Every day we’ll open the newspaper, or turn on Bloomberg to listen to market and investment risks being discussed. Whether it be political risks such as ‘trade war’ between the US and China, political instability in the Middle East or high levels of household debt in Australia, there is no shortage of risks to be mindful of. However, with all of this noise, it is often the most fundamental risk that is overlooked amongst expats, and that is currency risk.
As Australian expats working abroad, whether in Singapore or elsewhere, this can be a complex decision particularly when trying to design your financial and investment strategies around it. You may be in a position where you’re being paid your monthly salary in Singapore dollars, paying your investment mortgage in Australian dollars and purchasing groceries locally in Singapore Dollars, all while travelling throughout the region for work spending a wide range of currencies. Faced regularly with many currencies, it is easy to see how many expats fall into the trap of becoming forex experts and start looking to trade currencies, despite having no experience in financial markets.
While there are a number of factors to consider, for those close to retirement and the point in their lives where they plan to start drawing a retirement income, a general rule of thumb is to hold the majority of your investment portfolio in the same currency as your planned retirement income. Put simply, if you plan to draw your retirement income in Australian Dollars (AUD) when you retire, then it is likely that your retirement portfolio should be held largely in Australian Dollars.
When it comes to investments, currency risk in retirement is one that can and should be managed.
Currency risk is in fact one of the greatest risks to those expats looking to retire in Australia.
Let’s look at just how dangerous the wrong decisions when it comes to your currency exposure can be. Assume that you’re just two years off retirement, currently working in Singapore and you’re planning to return to the land down under to live out your golden years. You’ve calculated your required income in retirement and know that you’ll need to draw an annual income of A$100,000 to live the lifestyle that you’d like. This meant you would need a retirement portfolio of A$2.5M (based on a 4% drawdown).
You have the majority of your A$2.5M investment portfolio in Singapore Dollars (SGD) as your salary is in Singapore Dollars, so you thought this would be the smartest option, or a local banker or adviser convinced you to do so without doing your own homework. Now let’s consider that the Singapore Dollar depreciates considerably against the Australian dollar over the next two years from 1.04 to 1.30. Your A$2.5M portfolio is now only worth A$1.875M. What do you do? You’re not left with a great deal of options. You could choose to either tell your partner that you’re going to have to make some lifestyle adjustments or you can continue working to recover the amount you’ve lost.
“Currencies are generally quite stable…aren’t they..?”
It is all too often that we see people with their head in the sand assuming that this won’t happen to them because they’re invested in a safe currency that won’t move around very much. We don’t need to look too far back in time to see the large swing in the Singapore Dollar (SGD) relative to the Australian Dollar (AUD). In fact, back in 2013, it was in fact trading at approximately 1.3 – 1.35 relative to the AUD.
There is of course then Brexit. Consider those looking and working in the UK, planning to retire in Europe, Australia or elsewhere. From the peak, we saw an 18% decline in the British Pound relative to the Australian Dollar, which is a similar figure to the scenario we just outlined.
How are your investments positioned..?
Are your investment assets positioned correctly to manage currency risk? How much currency fluctuation could your retirement strategy handle? When was the last time you reviewed the currency risk associated with your portfolio?
Speak with a qualified Adviser today to review your portfolio and retirement strategy.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Adviser with Australian Expatriate Group, specialist division of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian expats in Singapore.
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Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.