Expat Retirement (Next Level) Planning
A blogger who goes by the handle Investment Pancake (IP) has developed a spreadsheet that hopes to help people try to figure out their numbers for some sort of expat retirement. This is something I have been writing about for many years as one of potentially several different alternative retirement paths.
The way I have put this idea together is for people who are under-saved, planning to go somewhere for a finite period as a younger and hopefully relatively healthy retiree and then coming back when they are older. The idea starts with having retirement coincide with paying off the mortgage (all the better if the mortgage is paid earlier earlier). I think selling your house is sub-optimal because it might be difficult to get back into the US housing market after being gone for five or ten years. The paid off residence could be rented out and the income net of taxes, insurance and property management company could cover a lot of the expense of living in another country. Even netting $1000 could could go a long way in Latin America or Eastern Europe.
Investment Pancake's post goes into great detail on this point giving an example of a couple just shy of 50 living in Washington DC. Only the husband works, making $85,000, they have a house worth $750,000 that still have a large mortgage balance outstanding (I think they are way over-mortgaged but I might be wrong about that) and they have accumulated investible assets of $600,000 that Investment Pancake has generating $52,000 from things like BDCs, Mortgage REITs and other high yielding vehicles.
They are interested in moving to Portugal and buying a beach house that would cost $350,000, using a HELOC for $250,000 of the cost. He talks about they're renting out their DC home to cover the mortgage and HELOC and that they could write off the interest on those loans. I don't think you can do that for a rental property, check with an accountant.
Before going any further I want to stress that the work Investment Pancake has done in creating his planning tool is extensive, I wholeheartedly commend the effort. The example might be autobiographical so maybe it is working out exactly as he says but the example couple has way more leverage than I think someone doing this would want. They appear to have no net liquid net worth. The interest rate risk taken in their portfolio is substantial. Over the last year the iShares Mortgage Real Estate Capped ETF (REM) as a proxy for MREITs is down 8.8% per Yahoo. The Van Eck BDC Income ETF (BIZD) as a proxy for business development companies is down 15.1% in the same time period. Arguably, rates aren't even up that much. The dividends for both funds have been lumpy. Maybe he is a great stock picker and his holdings are not down like those proxies are but what if you're not as good of a stock picker?
Investment Pancake's profile doesn't have much info so I don't know what his qualifications are for this advice but the example's assumptions are very aggressive, a lot would have to go right to generate 8-9% in a rising rate environment without seriously impairing capital. Who knows if rates will go up meaningfully, but if they do the couple in his example are doomed.
With some work, a retired couple could create a situation where net rent collected from a paid off house could cover all household expenses in a well chosen expat destination that courts American retirees. I would say to just rent in this scenario, not buy, you still have a home in the US and the benefits that go with owning a home. IP's example includes one of the partners having a web based business that would hopefully generate $20,000/yr. Each partner creating some sort of income stream generating $10,000-$15,000 could combine to cover all of the expenses beyond basics of rent and food; the fun/lifestyle stuff.
In my scenario, the portfolio can grow untapped or perhaps not quite as bleeding edge as implied by IP's example and Social Security can continue to grow, all the better if the house back in the states appreciates in value.
Zooming out a little, I would not want a retirement plan needing a lot of things to work out perfectly in order to work out. Obviously the more aggressive your assumptions the more risk you take. This is a viable idea for some folks but planning should include plenty of caution.