After spending some time in Brazil, it has occurred to me there are several financial advantages for the Brazilian early retiree, as compared to the US person retiring in the US. The US has a comparatively large FIRE movement, whereas Brazil does not, despite it’s advantages. As a US tax resident, I can’t take advantage of all of these benefits, but for a native Brazilian, here are 5 Financial advantages of retiring in Brazil verses the US to consider.
Free health care
This is a big one. In the US, subsidized (not free) government healthcare only begins at age 65. Anyone retiring before that needs to plan for health care. Paying out of pocket for medical care in the US is prohibitively expensive and can lead to bankruptcy for any significant procedure.
Here’s an interesting site summarizing some data on hospital costs for various procedures. According to them an average 3 days stay will cost $30,000 USD. So as you can see, private health insurance is a necessity in the US if you’re under 65.
To give an idea of prices, I went to healthcare.gov (the website for what you may know as “Obamacare”). On this site US persons can sign up for a health plan which may be subsidized partly by the government if they have a low income.
First I tried running my numbers for a household of two people both aged 45 and based in Miami. I entered an income of $40,000 per year. They have “Bronze”, “Silver”, and “Gold” plans. The cost per month of the first Silver level insurance plan offered was $1,095.94 per month, but reduced to $69.94 per month thanks to a $1,026 tax credit due to the income level I entered (the higher the income, the lower the tax credit).
This plan is not very good compared to the costs one pays in Brazil. There is a $15,050 deductible. That means you pay 100% of your healthcare costs until you’ve paid $15,050 out of your own pocket before your plan begins paying for medical costs. Keep in mind, this is for a couple making only $40,000/year. Crazy, right?
Once you do cross $15,050 of costs for the year, then you still need to pay for what they call “co-pays”. So if you visit the doctor, you pay $55 for each visit, for example.
I then changed the income level to $80,000/year income. I couldn’t find the same plan but this was the closest (some company and plan family).
You can see with $80,000/year income the monthly payment goes to $565.94, and the deductible is $15,200.
Depending on how your savings and investments are arranged you could avoid some of the high cost of health insurance, but it requires a bit of fine tuning. If the US person had all their money in after tax accounts (brokerage account, not a 401k or IRA account) they could live off of savings and avoid reporting income to reduce their taxable income and reduce healthcare costs.
Anyhow, in Brazil you don’t have to worry about any of that. Healthcare is free, and in my experience, very good.
Tax free investment income
In the US, largely all investment income is taxed. The exception to the rule is when the investments are made inside a Roth IRA or Roth 401K account. These are types of retirement accounts the US government gives special tax treatment to to encourage retirement savings. In such accounts, your money goes in after you pay taxes on it, but the money comes out tax free, so all the investment gains are tax free. This would be the closest thing to buying tax free investments in Brazil, however the US has strict limits on the amount of money you can put into these accounts.
The other retirement accounts are 401k and IRA accounts. In these accounts the money goes in tax free, so you have more money growing. When the money comes out it is taxed.
Finally, you can have money in a normal brokerage account. The money goes in after you pay tax, but the investment gains, dividend distributions, interest, etc. are taxed at rates set for those various forms of income. Usually the rates are lower than US income tax rates. I’m not going to cover US taxes much more than that, as it’s an extensive topic for which there is much already written on the topic.
The point here, is in Brazil there are tax free investments which can provide someone with income. Those include:
- LCAs (type of bond)
- LCIs (type of bond)
- Dividend payments from stock shares
- Pouponca (savings account)
- Capital gains from the sale of stock shares (up to R$20,000/month)
That’s a huge advantage!
Reduced Sequence of Returns Risk
If you’re not familiar, the idea of sequence of returns risk is when you draw down a portfolio at the same time it is loosing value in the market, there is a risk your portfolio will not recover if you receive bad returns up front in retirement. This is because there is less money in the account to recover when you do get good returns in the future.
I think of it like this: If the portfolio drops in value you’re forced to take a greater percentage of your remaining assets to continue to withdraw a fixed amount. If that happens, you’ll have much less to grow back later when you get better returns.
This effect has a big risk to your retirement if it occurs soon after you retire, but the risk reduces over time as your portfolio grows.
For example, let’s say I had a portfolio worth $1,000,000, and I need to withdraw $40,000 to live on each year.
In the charts below, you can see the effect of bad market returns up front in retirement verses latter on in retirement. When the bad returns occur first, the portfolio can’t recover in value when you inevitably have good returns latter on.
| Good returns upfront | ||||
| Year | Starting Value | Return | Withdrawal | Ending value |
| 1 | $1,000,000.00 | 0.1 | $40,000.00 | $1,056,000.00 |
| 2 | $1,056,000.00 | 0.15 | $40,800.00 | $1,167,480.00 |
| 3 | $1,167,480.00 | 0.05 | $41,616.00 | $1,182,157.20 |
| 4 | $1,182,157.20 | 0.07 | $42,448.32 | $1,219,488.50 |
| 5 | $1,219,488.50 | 0.21 | $43,297.29 | $1,423,191.37 |
| 6 | $1,423,191.37 | -0.1 | $44,163.23 | $1,241,125.32 |
| 7 | $1,241,125.32 | -0.15 | $45,046.50 | $1,016,667.00 |
| 8 | $1,016,667.00 | -0.05 | $45,947.43 | $922,183.60 |
| 9 | $922,183.60 | -0.07 | $46,866.38 | $814,045.02 |
| 10 | $814,045.02 | -0.21 | $47,803.70 | $605,330.64 |
| Bad returns upfront | ||||
| Year | Starting Value | Return | Withdrawal | Ending value |
| 1 | $1,000,000.00 | -0.21 | $40,000.00 | $758,400.00 |
| 2 | $758,400.00 | -0.07 | $40,800.00 | $667,368.00 |
| 3 | $667,368.00 | -0.05 | $41,616.00 | $594,464.40 |
| 4 | $594,464.40 | -0.15 | $42,448.32 | $469,213.67 |
| 5 | $469,213.67 | -0.1 | $43,297.29 | $383,324.74 |
| 6 | $383,324.74 | 0.21 | $44,163.23 | $410,385.43 |
| 7 | $410,385.43 | 0.07 | $45,046.50 | $390,912.66 |
| 8 | $390,912.66 | 0.05 | $45,947.43 | $362,213.49 |
| 9 | $362,213.49 | 0.15 | $46,866.38 | $362,649.18 |
| 10 | $362,649.18 | 0.1 | $47,803.70 | $346,330.03 |
As you can see, the returns are all exactly the same, just reversed in order from one chart to the other. The effect of bad returns upfront is the portfolio balance ends up 42.7% lower than the portfolio with good returns upfront.
This sequence risk only occurs when withdrawing from a portfolio. Consider the following example, where money is not withdrawn from an account.
| Good returns upfront, no withdrawal | ||||
| Year | Starting Value | Return | Withdrawal | Ending value |
| 1 | $1,000,000.00 | 0.1 | $0.00 | $1,100,000.00 |
| 2 | $1,100,000.00 | 0.15 | $0.00 | $1,265,000.00 |
| 3 | $1,265,000.00 | 0.05 | $0.00 | $1,328,250.00 |
| 4 | $1,328,250.00 | 0.07 | $0.00 | $1,421,227.50 |
| 5 | $1,421,227.50 | 0.21 | $0.00 | $1,719,685.28 |
| 6 | $1,719,685.28 | -0.1 | $0.00 | $1,547,716.75 |
| 7 | $1,547,716.75 | -0.15 | $0.00 | $1,315,559.24 |
| 8 | $1,315,559.24 | -0.05 | $0.00 | $1,249,781.27 |
| 9 | $1,249,781.27 | -0.07 | $0.00 | $1,162,296.58 |
| 10 | $1,162,296.58 | -0.21 | $0.00 | $918,214.30 |
| Bad returns upfront, no withdrawal | ||||
| Year | Starting Value | Return | Withdrawal | Ending value |
| 1 | $1,000,000.00 | -0.21 | $0.00 | $790,000.00 |
| 2 | $790,000.00 | -0.07 | $0.00 | $734,700.00 |
| 3 | $734,700.00 | -0.05 | $0.00 | $697,965.00 |
| 4 | $697,965.00 | -0.15 | $0.00 | $593,270.25 |
| 5 | $593,270.25 | -0.1 | $0.00 | $533,943.23 |
| 6 | $533,943.23 | 0.21 | $0.00 | $646,071.30 |
| 7 | $646,071.30 | 0.07 | $0.00 | $691,296.29 |
| 8 | $691,296.29 | 0.05 | $0.00 | $725,861.11 |
| 9 | $725,861.11 | 0.15 | $0.00 | $834,740.27 |
| 10 | $834,740.27 | 0.1 | $0.00 | $918,214.30 |
As you can see, if we’re not withdrawing, the order of the returns we get has no effect on the portfolio balance.
So what can you do?
In the US you basically need to hope for the best. If you get good market returns early on in retirement, you’re likely to be all set. It’s not generally considered good practice to stay invested in anything other than risk assets due to the relatively low returns of US Bonds, TIPs, and other non-risk assets.
In Brazil however, (at the time of writing) Tesouro Directo government bonds are paying very high rates. You can basically buy risk free assets with stock-like returns, virtually guaranteeing no sequence risk.
What about inflation risk? To mostly avoid that you can buy a IPCA+ security. Currently you get a Tesouro IPCA+ com juros semestrais for a rate of the IPCA plus an additional 6%. The amount you invest will grow at the IPCA (inflation) rate and be returned at mostly it’s original purchasing power when the bond come due (you loose some to taxes, as the IPCA interest is taxed). You also get a paycheck every year for the 6%, which is inflation adjusted (actually two paychecks of 3% each, more or less).
If you were planning for a 4% rule, that IPCA+ plan gives you a 6% rule with no sequence risk!
FGC Investment Protection
The government of Brazil provides insurance against loses for certain types of private bond investments, as well as checking and savings bank accounts. It’s called FGC. The closest equivalent in the US is called FDIC, which protects checking and savings bank accounts. The big difference is, in Brazil the protection extends beyond banks to bonds issues by private institutions.
Private institutions pay higher rates then the government bonds (Tesourro Directo), however with FGC protection, you get the same or a similar low risk, since they’re also government backed.
That can allow the savvy investor to benefit from low risk with government insurance, while arbitraging a higher level of returns from the private institutions.
This protection extends to the following investments:
- LC
- LH
- LCI
- LCA
- CDB
…As well as bank accounts. You’ll notice some of the investments listed are also some of the tax free investments covered earlier, such as LCA and LCI.
Low cost of living
I have written on this topic a couple of times in the articles on Hacking Life with Geoarbitrage and Grocery prices in US verses Brazil, so I suggest checking out those articles.
But it’s not just me saying it. You can check a site called Numbeo. They rely on user submitted data to develop cost of living information on various cities around the world. Check out this comparison between Rio and Miami
You can see that Consumer prices are twice as high on average in Miami. If you include rent, it’s three times higher. Note, that purchasing power takes into account income, which is less relevant for a retirement discussion. You can make more money living in Miami than in Rio, basically. We’re talking about people who have made money and are retired and spending it.
If you don’t like Rio, that’s fine. Go to Numbeo and choose any two cities to compare, and you’ll find these results are quite repeatable.
Anyhow, that’s it for today. Let me know what you think, or what I left out in the comments.
-Sirsandals
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