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 Vallarta Living | November 2007 
Expect Exodus of Broke Retirees
 Scott Burns - The Dallas Morning News
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 |  | Suppose you can find a place where the cost of living is about 75 percent 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? |  | |
Several years ago, a Dallas couple approaching retirement disappeared. Well-known on the charitable event circuit, the couple was in Dallas one day and gone the next. Phone disconnected. No forwarding address. No working cellphone number.
Eventually, word spread that they were somewhere in Mexico. They had sold whatever they owned, packed their car and headed for the border. We heard that they were living in small towns, the kind of places seldom featured in travel magazines.
I don't know what happened, but 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 unsustainable. They were heading toward a cliff.
They had to do something radical, like live in an RV – or leave the country.
Can moving to another country offer a cost of living so much lower than the cost of living here that it's 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.
The scenario
To test the economic idea, I decided to use ESPlanner, the financial planning software I've talked about 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 to turn a desperate idea into a workable strategy.
Imagine this. You're 57. You're married. You make a reasonable but not glorious income, $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 long 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 percent. Your wife doesn't work. The kids are grown.
Day after day you have a dreadful feeling that you're 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 percent reduction in your standard of living, more than you can bear or imagine.
Too little time
Can you reduce the shock if you spend less today and save as much as possible, shooting for a level standard of living?
ESPlanner says yes. But with just 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 moving to Mexico, Belize, Costa Rica or Panama.
Suppose you can find a place where the cost of living is about 75 percent 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.
Not bad.
Medicare oh-oh
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 percent a year faster than inflation – the $3,200 a year you'll pay at 65 will rise to a stunning $9,400 a year by the time you are 90. It will 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.
Can you do even better? Yes. Just keep searching for a low-cost area.
If you can find a place where the cost of living is 60 percent 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.
Readers can send questions to scott@scottburns.com and visit www.scottburns.com. Questions of general interest will be answered in future columns. |
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