How to Hedge Currency Risk if You Retire Abroad

Always a popular topic on PBH. In case you missed the Saturday Wall Street Journal's "Ask Encore" advice column by Kelly Greene, here it is in its entirety.

Q: We want to retire to Europe within the next five years. We will continue to draw a pension in U.S. dollars. What, if anything, can be done to protect us from the ravages of the exchange rate? Bob Powell, Geneva, IL

A: Living in Europe -- an idea romanticized by the best-sellers-turned-movies "Under the Tuscan Sun" and "A Year in Provence" -- is getting ever more expensive. Earlier this week, the euro hit a record $1.5983 against the dollar.

But if you're still itching to live the expatriate life in retirement, it's smart to think about ways to hedge your risk that the U.S. dollar could continue its lackluster performance. You can do so -- for a fee -- with help from a currency broker.

HiFX Inc., for example, a San Francisco currency specialist, helps individuals manage their foreign-currency exposure. "We basically help individuals do what big corporations do to protect themselves against foreign-exchange fluctuations," says Ward Naughton, president of HiFX's North American operation.

"Think about where the rates are right now and then take a look at the forecasts over the time period before you retire," he advises. If you think current rates are going to be better than those in the future, you can lock in an exchange rate for as long as two years "at a small premium over the spot rate today." His company helps individuals lock in currency rates through contracts, guaranteeing a set rate at the time of the contract.

In other words, if you expect the dollar's value to continue to decline against the euro, you could nail down a guaranteed exchange rate using current values so you don't wind up paying even more to trade dollars for euros in the future. There is one catch: You would need to put down 15% upfront of the total amount that you eventually plan to exchange (in case you break your contract early), Mr. Naughton says.

Here's how he has seen it work: A retiree who moved to France with a $4,000-a-month pension took out a payment contract in April 2006 in which he agreed to exchange $4,000 a month at a fixed exchange rate of $1.35 a euro, buying him 2,936 euros a month. The $4,000 was automatically withdrawn from the retiree's U.S. bank account, exchanged into 2,936 euros, and then sent to his account in France.

Without the contract, the exchange rate today would be $1.59 a euro, Mr. Naughton says, or only 2,516 euros a month -- 15% less. Of course, the guarantee lasts only a few years, at which point you would have to renegotiate a new rate.

One other expense to watch out for while living overseas: If you regularly wire pension checks from the U.S. to Europe, your bank may charge $25 to $35 each time you send an international wire, Mr. Naughton says, "If you're doing it every month, those fees start to add up." Some currency brokers don't charge for such transfers -- and sometimes you can bargain those fees away at your bank, as well.

By houstongal on Apr 20, 2008, 22:11 in Friendly Talkzone.

houstongal says on Apr 20, 2008, 22:12:

bump

Culture is language and language is culture - Dr. Annamaria Napolitano

robi666 says on Apr 20, 2008, 22:18:

The way to hedge currency risk is to have some kind of income in local money.
As an example, buying the house where you live is a simple way to do it.

It seems that what you described is betting on an exchange rate, not hedging currency risk.

"I am a citizen of the most beautiful nation on earth. A nation whose laws are harsh yet simple, a nation that never cheats, which is immense and without borders, where life is lived in the present."

goin_south says on Apr 20, 2008, 22:37:

Hg... I'll address this with you in a few days.

and, thank you.

goin_south says on Apr 20, 2008, 22:38:

what are you doing? still awake? you are in trouble en la mañana; you need me to scan/fax you a note for absence??? jjaa

and, thank you.

houstongal says on Apr 21, 2008, 06:27:

I was just catching up on reading the papers....

Robi/GS, I'm no expert on this topic. I'm just reprinting an article that I found which caught my attention. I'll let the "experts" debate this strategy.

Culture is language and language is culture - Dr. Annamaria Napolitano

tejasmarcos says on Apr 21, 2008, 06:31:

this is effective nonetheless. i saw the same story in staurday's wsj. if i would have locked in 6 months ago at 2200 to 1, i would still be enjoying a rate exchange 19% greater than now. therefore, if i were pulling down the equivalent of $2000 per month from my pension, it would create an additional $380 vs. pulling down $2000 at 1800 COP to 1.

my glass is getting shorter on whiskey, ice and water...

Timba says on Apr 21, 2008, 07:08:

Lets see, I want to retire and get some investment advice. Why not ask on a Colombian forum ?

Saltador says on Apr 21, 2008, 07:39:

I think the obvious way this could backfire is for the exchange rate to move the other way on you.

robi666 says on Apr 21, 2008, 08:07:

Saltador, that's what I was meaning with "betting". It's like in the casino.

HG, I understand, but I am far from being an expert. It is just that the strategy described seems a bit "naive", even to a dumb guy like me.

rhydewithdis says on Apr 21, 2008, 09:02:

This is not exactly "betting" the way you guys make this out to be...

Public corporations and individuals that do not operate speculatively (that is betting on the markets) usually want to be able to forecast future incomes with relative accuracy. Purchasing a forward contract on the currency markets to lock in an exchange rate at a particular price allows the purchaser to predictably manage their expenses without having to worry about fluctuations in the FX markets.

Depending on the premiums charged by the brokers, I think this is wise for anyone living overseas for an extended period of time on a fixed income.

They said I couldn't play football I was too small / They say I couldn't play basketball I wasn't tall / They say I couldn't play baseball at all / And now everyday of my life I ball.

tejasmarcos says on Apr 21, 2008, 09:06:

airlines do it like this every year when they purchase their fuel. it's an expense management strategy.

my glass is getting shorter on whiskey, ice and water...

Mr. Hollywood says on Apr 21, 2008, 10:03:

I expect that any real advantage to a service like this would be quickly eaten away by the costs of the service. A much better strategy is simply to diversify your currency holdings well in advance of a retirement so you don't have to convert funds when the rates are against you. Of course, this assumes you're not living month-to-month on a dollar denominated pension.

nine inch nails says on Apr 21, 2008, 20:43:

They think the dollar is going to rebound in the Fall and that the Fed is only going to lower rates one more time and only by 1/4 percent.

There is an interesting web-site that has all these anti-dollar articles posted every day:

(www.europac.net) that is definetely worth checking out. Yeah they are biased to only there investments but Peter Schiff pulls all these interesting articles together from the major US and world business journals that is all in one place and new articles every day!

get down, get down