Location, location
Should you consider moving to maximize your retirement savings?
Business columnist Chris Bouley, of UBS Financial Services, sizes up the importance of location when it comes to retiring.
Retirement planning is a relatively new concept. When Otto Von Bismarck established the first pension system in 1883, hardly any Germans lived past the age of 65 in order to receive it. In those days, the retirement plan was “work until you drop.”
Since then, the global life expectancy has more than doubled. In the US, there’s now a 40 to 50 percent chance that at least one spouse will live into their nineties.
All things being equal, would-be retirees have a limited array of choices for addressing the risk that they will outlive their retirement savings: (1) work longer,
(2) spend less, or (3) earn more. Easier said than done, right? Most workers balk at the idea of continuing full-time work into their seventies or eighties, and most want to enjoy their “golden years,” so there is a limit to how much they are willing to curtail their lifestyle in retirement.
And while there are ways to “earn more” – getting a better education or working longer hours, for example – these obviously involve both limits and tradeoffs. For most workers, a mix of these approaches will be needed – but planning ahead can help to keep their options open.
In this report, we’ll discuss how carefully choosing where your family lives – both during your career and during retirement – can enhance retirement success. We’ll also discuss how relocation during different life stages can help improve your chances of timely and comfortable retirement.
Career considerations
In the early days of their careers, workers have little or no financial capital to manage at first, and human capital (future unearned income) represents by far the largest asset on their balance sheet. During this stage, the most important investment decisions revolve around maximizing long-term earnings potential.
When choosing a city to start your career, earnings are clearly an important consideration – after all, the income disparity can be quite wide – for example, a secretary makes about 17 percent more in New York than in Miami, and a nurse makes twice as much in Geneva as they do in Frankfurt. Choosing correctly can have a similar long-term impact on earnings potential as getting a high-value degree.
But while wages and purchasing power are obviously the most important, it’s also important to start your career where there is a diverse set of opportunities in your field. Not only can this reduce the probability of being underemployed, but it also allows you to get a diversity of experience that will enhance your long-term earnings potential.
Retirement considerations
As we discuss in What if you live to 100?, Longevity risk – the probability of outliving one’s savings – has become an increasingly problematic component of retirement planning. After all, the Baby Boomers will be the first generation where many hope to spend as much time in retirement as they did in the workforce.
Instead, many Boomers – having underestimated their life expectancy or waited too long to begin saving – will work into their seventies and even eighties. According to the Bureau of Labor Statistics, 22 percent of the 65-plus population will still be in the workforce in 2026 – versus just 12 percent in 1996.
In retirement, “purchasing power” – which is really a measurement of the affordability based on local wages – is no longer the appropriate affordability metric. Instead, retirees should focus directly on the cost of living.
It’s a bit surprising that 80 percent of U.S. seniors live in metropolitan areas.
After all, the Bureau of Labor Statistics estimates that urban households spend about 27 percent more than rural households. Cutting your retirement spending by nearly 30 percent could have a huge impact on the sustainability of your retirement plan.
And while there are certainly other costs involved with living abroad, it could still be an attractive option for some of your retirement years.
It costs about half as much to live in beautiful Hanoi, Vietnam as it does to live in New York or Chicago. Instead of counting down the days to when we can retire, maybe we should be concentrating on where we can retire.
Conclusion and recommendations
The path to retirement success is not through higher earnings, but through higher savings rates and long-term investing. Because purchasing power differs so much from region to region depending on your career, being flexible and open to opportunities around the country and around the world can have a significantly positive impact on your retirement success, without sacrificing your family’s quality of life.
That’s why, when it comes to enhancing your earnings and savings potential – and lowering your cost of living in retirement – consider adding three more items to your list of variables to consider: location, location, location.