Millionaire Expat: How To Build Wealth Living Overseas

Introduction

The man stood naked. His back and butt were clean. But his arms and legs were caked with mud. He held a towel in his left hand as he stood behind his pickup truck. With his right hand, he held a running shoe.

A couple strolled behind him, along a grass trail beneath an overcast sky. The walkers looked furtively at the naked man. No, I wasn't one of the walkers. Nor was I (despite what many of my friends might think) the naked guy behind the truck. It was simply a full-page advertisement for Adidas in Runner's World magazine. It read, Runners. Yeah, we're different.

In 1999, Adidas published a slew of similar ads. They showed the eccentricity of the long-distance runner. Runners might be different. But expats are too. My friend, Catherine Parent, lives in Indonesia. She recently posted a picture of her toothbrush on Facebook. It was in a cup…with a cockroach. Her caption asked, To brush or not to brush?

My friend, Debbie Woodfield, lived in Asia for years. The New Zealander posted a photo of a drink menu at a café in Laos. They offered Lao Coffee, Espresso, and…silkworm poo tea.

Expats don't leave their home countries for giant bugs or poo tea. Most of us just want to experience something different. Some of our friends back home marvel at our bravery, or they think we've lost our marbles. But unless you're living and working in an active war zone, living overseas might be as safe, or safer, than the life you left behind. That said, there is one risk that many expats face. We risk running out of money during retirement.

You might wonder what I'm smoking if you're on a cushy expat package. After all, there's a large league of expats in Southeast Asia and the Middle East who make bucket loads of cash.

They left their home countries to teach at international schools or work abroad in industries such as banking, information technology, oil, cosmetics, pharmaceuticals, and shipping. Many work for firms like Coca-Cola, American Express, Johnson & Johnson, Google, Microsoft, and Exxon Mobil.

Not all expats (including millions in Europe) make massive sums money. But even those who do face financial risks.

In 2003, when I left Canada to teach in Singapore, I kissed goodbye to a defined benefit pension. Had I continued with my former job, I could have paid off a home, contributed modestly to investments, and received pensionable income for life.

By comparison, most expats run naked. Many don't realize they would need more than a million dollars in the stock market or multiple mortgage-free rental properties just to equal, for example, the retirement benefits earned by most public-sector workers in the United States, Britain, Australia, or Canada.

Such benefits are globally waning. But they're still a reality. Governments offer additional monthly cash: Social Security (for Americans), Canadian Pension Plan for Canadians. In fact, most developed world countries offer retirement benefits for their respective home-country workers. But it's different for expats. Few expats contribute to their home-country social programs once they've moved abroad. Without maximizing contributions to these plans, they can't fully open their mouths to such morsels once they've retired.

One of my former colleagues learned this the hard way. She's American. But she taught overseas for most of her career, so she contributed little to US Social Security. While working abroad, she earned a lot of money. She furnished her large apartment with fine carpets. She bought beautiful jewelry. She enjoyed flashy holidays—often flying business class to five-star resorts. Unfortunately, she didn't save much. Today, my friend is back in the United States, renting a room in somebody else's home. She's 70 years old and struggling far below the US poverty line. As Warren Buffett says, you only know who's swimming naked when the tide goes out.

In sharp contrast, I also taught with a couple who retired with about $5 million dollars in their investment account. That's a lot of money—especially for teachers. They paid for their two daughters to go to college. They own a mortgage-free home. They lived well as expats and retired fully clothed. But they were great planners.

My wife and I were similar. When I first started investing, I wanted to retire at 40. I was 19 years old and saving like a lunatic. I won't confess the screwy things I did to pinch pennies. Instead, I want to share what I did right: the part you'll find helpful. I planned how much money I wanted to save, and why. Such planning, even more than the hyperactive saving, made my life a heck of a lot easier.

In 2014, shortly after my 44th birthday, we retired from our Singapore-based teaching jobs. That doesn't mean we live like trust-funded hedonists. Nor does it mean we'll never work again. It does mean, however, that our private parts aren't sitting in somebody else's vise. A few years back, if our boss had gone on a firing spree, sacking skinny bald guys and bilingual blondes, we would have been fine. We had enough money to survive without working.

We saved and invested in the stock and bond markets—in a manner that I detail in this book. Fortunately, we dodged the armies of silver tongues who peddle horrible investment products. If we hadn't, we would still have to work for many more years.

Such investment schemes are sold most prolifically to British expats. Expats of every nationality, however, get sucked in. These schemes get pushed like Viagra. But they leave investors limp. Investors pay obscenely high fees. That's why they rarely make money when the gains (if they exist at all) are adjusted for inflation. The salespeople who sell these schemes make Everest-sized commissions—sometimes totaling more than $1 million a year. That's why some of these salespeople bribe their current clients. I'll offer you a free iPad, they might say, if you give me the contact details for 10 of your friends. Victims get locked into 10-, 20-, even 25-year schemes.

Once an investor catches on to the fee-burdened riptide, it's often too late. Those who scramble out of the water face redemption penalties. Some could lose everything if they try to sell early. What's worse, many overseas employers welcome financial sharks into their company seal pools. With the best of intentions, they endorse offshore pension sellers, most of whom have a single purpose: to reap the highest possible commissions from unwary workers.

But it doesn't have to be this way. Expats can enjoy the best of both worlds. They can live adventurous (even luxurious) lives and retire wealthy. But they need to save and invest effectively. I'll show you how to do that.

I'll show where you can open your investment account, while describing how to make investment purchases for different nationalities.

The strategy I describe beats the returns of most professional investors. Best of all, you won't have to watch the stock market, follow the economy, or read the dull business pages of The Wall Street Journal. This strategy takes about 60 minutes a year.

Don't believe me? Good. Don't believe anyone who talks to you about money. That goes double for a financial salesperson. Consider everyone a shark, until proven otherwise. Use the Internet as you read this book. Confirm all my sources.

Does 60 minutes a year sounds like too much time to spend on your investments? No problem. You could hire a scrupulous financial advisor. I list some in this book. They would build you a portfolio of low-cost index funds. Nobel Prize winners in economics recommend these products. Warren Buffett does too. In fact, Mr. Buffett says that when he dies, his estate will be invested in index funds.

I'll explain what index funds are and how they work. I'll also show you how to buy them.

Millionaire Expat outlines how to plan for your future. How much money should you invest, based on your future needs? How much of your investment portfolio can you afford to sell during each retirement year? The final two chapters provide these answers.

As an expatriate, you can live better, earn more, and provide for a generous retirement. You'll just need a plan. Fortunately, you're reading it.

Chapter 1

Grow Big Profits without Any Effort

Once upon a time, in a land far away, there lived a young farmer. His name was Luke Skywalker. Don't get confused by his Star Wars namesake. That was just a movie.

Luke had a farming mentor, an awkward little guy with a massive green thumb. His name was Yoda. Use the Force you must, young Skywalker, he said. Add new seeds to your crop fields every year. The Force will grow those seeds. They will flower and spread more seeds and those seeds will grow.

Which seeds should I plant? asked Luke. Buy the bags that contain every type of seed for every type of vegetable, replied Yoda. You'll never know which vegetables will grow the best in any given year, he said. Plant them all, you should. Let the Force look after the rest. But watch out for the dark side.

Luke wasn't sure what Yoda meant by the dark side. He just knew that Yoda was a mysterious little dude. So Luke bought a bag that contained every seed. He planted every one, and his crops began to flourish. Some years, his carrots grew best. Other years, his lettuce, parsnips, or beets took center stage. Sometimes, droughts and a searing sun hurt his crops. But his crops always came back, stronger than ever.

This is how the stock market works. You can buy a single fund called a global stock market index fund. Like a bag of seeds representing multiple plants, it contains thousands of different stocks, representing dozens of different markets. It contains American stocks, British stocks, Canadian stocks, Australian stocks, and Chinese stocks. In fact, a global stock market index contains about 7,400 stocks from at least 49 different countries. Nobody trades those stocks. With a global stock market index, you own all of those stocks. You would also have access to that money, any time you want.

Some years (much like the garden during a drought), the proceeds recede. But just like that garden, the stock market always comes back stronger than before.

Imagine if someone had invested $100 a month from 1970 to 2020. That would have amounted to just $3.29 per day. Between January 1970 and January 2020, that person would have added a total of $60,000 (see Figure 1.1 and Table 1.1). If they equaled the return of the global stock market index during those 50 years, that investment would have grown to almost $1.6 million. Between 1970 and 2020, global stocks averaged a compound annual return of 10.10 percent per year.

Figure 1.1 Global Stock Market Growth Source

SOURCE: Morningstar Direct.

Table 1.1 Global Stock Market Growth

SOURCE: Morningstar Direct.

Your Investment Time Horizon Is Longer Than You Think

In 2017, I met a 50‐year‐old Canadian woman who lives and works in Ethiopia. I need to take bigger risks with my money, she said, because I'm only going to be investing for 15 years. I want to retire when I'm 65. She failed to realize, however, that if she retires at age 65, her investment duration isn't 15 years. If she lives until she's 85, her investment duration would be 35 years. Investment lifetimes have two phases. That's why she shouldn't take unnecessary risks.

The first is an accumulation phase. This is when we're working and adding money to our investments. The second stage is a retirement (or distribution) phase. The day we retire isn't the day we sell our investments, hold a massive party with the proceeds, and drink tequila until we puke. We need to keep our money invested, so we can sell pieces of it to cover our costs of living. That money should keep growing so we can continue to live off its proceeds (see Chapters 19 and 20).

That's why a 50‐year‐old investor's time horizon could be 35 years or longer. A 40‐year‐old investor's time horizon could be more than 45 years.

Why Average Returns Aren't Normal

If we look at various 30‐year investment periods, global stock markets have averaged 9 to 11 percent per year. But individual calendar year returns that land precisely within that range are about as normal as a two‐headed poodle.

During my lifetime, it has happened once. Global stocks gained 10.06 percent in 1987 (See Table 1.1).

It's much the same for the US stock market. Between 1926 and 2019, US stocks recorded calendar year gains between 9 and 11 percent just three times. In 1968, they gained 11 percent; in 1993, they gained 10.1 percent; and in 2004, they earned 10.9 percent. The rest of the time, stocks soared, sank, or sputtered.¹

US stocks averaged 10.05 percent between 1926 and 2019, but single‐year performances were schizophrenic. On 24 occasions, US stocks recorded annual losses. On the flip side, stocks gained 25 percent or more during 25 other calendar years. Note the year‐by‐year performances in Table 1.2. Stock market volatility is normal. And it always will be.

Table 1.2 S&P 500 Annual Returns: 1926–2019

SOURCE: Bogleheads.org; Morningstar.com.

NOTE: Percentages in brackets show losses.

But have the meteoric rises, crashes, and rises resulted in stocks outpacing inflation?

What Is the S&P 500?

The S&P 500 is a common measurement of the US stock market. It includes 500 selected large‐company stocks. The composition of the index doesn't change much year to year. Some people measure the growth of US stocks by the Dow Jones Industrials. It represents 30 massive stocks, selected for their size and robustness. Sometimes, people reference the Wilshire 5000. It tracks more than 6,700 publicly traded US stocks. It's the most complete measurement of how US stocks perform. But over long periods of time, the S&P 500, the Dow Jones Industrials, and the Wilshire 5000 produce similar results.

For example, Vanguard's US Total Stock Market Index tracks the entire US market (like the Wilshire 5000). According to Morningstar.com, a $10,000 investment in this index would have turned into $19,453 over the 10‐year period ending May 18, 2017. The same $10,000 would have grown to $19,278 in the S&P 500 and $19,857 in the Dow Jones Industrials Index.² The results aren't always this close. But over periods of 10 years or longer, they're never too far off.

Stocks Pound Inflation

Global stock markets beat inflation over time. Credit Suisse's Investment Returns Yearbook 2017 shows investment returns for 21 countries. Between 1900 and 2016, the average global stock market beat inflation by 5.1 percent per year.

For example, US stocks beat inflation by 6.4 percent annually. U.K stocks beat inflation by 5.5 percent per year. South African, New Zealand, Canadian, and Australian stocks beat inflation by 7.2 percent, 6.2 percent, 5.7 percent, and 5.1 percent, respectively.³

Whether such outperformance will continue is anyone's guess. But over long periods of time, stocks have crushed inflation. For this reason, investing in the stock market is a wise idea.

When the Stock Market Beats Real Estate

I'm a huge fan of investment real estate. Buy a two‐, three‐, or four‐unit home and reap income from every tenant (single family homes are far less efficient). Once you've saved for the down payment, let the tenants pay your mortgage.

This isn't a book about real estate investing. To do the topic justice would require a whole new book. But I do want to show how stock market growth might be better than you think.

Take one of the world's hottest real estate markets: Vancouver, British Columbia. Referencing figures from the Real Estate Board of Greater Vancouver, CBC News reported that the average detached Vancouver home sold for $368,800 in 1994. By 2016, it was worth $1,470,265.⁴ That's a massive gain of 299 percent over 22 years.

In contrast, if someone had invested $368,800 in a Canadian stock index, it would have grown to $2,006,272 by December 31, 2016.⁵

If you had invested $368,800 in a US stock index, the money would have grown to $2,716,520 by December 31, 2016.⁶

I'm not suggesting that stocks were a better investment than Vancouver real estate over the past 22 years. Investors can borrow to buy real estate and leverage their gains. They can also rent their properties, creating cash flow in the process.

But anyone who kept a cool head, kept investment fees low, and invested regular sums in the stock market over the past 22 years would have done a lot better than most people think. I'll show you how to do that.

What Has the Stock Market Done for You Lately?

Some investors, over the past few years, have wondered what the stock market has done for them lately. If your investments have acted more like a deadbeat boyfriend than a moody yet productive home renovator, you have some legitimate factors to blame: high fees, a knucklehead behind the portfolio's decisions, or both.

Table 1.3 shows how a $10,000 lump‐sum investment would have grown over the past one‐, three‐, five and ten‐year periods ending January 7, 2020. For example, if $10,000 were invested in the US stock market, it would have grown to $13,065 over the 12‐month period. That's a 12‐month growth rate of 30.65 percent. If the same $10,000 were invested in the global stock market index, it would have grown to $12,436 for a 12‐month growth rate of 24.36 percent.

Table 1.3 What $10,000 Invested in US and Global Stocks Would Have Grown to (ending January 7, 2020)

SOURCE: Morningstar.com: Vanguard's Total Stock Market Index; Vanguard's Global Stock Market Index.

* January 07, 2020 was the date of this assessment.

Measured in US dollars.

This isn't meant to prove that US stocks beat global stocks or vice versa. Sometimes a US stock index will beat a global stock index. Other times, a global stock index will beat a US stock index. This table simply shows that it would have been tough to lose money in the stock market over these one‐, three‐, five and ten‐year periods. If you did lose money, a serpent in a suit was likely eating at your garden. I'll explain more about this in the upcoming chapters.

What's Inside a Global Stock Market Index Fund?

A global stock market index represents the entire world's stocks. Roughly 55 percent of its holdings are US stocks. Roughly 20 percent are European stocks, 15 percent are Pacific stocks, and about 10 percent comprise emerging market stocks. This isn't a strategic composition. It represents a weighting based on something called global market capitalization. For example, if we had the power to sell every single stock market share in the world, about 55 percent of the proceeds would come from US stocks, 20 percent from European stocks, 15 percent from Pacific stocks, and about 10 percent from emerging‐market stocks. That's why a global stock market index holds global shares in these proportions.⁷

Undressing Stocks with 50 Shades of Gray

You might wonder how money grows in the stock market. Such profits derive from two sources: capital appreciation and dividends. Let me explain with a story.

Imagine you've started a business called Fifty Shades, designing and manufacturing sexy underwear for men and women. After signing seductive advertising deals with Madonna and Miley Cyrus, sales thrust upward across every female age demographic. But as the company's CEO, you recognize a problem. Fruit of the Loom is spanking you silly in sales to aging Baby Boomer males. Only one solution makes sense: Sign Sylvester Stallone to a multiyear television‐advertising contract. He could dance around a boxing ring, wearing Fifty Shades skivvies while pounding away at Siberian‐sized strawberries and apples.

Such advertising should increase sales, but then you'll need to meet the product demand. New factories will be required; new distribution networks will be needed. They won't be cheap. To make more money, you're going to need more money.

So you hire someone to approach the New York Stock Exchange, and before you know it, you have investors in your business. They buy parts of your business, also known as shares or stock. You're no longer the sole owner, but by selling part of your business to new stockholders, you're able to build a larger, more efficient underwear business with the shareholder proceeds.

Your company, though, is now public, meaning the share owners (should they choose) could sell their stakes in Fifty Shades to other willing buyers. When a publicly traded company has shares that trade on a stock market, the trading activity has a negligible effect on the business. So you're able to concentrate on creating the sexiest underwear in the business. The shareholders don't bother you, because generally, minority shareholders don't have any influence in a company's day‐to‐day operations.

Your underwear catches fire globally, which pleases shareholders. But they want more than a certificate from the New York Stock Exchange or their local brokerage firm proving they're partial owners of Fifty Shades. They want to share in the business profits. This makes sense because stockholders in a company are technically owners.

So the board of directors (who were voted into their positions by the shareholders) decides to give the owners an annual percentage of the profits, known as a dividend. This is how it works. Assume that Fifty Shades sells $1 million worth of garments each year. After paying taxes on the earnings, employee wages, and business costs, the company makes an annual profit of $100,000. So the company's board of directors decides to pay its shareholders $50,000 of that annual $100,000 profit and split it among the shareholders.

The remaining $50,000 profit would be reinvested back into the business—so the company can pay for bigger and better facilities, develop new products, increase advertising, and generate even higher profits.

Those reinvested profits make Fifty Shades even more profitable. As a result, the company doubles its profits to $200,000 the following year, and increases its dividend payout to shareholders.

This, of course, causes other potential investors to drool. They want to buy shares in this hot undergarment company. So now there are more people wanting to buy shares than there are people wanting to sell them. This creates a demand for the shares, causing the share price on the New York Stock Exchange to rise. The price of any asset, whether it's real estate, gold, oil, stock, or a bond, is entirely based on supply and demand. If there are more buyers than sellers, the price rises. If there are more sellers than buyers, the price falls.

Over time, Fifty Shades' share price fluctuates—sometimes climbing, sometimes falling, depending on investor sentiment. If news about the company arouses the public, demand for the shares increases. On other days, investors grow pessimistic, causing the share price to limp.

But your company continues to make more money over the years. And over the long term, when a company increases its profits, the stock price generally rises with it.

Shareholders are able to make money two different ways. They can realize a profit from dividends (cash payments given to shareholders usually four times each year), or they can wait until their stock price increases substantially on the stock market and choose to sell some or all of their shares.

Here's how an investor could hypothetically make 10 percent a year from owning shares in Fifty Shades:

Warren Buffett has his eye on your business, so he decides to invest $10,000 in the company's stock at $10 a share. After one year, if the share price rises to $10.50, this would amount to a 5 percent increase in the share price ($10.50 is 5 percent higher than the $10 that Mr. Buffett paid).

And if Mr. Buffett receives a $500 dividend, he earns an additional 5 percent because a $500 dividend is 5 percent of his initial $10,000 investment.

So if his shares gain 5 percent in value from the share price increase, and he makes an extra 5 percent from the dividend payment, then after one year Mr. Buffett would have earned 10 percent on his shares. Of course, only the 5 percent dividend payout would go into his pocket as a realized profit. The 5 percent profit from the price appreciation (as the stock rose in value) would be realized only if Mr. Buffett sold his Fifty Shades shares.

Warren Buffett, however, didn't become one of the world's richest men by trading shares that fluctuate in price. Studies have shown that, on average, people who trade stocks (buying and selling them) don't tend to make investment profits that are as high as those of investors who do very little (if any) trading. What's more, to maximize profits, investors should reinvest dividends into new shares.

Doing so increases the number of shares you own. And the more shares you have, the greater the dividend income you'll receive. Joshua Kennon, a financial author at About.com (a division of the New York Times Company), calculated how valuable reinvested dividends are. He assumed an investor purchased $10,000 of Coca‐Cola stock in June 1962. If that person didn't reinvest the stock's dividends into additional Coca‐Cola shares, the initial $10,000 would have earned $136,270 in cash dividends by 2012 and the shares would be worth $503,103.

If the person had invested the cash dividends, however, the $10,000 would have grown to $1,750,000.⁸

Let's assume Mr. Buffett holds shares in Fifty Shades while reinvesting dividends. Some years, the share price rises. Other years, it falls. But the company keeps increasing its profits, so the share price increases over time. The annual dividends keep a smile on Buffett's face as he reinvests them in additional shares. His profits from the rising stock price coupled with dividends earn him an average return (let's assume) of 10 percent a