A few weeks ago while in Martinique, we walked by the French equivalent of McDonalds. As we continued to walk the first thing that popped into my head was, “This place looks almost identical to McDonalds”. Right about that time we walked by McDonalds itself, and then my mind drifted to purchasing power parity, travel, and retirement.
What is Purchasing Power Parity?
First off, purchasing power parity is a comparison of income levels and costs across cultures. Essentially, you take similar goods and compare the price across countries. Once adjusted for currency exchange they tell you if items are similarly priced across regions. When you do this with a market of goods it further allows you to compare income levels and other internal health factors of a country.
So, why did I think about this when I walked by McDonalds? The most famous Purchase Power Parity comparison is that of the Big Mac. Comparing the price of the Big Mac across countries is practically a cliche in early economics education. Now before we leave this, I’d be remiss in stating such a comparison is deeply flawed. The Big Mac is not similar across countries. In India, for example, they do not even use beef (for obvious reasons). Not to mention the obviousness of a company setting a price and that a single ingredient may not be indicative of the entire economy. But I digress.
By now you’re asking yourself, “Why FTF are you taking me through this basic economics lesson?” I’m here to talk about personal finance, not be lectured towards about some inane macro economic policy. Well in this case, purchasing power parity has a very real impact on travel and retirement.
International Travel and Purchasing Power Parity
I have done significant travel for work and play over the years. When you do so, you see Purchasing Power Parity in full effect. Furthermore, you feel it where it matters, in your wallet. You see, those countries with a high parity are expensive from a travel perspective. A trip to Norway or Australia is exceptionally expensive compared to travel to say Mexico. On my last trip to Australia for work, I marveled at how even a simple pasta dinner was the equivalent of 20-25 USD dollars on a restaurant menu. The Lobster was $300… Conversely the last all inclusive I went to in Mexico had all you could eat Lobster and liquor, all in with a room the price was less then $300 USD. So if your goal is simply to do cheap travel, you’re better off picking a country lower on the Purchasing Power Parity Scale. This is especially true if eating well is your goal.
Retirement and Purchasing Power Parity
Another area where Purchasing Power Parity comes into play is retirement. It is the latest fad to retire to a lower cost, low Purchasing Power Parity country. The idea is your money stretches further, you can hire a house keeper, eat expensive dinners, and own a nice house all for less than you could live in a modest home in the US. It’s an appealing idea that sounds so simple, go somewhere that your money takes you further, and live it up like the man from Monopoly.
Issues with Retiring and Traveling Abroad Beyond Pricing
The problem with both approaches is that the price of goods is not everything. If it was we’d all move to some war torn country in Africa and live like kings. No the other thing to consider is the quality of the goods themselves and your relative safety. Purchasing power parity can tell you how much cheaper health care is in rural India than the US. What it does not tell you is how likely you are to die from an infection. It also does not tell you how likely you are to be kidnapped and ransomed in one of those war torn countries I referenced. Both can be large discouragements to travel or retirement abroad.
Even beyond raw quality, Purchasing Power Parity does not tell you if the quality will be of the type you value. It’s very common for those who move to a foreign country, Expats, to return to their home country in failure. The basic reason is cultural differences. It can be very difficult to adapt to the values of a different country. For example, if you love steak you’re likely to not last very long in India as a retiree. They have quality in other areas, but due to religion a good steak is about as common as a winning lottery number. There are many other country specific examples, many more subtle than my India example (for example ketchup in Britain). As such you really need to look at these things should you choose to live somewhere else, or even travel there for a decent length of time. If you’re not willing to adapt to them, you’ll end up back home. Even with travel, if you’re not prepared for them they can seriously put a dent in your travel.
Focus on Local Eateries and Hang Outs
Usually there are one or two places in a country that cater to American tastes and values. So even being an expat you are not completely cut off. That being said, my experience with foreign travel indicates these places tend to be way more expensive than their local counterparts. Often times the price difference is to the point where you are looking at US prices or worse. In my example from Australia of a pasta dinner for example, the local Asian restaurants were near affordable and a better choice if you were near Cairns. You just have to be willing to bite the bullet and live like a native. That’s really the point of this post, if you want to retire or travel to a foreign country for cheap, be prepared to travel as if you are from that country.
My family adapts pretty well, as you’d imagine for someone that travels a lot. We tend to eat the local food, shun the touristy locations in favor of local hangouts, and utilize local public transportation. In fact we do usually live like a native while traveling. Still I’m not ashamed to admit after 3-4 weeks out of the country I’m likely to stop at a burger joint or a good steak house when I get home. There is nothing wrong with that, but realize even a seasoned traveler can long for the trappings of home. This is ultimately why I say retirement abroad is likely a fad. Many will succeed at the concept, but I suspect many more will fail.
Are you considering retiring internationally? Is purchase power parity your primary consideration? How are you preparing for cultural issues?