I’ve now been on this quest to improve my personal financial situation for over six months, and I think I can safely say that I’ve mastered the basics. I’m living within a budget, I don’t have any credit card debt, I’m on track to pay off my student loans within the next year and a half, and I’ve built up my emergency fund. It’s now time to turn more seriously to the topic of investing my money.
To be honest, I’ve been avoiding this topic. Of course, I’ve got my retirement account invested, but up until last year, I didn’t put much thought into how I had invested it. Luckily, it’s done ok – but we also haven’t had a big crash like in 2008, so my odds were good. And aside from that, I always thought investing was something I’d do after I had paid off my student loans and saved up an emergency fund, which was always a date so far in the future that I never thought about it.
I’ve also been overwhelmed by the options. In addition to not knowing exactly what to invest in in the stock market, I’ve not known if/how being an expat factors into the equation – should I be investing in the UK, through a UK broker? In the US? But the exchange rate is so bad right now, wouldn’t it be better to keep my money in pounds? And what about this idea of property investing, to generate more passive income? (That’s not something my parents do, so I’ve never really been exposed to it, until recently). And what about timing – analysts say we are late in this stock market cycle and that we should expect another crash in the next 1-2 years; why should I ‘buy high’? And should I be putting money into an IRA / Roth IRA?
With all these questions, you can see why I’ve been avoiding this altogether! On top of that, I’ve not wanted to take advice from financial advisers in the United States, because I’m not convinced they have any expertise working with American expats, and the financial advisers that serve expats generally would not take me as a client because I don’t have enough assets to make it worth their time (or my money).
Nevertheless, I’m at a point where I can start putting ~5% of my pre-tax income into an investment account (that number will jump to 20% once I’ve paid off my student loan, and to 30% once I start sharing my rent with someone else). So I went to my favorite source for information – Google – and came across this company called Thun Financial Advisers. I signed up for their newsletter, joined a free webinar, and read most of the research papers their advisers have published, and I have to say, I was very impressed (I’d welcome any critiques from people who know more about this than I do!) Their research answered most of my questions, and the founder, David Kuenzi, spent 30 minutes on the phone with me to talk through specific questions I had, free of charge. (They only take clients with $500,000+ in assets, but do give out a lot of free advice over these webinars and phone calls.)
In a nutshell, this is what I learned:
- Invest through a US broker. There three big reasons for this:
- Taxes: If you invest in any sort of a fund (includes ETFs, tracker funds) through a foreign broker, that investment is classified as a PFIC (Passive Foreign Investment Company), and any income is taxed at the highest rates of income tax, rather than at the lower preferential rates for US investments.
- Compliance: Foreign brokers don’t send your statements in US tax-compliant formats, making it much more complicated (and costly) to prepare your US tax returns. I guess in the past, this didn’t matter because the IRS had no actual way of finding out about foreign investments, but with FATCA (Foreign Account Tax Compliance Act), they can now.
- Fees: I haven’t verified this separately, but according to their research, fees for investing through a US broker are still substantially lower than investing through brokers in, e.g. the UK or Europe (or anywhere else in the world).
- Only put money into a traditional IRA if you live in a low tax location.
- In a traditional IRA, your tax is deferred until you withdraw it. If you live somewhere like Dubai, it makes sense to pay into an IRA, because it will reduce your US tax liability in the present. If you live in a high tax location like the UK, it means your income will be double-taxed – once by the UK when you are paid, and once by the US when you withdraw it in 30+ years.
- By the way, if you live in the UK, it makes sense to contribute to your UK pension, which is fully recognized under US law and is given the same tax treatment as a 401(k). If you are contributing to a foreign pension plan in another location, you should check to make sure it makes sense from a tax perspective.
- Think about currency hedges in your investment portfolio. This was a little more abstract to me, because I don’t know where I plan on living or retiring long term. But if you know, for example, that you will be retiring in Germany, then make sure you’ve got a good portion of Euro-denominated investments so you’re not hit by currency fluctuations.
- Take (tax) advantage of your non-U.S. spouse. This also doesn’t apply to me yet, but if you are American and are married to a non-U.S. citizen, there are ways to shield very large sums of money (up to $152,000 per year) from taxes by transferring it as a gift to your non-citizen spouse, tax free. There’s also some estate planning implications. Again, I didn’t go deep here, but there is a lot to this, and it’s worth thinking about.
In terms of what to invest my money in, David recommended a few Vanguard tracker funds – the Vanguard All World Stock Fund, and the Aggregate Bond Fund (which are also recognized as ‘UK reporting funds’, which matters for people living in the UK). I’m still figuring out exactly what I want to do here – I’m bought into the idea of passive tracker funds being a more efficient investment vehicle than investing in actively managed funds, and I’m into the idea of diversification. I’m just not sure I want to start funneling money into the markets when people are expecting a crash; it still seems to make more sense to invest at the bottom of the market. But at any rate, my plan is to start investing in January, so I have a few more months to think about this.
If this has piqued your interest and you want to learn more, I’d recommend starting with these articles:
- Guide to Investing and Financial Planning for Americans Living Abroad
- Top 10 Investment Mistakes Made by Americans Abroad
- The Foreign Pension Plan Dilemma for American Expats
You can find a full list of their articles here. (And no, I’m not getting paid for this post!)
I’d love any reactions from people who are more experienced with this than I am!
Austerity Kate 