It can be hard to get started saving for retirement-the sheer amount of money required is a barrier for many. Expats may be among the worst procrastinators, as a survey from earlier this year showed. Why don't expats save more? And how can we change our behavior while there's still time to make a difference?
First, it may come as no surprise that saving for the future goes against human nature. Studies in behavioral economics suggest that at a basic level, we're more strongly motivated by what happens in the short term than by the long-term possibilities. Additionally, we're also more likely to avoid pain before we seek out benefits. It follows that it's only human to resist cutting discretionary spending today (avoiding short-term pain) even at the expense of getting the retirement we want (a long-term benefit).
Expats Face Challenges When Saving for the Long Term
If having to overcome basic human nature isn't enough, expats also face additional obstacles when trying to save for the long term. Here are some examples of common financial misconceptions that influence expat behavior.
Confusing affluence for wealth: There are two hurdles here. First, since expats operate in a foreign currency devoid of personal historic reference points, we often don't have a realistic idea of how much our current lifestyle costs. This makes it easier to overspend. Additionally, in many cases, employers are paying for some living costs by providing benefits such as housing and car allowances, medical insurance, home leave, and funding our kids' education. This leads to underestimating our true expenses as well as to having little idea of how much is needed to replicate our current lifestyle in retirement. We sometimes confuse being temporarily affluent for having long-term wealth.
Thinking we have all the time in the world: There's a tendency to assume that our situation will always improve, a belief that persists even after our peak savings years are behind us. In part, this is because we don't usually have good points for comparison-expat postings tend to be short (two to three years), and we don't stay in direct contact with the same people over time. It's therefore difficult to get a realistic idea of the earning trajectory of a typical expat career over the long term. It's easy to assume that everyone's paychecks (including our own) will always be rising, and we're unprepared when we find out that this may not be the case.
Out of sight, out of mind: Unfortunately, the strongest motivation sometimes comes in the form of vowing to avoid the mistakes made by someone we know. But expats often don't have visible reminders of what failing to plan looks like. Those who face financial difficulties typically return to their home country where there is support (either family or a welfare network) to help them.
Six Things Expats Can Do to Get Started Saving
- The first step is always to recognize the problem. If you recognize any of the above challenges in your own situation, you'll be more likely to take action to fix them.
- Get a realistic idea of what your lifestyle costs. Include all costs, even those your employer currently covers. It's normal to be optimistic, but try to err on the side of overestimating expenses. Multi-currency personal finance programs such as Quicken or Moneydance can help you track your true spending habits.
- Work out how much you may need to fund your retirement, and how much you need to save and invest on a monthly basis if you start now. If you aren't lucky enough to be part of a generation that received guaranteed pension payments from their employer or government, don't be surprised if you determine you'll need to save at least the equivalent of $1 million U.S. dollars before retiring if you hope to replicate your expat lifestyle.
- Adopt the view that monthly savings is a pleasure, not a pain. This may require a mental trick such as described by behavioral economist Dan Ariely in his book Predictably Irrational. Mr. Ariely had a medical condition that could only be cured with regular injections that made him physically ill for the 16 hours. On injection day, he treated himself to something he liked-watching a movie. He learned to associate the unpleasant short-term injection with a short-term pleasure, and thus was eventually able to gain the long-term benefit of being cured. Similarly, instead of viewing the habit of saving as being a pain or having to do without, view it instead as a pleasure-that of paying yourself first. This involves both a shift in your outlook, as well as the physical act of setting aside money at the start of each month, before you pay anyone else or spend it. Learn to really enjoy the "ka-ching" factor of putting money towards your future.
- Substitute other short-term pleasures for spending. Once you're able to quantify your actual spending, you may be surprised at how much goes to short-term consumption such as dining out, compulsive shopping, or expensive hobbies. By changing your habits, you may find you're happy to substitute other activities. Try taking up a low-cost hobby or sport, join a club, learn how to cook your own gourmet food, or even just go for a picnic with the family or a walk in the park.
- Resist the urge to "keep up with the Joneses." Remember, many expats who appear to be well-off are merely temporarily affluent-often, they have not secured their financial future and are not actually wealthy. Don't be blinded by fancy cars and high spending habits. There's no shame in avoiding the trappings of consumerism or refusing to follow others into financial oblivion.
Saving-Just Do It
When it comes to saving for retirement, expats face all the normal tests of human nature-we tend to avoid the short-term pain of saving today, even if it may jeopardizes our long-term goals such as a comfortable retirement. We also face additional challenges specific to our expat lifestyles. However, by becoming aware of the pitfalls and following the steps outlined above, you can overcome your mental roadblocks and start saving.
About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future. For more information visit crevelingandcreveling.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.