Several years ago a Dallas couple approaching retirement disappeared. Well-known on the charitable-event circuit, the couple were in Dallas one day and gone the next. Phone disconnected. No forwarding address. No working cell-phone number.
Eventually, word spread that they were somewhere in Mexico. They had sold whatever they owned, packed their car and headed for the border. They were, conflicting reports said, living in small towns, the kind of places seldom featured in travel magazines.
We can only speculate on what happened. I think they were broke, had little or nothing in savings and knew they had to make a major change to survive on their Social Security income and minimal savings. Like millions of other Americans, their ship never came in. They got older. Work became harder to find. Suddenly, they realized their life was entirely unsustainable. They were heading toward a cliff.
They had to do something radical. Like live in an RV. Or leave the country.
The question is: Can a move to another country offer a cost of living so much lower than the cost of living here that moving is a positive solution?
I believe the answer is yes. I also believe that thousands of older Americans will be crossing the border in the years to come.
To test the economic idea, I decided to use ESPlanner, the powerful financial-planning software I've used in other columns. I wanted to compare, in steps, what a couple could do by moving to Mexico. I wanted to see how much lower the cost of living abroad must be for a desperate idea to become a workable strategy.
So imagine this: You're 57. You're married. You make a reasonable but not glorious income of $75,000 a year. It isn't rising very fast. It may not rise much at all in the future. Indeed, you're wondering if management won't find a way to eliminate your job well before you turn 66. Worse, your entire nest egg is about $100,000 from the sale of your home several years earlier. It earns a safe 5.5%. Your wife doesn't work. The kids are grown.
Day after day, you have a dreadful feeling you are running toward a cliff. In fact, you are -- an income cliff.
Today, you are spending your entire $60,000 a year of after-tax income. You aren't saving. But if you are forced to retire at 62, your income will plummet. It won't be much more than your Social Security benefits -- about $18,000 for you and about $8,400 for your wife, a total of $26,400. (All figures are in dollars of constant purchasing power.)
That's a 56% reduction in your standard of living -- more than you can bear or imagine.
A better standard of livingCan you reduce the shock if you spend less today and save as much as possible, shooting for a level standard of living?
ESPlanner tells us yes. But with only five years to go, it won't help much. By saving about $30,000 a year and creating a bigger nest egg, you can increase your lifetime consumption from $26,400 a year to about $33,700 a year.
That's a hefty increase, but it would still feel like a crash. So, it's time to think about Mexico, Belize, Costa Rica or Panama.
Suppose you can find a place where the cost of living is about 75% of the cost in the United States -- some beach town north of Puerto Vallarta or south of Manzanillo. What happens to your standard of living when you move to Mexico? It rises to the equivalent of about $42,400 in the U.S.
That's not bad. But then you notice a problem: You'll be living in Mexico, where you can't get Medicare services, but you'll still be paying for Medicare. If your premiums rise at the historical rate -- 4.6% a year faster than inflation -- the $3,200 a year you'll pay out at 65 will rise to a stunning $9,400 a year by the time you are 90. It would be a big hit on your standard of living.
Maybe it's time to blow off Medicare. What happens to your standard of living if you don't sign up for Medicare at 65? It goes up to the equivalent of $47,200 a year. Of course, you'll still have medical expenses, but perhaps you can make a better, less-expensive arrangement.
Could you do still better? Yes. Just continue searching for a low-cost area. If you can find a place where the cost of living is 60% of the U.S. cost, your lifetime standard of living, without Medicare expenses, will be the equivalent of $55,500 -- very close to the $60,000 you got to spend while working in America.
Questions about personal finance and investments may be e-mailed to firstname.lastname@example.org. Questions of general interest may be answered in future columns. More columns by Scott Burns can be found here and here.
Published Dec. 5, 2007