Financial choices for a comfortable retirement in a volatile world
Many people see retirement as a far away milestone that isn’t as important or as imminent as other financial priorities. There is also an unconscious bias at play, that makes people believe that “whatever income I am able to generate today, I will be able to maintain going forward”. What most of us don’t realize is that statistically, the peak earning age for most humans is between the ages of 45 and 54. This means that there are 30+ years left after peak earning age, where you will be earning less money - or none at all - and your expenses will come either from the income you are able to generate from your assets, or from your assets themselves.
As a result, many people skip the important step of planning for retirement, which requires answering a few simple, yet powerful questions:
Where do you see yourself living in retirement?
How much money do you think you will need in retirement?
What assets do you plan to own/enjoy?
How much do you think you will need for non-essential expenditures (covering travel, dining out and other leisure activities)?
What will your health requirements and expenditures be?
What are some potential events for which you might want to use some extra reserves: Children’s education? A child getting married? Medical emergencies? Helping a friend or family member?
How will you be able to generate the retirement income you need, in a way that properly manages risk and minimizes your tax burden?
These were all unanswered questions for my parents back in 2007, when they were looking at the prospect of retirement, for which they were clearly unprepared. They were already quite old at the time, and this was something they could not have done without my help, as they had not planned it before - This is sadly the case for many of their friends in Venezuela. I took them through a step by step approach for them to paint a vision for what they wanted and how to prioritize between choices. This included:
Deciding where to live - Country: They were living in Venezuela at the time, but with the increasingly decaying social and economic environment, we started looking at and evaluating other countries, assessing them through multiple lenses - overall appeal, cultural alignment, health benefits and affordability.
→ We ended up selecting Spain
Deciding where to live - City, type of property (house, apartment, assisted living, etc), regime (buy/rent). We assessed factors like affordability, appeal and lifestyle.
→ We ended up deciding to buy a condo in a Senior Living complex in Southern Spain, close to Málaga
Then came the important steps of planning and implementing the financial side of things, given that their assets were tied mostly in bank accounts and assets in currency-controlled Venezuela.
PLANNING: First step was to build a monthly budget plan for when they were based in Spain, including all the required expenses (mortgage, services, taxes, utilities, home/car/health insurance) and all the optional expenses (mostly travel & going out)
PLANNING: Next was to confirm the overall asset allocation approach: Given that my parents were quite old already and their net worth was relatively moderate, we agreed that we needed to have a very conservative, low risk investment strategy.
EXECUTING - ASSET CONSOLIDATION: Third was to move all the assets in a tax efficient way from both Venezuela and the US, and consolidate them in Euros in Spain. This was incredibly tedious and time-consuming, as it involved a high amount of risk and complexity. This step would help avoid certain devaluation (in Venezuela) as well as the exchange rate fluctuations of $ vs. Euro, which could be an element of short-term risk we didn’t want to deal with.
EXECUTING - ASSET ALLOCATION: Then came the step of allocating the assets following a strategy we discussed and agreed with the bank: Long-term deposits that delivered 4-5% yield; conservative mutual fund investments (5-8% yield); and a cash buffer on hand for expenses and unforeseen circumstances.
TRACKING: Finally, we implemented an expense tracker, so my parents could write down every expense they incurred in - this discipline alone helped them see whenever they were spending a little over budget.
I am happy to report that with this methodical approach, both my parents lived the rest of their lives in Spain very comfortably and never wanting for anything.
Javier Neves
Ockham Founder
