Retirement Survival

Surviving Retirement And Government Folly As Well

As of 2011 the so-called baby boom generation has stared to reach retirement age, and in fact it is estimated that going forward until 2029, this age group will retire at a rate of 10,000 per day.  However, for a number of reasons (including current economic issues), the real question for many is can they afford to retire?  For those living in the United States, there is the government old age pension program also known as Social Security.  But will that be enough?  With regards to someone retiring in 2013 at the full benefits retirement age of 66, the highest monthly amount is $2,533 but the nationwide average is US$1,261.  So, all depending upon how much you paid in over the years and when you retire, your monthly check can fall anywhere between these amounts.  But assuming the statistics are correct, we can make the comment that there are a large number of people out there that probably have US$2,000 or less per month coming in as a pension or retirement income.

There has been much discussion and debate about Social Security over the years.  While the estimations and assumptions vary regarding how and when it will run into solvency issues, the bottom line is that the long term viability as a solvent social insurance program is a very real problem.  Back in 1997 Mr. Timothy Cogley and Ms. Heather Royer prepared a report from The Federal Reserve Bank of San Francisco regarding Social Security where they state:

Although the system is currently accumulating a surplus, actuaries at the Social Security Administration forecast that the present value of future obligations far exceeds the present value of future revenues. The magnitude of the projected shortfall is enormous, amounting to roughly half of the federal government’s current outstanding debt. These projections suggest that the current system is unsustainable.  As it is now constituted, Social Security is primarily a pay-as-you-go system, which means that current retirement benefits are paid mainly from current tax receipts on younger workers. In contrast, a fully funded program would tax workers when they are young, invest the proceeds on their behalf, and eventually pay their retirement benefits out of the accumulated interest and principal. Although the current system does a little of this, it is mainly a transfer program rather than an investment fund.  A key variable in determining the solvency of a pay-as-you-go system is the ratio of taxpayers to recipients. However, this ratio has been falling for some time and will continue to fall.  In order to maintain benefits at current levels, younger workers would have to contribute a higher fraction of their income to the system.   Alternatively, if taxes were maintained at current rates, retirement benefits would eventually have to be cut.

http://www.frbsf.org/economic-research/publications/economic-letter/1997/may/proposals-for-reforming-social-security/

Mr. Andrew Biggs writing for the publication National Affairs in 2013 says that:

Over the next decade, the Social Security program will provide about $984 billion more in benefits than it will collect through the payroll tax that is intended to fund it, according to the 2013 report of the program's trustees. Social Security can continue paying benefits for now because it ran a surplus over the past three decades; the extra funds were lent to the Treasury for use on other federal programs, and as those loans are repaid, they can be spent by Social Security. But the deficit cannot be patched up this way forever, and the longer we wait to address the program's approaching insolvency, the more difficult any attempts at reform will become.

http://www.nationalaffairs.com/publications/detail/a-new-vision-for-social-security

We should call special attention to the comments from Mr. Biggs whereby he states:  The extra funds were lent to the Treasury for use on other federal programs.  What does that mean?  In short, the politicians spent it, there is NO excess cash just lying around.  In addition, the gentleman clearly states these funds were turned over as LOANS.  And as you well know, a loan must be paid back or at least that is the premise when money is borrowed.  In any event, the point is where will the money come from to pay off all the money the government politicians borrowed from Peter as a Loan to Paul (borrowed from Social Security to pay for other government expenses)?  The answer dear friends is from you, the tax-payer, and more likely the younger generation coming up behind the retiring Baby-Boomer's.  In fact, while we are are on this tangent of the younger generation having to suffer higher taxes, it should be noted this is a problem that is not just a phenomena in the United States alone.  Ms. Katie Morley wrote an excellent article for the Telegraph newspaper in London whereby she writes: My generation must be given the facts we need to plan ahead.  Younger generations already face unaffordable housing, university debts, fragmented careers and earnings stagnation, and far thinner occupational pensions than their baby boomer parents. If taxes must be raised, or benefits cut, then my generation will have to take the blow.

http://www.telegraph.co.uk/finance/personalfinance/pensions/11152068/Time-for-the-truth-Young-people-dont-expect-a-state-pension.html

But the US Social Security system was never designed to be here all pension or retirement annuity, although many Americans tended to hold that view.  Rather this program was meant to act as a buffer or supplement to other savings so the person at least had one guaranteed economic cushion in retirement.  In addition, it is a pay as you go system (as many other government social welfare benefit schemes), which means people currently working were (and still are) paying for retirees currently taking a check (there is no special government retirement savings account with your name on it whereby your payments are being saved for you and you alone).  And one real and looming problem is that the generation coming up behind the Baby-Boomer's is much, much smaller (meaning there will be less people paying in than before).

RETIREMENT TRENDS AND CHALLENGES FOR BABY-BOOMERS

In any event, the bottom line is that many people in the baby boom generation did not save and or benefit from an economic boom as their parents had.  Indeed many Baby-Boomer's have been hurt from the dot com crash of 2000 and the economic crisis of 2008, regardless if whether or not they had been systematically saving enough for retirement.  In fact, as nationwide US average, 25 percent of people ages 46 to 64 say they have no retirement savings and 26 percent have no personal savings.  For those Baby-Boomer's hitting retirement, 22 percent have no retirement savings and 14 percent have no personal savings.  The main source of income for people over 65 is Social Security (37 percent), income from working (30 percent), pensions (19 percent) and savings and investments (11 percent).   And the statistics coming out of the UK are somewhat comparable to their colonial cousins.  One out of seven people in the UK planning to retire have NO personal savings what so ever.  In addition, it is estimated that for most people the government pension system will account for 35% of an individual's total expected retirement income, which also mimics the US social security statistics.  But even government employees in the UK are worried about the solvency of their promised pension payout.  Unlike the US Social Security or even US Federal Government system, the UK has a program titled the Qualifying Recognized Overseas Pension Scheme which permits the pension funds to be transferred abroad to another country, outside the reach of politicians and bureaucrats.  In fact, in early 2014 it was reported that there was a 20% increase in inquiries regarding overseas pension transfers from officials in governmental departments, agencies and non-departmental public bodies.  Too bad that is not available for Americans.  If it were we predict a transfer of funds out and away at a drawn down rate almost akin to a 1975 Chevrolet Impala drawing down the gas tank as it goes around the block.

Coupled with that, we have another set of problems facing the Baby-Boomer's which involve taking care of both older parents and adult aged children.  Aside from the paradigm of possibly caring for elderly parents (which always existed for every generation regardless), the current new burden brought about by economics is the return and or continued economic support of college graduated sons and daughters.  A report recently complied by Pew Research indicates that 13 percent of parents with grown children said the recession had forced a child to return home in 2009 after living independently, and especially this is the case for male children aged 25 to 34.  In addition, 41 percent of parents provide some level of financial support for their children ages 23 to 28.  So not only are Baby-Boomer's faced with retirement concerns (how and if they can save enough to retire), they also have to deal with aging parents and adult children living at home. However, and again to be fair, this is not just a problem in the United States.  Looking across the board at all the so-called modern wealthy OECD nations collectively, it has been reported that there were 7.2 people aged 20–64 for every person of 65 or over in the OECD countries in 1950. By 1980, the ratio dropped to 5.1 and by 2010 it was 4.1. The average ratio for the EU was 3.5 in 2010 and is projected to reach 1.8 by 2050.  So what we glean from this is that the EU and also Japan is significantly worse off than the US.  In fact, Japan, Germany and France appear to have the worse scenarios in terms of workers paying into the state welfare pension schemes in comparison to retirees drawing down a check.   James Walsh, of the UK National Association of Pension Funds, said it best when he opined: This is not magic money. Higher costs have to be covered by raising the contributions paid by employees and their employers or by reducing the pensions paid when people retire.  But you probably have heard all this before, so what is the solution for you personally?

The Dominican Republic Lifeline

In terms of one's own personal economics, just as with any business, there are two ways to boost the bottom line: Increase Income, Reduce Costs (or both if possible).  Obviously of the two, reducing living costs is far easier to do, especially if you considering moving to a lower living Caribbean island as one way to accomplish two goals (retire in a beautiful warm weather climate and enjoy a better lifestyle with your retirement income at the same time).  And to be fair, this general comment can be made about many of the emerging or developing market nations as well.  However, the Dominican Republic does have some geographic and other advantages as well.  Close proximity to the United States and direct flights to Europe that certainly require less travel time than say flying to Southeast Asia or the Middle East make the Dominican Republic an attractive option over some other destinations.

However the real bottom line is the cost of living savings.  In other words, living better on what you have coming in as a retirement income in the Dominican Republic as opposed to staying in Europe or the US.  But do not simply take our word for it as there are two websites we are aware of to help you crunch the numbers.  One such site is Numbeo (link below), which claims their information is up to date as of February 2015.  In any event, comparing cost of living with Miami, Florida and Santo Domingo, Dominican Republic they claim that your purchasing power in Santo Domingo is just about double in the Dominican Republic.  Stated another way, it will cost you US$1,000 in Miami to get the same purchasing power as US$540 in Santo Domingo.  They also go on to say that: Consumer Prices in Santo Domingo on average are 30 percent lower than Miami, Rent in Santo Domingo is 70 percent lower than Miami, Restaurant Prices in Santo Domingo are 41 percent lower than Miami and that Groceries in Santo Domingo are 32 percent lower than Miami.

http://www.numbeo.com/cost-of-living/calculator.jsp

Another site offering a similar cost of living calculator is Expatistan.  According them, when comparing New York City to Santo Domingo, the cost of living in New York City is 112% more expensive than in Santo Domingo, Dominican Republic.  Again, what they are saying is basically by moving to the Dominican Republic, your purchasing power just about doubles.

http://www.expatistan.com/cost-of-living/comparison/

Obviously we have given you examples of just two US cities, but you can of course insert your current US or European city or whatever other city you might have been thinking about retiring and make the comparison yourself.  But just to give you another reference, Expatulator.com (www.expatulator.com) claims that living in Santo Domingo, Dominican Republic is LESS EXPENSIVE than: Cyprus, China, Spain, Taiwan, Jamaica, Malta, Brazil, Mexico, Germany, Martinique, Dominica (an English speaking island in the Caribbean not to be confused with the Dominican Republic), United Arab Emirates, Qatar, Italy, US Virgin Islands, Korea, Belgium, Ireland, Saint Vincent, Gibraltar, Anguilla, French Polynesia, Isle of Man, British Virgin Islands, Antigua and Barbuda, Saint Kitts and Nevis, New Zealand, Bahamas, Barbados, Australia, Cayman Islands and Iceland.  Actually this is just a partial list as the Dominican Republic ranks 296 out of 750 destinations.  The most costly destinations for expatriates are: Venezuela, Angola, China, Singapore, Norway, Switzerland, Monaco, Japan, Australia, Aruba, New York City, London and Bermuda.

Health care is another item of concern to retirees especially and here again, we have found that the private clinics and hospitals in Santo Domingo to be quite good and reasonable in terms of costs. A visit to a specialist in Santo Domingo will cost about US$50.  A visit to the dentist for a checkup and cleaning about US$65 and also other items such as medical tests to be quite affordable as well (CAT scans, radiograms, lab work, etc.).  If you are wondering about health insurance, there are quite a few very good private health insurance policies available and some of our clients have already signed up.  For a person aged between 50 and 62 years of age, the very best so-called Cadillac health insurance from a private insurance company will cost about US$1,700 per year in premiums.  That comes out to roughly US$150 per month and if you do the comparison with similar private insurance coverage in the US (assuming you can even get it) you will most likely find the US costs enough to give you a heart attack before the coverage begins.

Real estate is yet another cost concern and regardless if you buying or renting, the Dominican Republic still remains to be a low cost leader in all of the Caribbean.  Obviously what you pay will be determined by what you want and where, but generally speaking you can figure on anywhere from about US$400 per month up to US$1,000 per month for a 2 or 3 bedroom apartment in an upper middle class neighborhood, with the price difference directly related to how new the building is, where it is located, and what amenities it has.  Many of the newer buildings with usually feature a formal lobby with an attendant, elevators, a swimming pool in the building for tenants, gym facilities, and off street secured parking.  In addition, newer and more upscale buildings will also offer more upscale finishing such as marble in the bathrooms, marble or higher end flooring throughout, granite counters in the kitchen, and so on.  Buying of course offers the same ranges as well for the same reasons, but generally speaking you can plan on spending anywhere from US$120,000 for an upper end new one bedroom up to US$220,000 for a 3 bedroom unit.

In terms of banking and investments in the Dominican Republic, there are some worthwhile investment options to consider for additional income.  While many local banks will offer bank accounts in US Dollars, Euros and Dominican Pesos along with on-line banking and debit cards, the interest rates on such bank deposits are fairly close to what they are in the US and Europe.  However, local government bonds and commercial paper denominated in Pesos can offer yields up to about 12 percent and in US Dollars up to about 5 percent.  So, considering one might be living in the country and thus incur expenses in Pesos, having some of your money throwing off 12 percent interest in additional retirement income is not a bad thing at all.  And while we know there has been some comment in the financial press about investors chasing higher yield and higher risk in emerging markets, it is also true that local interest rates are just that – local.  The meaning is that interest rates can be higher in other markets for some valid reasons (such as shortage of investment capital, local inflation rates, or simple competitiveness in the local market and thus rates to attract investment funds).  Of course one must use some common sense and do some due diligence, and while we do not act as fund managers for clients, we do assist clients with advice and assistance as it pertains to banking and fixed income investing.  Many of our clients have been investing with bonds and commercial paper (both in US Dollars and Dominican Pesos) over the last 16 years and they have usually done quite well.

The other interesting option as it pertains to residency is the special process available for pensioners or retirees.  This special application status actually falls under the investor immigration law which means that retirees have the opportunity to apply for citizenship much quicker (should they wish to, as it certainly is not mandatory) in comparison with filing under the ordinary process.  In addition, retirees do indeed obtain some benefits such as 50 percent reduction in certain title transfer taxes when they purchase their first home or condo, taxation benefits for retirement income, the ability to import personal belongings and household goods at zero duty, and some other perks as well.  In fact, the program for retirees is very competitive in comparison to some other jurisdictions that also have retirement programs and the ability to apply for citizenship fairly quickly is attractive for many clients as well.  But the real long term benefit is the reduced cost of living, lower costs for real estate and year round Caribbean weather does not hurt either.

Truth be told there are a number of retirement destination options to consider, and the Dominican Republic is just one of them.  However, the general overall comment we can make is to try and think about not only today but tomorrow as well.  Countries like the Dominican Republic are indeed emerging or growing markets, with the key term being growing.  The country has a very young population, with very positive demographics in terms of age distribution.  This means no problems with aging demographics as is and will be the case with Europe and North America.  A increasing middle class, government focus on higher education and renewed interest in foreign investment in the Dominican Republic points to some attractive long term possibilities.  Embassy Suites very recently opened their second property, JW Marriot also opened a new hotel and after leaving the country many years ago the Sheraton Hotel chain came back to take over a hotel property they relinquished to another European chain many years ago.  The IGA supermarket chain recently entered the country as have a number of American and European chains (Forever 21, Levi's, Benetton, American Eagle Clothing, Chili's Restaurant, Outback Steakhouse, Tony Roma's, TGI Fridays, Hooters, Payless Shoes, Krispy Kreme, Denny's Restaurants, Victoria Secret, Ferragamo, Brooks Brother and a more extensive list too long to mention).  The point is that all of these stores and companies conduct market and demographics research before they come into a new market.  There must be something going on that is positive in order for these companies to make an investment.  So, while some people may pine for the idyllic Caribbean destination in the middle of nowhere, that appeal draws thin when you want access to goods, services, medical care and other things as well.  If you do not want to live in an urban area, you do not have to, but being in a destination whereby you have access a short drive away is convenient and appealing to many people (not only retirees).  In short, think carefully about what appeals to you and where you may want to retire, but know that you do have some very worthwhile options.