Keep it simple ….

Keep it simple ….

By Mr Chaos on May 5, 2021 in Family, Finance, Living Abroad

As a family of 6, we’ve learnt the importance of keeping things simple. That’s not to say we’re always successful, but we try to apply it to all areas of our lives, particularly personal finance. ‘Keep it simple’ was what came to mind when I spoke recently with some friends looking for financial advice. Let’s call them Peter and Susan* (I’ve just finished reading the Lion, the Witch and the Wardrobe to our kids).

Peter and Susan have lived abroad for several decades, are now in their late 60s and have just retired. They want to move back to the UK for the food and weather to be closer to their grandkids.

They reached out to ask for advice on how to transfer their foreign currency to British Pounds and how to invest their savings. I’m not a financial advisor – please read the disclaimer if you are in doubt!!! But I am very opinionated about personal finance. So I was happy to tell them what I would do if I was in their situation.

For those that don’t want to read the rest of this post, here were the things their story highlighted for me:

  1. Start with the end in mind
  2. Keep it simple – particularly personal finance
  3. Math is your friend – it makes your options much clearer
  4. The things you think are important, may not be

Solid financial foundations

Let me start by summarizing Peter and Susan’s financial foundations. They have no debt and have a track record of living within their means. They shared their financial details with me, although admitted that the experience was like having to strip off for your doctor… (mental high five that I decided to study finance rather than medicine).

Peter and Susan should definitely be worried

In summary:

  • Net proceeds expected from home abroad $300,000
  • Savings (in cash) of $300,000
  • Social security / pension income of $2,000 per month each ($4,000 in total)

Definitely keeping it simple!

But also in really good financial shape. Guaranteed social security / pension income and a $600k net worth.

Start with the end in mind

They reached out to me because of their uncertainty around transferring foreign currency and investing. But I’m a lot more curious these days, so I started by asking them what they wanted their life to look like back in the UK. They pictured themselves living in a house in a small village with a great pub. The house would be big enough to accommodate grown-kids and grandkids for long weekend visits.

As we talked, they mentioned that they had identified an apartment in the UK they were considering making an offer on. Apartment? But I thought it was a house in a village?

It took quite bit of unravelling and reorganizing chronologically, but their plans were as follows:

  1. Buy a small apartment in the UK using their savings, close to one of their grown kids so that they have a temporary base when they arrive in the UK
  2. Sell their home abroad
  3. Move into the small apartment
  4. Practice their British accents (I may have made this one up)
  5. Find the dream UK house they wanted to buy
  6. Sell the small apartment to help fund the house purchase
  7. Move out of their apartment and into their dream house
  8. Invest their remaining savings

It was clear from speaking with Peter and Susan that they felt overwhelmed by everything they needed to do.

Keep it simple….

Their end goal was to live in a home in a village in the UK. Some of their plans (the apartment!) were taking them away from this goal. They noted that they’d never laid their plans out sequentially as I’ve done above.

Start with the end outcome and work backwards to make your dream possible

Wayne Dyer

Keep it simple

I asked them why they wanted to buy an apartment in the UK as a temporary base instead of renting until they bought a bigger home. There were a few factors, but the main one was that they were property owners, not renters as ‘renting means throwing money away’.

Hmmm. I resisted the Vader urge to choke my friends with my mind.

To be clear, I’m not against buying, or renting for that matter. But I am against unsupported blanket statements. Like buying is always better than renting. This is where math can be your friend by helping you with the answer.

Instead of choking them, we discussed whether it really would be ‘throwing money away’ in this case.

The transaction costs of buying and selling the apartment were going be significant – equivalent to the cost of renting an apartment for two years.

But there were other two factors that resonated more deeply with Peter and Susan and tipped them in favor of renting.

  1. removing the additional overwhelm of having an additional property purchase and sale.
  2. reducing the time it would take to get into their dream home

By eliminating the apartment purchase we were reducing stress. Keep it simple.

Which was probably just as well, as they were about to have their breath knocked out of them. No, I was not about to finally choke them. But the math in the table below was going to deflate them.

A dream house

Peter and Susan were certain that their solid financial foundations and frugality meant that they had a comfortable retirement in front of them. Vitally important to them was that if something happened to one of them, the other would not suffer financially. They assumed this would be the case without asking math the answer.

But when we looked at the math, that comfortable future was not quite as clear cut. It was based on:

  • Expected purchase price of $500,000 for their UK home, with another $50,000 set aside for closing costs / furnishings
  • Forecast monthly expenses in their new home of $3,500 to $4,000 per month vs their combined retirement income of $4,000 ($2,000 for each of them individually)

Since they expected to have $600,000 in savings once they sold their overseas home, they felt they’d build in sufficient buffer.

If they maxed out on a $500k property, and something happened to one of them, the surviving spouse’s income ($2,000 per month) would be $1,500 less than their monthly costs ($3,500 per month). They’d have some savings left, which would cover about 3 years worth of the shortfall.

But this was not the comfortable position they envisaged for the surviving spouse.

However, if they bought a house for $300k, the remaining savings would cover the surviving spouse for over 20 years. This path would mean a smaller house and perhaps not in the exact area they’d want to be in.

I don’t know what decision Peter and Susan will ultimately make – these decisions are always very personal. But I do know they will keep it simple.

In both situations there are other factors that would come into play, like whether you’d added to your savings before something happened to one spouse, whether the savings had grown through investment, or how much lower monthly expenses would be for a single person as opposed to a couple. And in either case, the remaining spouse may want to downsize.

I also suspect that their estimate of monthly costs may be a little high. Particularly given their history of living within their means.

Answering their actual questions

As a final point, what about the original questions they had, and the reason they got in touch with me in the first place.

Firstly, how to transfer their foreign currency back to the UK?

I’ve been using Wise (formerly TransferWise) for several years. The fees are much lower than I was paying via my bank, and the exchange rate is also better. My only note is that Wise does not offer the protection over your money the same way a bank does. That’s why if I’m moving larger sums of money, I do this in several tranches.

It’s also revealing that we did not talk about the second big question they wanted my input on. Where to invest their spare cash. We’ve kicked that one down the road as it depends on the outcome of their next decisions. So there’s no point spending time on it today. But you probably know the general theme of my advice. Keep it simple!

How would your advice have been different if you had been the one speaking with them? I’m always curious about hear about other views I may not have considered.

2 comments

  • FI for the People - reply

    Bummer for this couple that they’re not as comfortable as they’d thought. But great that you opened their eyes now, before they plunk down any money on a UK residence, and advised keeping it simple. Maybe they’re not FIREd, but they’re still in decent enough shape and young (and hopefully healthy) enough to maybe make some simple (even if in some cases unwelcome) adjustments to get to where they want. Your suggestion of a lower-cost residence is smart, of course. Also, lowering their expenses if possible. But they ought not to forget the other side of the ledger. They might not like it, but taking a part-time gig for a little while might be a smart play. And/or, if they have other side hustles they can leverage, that, too.

    Mr Chaos - reply

    Some great thoughts. I’ve updated the post as I think they’re actually in really decent shape. I also suspect that their estimate of living costs is high and that will allow them to add to their savings.

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