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Written by: Peter Dougherty | BISSAN Wealth Management
The 4% retirement rule began with an interesting question: At different points in U.S. history, if someone retired, how much could they have withdrawn without exhausting their portfolio over a 30-year retirement?
The original answer was about 4.15%, not precisely 4%. To err on the side of caution, though, rounding down to 4% seemed prudent. And easier to remember.
So, can an American couple who retires in Spain simply translate “four percent” to Spanish: “la regla de 4 %”, spend only 4% of their net worth and expect to be financially prudent?
The answer, in any language, is “no”.
The 4% rule provides a useful framework for thinking about sustainable retirement spending. Like most financial rules of thumb, however, it relies on assumptions. Americans retiring abroad should take time to review a few of those assumptions.
A life in euros, but assets in dollars
American retirees in Spain are likely to have their IRA, 401(k) and brokerage assets in dollars and receive Social Security in dollars. But supermarkets, restaurants, and landlords need to be paid in euros.
This exposes them to a risk that ex-neighbors they left behind in Indiana don't face: exchange rates. If their U.S. portfolio earns enough to support their planned withdrawals but the dollar falls against the euro, their purchasing power in Spain has declined even though their investments haven't.
That doesn't necessarily mean they should sell-off dollar-denominated investments. It means they should consider the currency in which they spend their retirement income (€) and not merely the currency in which their portfolios are measured ($). Currency is an added source of retirement volatility.
The takeaway: after-conversion purchasing power is an important number.
Taxes don’t need a passport to cross the border
Moving to Spain doesn't mean leaving the IRS behind. U.S. citizens typically remain subject to U.S. federal income taxation even while living abroad.
At the same time, becoming a tax resident in Spain complicates the picture by inviting the Spanish tax authorities to the table. A withdrawal from a retirement account that looks straightforward from a U.S. financial-planning perspective is often interpreted differently under Spanish tax law.
The takeaway: the relevant number is the after-tax, after-conversion purchasing power.
The investment map moved when they did
It is true that the 4% rule was first calculated using historic U.S. stock and bond market returns and U.S. inflation levels. But that’s not the biggest reason its assumptions should be double-checked before an American retires in Spain.
Instead, it’s because a portfolio that worked well while living in the United States often becomes harder to manage abroad. Replacing familiar U.S. investments with locally available foreign mutual funds or ETFs is typically unadvisable due to unfavorable U.S. tax consequences, including PFIC rules. Meanwhile, leaving U.S. financial assets in accounts where they’ve sat may prompt questions from the financial institution once the account holder has moved.
The takeaway: the portfolio supporting the 4% withdrawal strategy may itself require reconsideration.
The rule isn't broken, it simply doesn’t work
None of this makes the 4% rule useless for Americans retiring abroad. It makes the rule what it always was: a starting point rather than a complete map.
Internationally mobile retirees may need to add currency exposure, taxation, account accessibility and cross-border investment restrictions onto the traditional concerns of inflation, longevity and market returns. There is no financial calculator that does that. Thankfully, there are cross-border financial planners that do.
Related: The Retirement Math Nobody Told You About Before You Moved to Spain