Money Needed

In his latest Weekly, Stick told the story of a farang in early retirement in Thailand having to return to his home country because he had run out of funds.

This is sad. But it doesn't surprise me.

Quite some time ago, there were several submissions on this site covering the subject of how much money is needed for a life in Thailand. Not all of them were very realistic.

I remember one man calculating with an interest of 9%. Well, I wouldn't be surprised to learn that he was one of those who had to return. I dare you: Can you show me an investment — any investment — that consistently, year after year after year for the past 50 years, has yielded 9% annually? And even if you find one — which I doubt — why do you think that, of millions and millions of possibilities to invest your money, you would have chosen this one? And even if you had, you would still have a problem because you would have forgotten two of life's harsh realities: inflation, and the taxman.

So what is a realistic interest rate to calculate with? You'll be surprised: It's 0%.

If you don't have an income from work anymore but live on your savings, your first and foremost consideration should be to secure your money. Don't run any risks. Make sure that, no matter what, you will not lose any of it. Because if you do, mathematics will work against you.

Imagine that in an economic downturn like the recent (or actual?) financial crisis, you lose half of your money. Very well possible if you bought the wrong stocks or certificates. So, in order to get even again, having just lost 50%, you now have to gain 50%, right? No, of course not. You have to gain 100%. Worse yet: With every pizza you eat, every drink you drink and every bus ride you take, these "100%" will be growing. And growing. And growing. You will never make it and can only hope to die young.

There is a huge difference between having a fortune while still working and living on a fortune without any other income.

During the last 15 months or so, I lost something like the equivalent of a very decent house in Thailand due to the stock market slumps. But that doesn't really bother me. I still have my job and my salary with which I can buy all I want. I don't need that money now, so it's a loss on paper only. Even if it takes the markets 10 years to recover, no problem. Better yet: Every month, I buy some new stocks at now reduced prices. In the end, the financial crisis might even prove beneficial for me.

But if you don't have any fresh money coming in; if, on the contrary, you need to deplete your coffers every day more, you have a real problem you will need a miracle to get out of.

So, as I said, securing your money should be your highest priority. Low risk always means low returns. For example, you could buy various different AAA-rated bonds. These days, if you are lucky, they will get you 4% annually. Ok. But here comes the taxman. What you'll have to pay, will, of course, depend on your personal situation, but around 30% will be a good bet. Many countries deduct between 25% and 35% of the interest directly at the source, and those who don't do it now, will certainly do so in 10 years. It's the writing on the wall.

Tax evasion? Well, right now tens of thousands of people who thought that their money was safe in Switzerland are about to find out that this was a really, really bad idea. Hundreds of thousands more will follow. In any long-term planning, just forget about it. Tax havens will disappear.

So, 4% of interest after 30% of taxes will leave you 2.8%. Sounds pretty much like an inflation figure, doesn't it? Thus, after inflation — 0.

Let's assume that we now agree that it is not a good idea to base your planning on significant interest income. Then how much money do you need?

This, of course, depends very much on how much you think you'll spend every month. When I last was in Thailand about 5 years ago, I thought that 50,000 baht per month would allow me a decent, but nowhere near luxurious, lifestyle. That's about 30,000 baht for rent and daily life and 20,000 baht for the extras. No, I'm not interested in the bar scene; I'm rather thinking of traveling abroad, medical bills, a new computer; things like these.

In the meantime, there was inflation, so I'd probably say 60,000 baht per month today. That's about EUR 16,000 per year right now. Please note that this is more than many retirees actually have in Western Europe.

Now we have a problem: Unless you have a terminal disease, which I hope you have not, you'll have no idea how long you will live. So, in order to avoid running out of funds in your highest age, you might consider buying into some pension fund. Starting at 65 years of age, for example, such a scheme will typically give you about 4% of your initial capital annually. Yes, the figures you will get quoted will be about twice that, but did I mention the taxman and inflation?

Of course, in this example, if you die before you can celebrate your 90th birthday, you'd have been better off simply keeping your money in the bank. Well, that's how they make a profit. You'll lose. The good news: You won't care, because you will have entered into a different world. Which risk do you prefer: Involuntarily adding to the profits of some insurance company, or being a pauper at 91? Your choice.

After all this theory, let's do a concrete example. Let's assume that you are 40 years old and would like to retire to Thailand. You need 16,000 Euros every year until the age of 65. After that, you'd like to make it 18,000 in today’s money because you anticipate rising medical bills. On the other hand, you'll receive 500 Euros per months, after taxes and adjusted for inflation, from the social security system of your home country you paid into for 20 years. Now, how much money do you need?

It's simple. 25 times 16,000 Euros, equaling 400,000 Euros, until your 65th birthday. 12,000 per year times 25 equaling 300,000 as the initial capital for the pension fund. A total of 700'000 Euros.

Surprised?

If you are already 50, and your social security income will be 750 Euros, the sum is 465,000.

If you have more, you'll be fine. If it's significantly less, be prepared for some hard times. Not now. But 10, 20, 30 years in the future.

Or forget your retirement dreams for the time being.

Stickman's thoughts:

I bet not that many readers have that amount laying around!