Reader Case: Can Costa Rica Save Their Retirement?

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It’s been two years since we released our book, and it still amazes me whenever someone writes in to us to let us know that we’ve changed their lives. It’s a gratifying and humbling feeling, and you’d think I would have gotten used to it by now, but nope. Blows my mind each time.

Today’s readers are wondering whether some Travel FIRE is in the cards for them, and who can blame them? Here in Canada, border restrictions are starting to finally ease up, and you can bet we’ve been eyeing Google Flights for places to go, as FIRECracker wrote about here. So let’s see where the math leads, shall we?


Hello Kristy and Bryce!  We recently found your book and it has blown both of our minds!  Neither of us could put it down!  We never thought it could be possible to be financially independent before the typical retirement age.   We met on a blind date and have been married for 21 years.  We worked hard to raise our kids and kill off the debt that came during our early adulthood.  Now, Mr.C is 46 and works full time while Mrs.B is 53, semi-retired and working part time. In 2019 the breaking point came for us and B quit due to the dumpster fire her job had become.  We’ve raised two great kids along the way.  We put our wonderful daughter through college and now at 25 she’s got a good paying career of her own started.  Our son is still in college, with one more year left , and are currently supporting him. We both wish we had discovered FIRE, and specifically YOU years ago!  Had we known years ago that this was a possibility, we probably would have made different investment choices (Mrs.B’s IRA was through work so it wasn’t a choice).  We realize that we are a little late to the game, but desperate and determined to make it work for us.  We are so tired of working and not enjoying life as it should be enjoyed!

We want to be ‘FI’ next year (Summer 2022) and move to Costa Rica.  Our annual spending budget at that time would be about $35,000.  Since we would be moving out of the country, we would be selling our home and vehicles, and pretty much everything we own.  As you can see, most of our investments are IRA’s which can’t be touched without penalty until April 2027 when Mrs.B is 59.5 years old. While we would also LOVE to ‘RE’ when we make the move, Mrs. B’s job is remote, so she can keep working if need be, and Mr. C might be able to stay at his company but work remotely part time (or will find another part time remote job). We will do whatever it takes in order to make this dream of ours come true.Here are our financials:

Combined gross income $156,000

Combined net income: $106,800 *out of Mr. C’s paycheck we have deductions for health insurance ($750 monthly for the family plan), $250 monthly HSA contribution, and $275 monthly IRA contributions

Monthly spending is $6,500

Debt: We recently updated our kitchen cabinets and took out a Home Depot credit card to pay for it instead of using our savings as they had a 0% interest for 2 years promotion.  The balance on the account is $12,800 and the minimum payment is $129. However we pay $625 in order to get it paid within the 2 years.  This is included in the $6,500 spending above.

Fixed assets:

Home – currently worth $405,000 and we owe $337,000

Cars – we have 2 cars, both paid off.  They are worth approximately $15,000 each.

Investments:

Cash/Savings: $43,000

H.S.A accounts $5,800.  Currently contributing $250 per month

IRA accounts – one in Mrs. B’s name worth $468,785, and one in Mr. C’s name worth $59,863

Roth IRA in Mr. C’s name, worth 13,739

Municipal bonds – current value of $33,628, earning 4%


Thank you for reviewing our information and we look forward to hearing back from you!
CostaRicaRetirement


The best time to learn about this FIRE stuff is as soon as possible in your working career, because the power of compounding and time really is the greatest force in the financial world. Unfortunately, try as we might, we can’t reach everybody in their twenties. CostaRicaRetirement are in their late 40’s/early 50’s. They are, in their words, a bit late to the game, but you know what? Better late than never.

At a glance, CostaRicaRetirement earn decent enough money, but their net worth isn’t as high as it could be given their age and earning power. This is pretty typical of your “normal” middle-class American family. While they might not have spent recklessly, they didn’t drive towards FIRE with the intensity that they could have, because they didn’t know FIRE was a possibility until now.

Their one big ace in their sleeve is their willingness to move to Costa Rica. Costa Rica is a beautiful country, and we loved our time there when we visited back in 2017. But can Costa Rica save their retirement? Let’s Math That Shit Up and find out!

Base Case Analysis

To start, let’s summarize their financial situation as it stands right now. But first, there’s a few oddities in how they’ve provided their numbers that we have to fix.

First of all, the difference between gross and net income is that net income takes into account taxes, union dues, and other expenses that get subtracted off your paycheque. But if those deductions then get transferred to another account that you control, that’s not really an expense as it is a transfer. So while health insurance premiums should be deducted, HSA and IRA contributions should not. We need to fix that.

Secondly, debt payments normally should be included as part of your monthly expenses, but the $12,800 Home Depot debt is a 0% interest rate, and will be paid off in 2 years. Because it won’t be a long term part of their budget, it shouldn’t be included in the ongoing expenses that we use to calculate our FI target. However, for the 2 years that they’re still paying it off, we still need to make sure it’s accounted for in our savings table.

So making these two fixes, here are their starting numbers.

SummaryAmount
Income$156,000 (gross), $113,100 (net)
Expenses$6500 monthly/$78,000 annual for first 2 years, $5875 monthly/$70,500 annual afterwards
Debt$337,000 mortgage, $12,800 credit card
Assets$43,000 (Cash) + $5,800 (HSA) + $468,785 (IRA) + $59,863 (IRA) + $13,739 (Roth) + $33,628 (bonds) = $624,815

Note that in our base case analysis, we’re assuming they’re staying put and continuing to live in their house, so we wouldn’t include the house or the car in their investable assets.

So given this starting point, how far are they from retirement? First of all, after they pay off the credit card debt, their annual living expenses would be $70,500, and by applying the 4% rule that gives us an FI target of $70,500 x 25 = $1,762,500.

Their net earnings are $113,100, and with an annual spend of $70,500 a year, that gives them a savings rate of $113,100 – $70,500 = $42,600, or $42,600 / $113,100 = 38%.

How long will they take to hit FIRE?

YearBalanceSavingsCC Debt PaymentROITotal
1$624,815.00$42,600.00$8,100.00$37,488.90$696,803.90
2$696,803.90$42,600.00$4,700.00$41,808.23$776,512.13
3$776,512.13$42,600.00$0.00$46,590.73$865,702.86
4$865,702.86$42,600.00$0.00$51,942.17$960,245.03
5$960,245.03$42,600.00$0.00$57,614.70$1,060,459.74
6$1,060,459.74$42,600.00$0.00$63,627.58$1,166,687.32
7$1,166,687.32$42,600.00$0.00$70,001.24$1,279,288.56
8$1,279,288.56$42,600.00$0.00$76,757.31$1,398,645.87
9$1,398,645.87$42,600.00$0.00$83,918.75$1,525,164.63
10$1,525,164.63$42,600.00$0.00$91,509.88$1,659,274.50
11$1,659,274.50$42,600.00$0.00$99,556.47$1,801,430.97

11 years.

Now that might seem OK at first, but keep in mind that CostaRicaRetirement are currently 46 and 53, so this would put their retirement date at 57 and 64. So they’re on track for a “regular” retirement if they stay where they are. But as we mentioned before, they’re willing to relocate to Costa Rica. How does this affect the math?

Travelling FIRE Analysis

When we were in Costa Rica, we actually found it to be one of the more expensive countries in Central America. But even an expensive country in Central America will pale in comparison to the cost of living in much of the USA.

If our couple were to move to Costa Rica, they would sell their house and their cars. Their house would net, after real estate commissions, $405,000 x 0.95 = $384,750. After paying off the mortgage, they would pocket $384,750 – 337,000 = $47,750. Selling the two cars would also give them additional $30,000. Both these numbers can be added to their net worth when they move.

Additionally, their living expenses would drop to $35,000. This is the factor that will most dramatically alter their retirement date, because their FI target would plummet from $1,762,500 all the way down to $35,000 x 25 = $875,000.

So in order to see how this move would affect their retirement, we take the previous table which models their current situation, and we add a new column to the left “Total After Selling House/Cars”, which is simply the “Total” column plus the proceeds from the house ($47,750) and the cars ($30,000). When this number crosses our FI target of $875,000, that’s when CostaRicaRetirement can pull the trigger on selling these assets and move to Costa Rica, confident that they will have enough afterwards to fully fund their retirement. And this trigger point comes in…

YearBalanceSavingsCC Debt PaymentROITotalTotal After Selling House/Cars
1$624,815.00$42,600.00$8,100.00$37,488.90$696,803.90$774,553.90
2$696,803.90$42,600.00$4,700.00$41,808.23$776,512.13$854,262.13
3$776,512.13$42,600.00$0.00$46,590.73$865,702.86$943,452.86

…Just a little over 2 years.

So here, we can see the power of Travelling FIRE. Even if you currently live in a high cost city, if you’re willing to relocate into a lower cost city, or even better a lower cost country, you can dramatically slash the time it takes to retire.

What to Do with the IRA?

They also asked what they should do with their IRA. Normally, we’d advise using the 5-year Roth IRA conversion ladder strategy to pull money out after retirement without paying any taxes or penalties, but Mrs. B will be 55/56 by the time their retire. That’s not that far off from the “normal” retirement age of 59 1/2, so this might not be worth the trouble for her.

That being said, if they fully retire at that point and their earned income drops to 0, Mrs. B can still use the Roth IRA conversion ladder to get a head start on converting to take advantage of the 0% tax bracket provided by a married couple’s standard deduction of $24,800. She would need to keep track of the fact that she can’t move it out of her Roth for 5 years, and she would only need to do these conversions for 3 years. After she hits 59 1/2, she can switch to normal withdrawals.

Mr. C, on the other hand, should definitely use the Roth IRA conversion strategy, since he’s pretty far from his normal withdrawal age.

Conclusion

Time may be your greatest weapon when it comes to retirement planning, but as we’ve discovered, if you don’t have time, you have the next best thing: Travel!

By being willing to relocate to Costa Rica, which again is pretty expensive by Central American standards, CostaRicaRetirement can hit their retirement goals in just over 2 years! And having been there, I have to say that Costa Rica is an excellent choice. Beautiful weather, gorgeous nature, and all the cocoa you could ever hope to eat! Plus, there’s an expat community already living there that they could embed themselves into. That being said, whenever you plan to move abroad, take a sabbatical or work remotely (if possible) for a few months to try it out. Every place has pros and cons, so make sure you don’t get blindsided.

How about you? Would you be willing to move to Costa Rica to retire? Let’s hear it in the comments below!


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26 thoughts on “Reader Case: Can Costa Rica Save Their Retirement?”

    1. You are absolutely right. This couple needs expert tax/legal advice tailored to their anticipated situation as US citizens who would likely become residents of Costa Rica for tax purposes and who would have to rely on any Tax Treaty/convention for the avoidance of double taxation between the US and Costa Rica (if one exists).

      Plus relevant parts of the Internal Revenue Code (IRC) and their state’s tax legislation needs to be considered in detail. I have a good understanding of Canadian tax law for someone not actually practising in that area of law, but that helps not one bit with this couple’s multi-national tax situation. In fact, with great respect for his other skills (including “math-ing that shit up’ in general terms), Wanderer is making many tax/legal assumptions about US citizens like the CostaRicaRetirement couple that should be/are way outside his comfort zone to advise about.

      A few blog posts back, there was an Alberta couple proposing to move to Colombia full time or to live there for just short of half a year, visiting other neighbouring countries for the remainder of the year (as per Wanderer/FireCracker’s advice). They got very superficial and likely incorrect advice from this blog about being able to avoid losing their status as Canadian residents for ITA (tax) purposes [ITA=Canadian federal Income Tax Act]. That was purportedly bad advice, with minimal considerations for how much some small facts change the situation. Among others, that couple had Colombian citizenship, which might make the tie-breaking rules in the Colombia-Canada Tax Treaty/Convention skew the way of them becoming non-resident Canadians with no “habitual abode” in Canada or with such an abode in Colombia or with no abode anywhere–which would trigger all of the consequences related to one becoming a factual or deemed non-resident of Canada based on their Colombian nationality/citizenship. Instead of advising them to do their homework, Wanderer and FireCracker extrapolated from their own situation (as, I suspect, Canadian citizens with no other nationalities), which is entirely unlike that couple’s.

      I was going to comment at the time along the lines of “just because the CRA might not realize all the facts, doesn’t make reality be something else”. And once the CRA gets a sense, one doesn’t want to deal with such a battle/penalties/deemed disposition assessments from aboard. I would go as far as to suggest that if the writers of this blog (whom I respect greatly) did not have the misfortune (for personal and pandemic reasons) to have to return to Toronto for such an extended period of time in 2020-2021, they might have already done well to analyze their tax residency situation based on the ties they demonstrably have with Canada (and maybe should do again a few years into the future, depending on how long they spend abroad, whether it be <183 days per year in any other country or not). In fact, there may be as much of a potential gain (less taxation somewhere else) as a potential loss (deems sale, withholding tax on non-resident dividends etc.) coming out of that analysis and introspection, depending on what, who, and especially where (and if that place has a tax treaty with Canada). Not to mention, even in your 30s or 40s, one should think ahead about the provisions applicable to accrual of Old Age Security-residency if one's plan is to rely on it at age 60-65-70+.

      –Getting off my soapbox, now. Decided not to go back and check for grammar and ease of comprehension. There is enough content above for a potential reader to glean what to further research and read about. No legal advice provided.–

    2. Agree with Veronica and Baba Novac. Tax residency implications are huge and should not be superficially passed over as being insignificant. As a Canadian, I have zero intentions of swapping my Canadian tax residency as the implications are pretty harsh tax-wise. I always wonder how simplistically so many people consider moving permanently from one country to another and are too “cheap/stupid” to pay someone to provide them with sound tax advice to easily avoid significant pain and suffering.

  1. has this couple considered plane tickets back to their home country? Costa Rica is beautiful, but their kids are probably going to get married and provide grand kids at some point in the near future. I can’t speak for everyone, but our parents have visited us more in the last few months since we had a child than the last 4 years combined!

    – Where’s the FIRE

  2. Hola,

    I’m a Canadian expat who has been living in Costa Rica with my family of 5 for the past 8 months.

    Costa Rica is a very expensive country, I have found that many things in CR cost significantly more then they do in North America – Cars, gasoline, electricity, groceries, etc. It would be a huge stretch for this couple to drop their spending from $70k/year to $35k/year just by moving here. If they were to move here and live like a local then sure it’s possible, but if they want to enjoy a lifestyle with a few North American amenities (eating out, travel, North American style accommodations, owning their own vehicle) they will struggle.

    Nicaragua is similar to CR and it is roughly half the cost if they are looking to really accelerate their FIRE date.

    Thanks for the article!

  3. Haven’t heard of the term travel FIRE before. You learn something new every single day.

    It’s great that your readers are proactively reaching out to you to get personalized advice. I can’t wait until the FIRE movement becomes so popular that companies literally can’t find employees to work for their company.

    Then we actually put the power back into the people.

    1. Put the power back into the people.

      Seriously? How old are you? 5? I can see you have no understanding how basic economics works.

  4. Interesting comments about the tax and other cost implications of retiring overseas in one country … worthy of research for a new book on the subject… there are a number of bloggers who write from that angle Route2Retire Panama….the vloggers Our Rich Journey … Portugal … there are some books on the subject … commentors could offer suggestions for further research? … we are retiring back to Canada from Beijing because it is cheaper … which is another interesting angle, ….

  5. First, we moved to Costa Rica when we retired. Costa Rica is very expensive. We found that a moderate lifestyle there was only slightly less expensive than living in the US. Further, residency/income requirements are very stringent and non-negotiable. The cost for their universal healthcare coverage is mandatory and not cheap. Property crime is white high.

    That said, I loved living there and leaving was difficult. But it is incredibly important to have all the facts while making FIRE plans.

    1. Can you elaborate more on the residency/income requirements, their universal healthcare coverage, and property crime issues?

      Thanks!

      1. Residency – Below is a pretty good link that walks through the different residency options:
        https://outlierlegal.com/services/immigration/immigration-to-costa-rica/

        Healthcare – All legal residents and citizens of Costa Rica are eligible to participate in the public healthcare system called CAJA which requires you to pay a monthly fee based on the income level you declared when you applied for residency.

        Property/Petty crime is very prevalent in Costa Rica. It is almost part of the local culture it happens so often. Home/vehicle break-ins occur all the time in the beach community I live in. The place we rent has a monthly cleaning service – the maid steals stuff from us every time she comes by (including my kids tooth fairy money – twice!).

        My family still loves it here.

    2. Hi Sue,
      Where did you move to when you left Costa Rica? I’m assuming you left for somewhere more affordable.

  6. Costa Rica is very expensive! This seems like a low estimate for yearly expenses in CR. Agree re flights home to the US.

    Also just a reminder that the US taxes on citizenship, not residency. Therefore this couple will need to continue filing taxes in CR, even if they don’t spend any time in the states during retirement. Not sure how that impacts them.

    As a dual Canadian/US citizen living in Canada, it’s extremely frustrating to have to file my US returns and deal with the tax implications of PFICS. Would love to see a post on a fire dual citizen in Canada and how they invest to reach FI!

  7. I’d move to Costa Rica any day of the week! But probably not until my kids are out of the nest. For now…I’ll settle for heading to Costa Rica for some slow travel perhaps for a full summer. That would be pretty cool, and certainly Pura Vida!

  8. We spend $5,975/month or $71,700/annually (excluding HSA and IRA contributions) in the US but will drop our spending to $2,917/monthly or $35,000/annually living in Costa Rica.

    *******

    I always enjoy seeing these magical numbers thrown around. If it was the opposite, let’s say $3,500/month spent now and will spend $5,975/month in the future, I wouldn’t bat an eyelash.

    I don’t think people realize how difficult it is to transition to a lower cost of living than they are used to. Now, if they had said they’ve already done it before recently, I would say, ok, I can buy that. But that’s not what I see here. Enough commenters above have stated how costly Costa Rica can be. I’m not saying it’s impossible to live on $3,500/month in Costa Rica but I think a reality check is in order.

    “We realize that we are a little late to the game, but desperate and determined to make it work for us. We are so tired of working and not enjoying life as it should be enjoyed!”

    What I read above in the quotation is the following: they are desperate, tired, and not enjoying life as it should be enjoyed.

    WHY?

    Also, what are you trying to run away from? You might want to resolve those issues before your move to Costa Rica. Otherwise, those same issues will follow you there.

    Probably a bit harsh on my part but a kick in the pants might be in order here.

  9. I think they shoud consider Ecuador, or even Argentina (runaway inflation means plummeting cost of living), but try to be flexible enough to move again if needed. Just rent, dont buy. Not sure if I am allowed to mention another webpage but I use Nomadlist for rough idea of comparitive cost of living. I use their Expat costs per month rather than Nomad or Local. There is time to decide the location, and you could even consider just going 6 months per year so you dont lose US citizenship and any benefits associated with it.

  10. Was there ever a blog post or page where they showed how to do the TTR calculation on your own? I could swear I saw one on this blog once, but I can’t find it anywhere.

    Sincerely,
    ARB—Angry Retail Banker

  11. In Portugal, expat pay 10% tax rate if you have dual citizenship. You will only pay tax where you live, not on both countries.

  12. Great turn around for the couple 😊If I were them I would move after the 2 years but would keep some part time work to offset drawing down on the portfolio which would give them the option to have a tradition retirement back USA if they choose, 5-10 years after soaking up the life in Costa Rica. They really wouldn’t have to earn much, but would give them more option later in life.

  13. Ahhh, the good old “geo-arbitrage” coming to the rescue…

    Firstly, I have personally been to CR strictly for vacation purposes and it can be pricey especially if you are used to the westernized living conditions BUT…, and this is where I think the equalizer would be, it is totally possible if you are willing to adjust your lifestyle as a local. Otherwise, I can only see them spending exact same amount in CR as they do back home if they are NOT as careful, strategic and intentional in their approach. Hence, the biggest factor here by far is NOT logic or objectively math driven but the subjective CHANGE itself and they will have to be accepting of this concept to make it all of this work.

    Secondly, I would have to agree with some of the comments already echoed in this thread in that the tax implications will be a factor to our couple if they become a non-residence of the US. Best to sit down and discuss with a knowledgeable tax accountant so to quantify and mitigate federal and state tax law implications as best as possible. OR…, maybe they can just be “nomadic” and possibly avoid the whole tax implication concept from the onset. They will just need to redo their math for the “plug-n-play” pieces to work logistically speaking.

    Other than this… the plans looks SOLID and viable for the longevity!

    ImmigrantOnFIRE

  14. Math didn’t including replacing cars in Costa Rica (at least 1) or Health Insurance costs.

    I’m sure other factors are missing as well. Oversimplification.

  15. The financial math is solid…excellent job FireCracker!

    Psychologically, the couple is not ready for Costa Rica. For the last 10 years traveling oversea, I came across many who came to the end of the road because they moved to another country for a wrong reason. Grass is not always greener on the other side.

    FireCracker has done the solid math for both of you! In practice, I suggest the following training steps to prepare for the exciting life oversea.
    1. Reduce your monthly expenses in the US below $50K/Year. This training will
    ensure you have the skill and the psychology to stay in your budget of $35K/Year
    in Costa Rica. Most oversea travelers, especially the long terms, have the following
    realization after the honeymoon. Entrepreneurs and businesses in developing
    countries are much more aggressive and in your face for your money.
    2. If it is possible, take monthly vacation to the country and execute the planned
    budget. Test drives the country until you have experienced all the good, the bad
    and the ugly. After the experiences, if you still enjoy the country, commit to it
    long term.

    Good luck!

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