By Marian T. Wellman, Lake Chapala, Mexico
Travelers to Lake Chapala with the Focus on Mexico program (www.focusonmexico.com) are offered a series of seminars about living in Mexico – What’s the health care like? What about immigration? What is there to do here? As part of these seminars, I give a program on U.S. Income Taxes and Cost of Living (comparing Lake Chapala with north of the border).
The financial scenario in the U.S. and in the world right now is extremely volatile, meaning downright scary for retirees. According to a New York Times article September 23, 2008, entitled “Retirees Filling the Front Line in Market Fears,” ‘today’s retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II.’ Without the (now “old-fashioned”) Defined Benefit Plans, promising a guaranteed income for life, retirees and those thinking about retirement must look at their “pot” of money and determine how to make it last. A survey by the Employee Benefit Research Institute, taken BEFORE last week’s market turmoil, said that 39% of retirees expected to outlive their savings, up from 29% in 2007.
So, if you are wishing you could retire, where does that put you? To boil it down simply, there are only a handful of considerations you need to look at, and each one of those can be analyzed. Let's say you have a certain amount of savings and/or a certain amount of income, like Social Security, and you’re trying to decide whether you can retire. Maybe you’ve been to an advisor, paid for a “plan,” done all the analysis you could, and don’t know. Worse, maybe you’re at a point of no choice – you’ve lost your job, your investments have gone down, you really can’t, or can’t stand, working any longer, and you have to retire, but are afraid you won’t “make it.” Here are your choices:
- I could work longer. With less time in retirement, that means less time that your savings have to support you, more time for them to grow (hopefully), perhaps a higher payout on your pension or Social Security by waiting (But maybe I can’t, or don’t want to)
- I could save more. This is just saying “I need a bigger pot.” My advisor tells me my savings will run out. (…but gas, and food, and everything! is costing so much, I can’t save any more. Or, I can sell my house, but at a lot less than I counted on in my ‘plan’)
- I could earn a higher interest rate on my savings. Let’s see – the post-World War II average earnings on equity investments is 8-10%. I’ll use that as an average return and I should be fine. (But…statistical averages are very tricky things. 1968-1980, returns averaged two per cent per year, and there were three years during that period where the market was down by double-digits. Are you starting retirement in one of those times?)
- I could live on less income in retirement. Aaah! There’s an idea. But like I said, gas is up, property taxes are up, insurance is up, food is up, health costs are up. How can I live on less, without having to eat cat food?
Here’s where the ideas presented in Focus on Mexico come in. According to Mexico Insights, an online magazine published by local writer Judy King, an average cost for a single person, based on her annual survey from three singles and three couples who track their monthly living expenses, is $1,800 per month. To include travel and a few more luxuries, be generous and make it $2,200 per month. This is easily handled by someone with, for example, a $1,000/month pension, and $1,200 per month from Social Security. Believe me, this person could live, and live WELL, at this income at Lakeside.
What are the additional costs for living up north? No freezing winters or boiling summers, (International Living: “world’s most perfect climate” – Lake Chapala) so no heat/air conditioning costs in Mexico. Easily saves $400 per month. Property taxes of maybe $50 per year instead of several thousand dollars. Same thing with home and car insurance prices. Same thing with gasoline, which, first, is subsidized in Mexico at roughly around $2.30 a gallon, plus in small towns like Chapala and Ajijic you’ll probably only use one tank of gas a month vs. 4 or 5. (This also lowers ancillary costs like less service, no snow tires, etc) Labor costs for maids, gardeners, construction workers average around $3 per hour or less, so all those people who make your life easier will now be affordable. Clothes are shorts, sandals and T-shirts – no suits, ties, winter coats, high heels or dry cleaning! Activities are $15 for a wonderful steak dinner out, with a glass of wine, and live music entertainment – no $100 evenings.
In my Focus on Mexico seminar, I take this analysis to its end – but then have to “gross up” the income to cover the additional income taxes on a higher retirement income. The net result is, to ‘recreate the same life’ that costs $25,000 a year at Lake Chapala (Lakeside), would cost $75,000 in the U.S.! This means a “pot of money” that needs to be $1.2 million larger!
Calculating retirement, no matter whether it’s done with the most sophisticated, Monte-Carlo simulation, or your own ‘gut feeling,” will always come down to those four factors, and the assumptions you make about them: Time, return on investment, size of your savings, and rate of withdrawal. These are all flip sides of the same coin! So if you don’t want to work longer, save more, take more risks to try to earn a higher return, or reduce your standard of living to barely getting by, try this last option: Think outside the box! Think of living somewhere where a lower cost of living doesn’t mean a lower quality of life! Try Mexico! Try Lake Chapala!
Marian Wellman has been a tax and financial advisor since 1983, and has lived in Mexico since 2004. She can be reached through contact information on her website,www.taxesinmexico.com, and provide details of all calculations shown in this article.
We are proud to have Marian Wellman as one of our Expert Speakers for our Focus On Mexico Programs. Her seminar on Cost of Living has helped many of our Focus clients realize that they could retire in Mexico a lot sooner than if they stayed back in the United States or Canada; and live an enhanced lifestyle in a near-perfect climate amongst the friendliest people in the world, our wonderful Mexican hosts.
Focus On Mexico offers 8-Day Educational Programs to Ajijic and Lake Chapala, Mexico (2nd Best Climate in the World). Join us on a Focus program and learn why thousands of Americans and Canadians chose to retire in Lake Chapala.
Our programs offer the perfect balance; a wonderful vacation and an insightful, educational experience. Our expert speakers cover all topics: Health Care, Real Estate, Legal System, Immigration, Bringing Pets, Cost of Living, US Taxes for Americans, Non-Residency for Canadians, Living on the Lakeside, Investing in Mexico, Mexican Economy and much more...
You’ll get everything you need to help you decide if Lake Chapala, Mexico is the place for you, plus have a lot of fun doing it. Retiring in Mexico couldn't be better.