Option 2: Returning to the land of your birth
If you are sure you want to stagger back to your home country, things are not quite as simple. On the one hand there is an argument to be made for saving directly in that country because that is where you will be spending the money. But alas, the issue of transfer costs will soon rear its head again, as it will in many of the scenarios we consider. Because the mere act of getting the money to a foreign bank account incurs exchange fees etc. then you may be shooting yourself in the foot.
A smarter bet would be to have a German account denominated in another currency, a so-called Fremdwährungskonto (in case you’re wondering, that word is worth 93 points in scrabble). Many banks offer accounts in dollars, yen or pretty much whatever currency you would like. The advantage is that you do not pay transfer fees and you can protect yourself against fluctuations by locking the value of your money into present exchange rates.
Then again, this doesn’t quite solve the problem because getting the money in the appropriate currency is only half the battle. You want to get that cash into some kind of retirement/investment fund in the other country, which again exposes you to the insidious friction of transfer costs.
All things considered, it is probably still better to do your saving in Germany and then, only once you leave, go on to cash out your retirement savings and transfer them. That way you only pay exchange fees once, as opposed to if you had made regular pension contributions to an offshore account.
Note: The veto consideration in all this is if the Euro zone eventually buckles under the weight of Greek debt or some other problem arising from the increasingly unhappy marriage that is the EU. If the Euro does implode , then nothing matters anymore because the world economy is screwed. If that happens in the next while, print out this post, burn it and hope the fire catches the attention of aliens, because they’ll be the only ones who can save us at that point.
A double life
Of course there is the possibility that you don’t know where you are going to end up. In that case, does it make sense to save for your retirement in two currencies as a way to hedge your bets?
Again we must consider two distinct scenarios. The first is if your home country is one of the so-called emerging economies, which are relatively unstable. Examples would be Brazil, South Africa, Ecuador etc. These countries tend to boast higher interest rates on their bonds, for instance, but they’re also riskier.
The other scenario is if your country has a relatively stable, developed economy e.g. the US, UK, Canada (I will leave other EU countries out of the equation because the intra-EU free movement of capital makes the union pretty much like one big country).
If the first scenario is the case then it may be tempting to take advantage of the more attractive growth rates in those countries. According to the International Monetary Fund around 80 % of world growth in the next few years is going to come from emerging markets like India and China — those two will account for a whopping 40 % of the growth on their own. But our old friend uncertainty makes another appearance at this juncture. Though some of these countries are becoming economic powerhouses, there is a not insignificant historical risk associated with such investments as well — Argentina has gone bankrupt several times in recent years, for instance.
But even if you assume that the country’s economy continues to do well for your whole lifetime, which of is entirely plausible — the nation of Botswana has enjoyed consistent growth of around 7 % for close to 30 years — the currency fluctuation and transfer costs remain an issue. Which is to say: You are probably still better off investing in those countries through a German based fund/account and converting later. It is important to note that the Euro is very strong in relation to most of these currencies so chances are you will stand to win when you finally do convert your money into the local currency.
If your home nation has a similar level of stability and industrialization to Germany then the differences between the two countries are likely to be negligible. Take interest rates, for example. These have tended to be similar in Europe and the US over the last 50 years . Also, if one compares the stock exchanges indices of the various industrialized countries (e.g. Nasdaq, Dax, Nikkei), they tend to sync over time. If that situation continues, there would be little reason to weather the risk of currency swings or the drag of transfer costs by keeping your nest-egg somewhere else. Summary: You’d be more prosperous doing things from and through Germany.
Note: Though a once-off cash out and conversion may be preferable in general terms, it can have huge costs and should not be underestimated. If you are saving through an insurance company, it will of course deduct money for its costs which presumably include administration, office staff salaries and doggy day-care for the CEOs’ pets. These charges are not spread evenly across the entire duration of your policy, they are concentrated in the beginning. In fact, your payments garner almost no interest in the first few years, the bulk of the money goes to fees. Only later do you get the benefit of compound interest. So if you cash out the policy early you could find yourself getting much less than you actually put in. And don’t get me started on the cancellation fees involved.
It is an option to sell your policy on the open market such that someone else pays the premiums for you and you get the cash immediately. These deals can be difficult to find and negotiate however.