This article was updated on January 17, 2021
Investing as a Digital Nomad in 2021 – that will be today’s topic.
This article will therefore look at the the retirement and investment options available to digital nomads, alongside some tax considerations, even though this shouldn’t be considered as formal tax advice.
For those that prefer video content, the video below summarizes many of the key aspects of investing and tax planning:
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Firstly what is a Digital Nomad?
A digital nomad is person who is able to make a living by taking the help of telecommunications technologies and works remotely instead of going to a regular job and working in an onsite location is known as a ‘Digital Nomad’.
Digital nomads usually spend their lives in a nomadic way. These types of people work from countries other than the location of the work such as coffee shops, restaurants, or any other places that they wish to work from.
They accomplish their work with the help of electronic devices such as ‘Smartphones, Laptops or Personal Computers’ using the internet from ‘Mobile Hotspots, Mobile Internet, USB Dongles, Public Wi-Fi, Personal Wi-Fi, etc.’
The Digital nomads were usually referred to as ‘Location-Independent workers’ before the term digital nomads became popular. The term was discovered in order to represent their digital and nomadic lifestyle just as the name suggests.
Most preferred locations of digital nomads usually consist of locations with low costs for living and a comparatively higher quality of life.
Some of the countries which provide such a suitable lifestyle are Thailand, Mexico, Bali, Colombia, etc. Some cities which are considered by the digital nomads regardless of the higher cost of living are Singapore, Oslo, etc.
A successfully digital nomad is financially stable than compared to a person who has started pursuing their career as a digital nomad.
Digital nomads most commonly consist of young remote workers, Independently wealthy persons, entrepreneurs, retired people, semi-retired people, etc.
Digital nomads usually have a lot of benefits such as flexible working hours, financial independence, location independence and a career irrespective of such disadvantages that have to be faced by the people who have regular jobs.
The typical situations that may have to be faced by the digital nomads while accomplishing their tasks are:
- Ability to maintain international health insurance that has coverage all over the globe.
- Ability to abide by the different local laws of the respective country of residence.
- Ability to be in contact with friends and family who are back at home.
- Ability to obtain work visas in order to work in different countries.
‘Differences between Expat and a Digital Nomad’ – Expat is a person who is a resident of a country and living in another country. For example, a person who is a resident of the USA living abroad is called as an expat.
Whereas the person working in a nomadic lifestyle is considered as a digital nomad. Expats could be focused on only one place other than their country in most cases.
Whereas digital nomads are considered to be traveling all over the world depending on the necessity of their work.
In both cases, the person should be able to organize their work in an orderly fashion and be ready to travel. Many people even though being an expat are trying to become a digital nomad.
‘Differences between Digital Nomad and a Freelancer’ – A freelancer is a person who works from a location other than the location of the office or country of the location of the office.
In most cases, freelancers choose to work from a specific location such as home or a rental property and do not wish to move constantly.
Unlike the digital nomads, freelancers don’t have to worry about things like obtaining the work visas, maintaining a globally covered health insurance, etc. People who choose to pursue a career as a freelancer become digital nomads in very few cases.
Retirement Savings for Digital Nomads:
It is the most common aim or a goal for most of the people to save some money which could aid them after retiring for having a better life, starting a business, etc.
Most often take the necessary steps and follow a strategy in order to save from a young age in order to increase the amount of savings for their future.
It is often considered by many people that working in a regular job in the same location as a normal employee would make the process of saving money for retirement easier than usual.
By doing so, people might be able to receive a government pension from an age of 60 (in some cases it may go up to 75).
The regular employees might be able to save some amount from their earnings to contribute to their retirement plan. If they have a good employer, even the employer might be able to add some incentives to the earnings of the employee for his retirement savings.
Some people may buy a house and pay their mortgage from earnings and by the time they retire, they would have completed the full payment for the house. This is also considered to be one of the best option available for retirement savings.
But as a digital nomad, the person might not be able to enjoy such privileges mentioned above. The options discussed above are only applicable to the employees who are based on a job at specific onsite location that needs to be done in the specific mentioned work hours.
So, we are going to discuss the retirement savings plans available for digital nomads, which could help them save more money for their retirement.
In most cases, digital nomads tend to be self-employed or managing their own business. They primarily focus on their lifestyle in order to reduce the taxes that have to be paid by them.
Even if a digital nomad works as an employee in a designation at a specific country for some time, they won’t be living in that country long enough in order to receive the pension from that country’s government.
The tax savings that have been earned in one country might have to be spent in the next country the person chooses to work next.
And it is clear that no person who calls themselves as a digital nomad would buy an apartment or a house at a specific location which has no use for them as they travel from place to place.
This means that the person as a digital nomad won’t be able to save much money for the sake of his retirement unless they have a well-planned strategy.
‘Tips for savings toward retirement for Digital Nomads’ – The person living their lifestyle as a digital nomad should follow certain tips in order to increase their savings towards their retirement. Some of the tips that should be followed by them are:
- The person should start saving or investing their money for retirement as early as possible (the younger, the better).
- They should focus on saving somewhat up to 20% to 60% of the income that has been earned by them towards their retirement based on the retirement strategy (based on factors such as the place of retirement, estimated cost of living, etc.)
- They should try to avoid investing money in the savings accounts which provide very low rates of interest. The person is able to benefit from the accounts with higher rates of interest.
- If they are willing to make an investment in the stock market, the primary choice of investment should be on stocks and bonds (through index funds having low costs or ETFs).
- The number of bonds in the portfolio of the person should increase as they approach the retirement age.
- They should try the strategy of buying and holding on to the assets rather than timing the market.
- The portfolio should be diversified and re-balanced each year. Markets should not be given much attention.
- Changes in the lifestyle by making it a little bit less expensive, organizing the taxes in such a way that the person is required to pay lesser taxes so that more money can be saved in order to contribute to the retirement savings strategy.
Coming to the factors mentioned above, the person should start investing at a young age. By starting to save or invest starting from a young age the person is able to enjoy the benefits of ‘Compound Interest’.
The compound interest is very beneficial to the people who invest for a longer time period. Compound Interest is very powerful that the person might be able to receive ten times or more if kept for a correct amount of time.
For example, let us consider a person ‘A’. let the amount of money that the person ‘A’ is able to save each year is $5000.
Let us say that this person has started investing at the age of 25 and wants to invest up to the age where he will be 65. Let’s assume that he/she had made the investment in the stock market and the average returns received by that person is 7%.
Then the amount the person retires with after 40 years would be around $1 million although the amount that has been saved by him was $200,000. This is the power of compounding.
Let us say that the person ‘A’ has decided to save from the age of 35 years, then the person would have to save 100% more money than in the earlier case where they have started investing at an age of 25 years.
This means the amount of money required to save to reach the 1 million would 100% more every year if he starts a decade later.
By the above-mentioned example, it is very clear that the person is able to earn a lot more money for his retirements by starting at an early age. This can be very advantageous than the cases where the people start to invest in the savings a little bit later.
People must focus on things such as the age that they want to start saving/investing, the age by which they want to retire, the amount of savings that they want to contribute every month for their retirements, choosing the specific type of investments so that the person might be able to gain higher returns and interests from their investments, etc. in order to gain the advantages from the compounding interest.
They should also consider the expected inflation while estimating the costs. For example, if they are estimating about having the returns somewhere around 9% and the expected inflation rates be about 2%, then the average return that should be expected by the person must be 7%.
By taking some principles from some popular theories such as FIRE (Financial Independence, Retire Early) movement into consideration, people might be able to get an idea about retiring early by investing and earning huge profits successfully.
They might also be able to learn some basic and important things about the people who have retired early in their 30’s. By starting as young as about 20 years or so, people who want to successfully create a failproof retirement savings plan and retire early might be able to succeed.
‘FIRE movement’ – Fire movement is also known as the short form for Financial Independence, Retire Early is a well-known theory about motivating people in order to save for their future by making their retirement savings plan successful and retire as early as possible by starting to invest from a young age.
This ideology behind the FIRE movement started in a book back from the early ‘90s which was named ‘Your Money or Your Life’.
The FIRE movement’s principles are primarily focused upon the Financial Independence and the Retire Early part is just a suggestion saying that the person might even be able to retire early by gaining a good amount of Financial Independence and doesn’t necessarily mean that the person would have to stop working when they succeed in their plan.
This is to motivate people to retire in their 30’s or 40’s by gaining financial freedom and achieving the retirement savings goals and aims set by them.
It is true that anybody’s future (especially that of the digital nomads) is not secure and guaranteed due to the increase in artificial intelligence and technology. Most of today’s labor might be jobless once artificial intelligence and innovative technologies that are created by people nowadays booms up in the upcoming days.
For example, a specific person’s skill set as of today might be replaced by a computer program or an algorithm in a few years (like about 10 to 20 years). Then many people having expertise in that specific skill might not be in demand as they are today.
There are many chances that a person would be most likely to get his/her things done with the help of a machine or a computer rather than a person. This is due to the error-free functionality, efficiency, and flexibility while using the support of a machine or a program or an A.I.
The above-mentioned topic is just to give an idea to the people that there might be a chance that they won’t be able to efficiently earn money with the help of their particular skill set.
It is better to save a part of their savings starting from today, so that one day even in such consequences where there won’t be any need for them in their respective area of expertise, they would be able to lead their life happily and be financially stable with the help of their investments that they have saved for aiding with their needs in their retirement or where there is no availability of work for them.
There are two ways that a person can be able to realize this scenario (start investing for their retirement at a young age), one way is in the form of a threat and the other is in the form of an opportunity.
The better way to perceive this would be in the form of an opportunity to make their lives financially independent and stable when they retire.
Some of the major principles of the FIRE movement that people (who want to retire early being financially stable) should take into consideration are:
- They should make some necessary amendments and changes in their lifestyle such that they live their lifestyle a little bit less luxurious than they used to so that they might be able to save/invest money into their savings plan.
- People should be considerate about how they spend their money. They should minimize their lavish and extravagant needs and not spend money on things they won’t require.
- Avoid or reduce making debts, taking credit cards/loans, etc. If they have to do so, they should make sure that they are doing it perfectly with lower interest rates possible.
- Spending money should be adequate and should not be excessive.
- Maximizing the savings amount from the earnings and investing in their retirement plan very effectively.
- Making sure about the costs and planning the future on the present day itself.
It was estimated that to lead a happy, stable, sufficient and self-sustained lifestyle, a person should be able to save as much as 25 times that of his annual earnings.
This means if a person is earning somewhere around a million dollars as an income annually, then that person should save about 25 million dollars for his retirement to be able to lead a stable and satisfactory lifestyle.
There are some other factors that influence the retirement savings plans of people (especially that of the digital nomads). Now let us take a look at those factors which mainly influence the savings plan of the people for their retirement.
Factors to be considered:
‘Investing Early’ – Although we have discussed this earlier as many times as possible, investing or saving early is the most effective way that an individual might be more effective while saving money towards his/her retirement.
We have already discussed this topic along with some proven examples. So, it is highly beneficial for digital nomads to save or invest as early as possible in order to gain more advantages.
‘Consideration of Risk’ – The individual should be well aware of the risks that are involved in making investments. They should make sure that there won’t be more risk involved with their investments.
Making an investment with very low risk such as investing or saving money with the help of a bank might not even be a considerable option to gain more profits towards their retirement.
Investing in cryptocurrencies won’t be considered as an ideal option. Neither would be investing in banks. Cryptocurrencies would have a very high amount of risk involved and investing in them may be a very adventurous option for the individual which won’t be an ideal savings plan for retirement.
Investing banks would involve a very low amount of risk, but the returns would be considered as very low too and the person won’t be able to achieve the targets and goals that have been set by them. Moreover, the returns won’t be enough to cover inflation as well.
While investing in the stock market, it is more likely to be one of the best options available to individuals in order to save money for their retirement.
For people who want to make a long-term investment stock market is very effective. US stock market is said to be providing around 7% returns to the respective individuals, who made an investment with it.
While dealing with the stock market, the asset class which is said to be most profitable is the ‘Equities’ and the most volatile option available to the investors would be investing in the individual stocks.
Making an investment in asset classes such as fixed income might also be considered as a profitable option available.
While referring to fixed income, we mean Bank Deposits, CDs, Bonds, etc. Most considered out of these would be the bonds. Bonds are nothing but investing the amount as a loan to the Government/Private Organization or a Corporation. The interest rates of the bonds differ according to the risk involved.
A diversified portfolio where the investment is made as ¾ into the equities and ¼ into the bonds would be a more optimal portfolio. But if a person is willing to lead a luxurious lifestyle in his retirement, then they would have to choose to invest more amount of their savings into the bonds.
‘Timing the Market’ – Timing the market won’t be a very good idea while saving for retirement. There is also a saying which implicates not to time the market, which is “Time in the market is better when compared to timing the market”. Buying and Holding on to the index funds or ETFs for a longer period of time (such as 20 – 40 years) would be very advantageous for the investor.
‘Debts’ – By the term debt, we advise the person to clear the debts as soon as possible (especially the ones having higher interest rates). This is first and foremost task that should be taken care of.
‘Tax Optimization’ – There is no such option as legally evading taxes but as a digital nomad a person should be more cautious and try to reduce their taxes as much as possible. This can be achieved by setting up the primary residence in a friendly country.
Having no proof of residency isn’t usually a good strategy, as all brokers need anti-money laundering documents like proof of address.
So setting yourself up with one tax-efficient base, for example in countries with 0% tax on overseas income such as Thailand or Malaysia, makes sense.
By following the above-mentioned steps and a few other steps such as investing all the savings and tax savings into the retirement and selecting the required and most compatible type of investment which suits the person, a digital nomad might be able to gain huge benefits from their investment and through that, they might be able to lead a luxurious lifestyle.
Investing in the stock market comes with a long set of risks as well as opportunities to gain profits included. A person should be able to make sure about their respective risk tolerance and their choice of investment wisely and not take any sort of hasty decisions while making an investment plan for retirement.
With the help of a personal financial advisor (like us) and setting up some goals and strategies while making the retirement savings plans, a digital nomad might be able to save more money towards their retirement to lead a stable, if possible, a luxurious lifestyle.
We wish that you have good growth in your investment career and be able to receive more advantages and profits from your investments.