Risky Business

Deciding not work anymore sounds great to many people, especially when you’re fifteen years away from the “standard” retirement age. But as the saying goes “it’s all fun and games until someone loses an eye”. Never before in modern economic times has it been riskier to end your income stream and that weighs on me every day. Having been extremely lucky twice, Diane and I bought and sold two houses in totally different markets and came out ahead in both cases. Allowing us to put a large down payment on our California house at a time when nobody was buying, we sold our Canadian house four months before the market peaked and then negotiated a purchase price one year later well below asking price in 2008 when sellers were desperate. Amazingly, after a 30% decline in our home’s value, Bay Area home prices rebounded quickly allowing us to sell last year at a 12.5% premium over asking price. Fast forward 14 months and here we are living mostly from that sale for as many years as it lasts.

ringgetBut all good things come to an end and although timing is everything in life, sometimes life throws you a curveball when you’re expecting a slider. With North American interest rates at all time lows and not expected to rebound to anything meaningful in my lifetime thanks to 40 years of horrible government policies worldwide, it’s been comforting seeing our MM2H Fixed Deposit accruing interest at 3.3% annually. For those unfamiliar with the program, the ministry requires participants of the Malaysia My Second Home Program (MM2H) to place a fixed deposit of 150,000 Ringgit in a Malaysian bank and maintain it while on the program. Most banks issue two separate deposits of 100,000 and 50,000 each with one year maturities and interest can be either paid as a cash dividend to a local checking account or reinvested as part of the principal. Unfortunately, the ministry prefers (decrees, actually) that fixed deposits must be set up with twelve month maturities and renewed at prevailing interest rates. Unexpectedly, Bank Negara (Malaysia’s central bank) recently cut nominal interest rates despite never ending claims about having the strongest economy in Southeast Asia and the move adversely affects interest starved citizens of western nations.

Naturally, the announcement came not long before our one year term matured and our bank quickly lowered our rate to 2.9% after the fixed deposits matured. Of course the interest rates jump to 3.1% for deposits that mature 18 months or longer which makes it impossible for MM2H participants to earn a higher rate. Making matters worse, the ministry continues to roll out new and restrictive rules that make MM2H a bit less attractive each year and a new rule that started in July, 2014 prohibits participants from changing banking institutions. Interested in about shopping for a bank with a better rate, we asked our agent at Joy-Stay (the nation’s best agent), and she sent us back this quote from the ministry’s website:

Kindly be informed effective 1st July 2014, MM2H participants are not allowed to transfer Fixed Deposit Account tagged under MM2H Programme . Thank you. Malaysia My Second Home (MM2H) Centre MALAYSIA

Enjoying the benefit of a 3.3% interest rate (for one year anyway), we chose to reinvest the interest and increased the principal balance of our fixed deposit by 4,950 Ringgit. Valuing our net worth monthly using current trading rates for conversion purposes and with rates hovering at or about 4.0 Ringgit per US Dollar, our fixed deposit wound up paying us about $1,230 USD in interest for our first year. Strategically speaking, there’s no way to earn that much cash on any North American fixed deposit, money market fund or other cash alternative so keep that in mind if you’re irritated about the rather large fixed deposit requirement. For comparison purposes, consider that the FD will cost you about $37,500 USD at today’s rates. Costa Rica’s Pensionado program asks for $60,000 if you don’t collect a pension and Panama’s very generous Pensionado Visa requires proof of continuous income of $1,000 per month income or a property investment of $100,000. Given that the fixed deposit is yours to take along with earned income should you leave the program, we view the MM2H FD as one part of all our assets that earns more risk-free interest than we could make at home.

HSBC's main branch on Downing Street; Georgetown, Penang

HSBC’s main branch on Downing Street; Georgetown, Penang

Of course currency risk is an issue that American expats need not worry about if they choose Ecuador or Panama who both use the US Dollar. Sadly, when we arrived as Experimental Expats, my thinking was we’d pay for almost all expenses from rent to food and entertainment using local currency. Hoping not to exceed our annual budget, we converted and transferred what I calculated as one year’s living expenses from our U.S. account into our local bank in Malaysia. Not realizing the Malaysian Ringgit was in total free fall for all of 2015, we received 3.7613 Malaysian Ringgit for 1 USD. Since we pay our rent via direct debit from a local checking account, we’re locked in at that rate at least until the Ringgit runs out. Not long after arriving, the USD rate went up. And up and up. Peaking at about 4.45 last year it became financially stupid to pay for anything other than rent with currency purchased at a lower rate.

credit cardThankfully, credit cards are widely used everywhere in Malaysia so except for our rent we began using our U.S. Dollar credit card that charges no foreign transaction fees for almost everything. Saving pennies here and dollars there, it’s imperative to use smart financial strategies if you’re planning on trying what we’ve done at a the ripe old age of 50. (Be aware that MM2H holders under age 50 need to place a fixed deposit that’s twice as much which is why I played House Husband in California for 18 months after my unexpected layoff at age 48 1/2). Our primary credit card offers exchange rates amazingly close to the trader’s rates as well as having a generous rewards program, After only 25,000 points (issued at 1 per 1 USD spent), we cashed in some points and took $400 off an upcoming plane ticket back to Canada. Amounting to a 1.6% cash back rate, every dollar saved may come in handy some day when we’re older given the state of world monetary policy and we recommend using an app for real-time currency rates (We like XE Currency).

fdSharing one more example of how important financial matters are if you’re thinking about early retirement on modest incomes and savings, here’s a smart move I made way back in 2010. Always having at least six month’s living expenses invested in fixed deposits, I was looking for a way to improve the interest rate offered at a time when CD rates began dropping. Even the smartest gurus never predicted an unprecedented drop down to almost zero so when I approached a branch representative and showed him a competitor’s rate that was 0.5% higher on one year fixed term deposits, he came up with a great idea. Suggesting I take a seven-year term at the highest available CD rate of 3.0% and then take the early withdrawal penalty after one year, the numbers showed I’d make the same annual percentage rate as the competing bank was offering on a one year term so I agreed. Within one year, bank CD rates plummeted down faster than anyone imagined and not needing our emergency funds I decided to keep the 3.0% rate for a rainy day.

After the first year, long-term CD rates were already down to 1.5% but thanks to good timing (once again), we locked in a semi-reasonable rate in for seven years and the bank’s been paying us literally twenty times the highest available rate for six and a half years. All westerners know what’s happened since the Great Recession of 2008 and a glance at today’s CD rates for any of the “too big to fail” US banks looks something like this:

imageSadly, our 84 month term comes to an end next February and obviously going from a few thousand dollars per year in interest to less than one hundred puts a huge dent in that part of our financial plan. Clearly the world’s most unfair financial scam in one human lifetime, the hijacking of the world’s entire monetary system by a group of élite bankers and politicians is pure bullshit. Basically ruining life for seniors and many pensioners that spent their entire lives working and saving, it almost makes me understand the populism so rampant throughout the world today. But protesting and wasting votes on unqualified billionaires disguised as saviors certainly won’t help our cause so I’m still pondering what to do with the “dream CD” and will sorely miss its three percent fixed deposit that sounds like a dream compared to today’s paltry interest rates. I’m no financial genius and I’m not licensed to give financial advice but I did work in the industry for 30 years and will tell you it’s really important to understand the markets, monetary policy and budgeting if you want to make a go at leaving your employment income behind. Let’s hope Malaysia doesn’t plunge into the abyss known as the black interest rate hole.

Singapore and central Malaysia already have the haze again

Singapore and central Malaysia already have the haze again

On a personal note, thanks to all of you who responded to my last post about lack of interest in the blog with nothing but positive feedback. Happy to hear that many people are in fact reading and enjoying the content as well as learning a few things about early retirement, becoming an expat and overseas living, I’ve decided to keep on writing even if events are not always rosy. For example, I just read that Malaysia stands ready to send its one enormously powerful firefighting apparatus to battle yet another year of out-of-control forest fires in Indonesia due to illegal slash and burn polices. But as usual, Indonesia refuses to officially ask for help so the annual event I call The Dead Sky Stench has begun to poison the skies around Kuala Lumpur, Singaporee and Southern Malaysia. Thankfully there’s no sign of the haze in Penang (yet) but I fear the worst again so stay tuned for more of the same. Asia’s worst crime against 70 million citizens seems poised to return for the 21st year in a row thanks to a few greedy corporate assholes and governments that care little about anything but politics.

blogOnce again, thanks to everyone who offered support. As expected, page views declined dramatically since I removed the posts about Offerup.com, a competitor of Craigslist that was my all time highest read post. Bringing lots of readers with no interest in expat life, I hope to attract more open-minded people that are curious about my topic. Having just received a request for an expat interview on Expat.com, a website I plug on my sidebar, I’m looking forward to garnering some new readers so please do feel free to share with some friends and email if you have questions about anything I’ve written about.

Cheers from Penang 

4 thoughts on “Risky Business

  1. Stu

    Another very insightful post thank you Rob – figuring out how to survive on fixed income, mixed with exchange rate hell is not easy to juggle. Not sure if you are able to take advantage of better rates in places like New Zealand as they are offering ~3% with local $NZ currency deposits I think. Might be an interesting topic to dig into, i.e. fixed foreign income source diversification as you also consider options for Thailand. All the best guys!

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    1. rodi (Rob and Diane) Post author

      Hi Stu
      American citizens who dabble in any offshore investments spend a lot of extra time on taxes and are always more open to IRS audits. Like most government bullshit it’s easier for the IRS to pretend that all the lost tax revenue is from offshore billionaires hiding their cash so they put all the FATCA reporting rules in place. Unfortunately for them the ones who could actually make a difference in the federal coffers all have high paid lawyers that fight audits and the agency can’t afford to fight them. So instaed they wind up auditing middle class expats that might just slightly exceeded the reporting threshold of foreign assets. Even if you’re not audited, any expat tax attorney would advise against having any offshore investments, brokerage, securities or commodities accounts if their tax situation is normally simple (as it usually is for non wealthy retired people like us). The hassle isn’t worth it for me and I’m a conservative investor that wouldn’t play the currency markets. Thanks for the comment !!

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