Investment plan to FIRE in EU country

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
dumbinvestor2021
Posts: 7
Joined: Sun Oct 17, 2021 11:10 pm

Investment plan to FIRE in EU country

Post by dumbinvestor2021 »

Emergency funds: 100k

Debt: No debt

Tax Filing Status: Married Filing Jointly

Tax Rate: 35% Federal, 12% State

State of Residence:
CA

Age: 42

401k
240k in Vanguard Target Fund 2040.

Taxable
300k cash (ready to invest)
170k mixed ETFs, dividends and a few individual stocks

expected new annual contributions (for the next 3 years)
200k in taxable
30k in 401k

real-estate assets
primary home residence fully paid (650k+ value)

key points
I`m trying to target FIRE in 3 years and I plan to relocate to EU (I have dual citizenship). To live comfortably I would need 3k euro a month post tax which is about 60-70k $ after accounting for EUR/US conversion (about 1.2) and capital gain/dividend taxation (26%). 2k euro/month would be the minimum so I need to generate a minimum income of 50k$ assuming also a pessimistic EUR/US change of 1.5.

I want to invest the 300k cash with DCA, dropping 10k a week and maybe double down when there is a deep. By the target date 2024 I`m planning to allocate

SCHD 20% (approx. div. yeld 3%)
VTI 20% (approx. div. yeld 2%)
VXUS 20% (approx. div.yeld 2%)
QYLD 5% (approx. div. yeld 11%)
NUSI 10% (approx. div. yeld 7%)
JEPI 10% (approx. div. yeld 7%)
DIVO 10% (approx. div. yeld 5%)
Gambling growth stocks 5% (no yeld)


My SS benefits should be around 1.5k/month but I will take this out of the equation to simplify the analysis.
My current portfolio plan is to have a total of 1.5M invested by the end of 2024 to generate some steady income (I`ll use the remaining cash for real-estate investments in the destination country).


Questions:

1. My very conservative estimate is that in 3-4 years I would need about 4% of my invested capital to produce the cash flow I need, and if the portfolio is just able to beat inflation than I should already be fine. Is this realistic or too simplistic?


2. I was thinking to fully convert the 401k to VTI/VXUS so to reach the 20% target right now because I will not touch these money for maybe another 20 years. For the remaining cash to invest I`m thinking about two options:
a) load SCHD/NUSI/JEPI/DIVO/QYLD proportionally every week (or month)
b) load first SCHD to reach the target 20% and then move to the ETFs with less growth as I get close to the year 2024
Does any of these two options make sense?

3. Any long-term alternative strategy to get the steady wanted income besides dividend ETFs or selling bonds? I started to invest in some BND/BNDX but in the past years have been worse than cash.


4. Any advise for exchange rate protection? Would VXUS help compensating for drops in the US dollar? Is there any correlation between US inflation and the exchange rate (US is currently gaining compared to EU despite high inflation)?. The alternative I have is to liquidate all the assets when I relocate and then reinvest everything in EU ETFs/funds. That might sound silly but the tax rate on the captal gain is going to be probably lower than what I would eventually pay in the EU country, especially if I move to a tax free state (there the rate is fixed to 26% with no brackets).


Any honest thoughts would be really appreciated.
Thanks!!!!
EddyB
Posts: 2431
Joined: Fri May 24, 2013 3:43 pm

Re: Investment plan to FIRE in EU country

Post by EddyB »

Sorry if the question is offensive, but are you calculating the capital gains taxes correctly? Presumably, they will only apply to your gain, not the entire proceeds of sale, but the gap between your spending and sale proposals seem like you’re treating the entire sale proceeds as taxable.

Since 26% is the rate that applies in Italy, in case that’s where you’re going I’ll also ask whether you’ve considered the wealth tax and the possibility of any tax incentive schemes. If Italy, depending on where you want to live, you may find that the retiree program is better (which may require putting an annuity in place to qualify, if you don’t have any other recurring pension-type payment).
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

If you are worried about exchange rates, why don't you add more EU bias to your investments? For example using a broad European fund like Vanguard FTSE Europe ETF (VGK).

Liquidating all the assets when you relocate and then reinvest everything in EU ETFs/funds would involve renouncing US citizenship. Hope you realize that.
EddyB
Posts: 2431
Joined: Fri May 24, 2013 3:43 pm

Re: Investment plan to FIRE in EU country

Post by EddyB »

wineandplaya wrote: Mon Oct 18, 2021 4:59 am Liquidating all the assets when you relocate and then reinvest everything in EU ETFs/funds would involve renouncing US citizenship. Hope you realize that.
Why do you think that? The OP didn’t say anything about escaping US taxes.
Topic Author
dumbinvestor2021
Posts: 7
Joined: Sun Oct 17, 2021 11:10 pm

Re: Investment plan to FIRE in EU country

Post by dumbinvestor2021 »

EddyB wrote: Mon Oct 18, 2021 2:45 am Sorry if the question is offensive, but are you calculating the capital gains taxes correctly? Presumably, they will only apply to your gain, not the entire proceeds of sale, but the gap between your spending and sale proposals seem like you’re treating the entire sale proceeds as taxable.

Since 26% is the rate that applies in Italy, in case that’s where you’re going I’ll also ask whether you’ve considered the wealth tax and the possibility of any tax incentive schemes. If Italy, depending on where you want to live, you may find that the retiree program is better (which may require putting an annuity in place to qualify, if you don’t have any other recurring pension-type payment).
Regarding the 26% tax calculation, I was assuming that I would generate the income from the dividend payout only. Regarding the wealth tax, yes that is a bummer. It should be 0.2%, so that can be considered an additional expense on the investment. It is true that there are tax incentives to reduce the taxation for people relocating to southern regions of Italy.They are actually advantageous since it would mean saving the wealth tax and paying a flat rate of 7% for 10 years. In that case it would probably not make sense to liquidate all the assets to avoid a higher US taxation (I'm expecting I will still be in a higher tax rate before moving to EU).

According to what I found you don't need an annuity to qualify for this tax incentive but works with any kind of foreign income. Are you talking about something different when mentioning the need for an annuity?

P.S. I don't plan to give up to US citizenship. So I would need to deal with managing things to avoid double taxation.

Thanks!
EddyB
Posts: 2431
Joined: Fri May 24, 2013 3:43 pm

Re: Investment plan to FIRE in EU country

Post by EddyB »

dumbinvestor2021 wrote: Mon Oct 18, 2021 10:02 am
EddyB wrote: Mon Oct 18, 2021 2:45 am Sorry if the question is offensive, but are you calculating the capital gains taxes correctly? Presumably, they will only apply to your gain, not the entire proceeds of sale, but the gap between your spending and sale proposals seem like you’re treating the entire sale proceeds as taxable.

Since 26% is the rate that applies in Italy, in case that’s where you’re going I’ll also ask whether you’ve considered the wealth tax and the possibility of any tax incentive schemes. If Italy, depending on where you want to live, you may find that the retiree program is better (which may require putting an annuity in place to qualify, if you don’t have any other recurring pension-type payment).
Regarding the 26% tax calculation, I was assuming that I would generate the income from the dividend payout only. Regarding the wealth tax, yes that is a bummer. It should be 0.2%, so that can be considered an additional expense on the investment. It is true that there are tax incentives to reduce the taxation for people relocating to southern regions of Italy.They are actually advantageous since it would mean saving the wealth tax and paying a flat rate of 7% for 10 years. In that case it would probably not make sense to liquidate all the assets to avoid a higher US taxation (I'm expecting I will still be in a higher tax rate before moving to EU).

According to what I found you don't need an annuity to qualify for this tax incentive but works with any kind of foreign income. Are you talking about something different when mentioning the need for an annuity?

P.S. I don't plan to give up to US citizenship. So I would need to deal with managing things to avoid double taxation.

Thanks!
I’m no expert on the 7% scheme, but I understood it to apply to all non-Italian income for those who qualify, but that in order to qualify, you have to have a source of retirement income equivalent to a pension (whether government, including social security, or private, including annuity payments), but that merely having dividends and elective withdrawals from your investments doesn’t do it. I hadn’t realized you were targeting all the income from dividends; that seems like an unrealistically high rate to me, but I don’t claim to pay much attention to dividend rates.
Topic Author
dumbinvestor2021
Posts: 7
Joined: Sun Oct 17, 2021 11:10 pm

Re: Investment plan to FIRE in EU country

Post by dumbinvestor2021 »

EddyB wrote: Mon Oct 18, 2021 10:25 am
dumbinvestor2021 wrote: Mon Oct 18, 2021 10:02 am
EddyB wrote: Mon Oct 18, 2021 2:45 am Sorry if the question is offensive, but are you calculating the capital gains taxes correctly? Presumably, they will only apply to your gain, not the entire proceeds of sale, but the gap between your spending and sale proposals seem like you’re treating the entire sale proceeds as taxable.

Since 26% is the rate that applies in Italy, in case that’s where you’re going I’ll also ask whether you’ve considered the wealth tax and the possibility of any tax incentive schemes. If Italy, depending on where you want to live, you may find that the retiree program is better (which may require putting an annuity in place to qualify, if you don’t have any other recurring pension-type payment).
Regarding the 26% tax calculation, I was assuming that I would generate the income from the dividend payout only. Regarding the wealth tax, yes that is a bummer. It should be 0.2%, so that can be considered an additional expense on the investment. It is true that there are tax incentives to reduce the taxation for people relocating to southern regions of Italy.They are actually advantageous since it would mean saving the wealth tax and paying a flat rate of 7% for 10 years. In that case it would probably not make sense to liquidate all the assets to avoid a higher US taxation (I'm expecting I will still be in a higher tax rate before moving to EU).

According to what I found you don't need an annuity to qualify for this tax incentive but works with any kind of foreign income. Are you talking about something different when mentioning the need for an annuity?

P.S. I don't plan to give up to US citizenship. So I would need to deal with managing things to avoid double taxation.

Thanks!
I’m no expert on the 7% scheme, but I understood it to apply to all non-Italian income for those who qualify, but that in order to qualify, you have to have a source of retirement income equivalent to a pension (whether government, including social security, or private, including annuity payments), but that merely having dividends and elective withdrawals from your investments doesn’t do it. I hadn’t realized you were targeting all the income from dividends; that seems like an unrealistically high rate to me, but I don’t claim to pay much attention to dividend rates.
You are right! You need to have 20k euro of income from a pension plus 10k euro from capital gain/dividend. I would say that for now I should ignore this incentive in my worst scenario case estimates because this law could change in the next years and I could loose the eligibility.

Regarding the dividend yield, to achieve that 4% I'm allocating a lot on dividend growth. If I back test that portfolio, the overall CAGR should beat inflation. I suppose I might need some cushion if the market goes down for some years, either in bonds or even cash reserves. I'm also planning to produce some more income with some small real estate investment to offset a possible market downtrends. Does it make sense? If not what are the alternatives you would suggest and why?

Regarding investing in VGK is there a reliable correlation between VGK performance and EU/US exchange rate? This subject is very confusing to me since I see there is a lot of geopolitical component to take into account...
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

EddyB wrote: Mon Oct 18, 2021 7:14 am
wineandplaya wrote: Mon Oct 18, 2021 4:59 am Liquidating all the assets when you relocate and then reinvest everything in EU ETFs/funds would involve renouncing US citizenship. Hope you realize that.
Why do you think that? The OP didn’t say anything about escaping US taxes.
dumbinvestor2021 wrote: Mon Oct 18, 2021 10:02 am P.S. I don't plan to give up to US citizenship. So I would need to deal with managing things to avoid double taxation.
If you are a US citizen or green-card holder, you essentially cannot buy EU ETFs/funds and if you do, you'd get a punitive tax rate. Also, European brokers typically don't want anything to do with you if are a US person. There are several threads on the topic and you'll find some information in the wiki, for example: https://www.bogleheads.org/wiki/Passive ... ing_abroad

You'll also run into issues if you try to own US mutual funds and - in some cases - US ETFs as an EU resident. If you only plan to sell, not buy, US ETFs while a EU resident, owning US ETFs via an expat friendly brokerage *might* work.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

dumbinvestor2021 wrote: Mon Oct 18, 2021 12:32 pm Regarding investing in VGK is there a reliable correlation between VGK performance and EU/US exchange rate? This subject is very confusing to me since I see there is a lot of geopolitical component to take into account...
Owning European stocks should at least partially insulate you from fluctuations in the EUR/USD exchange rate. I mean, you own defined pieces of European companies. It shouldn't matter that the currency of the ETF itself happens to be USD, as long as there is no currency hedge built-in. Of course, you might want to stay away from European stock for other reasons (if you believe that they will underperform). Also, what you are interested in, as an EU resident, probably isn't the EUR/USD exchange rate itself, but how the value of your holdings will correlate to the living expenses where you are a resident.
EddyB
Posts: 2431
Joined: Fri May 24, 2013 3:43 pm

Re: Investment plan to FIRE in EU country

Post by EddyB »

wineandplaya wrote: Mon Oct 18, 2021 1:17 pm
EddyB wrote: Mon Oct 18, 2021 7:14 am
wineandplaya wrote: Mon Oct 18, 2021 4:59 am Liquidating all the assets when you relocate and then reinvest everything in EU ETFs/funds would involve renouncing US citizenship. Hope you realize that.
Why do you think that? The OP didn’t say anything about escaping US taxes.
dumbinvestor2021 wrote: Mon Oct 18, 2021 10:02 am P.S. I don't plan to give up to US citizenship. So I would need to deal with managing things to avoid double taxation.
If you are a US citizen or green-card holder, you essentially cannot buy EU ETFs/funds and if you do, you'd get a punitive tax rate. Also, European brokers typically don't want anything to do with you if are a US person. There are several threads on the topic and you'll find some information in the wiki, for example: https://www.bogleheads.org/wiki/Passive ... ing_abroad

You'll also run into issues if you try to own US mutual funds and - in some cases - US ETFs as an EU resident. If you only plan to sell, not buy, US ETFs while a EU resident, owning US ETFs via an expat friendly brokerage *might* work.
Ah, I see what you mean. I’m a US citizen resident in Europe, with an EU-country-sited brokerage account in which I buy US-domiciled ETFs with a moderate tilt toward EU (or at least European) equities; I didn’t read “EU ETFs” to mean EU-domiciled ETFs, but rather EU-focused ETFs. That’s no doubt because I’ve already internalized your very good point. The brokerage issue and access to US-domiciled ETFs aren’t really problems in my experience, though.
Topic Author
dumbinvestor2021
Posts: 7
Joined: Sun Oct 17, 2021 11:10 pm

Re: Investment plan to FIRE in EU country

Post by dumbinvestor2021 »

Thanks everyone, all this info is very valuable.

So if I understand well, my best option is to keep investing in US-domiciled ETFs, maybe biasing my holdings towards EU ETFs for exchange rate protection. I was a bit concerned about this because I saw some long term forecast of EU/US trending over 2! I suppose that if that materializes for real, it could mean very high inflation which should increase the stock evaluation as well. Does it make sense?

Also, regarding taxation of Eu-domiciled ETFs, would any US taxation be avoided using the double taxation treaties or the The Foreign Earned Income Exclusion (which is currently of 107k)?

Thanks
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

dumbinvestor2021 wrote: Mon Oct 18, 2021 3:54 pm Thanks everyone, all this info is very valuable.

So if I understand well, my best option is to keep investing in US-domiciled ETFs, maybe biasing my holdings towards EU ETFs for exchange rate protection. I was a bit concerned about this because I saw some long term forecast of EU/US trending over 2! I suppose that if that materializes for real, it could mean very high inflation which should increase the stock evaluation as well. Does it make sense?

Also, regarding taxation of Eu-domiciled ETFs, would any US taxation be avoided using the double taxation treaties or the The Foreign Earned Income Exclusion (which is currently of 107k)?

Thanks
Right, inflation should be correlated with stock prices, in general.

About, double-taxation: I don't think FEIE applies here since we're talking about passive income from investments. But for most EU countries, tax rates are higher than US federal taxes, so your US taxes can often be reduced to zero using the Foreign Tax Credit. But there are exceptions to that. At least that's my understanding.
halfnine
Posts: 2421
Joined: Tue Dec 21, 2010 12:48 pm

Re: Investment plan to FIRE in EU country

Post by halfnine »

dumbinvestor2021 wrote: Mon Oct 18, 2021 3:54 pm Thanks everyone, all this info is very valuable.

So if I understand well, my best option is to keep investing in US-domiciled ETFs, maybe biasing my holdings towards EU ETFs for exchange rate protection. I was a bit concerned about this because I saw some long term forecast of EU/US trending over 2! I suppose that if that materializes for real, it could mean very high inflation which should increase the stock evaluation as well. Does it make sense?

Also, regarding taxation of Eu-domiciled ETFs, would any US taxation be avoided using the double taxation treaties or the The Foreign Earned Income Exclusion (which is currently of 107k)?

Thanks
How you set it up will largely depend on the country you end up a tax resident. In general:

Non-Roth Retirement Plans
Most likely won't have any issue with. LIkely recognized by your new country. Therefore, can buy/sell whatever you want within it without adverse tax consequences.

Roth Accounts
May not be recognized in your new country and be subject to taxation as if a taxable account. Or might be recognized as a retirement plan, however, might be taxable upon distribution. Or might be completely recognized as a tax-free retirement plan.

FEIE
The important part here is the EI which is for Earned Income. So this will essential only apply to employment income from foreign sources.

US ETFs or Mutual Funds
Might be subject to income (or income like) taxes in your new country. Although, this can sometimes be dependent on which ETF or fund you own as some may qualify for capital gains tax treatment while some may not.

Non-US ETFs or Mutual Funds
Not taxed favourably by the IRS. See PFIC.

US Brokerage
Schwab and IB are generally expat friendly but that depends on the country you end up in.

Non-US Brokerage
May or may not be welcoming to an Amercian citizen.

Timing Considerations
It might be beneficial to sell and re-buy prior to leaving the USA to reset the basis to zero to prevent being taxed on gains that occurred previously to living in your new country.

Fixed Income
Unless the exchange rate is the same at the time of purchase and redemption, bonds will be subject to capital gains in at least of the countries. Savings accounts do not suffer this same fate so some consideration should be made on how to hold fixed income.

(Edited to add)

Tax Loss Harvesting / Tax Gain Harvesting
Might not be recognized in your new country.
Valuethinker
Posts: 49020
Joined: Fri May 11, 2007 11:07 am

Re: Investment plan to FIRE in EU country

Post by Valuethinker »

wineandplaya wrote: Mon Oct 18, 2021 1:27 pm
dumbinvestor2021 wrote: Mon Oct 18, 2021 12:32 pm Regarding investing in VGK is there a reliable correlation between VGK performance and EU/US exchange rate? This subject is very confusing to me since I see there is a lot of geopolitical component to take into account...
Owning European stocks should at least partially insulate you from fluctuations in the EUR/USD exchange rate. I mean, you own defined pieces of European companies. It shouldn't matter that the currency of the ETF itself happens to be USD, as long as there is no currency hedge built-in. Of course, you might want to stay away from European stock for other reasons (if you believe that they will underperform). Also, what you are interested in, as an EU resident, probably isn't the EUR/USD exchange rate itself, but how the value of your holdings will correlate to the living expenses where you are a resident.
Generally I don't agree with this analysis.

At the very least it is somewhat indeterminate whether owning European stocks insulate the investor from moves in the EUR.

Generally holding the stocks of a country does not insulate you against movements in the exchange rate, because the home country listing of a stock (which determines which sub index of the global index it is in) is an accident of history/ corporate governance.

Extreme example. Nestle. Holding Nestle is not going to protect you against volatility in the CHF. The company is HQ'd in Switzerland, along with a number of multinationals, but say 98% of its activities, both buying inputs & selling outputs, are in other currencies. The only "hedge" is that to the extent it pays the dividend in CHF and hedges its own currency exposure to allow it to do that, you have an income from the shares in CHF.

Another example. UK. If GBP rises by +10% then the income of the FTSE100 companies (about 84% of the larger FTSE All-Share index) falls by 6-7% because their profits earned in other currencies are worth less in GBP. These are very international companies. Mining like Rio Tinto & BHP. Tobacco like BAT (biggest business is US). Diageo (drinks). Pharma (GSK & AZ). HSBC (banking in Hong Kong & globally).

Also the European index is skewed. It is very underweight in technology stocks compared to US, Japan, Korea. Basically there is ASM Lithography and what else? On the other hand, there is high exposure to China via capital goods stocks & via major car companies (Daimler, VW).

There is probably a somewhat greater domestic exposure in EU listed stocks. But even Carrefour (grocery stores) is a global company with operations all over the world. It's not something one can rely upon.

If the currency exposure in the equity fund is unhedged, then owning the stocks of one sub index, even the S&P500, is not a currency hedge.

To hedge currency you have to have an explicit policy to use derivatives (options, futures, forwards, swaps) to hedge the assets of the fund.

Most bond funds hedge to their currency of reporting/ denomination. Most equity funds do not.
Valuethinker
Posts: 49020
Joined: Fri May 11, 2007 11:07 am

Re: Investment plan to FIRE in EU country

Post by Valuethinker »

dumbinvestor2021 wrote: Mon Oct 18, 2021 3:54 pm Thanks everyone, all this info is very valuable.

So if I understand well, my best option is to keep investing in US-domiciled ETFs, maybe biasing my holdings towards EU ETFs for exchange rate protection. I was a bit concerned about this because I saw some long term forecast of EU/US trending over 2! I suppose that if that materializes for real, it could mean very high inflation which should increase the stock evaluation as well. Does it make sense?

Also, regarding taxation of Eu-domiciled ETFs, would any US taxation be avoided using the double taxation treaties or the The Foreign Earned Income Exclusion (which is currently of 107k)?

Thanks
See my post. Absolutely not. You should hold the global index for maximum diversification of companies and sectors. Holding European companies is not a good way to currency hedge*.

I suspect EUR hedged equity funds are just not available to you in the US market? And you can't hold Dublin domiciled ETFs because of PFIC?

So if you want exposure to the Euro, you have to hold Euro bond funds. Most US based bond funds will hedge to the US dollar, but you may be able to find ETFs that own Eurozone bonds, but do not (even though they will report in USD).

An alternative is to directly own Eurozone govt bonds. Yields on the safe ones are very low.

I have written many posts pointing out the high weighting in Italian govt bonds in the index (was nearly 50%). The market does not believe Italy to be as low credit risk as Germany, say -- that 2% difference in yields, say, says that Italian bonds have a 2% chance pa of defaulting (very crudely - the market would also be pricing in what recovery bondholders would get in such a situation, say 70-80 cents/ dollar once IMF sweeps in and forces fiscal restructuring). We don't have to have a view, we just note the market's view.

For that reason, for Eurozone based investors, I have suggested a global govt bond index (or index of high quality bonds) hedged into Euros. Yields will be very similar but there is greater credit diversification.

Italian default or exit from Euro is a nightmare scenario w vast implications. But the market is telling us that it *could* happen (we'd have to go into political discussions forbidden here to discuss the path which would lead to that disaster). So global diversification is a way of minimizing the (large) shock to the world financial system of that event.

In your shoes, I'd probably have a Eurozone bank account, and make deposits into it. Making sure I believed the deposit insurance would work (very small Eurozone countries might not be able to bail out a major bank failure) and staying within the 100k EUR limit. With Bank of Cyprus, anything over 100k EUR in deposits was heavily diluted (about 60%). Eventually, I might buy a property in the country in which I intended to retire.

* there will be some correlation. It's not zero. Some of these companies are very domestic-oriented (less so for the European index than most other indices**). But it won't be reliable - it will vary over time and with the changing foreign exchange hedging policies of different companies. It's just not a good way to achieve currency hedging in a portfolio, compared to actually hedging currency (with hedged funds).

** Europe has a lot of big exporters. Genuine exporters. Daimler. VW. Siemens etc. Given the complexity of global supply chains, they are also big importers and they have large manufacturing operations in low cost countries like China. Main problem is European index has no big internet or technology stocks (almost) except ASM Lithography (can't think of any others off top of my head).
Also, regarding taxation of Eu-domiciled ETFs, would any US taxation be avoided using the double taxation treaties or the The Foreign Earned Income Exclusion (which is currently of 107k)?
Over on the non US investing board we have an absolute guru on the taxation issues for foreigners living in US or US expats. Ted Swippet. There are also wiki entries covering these situations.

The bottom line is that, because of PFIC, if you are liable for US taxes, you do not want to own non US-domiciled funds. Pensions seem to be about the only exception (if you happen to come from a country with a Treaty w USA). PFIC is a punitive horror.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

Valuethinker wrote: Tue Oct 19, 2021 4:14 am See my post. Absolutely not. You should hold the global index for maximum diversification of companies and sectors. Holding European companies is not a good way to currency hedge*.
Is it a question of wanting to hedge against currency or a question of hedging against increasing cost of living in Europe though? I think what OP essentially wants is an inflation hedge for the European market and for that having a European home bias, i.e. owning European stock is appropriate. Do you disagree?

About fixed income, as a resident, you can sometimes buy debt directly from the treasury in the country that you're resident. I would probably feel more comfortable owning say Spanish debt if I'm living in Spain or Italian debt if I'm living in Italy since it's easy to imagine a country figuring out a way to give preferencial treatment to it's own residents if things go south. We saw that during the Iceland crash iirc.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

Valuethinker wrote: Tue Oct 19, 2021 4:14 am Italian default or exit from Euro is a nightmare scenario w vast implications. But the market is telling us that it *could* happen (we'd have to go into political discussions forbidden here to discuss the path which would lead to that disaster). So global diversification is a way of minimizing the (large) shock to the world financial system of that event.
If you live in Italy though, with most of your holdings outside of Italy, is it really so nightmarish? Isn't the most likely course of events that debt will be denominated in some new currency which is then devalued. That means of course that your Italian debt will be worth a lot less, in USD. But it also means that your cost of living will suddenly get a lot lower, also in USD. Because the income of everyone around you just plummeted. So now your US Social Security and your global equity holdings will buy you a lot more.

What I'm saying is that even if owning Italian debt is risky, is it not a risk that you are already hedged against, if you are also an Italian resident?
halfnine
Posts: 2421
Joined: Tue Dec 21, 2010 12:48 pm

Re: Investment plan to FIRE in EU country

Post by halfnine »

Valuethinker wrote: Tue Oct 19, 2021 4:14 am ...See my post. Absolutely not. You should hold the global index for maximum diversification of companies and sectors. Holding European companies is not a good way to currency hedge...
This.
Valuethinker wrote: Tue Oct 19, 2021 4:14 am ...For that reason, for Eurozone based investors, I have suggested a global govt bond index (or index of high quality bonds) hedged into Euros. Yields will be very similar but there is greater credit diversification...
This
Valuethinker wrote: Tue Oct 19, 2021 4:14 am ...In your shoes, I'd probably have a Eurozone bank account, and make deposits into it. Making sure I believed the deposit insurance would work (very small Eurozone countries might not be able to bail out a major bank failure) and staying within the 100k EUR limit. With Bank of Cyprus, anything over 100k EUR in deposits was heavily diluted (about 60%). Eventually, I might buy a property in the country in which I intended to retire...
And this.

We have a slightly different arrangement to the entirety of the above as we have other ties beyond Europe and the Euro. But I believe Valuethinker has provided a sound starting point for where to begin.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

halfnine wrote: Tue Oct 19, 2021 7:23 am
Valuethinker wrote: Tue Oct 19, 2021 4:14 am ...See my post. Absolutely not. You should hold the global index for maximum diversification of companies and sectors. Holding European companies is not a good way to currency hedge...
This.
OP doesn't need a USD/EUR currency hedge. They need a hedge against inflation where they live.
halfnine
Posts: 2421
Joined: Tue Dec 21, 2010 12:48 pm

Re: Investment plan to FIRE in EU country

Post by halfnine »

wineandplaya wrote: Tue Oct 19, 2021 9:29 am
halfnine wrote: Tue Oct 19, 2021 7:23 am
Valuethinker wrote: Tue Oct 19, 2021 4:14 am ...See my post. Absolutely not. You should hold the global index for maximum diversification of companies and sectors. Holding European companies is not a good way to currency hedge...
This.
OP doesn't need a USD/EUR currency hedge. They need a hedge against inflation where they live.
Owning European companies instead of global companies is not the way to currency hedge. See the part about having local bank accounts and owning a local home above.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

halfnine wrote: Tue Oct 19, 2021 9:43 am
wineandplaya wrote: Tue Oct 19, 2021 9:29 am
halfnine wrote: Tue Oct 19, 2021 7:23 am
Valuethinker wrote: Tue Oct 19, 2021 4:14 am ...See my post. Absolutely not. You should hold the global index for maximum diversification of companies and sectors. Holding European companies is not a good way to currency hedge...
This.
OP doesn't need a USD/EUR currency hedge. They need a hedge against inflation where they live.
Owning European companies instead of global companies is not the way to currency hedge. See the part about having local bank accounts and owning a local home above.
No one is suggesting that it is. The suggestion is that owning European stock (with caveats of course) can be a hedge against cost of living in Europe. Discussions about currency hedges are a distraction.
halfnine
Posts: 2421
Joined: Tue Dec 21, 2010 12:48 pm

Re: Investment plan to FIRE in EU country

Post by halfnine »

wineandplaya wrote: Tue Oct 19, 2021 9:54 am
halfnine wrote: Tue Oct 19, 2021 9:43 am
wineandplaya wrote: Tue Oct 19, 2021 9:29 am
halfnine wrote: Tue Oct 19, 2021 7:23 am
Valuethinker wrote: Tue Oct 19, 2021 4:14 am ...See my post. Absolutely not. You should hold the global index for maximum diversification of companies and sectors. Holding European companies is not a good way to currency hedge...
This.
OP doesn't need a USD/EUR currency hedge. They need a hedge against inflation where they live.
Owning European companies instead of global companies is not the way to currency hedge. See the part about having local bank accounts and owning a local home above.
No one is suggesting that it is. The suggestion is that owning European stock (with caveats of course) can be a hedge against cost of living in Europe. Discussions about currency hedges are a distraction.
I live in Europe. And pay taxes in the USA. I don't own European stock as a hedge against cost of living in the country I live in. No plans to either. I'd rather own property and some of the various fixed income products that are available and have global equity investments. Otherwise the cure might be worse than the disease.
Topic Author
dumbinvestor2021
Posts: 7
Joined: Sun Oct 17, 2021 11:10 pm

Re: Investment plan to FIRE in EU country

Post by dumbinvestor2021 »

Anyway I love this forum, there is so much to learn from this discussion! I have to admit that I feel really dumb and I wish I knew a bit more about macro economy. So forgive my ignorance :D

After reading all the comments my naive understanding is this

1) if there is a dollar devaluation because of higher inflation in US I should be intrinsically hedged against increase of EU/US conversion by owning US stocks since they will grow proportionally to that and then they will eventually generate a higher income in US than initially estimated. In this case I understand that owning geographically diversified stocks is still the best option for general protection and investing in EU stocks like VGK rather than broader international markets should not matter because if EU inflation goes up, the EU exchange rate with other foreign markets will follow that proportionally.

2) if there is a dollar devaluation because of geopolitical issues then the market will probably go down as well and in this case I would loose in the exchange. In this case it should not even matter if the stocks are in US or foreigner market. Because of this some of you are proposing to have EU assets, cash in banks, maybe fixed income annuities or house investments. So this should be the same type of protection one would consider in general even when living in US. I already have this plan in mind (100k euro as cash reserve and two houses to own, one to be rented)

Going back to my investment allocation looks like that maybe it is too aggressive in general since it is all in stocks. I naively assumed that dividend ETFs would be a good replacement for bonds but taking the scenario 2) into account it could be even more risky due to the currency exchange. Maybe I should consider to replace some dividends with some EU bonds or annuities once I move there. What do you think? The problem is that I would need to consider different failure scenarios since the total generated dividends will be less so the income strategy will need to be different.


Thanks!
Valuethinker
Posts: 49020
Joined: Fri May 11, 2007 11:07 am

Re: Investment plan to FIRE in EU country

Post by Valuethinker »

dumbinvestor2021 wrote: Wed Oct 20, 2021 12:10 am Anyway I love this forum, there is so much to learn from this discussion! I have to admit that I feel really dumb and I wish I knew a bit more about macro economy. So forgive my ignorance :D

After reading all the comments my naive understanding is this

1) if there is a dollar devaluation because of higher inflation in US I should be intrinsically hedged against increase of EU/US conversion by owning US stocks since they will grow proportionally to that and then they will eventually generate a higher income in US than initially estimated. In this case I understand that owning geographically diversified stocks is still the best option for general protection and investing in EU stocks like VGK rather than broader international markets should not matter because if EU inflation goes up, the EU exchange rate with other foreign markets will follow that proportionally.
You are overthinking this.

You cannot hedge foreign exchange exposure by your equity investment strategy *except* buying funds/ ETFs which hedge their currency exposure (most do not). I have explained why at some length but in brief: companies HQs bear no predictable relationship to their FX exposure. HQ and stock exchange of listing are often historical accidents.

You can hedge FX exposure by holding bonds which pay in that currency, bank accounts OR investing in funds/ ETFs that do hedge currency (most do).

The currency a fund or ETF reports in is not relevant to its FX exposure (barring hedging).
2) if there is a dollar devaluation because of geopolitical issues then the market will probably go down as well and in this case I would loose in the exchange. In this case it should not even matter if the stocks are in US or foreigner market. Because of this some of you are proposing to have EU assets, cash in banks, maybe fixed income annuities or house investments. So this should be the same type of protection one would consider in general even when living in US. I already have this plan in mind (100k euro as cash reserve and two houses to own, one to be rented)
US market has gone up during devaluation periods, and it has gone down.

You can't predict what will happen during a devaluation period.

Again you are making too many assumptions about markets and how they will react to macroeconomic events. People a lot smarter than you and I and with access to a lot better information-- try to do this and fail.

If you want to hedge to the Euro then holding bank accounts in EUR, owning property (rent is paid in EUR, houses are bought and sold in EUR) are good hedges.
Going back to my investment allocation looks like that maybe it is too aggressive in general since it is all in stocks. I naively assumed that dividend ETFs would be a good replacement for bonds but taking the scenario 2) into account it could be even more risky due to the currency exchange. Maybe I should consider to replace some dividends with some EU bonds or annuities once I move there. What do you think? The problem is that I would need to consider different failure scenarios since the total generated dividends will be less so the income strategy will need to be different.


Thanks!
Yes 100% stocks leads to volatility. Most people cannot live with that volatility. History has had some pretty brutal bear markets - they don't all recover within a month like the Covid-19 one.

Yes owning assets like annuities and bonds that have a legal obligation to pay in EUR is a currency hedge.

In general it is best to think about total return rather than dividends. Apple pays a dividend, so does Microsoft. Amazon and Google do not. Does this tell us which is a better company to invest in? Berkshire Hathaway (Warren Buffett) has never paid a dividend and goes into some detail in a letter to shareholders as to why.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

halfnine wrote: Tue Oct 19, 2021 11:05 pm I live in Europe. And pay taxes in the USA. I don't own European stock as a hedge against cost of living in the country I live in. No plans to either. I'd rather own property and some of the various fixed income products that are available and have global equity investments. Otherwise the cure might be worse than the disease.
Owning property in Europe is a great way to hedge against inflation. I would too, if I was already living in Europe. Personally, I live in the US, own property in the US, get my salary from US sources but plan to move back to Europe one day. Overweighting European stock, and also underweighting US stock, is the only reasonable way I found to hedge against a scenario where Europe outperforms the rest of the world economically, eroding my future purchasing power.

I plan to remove this tilt to European equities once I do relocate however, sell my US home and buy a new home in Europe.
namajones
Posts: 778
Joined: Sat Aug 08, 2020 12:41 pm

Re: Investment plan to FIRE in EU country

Post by namajones »

dumbinvestor2021 wrote: Sun Oct 17, 2021 11:52 pm Any honest thoughts would be really appreciated.
Thanks!!!!
1. Your investments are too complicated. Why not just everything in one target date fund? Do you know something the professionals don't?

2. Taxation. Have you looked into the taxation of estimated capital gains even if you do not sell? Denmark does it. Germany, too, I understand. This may change your approach. If you're not an expert yourself, I would spend the 800 Euros or so for a consultation with an expert.
Topic Author
dumbinvestor2021
Posts: 7
Joined: Sun Oct 17, 2021 11:10 pm

Re: Investment plan to FIRE in EU country

Post by dumbinvestor2021 »

Valuethinker wrote: Wed Oct 20, 2021 3:15 am
dumbinvestor2021 wrote: Wed Oct 20, 2021 12:10 am Anyway I love this forum, there is so much to learn from this discussion! I have to admit that I feel really dumb and I wish I knew a bit more about macro economy. So forgive my ignorance :D

After reading all the comments my naive understanding is this

1) if there is a dollar devaluation because of higher inflation in US I should be intrinsically hedged against increase of EU/US conversion by owning US stocks since they will grow proportionally to that and then they will eventually generate a higher income in US than initially estimated. In this case I understand that owning geographically diversified stocks is still the best option for general protection and investing in EU stocks like VGK rather than broader international markets should not matter because if EU inflation goes up, the EU exchange rate with other foreign markets will follow that proportionally.
You are overthinking this.

You cannot hedge foreign exchange exposure by your equity investment strategy *except* buying funds/ ETFs which hedge their currency exposure (most do not). I have explained why at some length but in brief: companies HQs bear no predictable relationship to their FX exposure. HQ and stock exchange of listing are often historical accidents.

You can hedge FX exposure by holding bonds which pay in that currency, bank accounts OR investing in funds/ ETFs that do hedge currency (most do).

The currency a fund or ETF reports in is not relevant to its FX exposure (barring hedging).
2) if there is a dollar devaluation because of geopolitical issues then the market will probably go down as well and in this case I would loose in the exchange. In this case it should not even matter if the stocks are in US or foreigner market. Because of this some of you are proposing to have EU assets, cash in banks, maybe fixed income annuities or house investments. So this should be the same type of protection one would consider in general even when living in US. I already have this plan in mind (100k euro as cash reserve and two houses to own, one to be rented)
US market has gone up during devaluation periods, and it has gone down.

You can't predict what will happen during a devaluation period.

Again you are making too many assumptions about markets and how they will react to macroeconomic events. People a lot smarter than you and I and with access to a lot better information-- try to do this and fail.

If you want to hedge to the Euro then holding bank accounts in EUR, owning property (rent is paid in EUR, houses are bought and sold in EUR) are good hedges.
Going back to my investment allocation looks like that maybe it is too aggressive in general since it is all in stocks. I naively assumed that dividend ETFs would be a good replacement for bonds but taking the scenario 2) into account it could be even more risky due to the currency exchange. Maybe I should consider to replace some dividends with some EU bonds or annuities once I move there. What do you think? The problem is that I would need to consider different failure scenarios since the total generated dividends will be less so the income strategy will need to be different.


Thanks!
Yes 100% stocks leads to volatility. Most people cannot live with that volatility. History has had some pretty brutal bear markets - they don't all recover within a month like the Covid-19 one.

Yes owning assets like annuities and bonds that have a legal obligation to pay in EUR is a currency hedge.

In general it is best to think about total return rather than dividends. Apple pays a dividend, so does Microsoft. Amazon and Google do not. Does this tell us which is a better company to invest in? Berkshire Hathaway (Warren Buffett) has never paid a dividend and goes into some detail in a letter to shareholders as to why.
Ok let me clarify here... I`m not trying to predict the unpredictable and I fully understand that market has gone down and also up during devaluation periods. Temporary drops/corrections might be caused by multiple chaotic factors including politics. For that we can all agree that the only way to have protection is to have some EU assets (cash, bonds, houses, etc..), in the same way one would want to have bonds in his portfolio to avoid selling stocks to generate income during a market correction.

My original concern instead was if for any reason the EU/US would degrade substantially in the next 2-3 decades without that being reflected by the stock evaluation. However I understand now that my concern was quite silly because if I own some Apple stocks and the dollar goes down it does not necessarily mean that Apple loses his value if Apple keeps selling its products. That is just another way to tell that stock in the long run have been historically growing with the inflation. So the only concern for me in holding US stocks should be if I believe the US economy would become worse than EU, which is currently not my concern at all.

So problem solved, I`ll just plan to have some more EU assets for temporary protection and have US equities for long term income generation.
Topic Author
dumbinvestor2021
Posts: 7
Joined: Sun Oct 17, 2021 11:10 pm

Re: Investment plan to FIRE in EU country

Post by dumbinvestor2021 »

namajones wrote: Wed Oct 20, 2021 5:57 am
dumbinvestor2021 wrote: Sun Oct 17, 2021 11:52 pm Any honest thoughts would be really appreciated.
Thanks!!!!
1. Your investments are too complicated. Why not just everything in one target date fund? Do you know something the professionals don't?

2. Taxation. Have you looked into the taxation of estimated capital gains even if you do not sell? Denmark does it. Germany, too, I understand. This may change your approach. If you're not an expert yourself, I would spend the 800 Euros or so for a consultation with an expert.
1. In fact I already own a target fund 2040 in the 401k and my original strategy was to replicate a Vanguard target funds 2025 in my taxable account and allocate VTI,VXUS,BND,BNDX. I started that but then I got into the dividend stock discussions. The portfolio I`m considering should have both growth and dividend yield. I know there is a debate between dividend vs growth and I think that is a long discussion. In the long run growth would win but with dividend growth there could be morel psychological protection in the sense that you could avoid selling at loss if the market goes down of 50% because you will still get some (reduced) dividends to support your expenses. There is also a trend in assuming little growth in the next years and the DRIP compounding could be a better option. Anyway I know there is no perfect plan, I just want to make sure I don`t screw it up completely :D . My concern for example with the CEF ETFs is that have not been proven in a downtrend or long run correction market. I`m basically using them to replace the function of bonds, in the sense that if the market goes down I expect them to provide enough income for a minimum expense coverage. Probably when I relocate to EU I could buy an annuity to replace some dividend income or some EU bonds to make this portfolio even more balanced.

2. this is interesting and concerning I`ll check this out... I have not heard much about taxation of unrealized gains for my country I only know that capital gain and dividends are all taxed the same. There might be some incentives for people returning from abroad but those are a bit complicated and I am still trying to understand them better.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Investment plan to FIRE in EU country

Post by wineandplaya »

On the topic of taxation, you definitely want to figure out how US tax advantaged accounts (IRAs, Roth IRA, 401(k) etc) will be treated where you'll live. These account can either present major tax savings or result in double taxation. In some cases (depending on the country and your age), you might want to withdraw Roth balances before expatriating. Since you are married, you also want to figure out how married couples are taxed. You might not be able to split pension income between yourself and your spouse like you can do in the US which could matter if one spouse earns a lot more than the other. If there is a period of advantageous tax rates for returning expats, it might in some cases be smart to use that period to spend down the pre-tax balances of the higher earning spouse.
namajones
Posts: 778
Joined: Sat Aug 08, 2020 12:41 pm

Re: Investment plan to FIRE in EU country

Post by namajones »

dumbinvestor2021 wrote: Wed Oct 20, 2021 11:07 am
2. this is interesting and concerning I`ll check this out... I have not heard much about taxation of unrealized gains for my country I only know that capital gain and dividends are all taxed the same. There might be some incentives for people returning from abroad but those are a bit complicated and I am still trying to understand them better.
When I first heard about taxation of unrealized capital gains, I thought it was a joke. But it's not. It is, however, the height of absurdity.
Post Reply