Economic Factors to Consider When Living Abroad

The value of world currencies relative to one another fluctuates daily.
One reason that some people retire abroad is related to the lower cost of living that you can find in some countries. Depending on your retirement destination, by living abroad you can reduce you cost of living by 80% without sacrificing too many amenities. If economic reasons are a critical component to your decision, then it is suggested that you give thought to the following factors affecting the costs of living abroad.

Your Retirement Destination and National Economies

One can quickly evaluate a country by national economic measures such as the per capita Gross Domestic Product (how much money a country makes per person) or average income for that country. The most current data can be found by doing a search on the internet (comparison of international cost of living). The search will reveal that in the USA, average incomes are in the area of $45,000 a year compared to average incomes below $5,000 a year in many developing countries.

In general, countries with low average incomes or GDP’s will enable you to lower your cost of living without lowering your standard of living. The theory is that your US dollar will have more purchasing power in these types of countries. You will still have to evaluate whether or not you will have access to those things that you want and need to make it through life.

These factors all have to do with variations in the global economy that affects the costs of land, labor, and resources from one country to the next. However, these are not static factors. Over time, the variations in costs change. A good example is Japan, which after World War II had a very low cost of living and developed a reputation for cheaply made products. Within the span of 30 years, Japan rebuilt itself and emerged as an economic power house. Today, Tokyo is now the most expensive city to live in on the planet.

Today many “developing countries” countries are among the best places to retire for economic reasons. However, many of these countries are undergoing the same type of transformation that Japan did and are on the  the upwards climb with regard to economic development. It is very likely that many of these nations will become developed nations within the next few decades and you will see raising costs of living.

Your Retirement Destination and Economics and Regional Economies

Whenever looking at data, you should also keep in mind that you are often looking at averages and not getting a full picture of a nation’s economy. You will need to become familiar with internal variations in the cost of living within any particular country if you want to retire abroad.

As a general rule of thumb, costs of living tend to be much higher in urban areas and much lower in rural areas. If you should decide to live in a developing country, you may find costs to be higher than you had anticipated if you decide to live in a large urban area. Costs are higher in urban areas simply because there are more people competing for a limited amount of land. This tends to drive the price of rent up and other commodities up. Additionally, if there are many foreign companies in the city, the foreign workers who may have high western wages and will compete with your retirement income for housing and other goods.

To stretch your retirement dollar the further, a smaller city or a rural destination may be your best bet. The downside is that access to many amenities (dining, health care, shopping, entertainment, etc.) found in the city is likely to be reduced. On the other hand, if that location becomes very popular to expatriates, then prices will start to climb as a result of the higher demand for the local resources. In some instances, old timer expatriates may find themselves being driven out by a more affluent and younger generation of expatriates.

Your Retirement Destination and Currency Factors

A third financial factor that you should consider is the trend in how the US dollar is faring against the currency of the foreign country selected. This changes from day to day, but generally you can spot year to year trends easily. If the dollar is growing stronger, you can buy more and live on less. On the other hand, if the dollar is growing weaker, the opposite is true.

What affects the value of currencies? To some degree, the value of currencies are affected by the global demand for that currency. The US dollar has historically been in high demand (although this may be changing) in relation to currencies in developing countries. National economies also affect demand. Countries with sound fiscal policies and good economic growth will tend to have higher demand for their currencies. National banking systems also play a role by influencing demand for currencies by buying or selling currencies. Often times, nations don’t like to see their currencies fluctuate too widely in value and may do things to stabilize their currencies. Political stability or instability can also cause fluctuations.

How significant are these currency changes over a year? They can be quite significant, in extreme cases the value of a currency can shift by 100% or more overnight. By looking at international, national, and currency data you will be able to make a better financial decision about where to live. Of course, there are cultural and political factors to consider as well, but that will be covered in future articles.

For example, in 2008 I saw the value of the Philippines peso climb against the dollar and my purchasing power in the Philippines declined by about 20%. Fortunately, this was not a major setback for me, but it could have been problematic if I did not have enough discretionary income.

Fortunately in 2009, the value of the peso began to drop and my economic position was improved greatly.

Your Retirement Destination and Economic Factors – Summary

If your definition of a best place to retire depends on economic factors, it will be a good idea to understand the economic dynamics within a country as well as the relationship of that country to the global economy. Your purchasing power is not fixed and is likely to change over time. If you retire abroad on a very good pension, odds are there is a lot of play in your income and you are not vulnerable to changes in your purchasing power.

On the other hand, if your retirement income is on the lean side, your purchasing power could be affected by forces beyond your control and you could find yourself exposed vulnerable to these changes.

(Photo by Sanja Gjenero)

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