Building Retirement Capital

High on the list of financial objectives for expatriates is the desire to create sufficient funds for retirement and, thus, be financially independent. There are several possible avenues one can take in order to work towards achieving this objective:

  • pension plans (which come in many forms);
  • government plans;
  • building capital through financial assets, which are liquid;
  • building capital through accumulating real assets (e.g. property);
  • creating value in one’s own company (which can be realized).

1) Discipline and persistence

There are spectacular examples of young entrepreneurs being able -accidentally or not- to realize astounding value in their company. A recent example of this is Mark Zuckerberg (age 26), founder of Facebook, whose current net worth is estimated to be 4 billion. (1)

There is also the well-known fact that Microsoft’s success produced a large number of “Microsoft millionaires” among its early employees, where shares represented a substantial part of their remuneration. An estimate in 2000 put the number at 10,000. (2)

There are also examples closer to home. Particular in the oil and gas industry, some expatriates with an entrepreneurial spirit, have been able as well to build value in companies set up by themselves and realize this in financial terms.

This article addresses those readers for whom, what Brian Tracy calls (3) “The Law of Accumulation” would apply: “every great financial achievement is an accumulation of small efforts and sacrifices”. In order to accumulate, discipline and persistence are essential.

2) Time Value of money

The need for persistence and discipline ties in with “The Eighth Wonder of the World” (a quote assigned to Albert Einstein (4)): compound interest! Compounding interest is the process of generating earnings on an asset’s reinvested earnings. To work, it requires two things: the re-investment of both earnings and time (5). The more time you give your investments, the more you are able to accelerate the income
potential of your original investment.

Readers will have seen the tables before. Unfortunately, they are often misused by overzealous pension plan sellers. The reality is that the growth assumptions are truly just that: assumptions. But compound interest is powerful.

3) Forced saving

Those expats working for large international firms or institutions will automatically build towards retirement through employer pension plans; such plans come under various definitions such as benefit plans, money purchase plans, final salary plans, deferred plans, 401(k) plans and so on. What is great about these plans is that participation in most of these plans is obligatory. So, one becomes a “forced saver”: the discipline and persistence needed to benefit from the time value of money is automatic!

Any plan where the employer matches voluntary contributions represents a unique opportunity for extra savings and should be utilized when possible.

Global companies often remunerate their executives with company shares. This can take place in various forms. Substantial holdings in one’s own company can be extremely lucrative (Microsoft example) as well as disastrous (World Com and Enron examples). Overall a balanced holding in many cases and (again) over time will work out very well.

International pension plans, core product of most investment advisory firms for expatriates, aim to match in the need of creating retirement capital yourself. There are pros and cons to these plans, so participation deserves a lot of consideration. However, they may help people save, who otherwise would not.

4) Building retirement yourself

Expats working for themselves or for local firm/ organizations in most cases will have to build retirement capital entirely themselves. As I mentioned in my previous article, many of the expatriates who have company pension plans may still be keen to create retirement capital independently as well. When the responsibility for creating retirement capital is -entirely or partly- on one’s own shoulders, discipline and persistence need to be enforced by oneself. This comes easier to some than to others…

5) Personality types and Saving

An interesting study, the Retirement Confidence Survey, was concluded in 1998 by the Employment Benefit Research Institute in the US (6). This survey aimed to gauge the views and attitudes of both
working and retired Americans with regards to retirement. This study identified 6 types of personalities, giving some perspective as to which attitudes are helpful for saving, and which attitudes are not.


The Denier (10%): “Retirement is so far away”
The Struggler (9%): “Save? If I have $5 leftover I save it”
The Impulsive (20%): “I should plan and save but, oh..I need to buy a new suit”
The Cautious Saver (21%): “I put a set amount into savings each month and hope it will be enough”
The Planner (23%): “I am saving, investing and planning for a secure future”
The Retiring Saver (17%): “I have been sacrificing and saving for years; now I am enjoying”

Rarely do people fit neatly in one type of personality. Readers may recognize themselves in several of these 6 characteristics. Age is also likely to influence which of the personalities you most associate with. I would predict that, as we age, we pay more attention to planning and are more able to apply the persistence and discipline that achieving financial independence requires. Most expatriates are money conscious and I expect will score highly on the types: ‘Cautious Saver’ and ‘Planner’.

6) The investment of what we save

Where our savings go to – the actual investment – is as important as our ability to save in the first place. Most of my articles cover this topic. In the context of building retirement capital, the following points are important:

  • defined benefit plans are in most case very conservatively managed; this has worked out well for its investors over the last decade.
  • Self-directed plans, such as 401(k) plans, when invested aggressively (e.g. 100% equities) carry lots of volatility, and thus risk, compared to defined benefit plans. The same holds true for investment accounts and savings plans that investors direct themselves.

The consequence of this is that the “forced saver”, who in his package of investments has a defined benefit plan (final salary plan), has a built-in conservative dimension that the expatriate, who must build retirement capital entirely himself, does not have. I would suggest that the latter always has a strong conservative component in his invested savings.

7) Ability to save and budgeting.

The ability to save and the amounts we can save, of course, are also influenced by our levels of earning. For some expatriates, their levels of earning (and costs covered by their company) will, in themselves,  automatically generate significant savings every month. For others, remuneration does not automatically result in savings. For them the ability to budget and live within a set budget is key. This topical issue will be the subject of my next article.


Notes and sources:

1) Forbes Billionaire list March 2010
2) “The Few, the Tech-Savvy Few: Option Millionaires” by Wendy Kaufman 11 February 2007
3) Brian Tracy Newsletter 17 December 2010
4) Union Plus Retirement Planning Center website
6) EBRI Issue Brief, August 1998: The 1998 Retirement Confidence Survey”
7) EBRI Issue Brief, August 1998: The 1998 Retirement Confidence Survey”