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July 4, Timing, and Currency Management

One of the exciting parts of my job is receiving calls from individuals who have received an opportunity to go work and live in a foreign country.  In many cases, they are young and thinking about how do they save for retirement.  After discussing their pension options (and the compatibility of those pensions to the United States’ and their local tax system), we discuss how they can open a brokerage account and begin moving money.  In these cases, we calculate about how much they are saving and then discuss how often they should move money back to the United States for their savings and retirement (and should they do an IRA, etc.).  For many of these individuals, I will suggest they pick two dates during the year that are easy to remember and move money and invest then: for Americans, especially those living abroad, these easy to remember dates end up being “January 4th and July 4th,” because Americans remember July 4th and their local bank is likely to be open on those dates (even if the U.S. one isn’t!). 

This “January 4th and July 4th” mantra in order to help Americans abroad with their currency management is intended to help those Americans who they are earning in one currency and spending/saving in another.  For instance, in the case of Americans with retirement savings in dollars who are retiring abroad or Americans working outside of the United States who will be retiring in the United States. This is especially crucial, because the various costs of moving money can cut into your savings-- costing in excess of 2 or 3 % per year!  

Use timing to keep costs down relative to your cash supplies

Moving cash from one currency to another costs money (as we discussed in a previous post), whether it is in wire fees from the originating bank or from the receiving bank, these costs can eat into your savings.  Generally, we recommend only moving money when it means your costs are less than 1% (ideally less than .5%).  For instance, sending 1,000 dollars a month with a 25 dollar wire charge means your overall fee will be 2.5% and mean you are hurting your total returns quite substantially.  If you move money quarterly ($3,000/quarter at 25 dollar wire charge), you’ll be saving yourself approximately $200 and automatically increasing your total returns by 1.75%.  Expenses further decrease to .42% if you move it biannually.

Use timing to mitigate both investment and currency exchange risks

Using regularly timed exchanges can do more than help lower your overall expenses and improve returns as it can also help mitigate currency and investment risk. 

One of the fundamental concepts in retirement savings (401k, etc.) is that regular contributions help reduce investment risks for those saving for retirement, a concept known as dollar cost averaging.  Essentially, dollar cost averaging makes the argument that if you invest regular fixed dollar amounts into a variety of assets sometimes you’ll be buying the assets on the cheap and sometimes you’ll be buying them when they are relatively expensive, but over time the regular fixed investments will work themselves out and mean that you’ll end up paying a “fair price” for your investments over time.  

While both the markets in stocks and currencies can show long-term trends (which is a concept you can discuss with your financial advisor, especially if you are making a larger purchase in another currency), you can work to hedge out short-term fluctuations in the currency market by moving regular intervals of cash.  

Obviously, the more movements of cash you can do, the more effectively you can balance out the currency risk, but this needs to be weighed against the transaction costs.  If you are an American thinking about retirement abroad, working with a financial advisor to establish a sound currency management strategy can help lower your risks and significantly improve your financial well-being.