How to see the world and 'arbitrage' your retirement

NEW YORK Fri May 17, 2013 8:45am EDT

A man soaks his feet in a fountain while reading a magazine on the Rose Kennedy Greenway on a warm summer afternoon in Boston, Massachusetts July 19, 2011. REUTERS/Brian Snyder

A man soaks his feet in a fountain while reading a magazine on the Rose Kennedy Greenway on a warm summer afternoon in Boston, Massachusetts July 19, 2011.

Credit: Reuters/Brian Snyder

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NEW YORK (Reuters) - In the financial world, arbitrage is a trading strategy that earns profit by exploiting price differences between markets.

By that definition, Dan Prescher is a sophisticated arbitrageur. The 58-year-old makes a decent living as a special projects editor for International Living magazine. But by residing in the village of Cotacachi in the Ecuadorian Andes, he has leveraged his income into a better lifestyle than he would ever enjoy stateside.

"That's the way we look at it," says Prescher, who lives with his wife, Suzan Haskins, in an apartment with a view of Mount Imbabura. "If you can cut your cost of living in half, it automatically makes your income twice as big. You have instantly doubled the value of your savings."

That kind of equation can be a game changer. Consider that at the end of 2012, the average 401(k) balance of those ages 60 to 64 was $133,100, according to Boston-based Fidelity Investments. Now factor in that an American man turning 65 can expect to live to age 83, and a woman to 85, according to the Social Security Administration. Your money might have to last a long time.

That is where retirement arbitrage can help. You can exploit price differences by earning money in some countries and spending it in others. You can, for example, make money in the United States by collecting Social Security, pension or annuity payments. You can pick up fatter dividends by investing in mutual funds that buy foreign stocks, and boost interest earnings by investing in foreign bond funds. Then you could crank up the purchasing power of all those income sources by living abroad for at least part of the year.

"It certainly seems to be happening more ... especially early on in retirement," says Olivia Mitchell, a retirement expert and director of the Pension Research Council at the University of Pennsylvania's Wharton School. "A lot of people are living abroad for at least a few months, because it can be so much less expensive than living in the U.S."

Currently about 350,000 retired Americans get their Social Security checks sent abroad, according to the Social Security Administration. And 3.3 million baby boomers are actively considering the possibility of retiring abroad, according to the trade publication Travel Market Report. Americans have been setting up outposts everywhere from Uruguay to Spain to Thailand, where the cost of living is considerably lower than it is in the United States.

Living abroad can present its own set of difficulties. You may have to navigate foreign bureaucracies, cope with foreign languages and customs, and live far from family and friends at a time when you are slowing down. And it's not a perfect financial solution: You can't dodge your U.S. income tax responsibilities, unless you give up your citizenship.

And it probably won't be forever. "Realistically, there will probably be a later period of reverse migration, when mom eventually comes back and will need loved ones nearby to help out," says Mitchell.

So think of it as an early retirement or seasonal interlude, and stretch your money to the max. Here's how:

FOREIGN HEALTHCARE IS CHEAP

An American couple retiring now will need roughly $220,000 to cover healthcare costs throughout their retirement, even with Medicare coverage, according to estimates from Fidelity.

Compare that with those who have residency visas in Costa Rica and who participate in the national healthcare system, which can run as low as $50 a month for full coverage, according to Prescher.

But foreign healthcare systems may not always be accessible. "You can't just show up in a place with universal coverage and say, ‘Fix my heart,'" says Don Whalen, a planner with Versailles Financial in Alpharetta, Georgia, who has many expatriate clients. "The rules vary by country."

Alas, you can't take your Medicare benefits abroad with you. But retirees can take out private policies abroad that will cover them across country lines. Prescher and Haskins have a policy through U.K.-based Bupa (www.bupa-intl.com), which secures them annual, global coverage for $5,600 for the two of them.

REAL ESTATE

The U.S. housing market is looking increasingly robust again. That means the era of the screaming real estate bargain, as the market bottomed out around 2010, is largely over.

That is not necessarily so abroad. Thanks to the European debt crisis, for instance, Spanish real estate prices have dropped by around 40 percent since their 2007 peak. Greece is now offering long-term residency (including the right to work) to real estate buyers, in order to revive its housing market. And Prescher and Haskins bought their condo in Ecuador for the princely sum of $47,000 four years ago.

Renting is cheaper abroad, too. A couple retiring to Mexico could expect to rent a two-bedroom home for $800, according to a rough estimate by International Living magazine. Prices vary by region, of course, but popular Mexican towns for American expats include San Miguel de Allende, Cancun and Puerto Vallarta.

LOWER COST OF LIVING

As of March 2013 the average Social Security benefit being paid out was $1,155, according to the Social Security Administration. That may not go far in Miami or Manhattan, but in some popular expat locales it could cover monthly expenses very nicely indeed. In Nicaragua and Malaysia, for example, a couple can live comfortably for around $1,000 a month, according to International Living. Food, clothing, transportation and everything else may be cheaper abroad, depending on where you look.

Says Versailles Financial's Whalen: "If you can move somewhere where suddenly everything is 75 percent off, it means your retirement savings will last that much longer."

(The writer is a Reuters contributor. The opinions expressed are his own)

(Follow us @ReutersMoney or here Editing by Linda Stern and Douglas Royalty)

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