LeanFIRE: Living On the Edge of Disaster

Many retirees in Thailand take advantage of geographic arbitrage to lower their living expenses, but some of them are living on the edge of financial disaster.

LeanFIRE, or Financially Independent Retire Early on a minimal portfolio, has many risks. Let’s look at how exchange rate, market crashes, local inflation, and other factors can affect someone who is already living on the edge.

We will use a common example of someone who retires early in Thailand with 350,000 USD of US dividend stocks which yield 3.5%. Let’s say we only live off the dividends, which gives us 12,250 USD or about 1,000 USD per month. That’s in-line with a modified 4% rule because this portfolio may need to last 60 years.

Let’s assume that income is tax-free. That is realistic since the Thai government doesn’t tax foreign income as long as it’s kept outside of Thailand for one year, and 12,000 USD of qualified dividends is under the cut-off to pay tax to the US government.

Exchange Rates and Market Crashes

You can see from the graph above the Thai Baht has been anything but stable since the Asian financial crisis in 1997. It is definitely not reverting to the mean as some people say. In fact, your income in Thai Baht would have fallen 15% from just 2016 to 2018.

Let’s assume your portfolio survived the US tech crash and you retired to Thailand in 2000. Soon after, you had the unpleasant experience of slowly watching your income decrease by 33% as the Thai Baht fell over the next seven years from 45 to 30 THB per USD.

Your monthly income of 1,000 USD which bought 45,000B in 2001, only bought 30,000B in 2007.

If that’s not enough pain and suffering for an early retiree to endure, the global financial crash happened in 2008. Dividends were cut an average of 25%.

Now you have only 22,500B per month, a 50% reduction from your original amount in just 8 years!

And it could get even worse.

What About Inflation?

Inflation of just a few percent per year can dramatically reduce your spending power when compounded over decades. The problem for expats is inflation is not the same everywhere in the world. Although many US companies sell their products internationally, their profits from Thailand have a very small effect on the dividends they pay out. So, what happens if your living expenses in Thailand experience high inflation while your dividends from the US are flat?

Some bloggers say expats don’t need to worry about local inflation while using geographic arbitrage because prices are cheaper. For example, if your rent in Thailand is 300 USD a month, 10% inflation is only an increase of 30 USD. If your rent back home is 2,000 USD, a much lower inflation rate of 2% is still more at 40 USD. Higher inflation rates have less effect on the dollar value of goods and services when prices are cheap.

But for someone on LeanFIRE, there isn’t any extra income to absorb higher costs. If you’re only living off about 20,000B per month like in our example in 2008, how many times can you absorb 10% increases in prices without it becoming a large percentage of your total monthly income?

If your rent is a modest 8,000B per month, two years of 10% increases is almost 1,700B, 8.5% of your total monthly income of 20,000B. That may be an extreme example, but over 60 years you get the idea.

High Thai inflation even for a few years could easily reduce your spending power on LeanFIRE by a large percentage even though the actual dollar amount is small.

Combine high local inflation with exchange rates that move against you along with dividend cuts and you have a recipe for financial disaster. That may sound like the worst case scenario, but that’s exactly what happened in recent history.

Can you retire in Thailand on $200,000?

It should be obvious by now there is no way this would work long-term. LeanFIRE with 200,000 USD of stocks only gives an income of 665 USD per month using 3.5%, which is 19,000B at current exchange rates. If you increased your dividend rate to 5% or more for extra income, you run the risk of being completely decimated during a market crash because of the sector concentration required to have a higher dividend yield.

It may work for now, but it would be very difficult to survive any adverse economic event in the future since you are already at the extreme low-end of income with no safety cushion. Remember, some early retirees are planning to live off their portfolio for over 60 years. You are sure to see multiple crashes and exchange rate fluctuations during a 60-year retirement.

Using the scenario above, a 50% reduction in spending power happened in just eight years. It would be very difficult to live off 9,000B per month for years.

Some people like to say that’s more than many Thai people live off. Yes, it is, but Thai’s also have family and community for support during rough times. A foreigner doesn’t have the same support network. It’s likely his Thai family would ask him for help during an economic crisis – much more likely than he would be to receive financial aid from them.

Other Risks

One thing I’ve learned in life is my opinions on something can completely change over time. Someone who retires early on LeanFIRE most likely doesn’t want kids. Just because you don’t want kids in your 30’s doesn’t mean you won’t change your mind later. I would rather keep my options open by having a financial buffer than have my wants dictated by lack of money. Quality schools in Thailand are very expensive.

Say goodbye to ever visiting your home country or traveling anywhere outside of SE Asia for the rest of your life if you LeanFIRE in Thailand on the absolute minimum. It’s easy to be disillusioned with the way things are back home and never want to go back when you first come here, especially if you are escaping something in the first place. But over time it’s possible your views will change. There are lots of people who loved Thailand at first but after a few years need to get out regularly to stay sane. Keep your options open by having a large enough portfolio.

It’s prudent to have a buffer for major health costs. Although basic health care is cheap in Thailand, operations can still cost tens of thousands of dollars, even if you have health insurance. Insurers will only pay half of what they originally cover for any injuries caused by a motorcycle crash. Many foreigners in Thailand have asked for public donations recently for medical care because they didn’t plan ahead.

How To Reduce Risk as an Expat

The best way to protect yourself against exchange rate and local inflation risk is to invest in the market where you live. Investing some of your equity in the local market is important no matter where you live in the world as an expat.

Holding investments in both your local and home currencies gives you the flexibility to react to exchange rate and market fluctuations. If the US market or the US dollar crash, you can live off your investments in Thailand. If the Thai market or Thai Baht crash, you can live off your US investments. There is no better way to reduce risk than to diversify, and it’s especially true for expats.

The charts above show the Stock Exchange of Thailand Index and the S&P 500 Index. Although they look similar, in the late 1990’s Thai and US markets were inversely correlated. The Thai market crashed while US markets were rising due to the tech bubble. Also, during the lost decade from 2000 to 2010 when US markets were flat, emerging markets were booming. The Thai stock market almost doubled during that time, including a 100% return in 2003.

Investing in your local market and diversifying internationally lowers your overall portfolio risk. The question everyone should ask themselves is – can you afford not to invest in the Thai market?

Some early retirees work part-time or have other passive income. That’s a good idea as long as you don’t rely on the extra income to pay for your regular expenses. You are much more likely to lose your side-hustle during a recession or market crash, causing your living expenses to far exceed your income. Put whatever extra money you make into your portfolio for a rainy day.

Conclusion

Most portfolios had a rough time going through the tech crash in 2000 and then the global financial crash eight years later. You would have also had exchange rate and local inflation risks to deal with if you had FIRE’d in Thailand. Recent history shows a LeanFIRE retiree living off only dividend income would have failed in only eight years. It’s important to invest some of your equity in Thailand to protect against exchange rate fluctuations, market crashes, and inflation risks.

Click here to find out how much we recommend you have to retire in Thailand.