Maybe this column has helped but I get the impression there
is a growing awareness that something must be put by for the
future. There are perhaps two main groups of expatriates;
one consists of career expats with regular employment contracts,
while another consists of basically freelance expats or entrepreneurs.
Most expats in Bali fall into the second category. Both groups
have something in common however in that unlike their counterparts
in their home countries they generally have no structured
savings or pension plans. Most are nevertheless in a position
to save. But when you have funds to put aside where should
you put them? Where can you get the best returns and in what
currency should you be saving? The fact is there is no single
solution that fits all situations. But save we must, so where
do we start?
The wide disparities in savings potential
I am frequently asked how much expatriates in general are
able to save. Needless to say the figure varies considerably.
Like from zero to ten thousand dollars per month! From my
experience I would say that the average expat in Jakarta saves
at least US$2,000 or equivalent a month. Rarely do I meet
anyone who cannot save at least $1,000 a month. Top managers
can usually save around $5,000 a month and highly mobile professionals
in the oil industry, some of whom make $1,000 a day, can clearly
save much more. In Bali, where most expats live out of choice,
the savings ability ranges from nil to quite significant sums
in the case of successful business people. Interestingly the
lower paid expatriates, such as English language instructors,
are often able to save more than seemingly wealthy entrepreneurs.
This can be due to the heavy burden of financing a business
where every penny of income is immediately swallowed up in
surviving or expanding. Not all businesses are successful
and it is often the lowly paid salaried expat who is more
able to budget and who ends up accumulating a sizeable lump
sum and decent income in retirement.
How much should you be saving?
As a rule of thumb everyone should be saving 15% of their
income throughout their working life in order to ensure an
adequate income in retirement. You can also calculate how
much you should save by estimating how much you can comfortably
live on in retirement. Much depends on where you plan to live
but let’s say you can live on $2,000 a month in today’s
money. If we assume you can generate 4% interest from a capital
sum you would therefore need to accumulate $600,000 before
you retire. And this figure will need to be adjusted annually
to take into account inflation! Of course you can manage with
a smaller amount by dipping into capital to achieve the monthly
$2,000 but as inflation bites there is the danger that the
capital will run out at a time when your health and long term
care needs are the greatest.
How can you reach such a target?
The answer may be no way if you have left it too late. But
if you have another 20 years to retirement and can rely on
a steady income then by putting $1,000 a month into a regular
investment plan generating an average return of 7.5% per annum
you should meet the target (but remember it is a moving target
so savings should also move up with inflation). If the target
is beyond reach you can at least comfort yourself by knowing
that you are in the majority. Studies in the UK have shown
that even in a country where pension contributions are mandatory
only a minority will have saved enough to maintain their standard
of living in retirement. But it does not mean you should give
up. Early action will at least provide some damage limitation!
Careful planning is the key
Before any attempt is made to commit to a long term savings
plan it is important to build up a safe cash reserve. Ideally
this should be in a ‘hard’ currency and offshore
in a well-regulated jurisdiction. Usually a minimum of US$5,000
is now required to open an offshore bank account. Future needs
should be identified and separated into short, medium and
long term. Then you can consider allocating regular amounts
from the reserve into one or more plans. To achieve a higher
return than a bank deposit means placing funds into the world’s
financial markets, particularly stock markets which reflect
the world’s growth. But such markets can be volatile
in the short term so should not be entered unless a medium
or long term commitment can be made. All the major life companies
offer suitable plans but for best results contributions must
be maintained for a number of years.
Which is the best plan to build up your wealth?
If you are confident that your income will be maintained then
you can choose a plan that offers maximum bonuses. One particular
plan currently available is almost charge-free provided it
is maintained to maturity. Penalties are applied however in
the event of missed contributions and these would cancel out
the benefit of the bonuses. Other plans are available which
are more flexible but the basic charges are higher. These
would be appropriate if you were uncertain of future income.
Due to plan charges the returns are less attractive if you
save less than $500 a month. The cost of transfers is also
a consideration. One company offers an interest paying deposit
bond which can feed an investment plan at no charge so the
only TT charges would be in respect of periodic transfers
from your bank.
Are these plans suitable for everybody?
No. They are appropriate only where the person has a regular
income or adequate reserves and also the self-discipline to
maintain a savings commitment. Also for tax reasons they may
not be appropriate for American citizens or Australians who
plan to return home in the foreseeable future. Fortunately
alternative products are available in these cases. Some people
‘save’ by buying investment properties and plan
to count on income from these in retirement. This is risky
however as the real estate market can go through severe cycles
like stock markets. An additional string to the bow is recommended!
However, any form of saving is better than none at all. But
don’t keep it all under the mattress!
Colin Bloodworth is a senior adviser with Financial Partners
International. The opinions expressed are his own. If you
have any questions regarding personal finance you may contact
him at 021 520 8099
or colin.bloodworth@financial-partners.biz
