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So the other day an email popped up into my perpetually-exploding inbox, and it read:
I’m a huge fan of your blog. Unfortunately it’s only in English and our Brazilian community in majority don’t speak the language.
I’d like to request your permission to use translated parts of great posts like this https://www.millennial-revolution.com/freedom/five-stages-early-retirement/
Please please please…that will be so useful for our small but growing FIRE community in Brazil !!! We’ll give M-R the credits and link to your post for sure!
Thank you so much!
To which my response was: There’s a FIRE community in Brazil?!?
Turns out: yeah! There’s a small but vibrant community of FIRE bloggers in Brazil who are pursuing FI in their own unique way, with the added challenge of being mostly Portuguese-speaking only, meaning many of them can’t read the plethora of FI blogs in North America, hence guys like my emailer who were trying to run around and translate English-language articles into Portuguese for the Brazilian community.
Now, you guys know me. That is WAY too cool a topic for me to ignore. So without further ado, I’d like to present…our totally awesome interview with Brazilian FIRE blogger AA40 from the site http://www.aposenteaos40.org/
AA40, welcome. Thank you so much for talking to us today.
Hi FireCracker. First I’d like to thank you for the opportunity of sharing a little bit about how it is like to invest in Brazil as well as some of the things people that are looking to live off investment income and retire early are doing in this crazy emerging market we live in down here.
Well then let’s start with that, because it’s really interesting how different investing is for you guys/gals. For starters, when we were initially talking over email, you mentioned that Brazil is the opposite in terms of investing compared to the US in terms of asset allocation. What do you mean by that and why?
In one of the first emails we exchanged I did mention that our asset allocation in Brazil usually (not for everyone) leans towards fixed income. As you know, we have one of the highest interest rates in the world. Not only that, we have one of the highest REAL interest rates in the world. It means that a Brazilian doesn’t need to “risk” much on the stock market to obtain good returns because the government bonds and even some CDs can provide about 4% above inflation a year. This doesn’t come close to CDs and Bonds yield in the US for instance.
Of course, we diversity our investments and use ETFs and stocks for that but our asset allocation is more or less the opposite of an American seeking early retirement. While you guys go 60% stocks/40% bonds in the US, in Brazil we usually go 60% to 80% fixed income (bonds, CDs and other instruments you guys don’t have such as LCAs – Agriculture backed up debt contracts, LCIs – Real estate backed up debt contracts) and only 20% to 40% at most in stocks/REITs.
Most people in Brazil (not FIRE community though) still keep their money in savings accounts with big banks. While the current rate of return on a savings account of 5.12% might seem really good for you, it is not. We can get much better rates in CDs, government and corporate bonds, good funds and others but for that you have to invest through a brokerage firm which is something not yet very popular among Brazilians either by lack of knowledge, interest or simple fear.
Our blogger community plays an important role here by trying to clarify all questions, concerns and promote financial education for our people to invest in the best way possible, maximizing the power of compounding interest overtime but there is still a long way to go.
4% return after inflation? You gotta be shitting me! That would be the equivalent of 6-7% bond yields stateside. What about investing in stocks? Do you have Brazilian Index funds?
Different people use different strategies here. As we have a lot of crappy companies in our main indexes – natural for an emerging market – some people like to pick good stocks directly while some don’t and so they index.
We at AA40, like you guys, are in favor of investing through low cost index ETFs, however the ETF market in Brazil is not as vigorous as in the developed countries yet but it’s growing. We don’t have hundreds of options but we do have some ETFs such as the PIBB11 and BOVA11 that basically replicates the IBOV (Main Brazilian stock index).
We also have small caps, dividends, sectors and other ETFs – Full list here.
One thing is different though – Dividends. In Brazil, the dividends on ETFs are not deposited into your brokerage account every month/quarter but it’s automatically reinvested into the principal.
One very interesting ETF we use here is the IVVB11 which is the S&P 500 index but negotiated in the Brazilian stock market. As you know, for a foreigner to directly invest in the US market can be real pain in the ass and it can take lots of hours of reading (taxation alone is a nightmare) so via this ETF we can invest in the US without moving our money overseas and all the complication this entails.
What are the MERs like?
As for the management expense rates, we definitely have higher costs than developed markets have due the lack of competition basically.
Some actively managed funds can charge up to 3% or even 4% a year which is insane. The index ETFs I mentioned above charge more reasonable fees. The PIBB11 charges 0.06% a year while the BOVA11 charges 0.54% a year.
Another thing that plays an important role is the income tax. The longer you keep your investments in the market the lower is the income tax you have to pay on fixed income. It’s not by income brackets like in the US. It’s according this table below:
|Up to 180 days:||22.5%|
|181 to 360 days:||20.0%|
|361 to 720 days:||17.5%|
This is also another reason we advocate to invest for the long term.
There is a big campaign going on now trying to make people invest through brokerage firms instead of big banks like I also mentioned above. You have way more and better investment options, lower fees, same security levels (FGC which is the same as FDIC insurance in the US). You can also buy government bonds free of charges through brokerages but almost never through banks which normally can charge up to 0.5% just to give your money to the government to use.
How does currency-hedging work in this case? Is most of your money held in Brazilian Reais or something else?
Most of us who are investing towards the financial independence goal have most of our money in Brazilian reais as we plan to live here. Although, as a result of our recent economical/political crisis, more and more people are investing in hedge funds and ETFs held in stronger currencies such as the USD or EURO. Some prefer FX funds to hedge against the devaluation of BRL.
We at AA40 usually say it’s a good idea to keep a portion (~10%) of your portfolio in a stronger currency investment. That also makes sense if you are planning to do lots of international travels – which is the dream of most of us during FI/RE time – so you wouldn’t have to worry too much if the BRL x USD/EUR exchange rate goes wacky!
Since Brazil has a similar oil-heavy economy as Canada, you guys got whacked by the oil price crash in 2015 along with us. What was that like?
Oh boy did we. Now, on top of that, you add corruption like never before. I’m not talking about small amounts. I’m talking about billions of dollars lost in bribery scandals on all levels of the government.
If you see the chart below, it will tell you what happened. Petrobras, or giant state-run oil company fell from 39 reais a share in 2009 to less than 5 reais in 2015.
Not only oil got hit but Brazil is heavily depended on iron ore exports as well and guess what? It also got hammered. The whole economy sank and people are still suffering with that now a days. The 14% unemployment rate is only now showing some signs of decline.
Amid all these terrible news on the stock market, the interest rates and CPI skyrocketed to 14.25% and 10.67% respectively. It’s not the worst news for someone with money invested in fixed income but for the economy, job creation, GDP, exports is really bad. During times like these you hold on to your fixed income which was still paying 3 to 4% real while you wait for long term buying opportunities on stock market. By simply rebalancing your portfolio you would achieve that.
Wow, that is some CRAZY inflation. So I’d assume you can’t be touching fixed-rate debt with a ten-foot pole in situations like that. How are you hedging against that? Do you have an equivalent of Real Return Bonds or TIPS (Treasury Inflation Protected Securities)?
If you’re someone thinking in a long term retirement portfolio, you must add some TIPs to it to hedge against inflation and its terrible effect on the purchasing power. Here we call TIPs the Treasure Bonds IPCA+ (IPCA is the Portuguese term for CPI). It pays you the inflation rate plus a percentage of gross real return.
The inflation finally gave up during 2017 thanks to some reforms promoted by the new government (naturally very unpopular because of that plus more corruption scandals). When I’m writing this, the 12-month accumulated inflation is at 2.8%. Not bad at all if you compare to 10.67% in 2015. With that, the interest rates also fell from 14.25% to 7% currently.
At the moment, one of these bonds, which matures in 2045, is paying inflation plus 5.46% for someone who holds it until maturation date.
Compared to American TIPs, this is incredibly good. Of course, you have to pay income taxes on the total gains but still, you’ll have more than 4% a year in real terms.
It means you could easily use a safe withdrawal rate of 4% or more only investing in IPCA+ fixed income here in Brazil if inflation behaves.
These bonds are considered the safest fixed income you can have here as it’s backed up by the national treasury (in the worst case they can print more money).
OK let’s switch gears here a bit. What is the cost of living like in Brazil? One of the biggest challenges to Canadians trying to achieve FI is avoiding overpaying for real estate. Do you have this problem in Brazil?
Great question. In Big cities like São Paulo, Rio de Janeiro, Porto Alegre and most of the state capitals the cost of living is pretty high and so are real estate prices. The only way for a poor or middle class person to buy a house is to get trapped into 30-year mortgages, paying absurd interest rates which leads you to pay twice the original price for a house/apartment. Unfortunately people here don’t think in financial terms but only emotionally when analyzing either to buy or not and most fall into a trap without even seeing it as such.
My opinion is exactly like yours when it comes down to buying a house. You buy it cheap or you don’t buy at all and rent. With the high interest rates in Brazil it’s almost never a good idea to buy a house if you math shit up. You lend money and never borrow money here – that’s our mantra.
If you want to invest in real estate in Brazil we recommend to do so through REITs (FIIs as we call them here). It’s well regulated and you have good options and regular income from them.
And as a corollary to that, one of the biggest challenges to Americans is the cost of health care. What is this like in Brazil?
Brazil has a public healthcare system. It doesn’t mean that you can rely on it. Usually in big cities the waiting lines for exams and to see a doctors so huge that it’s almost impractical to wait. Public hospitals and healthcare centers are always crowded and do not receive all the necessary funding from the government. In smaller cities and countryside it’s usually much better.
Most of us prefer to buy healthcare plans as we call it (not exactly insurance) from private healthcare companies. Usually you pay an amount every month and you have a long list of medical procedures and clinics that are 100% covered (no co-pay).
Fortunately, health care is way more affordable here than it is in the USA but if you want better treatment and don’t want to wait in line you will have to spend some money every month. The good thing is that you have option if you want to face the public healthcare system and save money or if you just don’t have the money.
Out of curiosity, how much does private insurance cost in Brazil?
There is a wide range of prices with different companies as you can imagine. The one I have, for instance, which is a good but not a top-notch plan I pay R$ 316 a month (~100 USD) and it covers 100% in-network clinics and hospitals, emergency, exams, a big list of medical procedures and surgeries and 100% of in-network doctors.
The older you get the more you pay unfortunately. In this site there is a nice table that shows the average by age in different categories (individual, family or corporate). This is from 2016 but it can give you a good view on how things work. The prices are in BRL so divide by 3.30 to get it in USD.
Jesus Christ, those numbers are a FRACTION of what the Americans pay. OK, but let me ask you this: Do people in Brazil typically have a lot of student debt? Americans who write into us regularly have over $100k in student debt, which is just mind-boggling for me.
Wow. No, not even close to what Americans have. Unfortunately, we don’t have this statistic here yet for me to share.
We do have public universities which are among the best universities in the country. Once you get approved on the very hard tests to get into one of them, you don’t pay tuition – which is great.
Of course, only the federal universities cannot fulfill all the demand so the government has a financing program to enable people to study in private institutions and you can pay back later when you graduate. This is called FIES (Student financing program) which works similarly to the American system but the difference is the price of tuition which is way lower for most courses (maybe law and medicine in some well-known schools might come close already).
Great. So even developing countries like Brazil have figured out a system for health care and student debt. *Angry Sigh*
ANYHOO, getting back on track, FI isn’t really “common” anywhere, but what’s it like to pursue FI in Brazil? Are you guys seen as “crazy” by the general population?
Crazy is the right word. Everything that goes against the general thinking is called crazy, right?
The FIRE movement is not very big here and is gaining some traction lately I guess mostly inspired by experiences shared by blog like Millennial-Revolution of course, Mr. Money Mustache, Retireby40, the great RootofGood, ERE and many others.
The number of blogs about this subject has grown exponentially in the past few years down here– AA40 among them.
Most of the bloggers actually post their net worth every month (it’s kind of a healthy competition and one of these bloggers even compiles a ranking) along with investment strategies and general comments about what’s working and what’s not.
AA40 is trying to gather some of these bloggers to organize the Brazilian’s first ever FIRE congress or meeting. Something more like the Chautauqua you guys have every now and then and maybe bring some guest speakers like FireCracker (open-minded people who loves to travel and wants to visit Brazil). This is only an idea for now but definitely something we’re looking forward to do. If you and/or other bloggers are interested in traveling to Brazil to brush up your Portuguese and speak to our community you’re very welcome.
I may take you up on that.
Tell us about the FI community in Brazil. Do you have your own FI bloggers in Portuguese or do people read the American/Canadian blogs? Is there a “Senhor Money Mustache”?
We do have a very engaged FI blogger community but we also read a lot the American/Canadians blogs. The main problem though is our language which kind of isolate us from the rest of FIRE community. People who speak/read English in Brazil are not common, so blogs like AA40 and many others try to bring the best of what is published in English to Portuguese and, more important, adapt to our reality. We cannot recommend to invest heavily or only in stocks here because it doesn’t make sense from risk standpoint as you can lose 50% in a matter of days – remember, we live in a emerging market and you have to have an stomach of steel to ride it.
There is not just a single blog that stands out here but dozens. One of these bloggers compiled a list of blogs in the Brazilian fire community and ranked them by number of access – click here. As their target Portuguese-speaking people, the number of access is not significant compared to English written ones like yours.
Wow, this was super illuminating, and I just wanted to thank you for doing this.
I’d really like to thank you for this interview and I can’t really express how much you and other bloggers like you mean to us. It means so much to finally have a purpose to put in those hard working hours, try to save more, and invest better. You’re the living proof that it’s totally possible to get out of the rat race once and for all and have the ultimate freedom to do whatever comes to mind possible.
A huge thanks from all Brazilian FIRE bloggers to FIRECracker and all readers of M-R.
And a huge thanks back! AA40, everyone, and you can read more from him on his blog http://www.aposenteaos40.org/
Man, we are getting international as FUCK over here. Any Brazilian readers out there? Let’s hear you in the comments! And if you have an interesting international take on FI, please email me. I would LOVE to feature you!