NEW YORK (TheStreet) -- Why would an American leave her home to live in a foreign country?
After talking with more than 500 expats who answered more than 6,000 questions about living in Panama, Belize and Nicaragua, and conducting the study Expats: Expectations and Reality, the Web site Best Places In The World To Retire can report that many Americans moved abroad to reduce their financial risk. Here are the three reasons they gave.
1. It Costs Less to Live in Central America
In more than two years of speaking with expats, we've never heard a single one say that it cost more to live in Central America than in the U.S. or Canada. Just how much less it would cost you depends on many factors, but a very, very rough average seems to be that it would cost you about half.
This means that 1) on the same amount of money you spend in North America, you can live twice as well in Central America; 2) you can live the same in Central America as you would have in North America and save half the money you would have spent and thereby continually increase your net worth; or, 3) you can create some combination of living better and saving money. Of course, having a higher net worth is a great way to decrease your financial risk, but even if you don't save all of it, having your cost of living cut in half provides you with significant room for error.
2. It's a Reasonable Prediction That It Will Be More Expensive to Live in the U.S. in the Future
No one knows how much it will cost to live in the U.S. in the years to come, but it is not irrational to predict that costs will go up. Here are some of the reasons:
- Health care costs continue to rise and seem likely to continue to do so.
- Residential energy prices have been on the rise, in part because of government regulations requiring that energy come from renewable resources. Alternative energy costs more, so you'll probably be paying more.
- The U.S. is overregulated, and government mandates come with costs for businesses. Small businesses can find it tough to compete in an overregulated environment, and when they disapear, that means there's less innovation, less competition and higher prices for you.
- Eventually, someone is going to have to pay for the government's debt. Even at today's almost absurdly low interest rates, interest payments on our national debt make up a large portion of government spending. If interest rates rise to levels more in line with historical averages, we'll have a real problem. If it happens, the most likely outcome will be increased taxes or a reduction in purchasing power because of inflation. If inflation rises to 10%, in seven years, if your income stays the same, you'll be able to buy only about half of what you could before.
3. If You Live Abroad, It's Easier to Reduce Risk by Diversifying Your Assets
Diversifying your assets means spread your investments across asset types and geographic regions. This reduces your overall risk, because if one asset class or geographic region suffers losses, you'll still have investments elsewhere that will hold or even gain value.
To illustrate this point, let's consider Joe. Like many baby boomers, Joe has more than half his net worth tied up in the equity in his home in the U.S. Now, ask yourself the question, "What could possibly go wrong for Joe to cause the price of his house to decrease, and therefore, significantly reduce Joe's net worth?"
Here's a short list: 1) housing crash; 2) interest rates rise (think they'll stay at historic lows forever?); 3) another recession hits; 4) the government raises taxes to pay for some of its debt, which strangles the economy and makes it so that people can't afford to buy Joe's house. I'm sure you can think of many additional possibilities.
Among the rational things Joe can do in order to protect his rather precarious net worth and decrease his risk would be to sell his home, take the equity, and diversify his assets. Perhaps Joe could purchase some assets in another country or among several countries, and in several currencies. Then, not only would Joe be protected against the value of his house going down, but he would also have protection against the possibility of the dollar being devalued. Then, if any of the events mentioned above happen, Joe will still be safe.
The Bottom Line
We live in a world of uncertainty where many countries in addition to the U.S. are spending more than they take in. Of course, this cannot continue. What happens when it no longer continues is anybody's guess. Facing these eventualities, many of the expats I spoke with feel a lot more comfortable with a lower cost of living and a diversified asset portfolio, like I've described above for Joe.
What if none of these bad scenarios ever happen? It is, of course, possible, that interest rates will stay low for many more years, the U.S. will find a way to pay its debts without inflation or raising taxes, the economy will do great, and nothing else unforeseen will happen.
In that case, our expats will have moved to a lower-cost place and experienced the feeling of well being that caused them to sleep well at night, as opposed to sweating it out in the U.S. and hoping that they guessed right. They don't see this as much of a downside.