Living Overseas Passively 103: Retirement Income

What are the best methods to retire overseas with income from our working years? Most of this income will be hard to tap into because most of it is unusable until 60 years old. But let’s take a look at our options and see what plans we can make with our retirement income.

Welcome back to the Living Overseas Passively series (101, 102). The series is all about maximizing passive income by moving overseas during our golden years—or even earlier. With that, let’s jump into our retirement income planning.

Living a Middle-Class Life is Stressful

First, a quick review of our retirement income sources. 

1. Pensions. Probably the most exciting of the bunch are pensions (or defined pension). It is hard to find a pension, as most of them reside with government employment. I will have a nice pension the day I retire from the military. Teachers, firefighters, and cops may have good pensions as well.
2. 401Ks. Next up are employer-matching 401Ks (or defined contribution). Usually, the employer matches up to 5%. We will need to maximize our full limit to get the full benefits of 401Ks. In 2021, the limit is $19,500. You have to reach 59 ½ to start withdrawing from your 401K.
3. Roth IRA. Outside of pensions and 401Ks, there are Roth IRAs. The Roth IRA is an after-tax contribution vehicle. However, the limits are $6,000/year before the age of 50. My idea is to invest in index funds until I reach age 59 ½, then convert those gains into high-yield securities, making all my dividends tax-free.
4. Annuities. Annuities can be tricky, so we must use all of our due diligence when dealing with these. Annuities give us a guaranteed monthly income after providing them with a lump sum of cash. In “Annuities vs. Dividends,” I write that most people, with a bit of education, can achieve better returns with a dividend portfolio. 
5. High-Yield Savings Account/Certificate of Deposit. Don’t forget about these investment vehicles. They are both safe and insured against loss. Currently, the rates are not high (they are actually in the toilet), but they may not always be that way.
6. Treasury Bonds. Treasuries could fall under retirement planning or investing, but they are very safe vehicles. The yield on the 30-Year Bond is 2.00%. This rate is not going to beat inflation, but it beats holding cash.
7. Social Security. If we move to the right country, we may fund our lifestyle just from social security. Not too bad, except will social security be around when you retire? I don’t like guessing.

How We Built 13 Streams of Income

Now, how do we turn all of these vehicles into $2,000/month of passive income? First, we may have to wait until 59 ½ before we draw down many of these accounts. That’s a bummer, but waiting may give us more time to stack up additional income. 

Pensions. Military pensions start the day you retire. With the additional support of VA disability, you will most likely hit $2,000/month easily after 20 years of service. The military may be one of the best sources of passive income ever. As I like to say, “Active Service, Passive Income.”

401Ks. 401Ks are tricky because we base them on capital gains. This means that we invest money into mutual funds (hopefully the S&P 500). Over the years, the value of our mutual funds has increased.

To draw down our 401K, we sell shares of our mutual funds—the opposite of dividend investing, where our shares pay us income. We have to be very careful with extracting revenue from our 401K due to the sequence of returns risk. 

The Invisible Budget

In my most straightforward understanding, the sequence of return risk means that if you sell shares at the lowest point, it will damage all future gains moving forward. Therefore we will want to sell shares when they are at higher thresholds. 

To prevent ourselves from selling shares into a down market, we can keep treasury bonds, cash, and CDs on hand. Also, we can diversify our passive income so that we are in complete control of our withdrawals. 

To hit $2,000/month of 401K income, we will need $600,000 inside our account. Hopefully, the 4% rule can keep our 401K funded for the long term. I don’t like guessing. Also, we will need more than $600,000 because Uncle Sam will tax us as we withdraw cash. 

Roth IRA. Thankfully, we have more control of our Roth IRA. I will invest in the Total Stock Market Index Fund (VTI) until I reach 59 ½. Then I will convert all of these shares into a Closed-End Fund like Pimco Dynamic Income Fund (PCI). The conversion will be completely tax-free. 

4 Steps to Become Rich

PCI yields roughly 9.5%, so I would need around $250,000 worth of shares to achieve $2,000/month income. That amount is achievable for most people that take retirement seriously. Did I mention that this income would be tax-free?

Annuities. I believe most people can achieve better results with dividends than annuities. However, for the sake of this article, let’s say we use an annuity. I would not want to try to achieve $2,000/month with an annuity. However, an amount like $400/month would be a little more feasible. Each annuity is different, but I would guess around $200,000 would yield you $400/month—a guess based on a guaranteed 3% return. 

High Yield Savings Accounts/CDs. We will use these when the market is down, and we want to prevent a sequence of return risk. It is always good to have a couple of years worth of cash-like products in your portfolio.

For our purposes, keeping $24,000 to $48,000 in these instruments would keep us safe. Or could keep one years’ worth in High Yield Savings accounts and another year in Treasuries. Hey, a 2% return is better than 0.40%.

Become CEO of Yourself

Social Security. If you worked for 30 to 40 years, you should have an excellent social security check coming your way. Why not maximize it overseas. If you use it in conjunction with other retirement income, you can live a very comfortable life overseas.

Debt-Free. One last word on debt; don’t have any debt going into retirement. Real Estate debt is okay as long as your home is being rented. 

Conclusion. Retirement planning should start now. Once you have the inkling to retire overseas, you can gear your investments towards that end. Remember, we base the 401K off of capital gains and selling shares. We will want to extract income from 401Ks only at the appropriate time.

Things like tracking your social security amount, building your cash allocation, and creating dividend income in your Roth IRA, can lead to fantastic success in overseas living. The goal is to be as comfortable as possible and not worry about money at all. We haven’t even got into the other passive income streams. You can see how lucrative it is to focus on your income. Enjoy and Happy Investing. 

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