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.