Hold Some Savings in the Currency You Will Spend
Picture a retired teacher named Elise, sixty-three, who lives in Manchester and plans to move to Spain. She has saved £400,000, all of it in pounds. When she began planning, one pound bought 1.17 euros, so her savings stood at about €468,000.
In the year before she retires, the pound falls to 1.05 euros. Her savings are still £400,000. They are now €420,000.
The money did not change. What it buys where she plans to live did. She has lost about 10 percent of her buying power, and she has not spent anything.
A currency’s value moves against other currencies. When the one you earn and save in drops against the one you will spend, your savings buy less there. When it rises, they buy more. It can go either way, and it often does.
If Elise had held a quarter of her savings in euros before the fall, the same drop would have cost her about 8 percent instead of 10. Holding some euros makes no prediction that the pound will fall. It puts part of her money in the currency where her bills will arrive.
There are a few common ways to do it. A bank account that holds the other currency, which some banks and online services offer. A brokerage account that holds government bonds issued in that currency. Or a bank in the country where you plan to live, once you have the papers it asks for.
A few things are worth checking. How reliable the issuer is. What interest the account pays compared with that country’s inflation. What it costs each time you change money. And what the reporting rules are, because many countries expect residents to tell the tax office about foreign accounts, and the rules differ from place to place.
Our calculator works in dollars, and it compares two routes for each country: the American inflation-protected bond, and the country’s own bonds. In our default case, about one country in eight needs less money with its own bonds. Mexico’s inflation-linked bonds pay about 4.6 percent above inflation, against 2.9 percent for the American ones. In the other countries, the American bond comes out ahead even after we charge 3 percent each time dollars are changed into local money. Yields differ, and changing money costs money.
Elise might find next year that her pounds buy more euros. Holding part of her money in each currency would make the change smaller in either direction.
You could decide what share of your savings should sit in the currency you will spend. Some people choose a quarter, some half, and some move everything in the last two years before they go. You could pick a number, write it down, and look at it again each year.
Which currency will your bills arrive in, and how much of your savings sits in it today? Tell us in the comments. Someone reading may be about to ask the same question.
Tell us in the comments