First, about the state of Social security:

  • For years, the Social Security program has been taking in more in payroll taxes from existing workers than it needed to fund benefits. The government borrowed that surplus and promised to pay it back with interest by issuing special issue bonds to the program.

  • The federal government will have to start paying back what it owes the Social Security trust fund in 2017 so the program can continue paying 100% of benefits.
  • The trust fund will run dry by 2041. Without that cushion, Social Security would only be able to pay out the money it collects in payroll taxes. If the system is left unchanged, in 2041 Social Security will only be able to pay out 78% of benefits promised to future retirees.

  • Currently, the first $102,000 of wages are subject to the 12.4% payroll tax that funds Social Security. Typically, only half of this is paid by workers, and the other half is paid by employers. To keep the system solvent over the next 75 years, the trustees estimated that the Social Security payroll tax rate would need to increase to 14.1%, up from the current 12.4%. Or lawmakers could bring it into balance by cutting benefits by 12%.

And about Medicare:

  • Medicare was designed to be funded by three sources: payroll taxes, Medicare premiums paid by beneficiaries, and general revenue or money from income taxes.
  • The Medicare program is already taking in less than it has committed to pay out, and the trustees forecast that the Medicare trust fund will be depleted by 2019, at which point Medicare would only be able to pay out 78% of costs.

  • The payroll tax portion of that funding comes from a 2.9% tax on all wages, half of which is paid by workers and half by their employers. To make Medicare solvent over the next 75 years, the trustees estimate that 6.44% of wages would need to be taxed.

Discussions about universal healthcare always include people making disparaging statements about "government-run healthcare." Some of them are not even aware that the US already provides universal healthcare for seniors, and that, all things considered, it works reasonably well.

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Related links:

Retiring in Malaysia

As I mentioned in an earlier post on outsourcing retirement, India does not allow or encourage foreign citizens to retire there. On the other hand, several other Asian countries are actively trying to attract foreign retirees. Thailand is probably the best known among these, but of late, Malaysia has been getting some attention too.

Here are some interesting details about Malaysia's Malaysia My Second Home program for foreign retirees:

  • The program is open to all foreign citizens wishing to retire or reside in Malaysia on a long term basis, and their spouses and children under 18 years.
  • You will get a 10-year visitor pass and a multiple entry visa which is renewable every ten years.
  • You can invest and own businesses in Malaysia. You are, however, not allowed to work there.
  • Unlike Thailand and Singapore, Malaysia allows foreign retirees to own property and to apply for domestic loans to buy property.
  • There is no minimum requirement to stay or visit Malaysia per year. You may come and go as you please.
  • Malaysia does not tax any income that you earn outside Malaysia.
  • There is no age limit to participate in the program.
  • If you are under 50, you need to deposit RM300,000 (around $93,000) in a bank account in Malaysia initially.
  • If you are over 50, you can either deposit RM150,000 (around $47,000) or show proof of monthly income of RM10,000 (around $3,000) from a consistent source such as social security, company pension or rental income.
  • In either case, after the first year, you are required to maintain a minimum balance of RM60,000 (around $19,000).

It appears to be quite an interesting package. Malaysia is attractive for its relatively low cost of living, warm weather, good medical facilities, and a friendly and diverse population.

Related links:

  • Official site for the Malaysia My Second Home program
  • Article on retiring to Malaysia from EscapeArtist.com
  • Article on retirement in Malaysia from retire-asia.com

Retirement homes in India

There has been a growing market for retirement homes in India in recent years. With an increasing number of older adults living independently, this trend is likely to continue.
According to a recent Associated Press story, these new retirement communities are so far available only for the affluent.

The buy-in prices of $75,000 to $125,000 rule out the vast majority of the population, although with the economy growing every year, developers are betting the market will increase.
A PBS Nightly Business Report story from 2006 described the expenses for people renting at these facilities.
Living in retirement homes doesn't come cheap. Each resident pays a fee of up to $450 U.S. per month, a princely sum in a country where the average worker earns $120 U.S. a month. But there is no denying the demand. The Indian government has yet to work out a plan to deal with the country`s aging citizens, but the private sector has recognized the growing demand for retirement homes.
An article from India Abroad explains the contractual agreement for purchasing retirement homes.
You can either buy a house outright or pay a deposit and a rent for the rest of your life. The deposit will revert to your children as part of your estate.
But, if you choose to buy a house, then it cannot revert to your children, as most of these colonies don't accept people under 55 years of age. Nor is anyone allowed to buy a house as an investment. However, [some] builders offer a buyback scheme for these homes after the demise of the resident couple. This is part of the original sale agreement with a built-in price escalation.
Many of these places cater to retirees whose children live outside India. In recent years, I have known several older Indian immigrants from the US and UK who purchased villas and apartments in India. Some of them have already transferred their residence to India, and some others treat these much like vacation homes, with yearly trips for extended stays in India. According to the India Abroad article, this is indeed the intended target for builders of retirement homes.

Developers are also looking at a big non-resident Indian retirement market and building homes for the high-income couples working abroad in the US, Canada, Europe and even the Middle East who will retire in the next 3 to 5 years.
[This] is a big opportunity. There are couples working abroad who would want to spend 3 to 6 months in a year in India. Retirement homes could target them as well.

Links to some prominent retirement communities and developers in India:


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Retirement visa to India for non-Indians

I received a number of questions from non-Indian readers who wanted to know if there is any special visa or residency status that can be held by a non-Indian who wishes to retire in India.

As I mentioned in an earlier post about outsourcing retirement to India, the answer to this question is not very promising. There is no such thing as a "Retirement visa" to India. Still, I want to summarize the available options in this post.

First, those who have some Indian ancestry may be eligible to apply for the Overseas Citizenship of India (OCI) status that I mentioned in an earlier post on India and dual citizenship. This is available to you if you, one of your parents, or one of your grandparents, were previously a citizen of India. You must also be a citizen of a country that allows dual citizenship. If you qualify, this is the best option, since it allows unlimited stay in India with few restrictions.

Next, there is a special status called Person of Indian Origin (PIO) available if you are married to a person of Indian descent. If you qualify, this entitles you to visa-free entry into India for fifteen years. Normally you can stay for up to 180 days on each visit, but you can exceed this limit by registering at a Foreign Registration Office (FRO).

But what about non-Indians who do not qualify for OCI or PIO status who want to retire in India, or want to have a long-term stay? Here the options become more limited.

The most common visa used to travel to India is a Tourist visa, so let us look at this in some detail.

  • A Tourist visa is normally issued for a period of 6 months for citizens of most western countries. Citizens of some countries may be issued visas valid for 90 days.
  • US citizens are eligible for a 10 year tourist visa. You still cannot stay in India longer than 180 days. You have to leave the country after 180 days but can come back in again without obtaining another visa.
  • Tourist visas are non-renewable. If you want to stay longer, you have to leave the country, get a new visa, and then return. Except for genuine emergencies, there is no way to extend your stay beyond the original period that it was issued for. It is also very difficult to get a tourist visa converted into any other kind of visa in India.
  • Overstaying your visa is a crime, and is taken seriously by Indian authorities. Overstaying can cause your future visa applications to be refused.
  • The most common way to extend your stay beyond six months is to go to a nearby country, and apply for another visa. Sri Lanka and Thailand are usually popular options for this.
What other visa options are there that can be used for longer-term stays?
  • Student visas are available to those who wish to study at recognized institutions in India. A student visa is valid for the period of study in India, up to a maximum of 5 years.
  • If you are coming to India to do business, but are continuing to be paid by an overseas company, then you can apply for a Business visa. Visitors traveling to India on business are generally granted multiple entry business visas valid for up to 6 months. It is also possible to obtain longer term multiple entry business visas, valid for up to 5 years. The period of stay in India for each visit is limited to 180 days.
  • If you intend to be paid in India by an Indian company, then you need an Employment visa. Employment visas can be extended as long as you remain employed by the company. Employment visas are usually held by skilled professionals working as technical experts, senior executives, etc.
What about a "Residency permit" or "Permanent residence visa"? Unfortunately these don't exist. What is sometimes known by these names is an Entry visa ("X visa") which has the advantage that it can be renewed within India, without having to leave the country after 180 days as for most other visa types. Here are some details on this type of visa:
  • The requirements for an Entry visa are not entirely clear. If you have a genuine need to be in India for longer than six months, and if the FRO approves your request, you may be eligible to get one.
  • For example, it may be given to someone who entered the country on a Tourist visa but then decided to start a business which requires them to stay for a longer period. Setting up a business in India is not an easy task, however.
  • Spouses of those on business/employment visas for over 6 months also are usually given Entry visas.
  • If you marry an Indian citizen when in India, you also become eligible for an Entry visa. As I mentioned before, you are now eligible for PIO status in this case, which is a better option.
Entry visas used to be given to foreign owners of property. These are harder to come by now, since the rules for buying property are being enforced more strictly. The way this works is like this:
  • To purchase property in India you have to first stay a minimum of 182 days in one financial year in India. As I mentioned in an earlier post on taxation in India, the financial year in India runs from April 1 to March 31.
  • You cannot stay for longer than 180 days with a single visit on a Tourist visa, so you have to leave the country and come back for another visit within the same financial year to meet the residency requirement for purchasing property.
  • Once you have signed all the necessary documents for the purchase of the property, you can go back to your home country and apply for a multiple entry visa to India. You may have to show documentation about the property you own, and that you have adequate funds for your extended stay in India.
  • The embassy may now issue you a Entry visa which will enable you to stay for a longer period within India with the added benefit that you don't have to leave India to renew it.
  • If you decide to take this route, be sure to follow all applicable regulations to the letter. Many Brits who purchased property in Goa without paying attention to details have been forced to sell them in recent years. For a sobering look at the current status of things, see this article in a Goan newspaper (link currently down).
The official sources for information regarding travel and immigration to India usually aren't very helpful. Indian embassies aren't very friendly to enquirers either. I have listed below some of the sources that I have found to be useful.


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Early withdrawals from Retirement accounts without penalty

Most of our investments are in retirement accounts, such as 401(k) and IRA accounts. We do this to take advantage of the considerable tax-deferral advantage provided by these accounts.

I am often asked if it bothers me to "lock in" our money in such accounts where we won't be able to withdraw the money for many years. Normally money in 401(k) and IRA accounts can be withdrawn only if you are 59½ or more years of age. Any earlier than that, and you have to pay a 10% penalty. I want to explain in this post why this is not a big concern for me, since I am convinced that there are ways to access money early from these accounts penalty-free if it ever becomes necessary.

First, some special cases:

  • Most 401(k) providers allow for penalty-free hardship withdrawals in cases of genuine need, such as a medical emergency or disability. This is clearly not a good situation to be in, and shows the importance of having an emergency account and medical and disability insurance. Also, money taken out this way cannot be put back into the retirement account.
  • Most 401(k) providers allow short-term loans without penalties. This is again not advisable in most situations. If you leave your job before the loan is paid back, you must pay back the remaining balance. Otherwise it will be considered a withdrawal and subject to taxes and penalties. You also lose the benefit of any growth this money may have had if it had remained invested during the loan period.
  • You can withdraw your Roth IRA contributions at any time, without penalty. This does not apply to earnings, just contributions. It is normally not recommended to withdraw funds from a Roth IRA early, due to the unique tax advantages offered by these accounts. It is better to keep the money in the Roth IRA for as long as possible.
The situations above normally don't apply to early retirees.

There are a number of other options available to early retirees that are quite useful.

  • Some 401(k) providers allow early retirees who are at least 55 years old to withdraw as much as they want without the 10% penalty. This option is not available if you quit earlier than 55. Also, this is only available from the employer that you retire from, not from any 401(k) accounts you may have had with your previous employers.
  • The most useful option for early retirees to avoid early withdrawal penalties is by taking Substantially Equal Periodic Payments, commonly referred to as SEPP or 72(t) withdrawals. This is only available for IRAs, not for 401(k)'s, so you need to roll over your 401(k) to an IRA before you can do this.

Since the SEPP is the most frequently used option, here are the basic rules, as summarized in a post in My Money Blog:

  1. You must make the withdrawals regularly, at least once every year.
  2. You must take them for either 5 years or until you reach age 59 ½, whichever is longer.
  3. You must wait until these equal payments end before you can start taking unrestricted amounts of money out of your IRAs.
  4. If you decide to do this, you can’t change your mind. If you do, you’ll owe a 10% penalty retroactive to your first withdrawal, plus interest.

You can calculate the amount of your SEPP according to three IRS-approved methods: required minimum distribution method, the fixed amortization method, or the fixed annuitization method. See the links below for additional details.

Related posts:

Related links:

  • Investopedia article on Rules Regarding Substantially Equal Periodic Payment (SEPP)
  • Article from the Retire Early Home Page on IRA withdrawals before age 59½
  • IRS FAQ article on early withdrawal penalties
  • Article on 401K hardship withdrawals from 401khelpcenter

Net Worth update - December 2007: Up 1.3%

Our household Net Worth at the end of fourth quarter, 2007, was $658,360.

Our Net Worth increased by $8,160 (or 1.3%) in this quarter. This quarter has been a challenging one, due to the poor returns in the stock market, and some unexpected expenses we incurred. To summarize:

  • We made $13,450 in new contributions to our savings and investment accounts.
  • We had a net increase in our real estate assets of $11,577, partly due to mortgage payments we made and partly from increase in the value of property we own in India.
  • We had a net unrealized loss of $16,867 in our investment accounts.

Looking back at 2007, our Net Worth increased by $128,345 (or 24.2%) for the whole year.

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