In my original Kiwiarbitrage article, I explained how I determined that my family and I could afford to “retire” to New Zealand (NZ). I also stated that I would write many more articles on New Zealand and geoarbitrage. Since then, I’ve written precisely none … until now!

This article starts with general lessons that any expatriate (EXPAT) pensioner should know before moving, some of which I didn’t. Secondly, since several readers contacted me over the past few months and asked what the cost of living in New Zealand is like, I discuss that below. The article is organized so people can read the sections they’re interested in and skip the rest. I also try not to concentrate too much on COVID-19 pandemic-specific lessons but rather lessons that apply to all environments.

Finally, this article is anything but definitive. There will be others. For instance, I want to write one for EXPAT US military retirees and veterans. However, I limited this article to just the general lessons I’ve learned from retiring overseas and cost of living insights for the sake of time.

General EXPAT Pensioner Lesson #1: Location, Location, Location

I know the location principle comes from real estate, but it also seems applicable to retirement geoarbitrage. I’ve told numerous people over the past 18 months how serendipitous it felt to move the family to NZ just before the global pandemic. I say that because NZ is one of the few countries in the world that kept COVID 19 at bay. While true, upon closer examination, our Kiwiarbitrage decision looks a lot less serendipitous and much more like the result of good analysis.

In truth, it was apparent to my wife and me during our two holidays to New Zealand that it was an exceptionally well-run country. We didn’t really need to research it to find that it’s one of the most democratically free, safest, prosperous, business-friendly, happiest and stable countries in the world. It was plainly on display during our visits!

Of course, all those top ratings come with a price a like high(ish) cost of living, which can be a big issue for retirees if they don’t plan properly. However, as I noted in my original Kiwiarbitrage article, the cost of living is relative to the other places one could retire. And, since my wife and I were looking at options like Europe, California, and Hawaii, New Zealand seems like a bargain in many ways. That was made even more apparent as COVID-19 raged almost unchecked over many parts of the world in 2020. In contrast, in New Zealand, the nation shut the borders, went through a six-week lockdown, and then went back to their everyday lives. How many EXPATs in low cost of living countries like Mexico or Costa Rica can say that?

General EXPAT Pensioner Lesson #2: Understand Historical Exchange Rates

OK, since I just bragged about my excellent retirement location selection skills, let’s burst my bubble. To do that, let’s discuss a serious mistake I made during my first year of Kiwiarbitrage. After all, I love beating myself up for money mistakes. In fact, I wrote a trilogy of articles highlighting some of my worst financial mistakes, which you should read if you want a good laugh. They will definitely make you feel better.

Back on topic. The Kiwiarbitrage money mistake I made was not paying closer attention to the exchange rate. As you may recall, in February and March 2020, countries worldwide locked down their borders to combat COVID-19. As a result, the global economy slowed significantly. During that time, the US dollar (USD) rose in value against most foreign currencies, including the NZ dollar (NZD).

The USD often strengthens in value during geopolitical or economic uncertainty. Knowing that, I transferred several months’ worth of living expenses in March 2020, as exchange rates swung in the USD’s favor. And then … I stopped paying attention to the issue.

I know that tracking exchange rates is an obvious must for an EXPAT to maximize the goodness behind geoarbitrage. However, I got distracted. After all, it was 2020, and there was a lot of stuff going on! In any case, the USD rose to an 11-year high against the NZD during that time. Not only that, but when I got around to rechecking exchange rates in October 2020, I lacked the historical knowledge to realize that rates were still higher than the previous decade’s average.

What happened? Well, I mentally anchored on the exchange rate I got when we originally transferred money after we moved in January 2020. Thus, instead of transferring multiple years’ worth of living expense money over at a great rate (which is what I should’ve done) I decided to wait for it to bounce back. In the end, I waited only to see the USD’s multi-year advantage vanish as the exchange rate rapidly corrected towards the mean. It was literally a 10,000 NZD mistake … which can go a long way over here.

That was a humbling experience, but not necessarily unfamiliar. In many ways, it reminded me of my less than stellar stock picking days. Fear of missing out on a better exchange rate is just like the fear of missing out on a better stock price!

General EXPAT Pensioner Lesson #3: Visa Pathways

While I’ve yet to see a hobbit during our time in NZ, it sometimes feels like Gandalf guards the permanent resident visa pathway while shouting “YOU SHALL NOT PASS!” at us. Then again, the NZ immigration system was not designed for a financially independent retired early pensioner and his family to immigrate and live off his pension. That said, I don’t want to write a dissertation on NZ immigrant visa pathways. What I will say, is that it’s essential to know your options when immigrating and trying to establish long-term residence because you need to stay flexible.

For example, COVID-19 threw our Plan A out the window as the country shut its borders and the tourism industry cratered. That’s important because Plan A was for Mrs. Grumpus to get a job (that would’ve qualified for a permanent resident visa) in the tourism industry (her area of specialty). At the same time, I was to complete my master’s program (which got us our original visa into the country). Needless to say, with the borders shut, there weren’t too many jobs in the tourism industry. Fortunately, by successfully completing my master’s program, we could extend our visa for three years, which gave us time to examine backup options.

One backup pathway to permanent residence I investigated was an investor visa. Investor visas usually require an immigrant to bring a certain amount of money into a country over a certain period and invest it locally. NZ has two types of investor visas, one of which was entirely out of our reach. I felt the other, although a long shot, was worth a try since I didn’t want to return to full-time work. It became Plan B, while Plan A (full-time employment for Mrs. G) remained our primary goal.

However, as explained below, Plan B ran afoul of the US tax code. As a result, I’m now entertaining Plan C, which is the idea of returning to full-time employment by May 2022. However, I will only do so for the length of time necessary to earn permanent residence for my family. I also have a Plan D, which involves an entrepreneur visa, but that’s purely written on the back of a cocktail napkin at the moment. Then there’s Plan E, which entails a return to university for yet another degree while using the remaining portion of my GI Bill.

Do you get my point?

General EXPAT Pensioner Lesson #4: Passive Foreign Investment Companies (PFICs)

Have you ever heard of PFICs? Neither had I before attempting Plan B, despite paying for international NZ tax advice before moving here. In hindsight, I should’ve paid for international US tax advice too. The US tax code is so large and complicated that there’s no way to know everything before moving.

In any case, PFICs are a US tax code designation for basically anything that looks, smells, feels, or tastes like a mutual or index fund investment in a foreign denomination. This designation is important since gains from PFICs are taxed as regular income at regular income tax rates. Also, since the US taxes citizens no matter where they live, it’s a tax that Mrs. G and I would be subject to.

The best way to execute Plan B would have been to transfer the investment money from the US and purchase NZ mutual and index funds to meet investor visa requirements. Assuming we could amass the required amount, we would’ve kept the money invested for the time necessary to gain residence and then use some of the money to buy a house. In NZ, foreigners can only purchase property once they’ve achieved permanent residence.

There were many reasons why this plan made sense, especially if we intend to remain in NZ long term. For one, NZ doesn’t tax capital gains. Moreover, NZ taxes resident’s foreign investments, which I briefly mentioned in my previous Kiwiarbitrage article. So, consolidating assets in NZ accounts looked good from an NZ tax code perspective.

However, the US’s PFIC rules made Plan B cost-prohibitive because NZ-based dividends and capital gains would’ve been taxed as ordinary income back in the US. If I was a typical US retiree, I could’ve just waited for a year in which I showed zero earned income to sell my NZ holdings and let the gains fill up the 0% to 22% tax brackets. However, since I am already earning a pension, I will always have earned income!

Fortunately, thanks to the co-founder of the NZ-based Kernel Wealth, I found out about the PFIC rules before I bought my first NZ mutual funds. Unfortunately, I had already transferred over a significant amount of money to NZ. That said, I had a US CPA who specializes in foreign tax issues confirm that Plan B was subject to PFIC rules. When she did, I gave up on the plan. Now I’m waiting for exchange rates to swing in favor of the NZD. Once they do, I’ll return that money to the US.

Did I mention that paying attention to exchange rates is essential for an EXPAT?

Kiwiarbitrage Lesson #1: Cost of Living – Groceries

About nine months into our stay in NZ, Mrs. Grumpus approached me. She thought we were paying as much for groceries in NZ as in Hawaii (our last duty station before retirement). In the past few years, she’s taken over the job of tracking day-to-day expenses in Mint, which I used to do via Microsoft Money and Quicken. I told her I found that hard to believe since NZ, with its population of 5 million, is an agricultural powerhouse that produces enough food to feed 40 million people. Conversely, Hawaii imports almost all its food.

Here’s the funny thing, I ran the numbers recently, and I don’t think she’s wrong.

It turns out that for our first 11 months in NZ, 01 FEB through 31 DEC 2020, my family of four spent US $10,603 on groceries. During the corresponding 11 months in 2019, we paid US $10,748 in Hawaii. Adjust those 2019 figures for inflation, and it equals US $10,942. So, Mrs. G was almost spot-on in her assessment. Our grocery bill in NZ was as much as the one in Hawaii.

Of course, there’s context to those figures. The Hawaii costs include US military commissaries and clubs like COSTCO, meaning costs would’ve been higher had we not had access. On the other hand, NZ has no military commissaries and only one COSTCO in Auckland (a completely different island than where we live). The NZ prices also include COVID-19 prevention measures forced on NZ supermarkets in 2020. That said, one would expect those costs to show up in the inflation figures that I used to translate 2019 costs into 2020 costs.

Funnily enough, Radio New Zealand recently published a string of articles on food production and the cost of groceries in NZ. They drew two conclusions about why groceries are so expensive in a nation that produces roughly eight times the amount of food needed to feed its populace. The first reason is the strong export market. With international markets willing to buy NZ grown food at a premium, NZ food growers and distributors can afford to sell for the same prices in their home markets. Otherwise, they would just sell all their products internationally and reap a higher profit.

The second reason is a lack of competition among NZ supermarkets. Turns out there are only two national supermarket companies. While they each own several different grocery store chains, the profits all flow to one or the other parent company. Thus, there’s no real competition to drive down prices in favor of consumers. Couple that with a small population and there’s little incentive for international companies like Aldi or Walmart to come to NZ and attempt to compete.

Kiwiarbitrage Lesson #2: Cost of Living – Rent

So that’s food, what about other costs? In general, you pay a little more for gas (petrol), durable goods (like refrigerators and cars), and clothes in New Zealand than you would in most places in the US. On the other hand, rent is comparably cheaper in the part of NZ that we live in (Nelson) than where we were thinking of retiring in the US (San Diego) or where we lived in Hawaii (Aiea).

Currently, we rent a modern 7-year-old home with 3.5 bedrooms that overlooks our city and the ocean for about US $1650 a month. In Hawaii, we paid $3750 a month for a modern 4 bedroom house where you could only see the ocean from the second floor. Granted, the Hawaii house had more square footage, but not twice the amount (which the Hawaii rent price implies). Now, if we were buying a home in NZ anytime soon, I might be worried about the skyrocketing house prices. However, I understand the same phenomenon is hitting the US housing market propelled by the aftershocks of COVID. As such, that’s a wash, in my opinion.

 

Kiwiarbitrage Lesson #3: Perception vs. Reality

This discussion brings me back to a point I made in my original Kiwiarbitrage article. The idea of saving money through geoarbitrage all depends on the places you compare. Suppose you’re interested in moving to NZ (or anywhere else in the world). In that case, I suggest you go to a cost of living comparison website like Numbeo and compare your potential locations. Moreover, you should compare the categories that are most relevant to you.

For example, as someone who can only rent in NZ based on his visa condition, the cost of living in Nelson is 4.14% more expensive than San Diego if rent is NOT included. However, WITH RENT, the cost of living is roughly 23% cheaper in Nelson than in San Diego. Based on my experience so far, which includes monitoring my family’s cash flow semi-annually, I can say that Numbeo’s analysis seems correct.

That said, and much like I stated in my original Kiwiarbitrage article, I still don’t view our move to NZ as geoarbitrage. Yes, it’s cheaper to live here, but that’s not the reason we moved. We moved for several reasons that made my wife and I believe that we would improve our quality of life. For the most part, that’s proven to be the case; our quality of life has improved. The cheaper cost of living compared to our other retirement options is just icing on top of the cake.

I won’t lie and say that it’s been all roses, though, because an international move is difficult under normal circumstances, let alone during a global pandemic. Furthermore, EXPAT financial life is complicated. It’s even more complicated for US citizens who must continue to file US tax returns year in and year out. This is something I hoped you picked up from the PFIC discussion.

The Main Financial Takeaway

After 18 months as an EXPAT retiree and pensioner, my belief is that the more financial connections you have to your home country, the more complicated your financial life as an EXPAT will be. For example, I have a US pension, lifetime US (military) healthcare insurance, US credit cards (because NZ credit card programs suck!), US bank accounts and US retirement savings. All of these require constant observation, action, or interaction. This means my financial life is going to remain complicated for the foreseeable future.

However, that isn’t a complaint. It’s simply a fact of retired EXPAT life. Furthermore, this complication is potentially good news if you like reading articles about geoarbitrage, retirement, and New Zealand, because I’m going to have plenty to write about for years to come!