I wasn’t actually planning to write this, but I decided to quickly put this piece together as an addendum of sorts to my recent article exploring the possibility of being able to retire in Thailand with $200,000.
A few questions in the comments section prompted a discussion about whether or not inflation is a problem or concern for someone living off of passive dividend income in Thailand.
I would say the comments insinuated that some people believe this is a legitimate concern – perhaps even more of a concern than it would be for someone living the same lifestyle in the United States.
Well, I’m here to assuage you of these fears using old-fashioned math. And I’m also here to point out why I’d be more concerned about inflation if I were living in the States.
But first, as I’ve noted numerous times in my comments to readers, it doesn’t behoove me in any way to convince anyone to move here, as it would only likely serve to increase my costs over time (actually making inflation a real problem).
However, I feel it’s my responsibility to present an honest and accurate view of my thoughts and experiences as a 35-year-old living off of passive income in Chiang Mai, Thailand. The whole reason I write is to help, inspire, and motivate others to become more free, wealthy, and happy versions of themselves.
The fact of the matter is, moving abroad as a dividend expat almost completely eliminated my inflation concerns. While it’s something I think Americans may have to think about, I’ve practically eliminated the word inflation from my lexicon.
So let’s work through why I don’t think it’s worthwhile to be concerned about inflation if one were to retire in Thailand (and why I personally worry about inflation about as much as I worry about getting struck by lightning).
Dividend Growth Investing
As we wind our way through this discussion, the first thing to note is the very investment strategy I personally use as the foundation of my financial independence via my six-figure dividend growth stock portfolio. It’s also the strategy I enthusiastically write about most days of the week.
That strategy is dividend growth investing.
I won’t get too crazy here, as I’ve already written countless articles about why the growth in dividend growth investing should offset most inflation concerns, but one’s passive dividend income, assuming they’re a dividend growth investor, should grow at least in kind with inflation.
This is the bottom line:
Most high-quality dividend growth stocks are increasing their dividends annually at a rate that exceeds US inflation.
For perspective, the average 10-year dividend growth rate for the 115 Dividend Champions on David Fish’s Dividend Champions, Contenders, and Challengers list is sitting at 7.0%. And that average is actually higher for Contenders and Challengers.
Seeing as how annual inflation in the United States has been sitting in the low single digits since at least 2007, one’s passive dividend income should be increasing at a rate faster than their overall expenses are increasing, all else equal.
Now, inflation isn’t a perfect metric. It’s localized to to a large degree. And it can be quite specific to one’s spending habits. Plus, personal lifestyle inflation is probably a bigger issue for someone than economic country-wide inflation.
But the point remains that dividend growth investing is an excellent long-term investment strategy in terms of combating rising expenses over time due to the very nature of growing dividends.
The Increase In Purchasing Power Achieved By Moving Abroad
The next point that’s critical to this discussion is the massive increase in local purchasing power that’s achieved when one takes advantage of geographic arbitrage.
My purchasing power (in local terms, using the dollar as my earning currency and the Thai baht as my spending currency) has been tripled, effectively turning me into a millionaire almost overnight.
What this means is that, on an apples-to-apples lifestyle comparison, my lifestyle here costs me approximately 1/3 of what it would cost in the States.
A great example of this is the $420/month luxury one-bedroom apartment I live in.
I have not a doubt in my mind that a similar apartment (with the same amenities) in a similar location inside of a similar city in the United States would cost closer to $1,500 per month. It’s not even arguable.
So when moving abroad to a much cheaper country, it’s almost like jumping into a time machine where you’re able to go back in time and experience costs from the ’50s or ’60s, all while earning in 2018 dollars.
As such, it’s not inflation that I’m dealing with at the outset. It’s deflation. And massively and wonderfully so.
Inflation In Thailand
Now that I’ve lowered my costs rather substantially, it’s important to take a look at the actual inflation rate my new home has.
After all, if Thailand had 20% annual inflation, my purchasing power would be eroding rather quickly, even after factoring in ~8% annual growth on my five-figure dividend income.
Fortunately, Thailand doesn’t have anything close to 20% inflation. And it’s not actually even close to 8%, meaning my purchasing power is still yet increasing each year in a place where I’ve already experienced a massive improvement in my purchasing power right off the bat.
What is annual inflation here?
It’s currently below 1%, according to the The World Bank.
Better yet, inflation is arguably a more accurate metric in Thailand, due to it being a much smaller country with less variance (compared to the US). While inflation in Tulsa is naturally quite a bit different than inflation in San Francisco, Thailand isn’t quite as big or diverse. And so I’d say that the spread between these two rates, in real life, when thinking about a city that’s personally desirable to live in, is even more advantageous for me.
But I can tell you that I wouldn’t fear it in the least if this were to increase by 500 or 600 basis points, as I’ll show.
Inflation Is Simply A Rate Of Change, Meaning One Has to Discern Between Relative And Absolute Growth While Simultaneously Considering The Base Upon Which The Growth Is Occurring (Which Affects Aggregate Costs Over The Long Run)
This is the crux of the issue.
I sort of thought this was fairly straightforward and widely understood, but recent comments have led me to believe that some are looking purely at growth rates in the relative sense and comparing them only on that level.
What you don’t want to do is look at growth rates in a comparative sense without considering the difference between the absolute and the relative and how this affects aggregate costs over a long period of time.
Now, Thailand actually has an inflation rate that is lower than the United States. So if anyone should be worried about inflation, it’s people living in the US (not me).
But let’s just spot the US a huge advantage for the sake of argument and assume that Thailand’s inflation were much higher than what the US sports, because it’s possible that Thailand’s inflation could increase to a much higher level (and higher than the US) at some point in the future, although this is anything but certain.
Using my above example of my real-life apartment, on an apples-to-apples-basis, we’ll assume (for the sake of this argument only) the US has an inflation rate of 2% (which is fairly accurate right now) and Thailand has an inflation rate of 5% ( more than five times its actual number).
So I’m giving the US a big advantage here just to prove a point.
This advantage is actually massive in real life, as any city in the US that’s desirable to live in is in reality seeing its rent increase at a rate much faster than the overall country-wide inflation rate. For example, Portland, Oregon (which reminds me of Chiang Mai in some ways) has experienced annual rent increases near or past the double-digit mark over many years now. And so goes the cost of almost everything else. A similar situation is playing out across many high-quality cities in the US.
But just so people can see what an increase in inflation might actually look like here, let’s use old-fashioned math.
A $420/month apartment that’s inflating at 5% annually over 10 years would end up running someone approximately $63,770 in aggregate rental costs over that time frame. The annual rent would be under $8,000 in the 10th year (or $657/month).
A $1,500/month apartment that’s inflating at 2% annually over 10 years would end up running someone approximately $175,580 in aggregate rental costs over that time frame. The annual rent would be right about $21,100 in the 10th year (or $1,758/month).
An initial spread in costs of $1,080/month grows to $1,101/month at the end of this decade.
See, what’s happening here is that even though the relative growth rate in the first example is higher, the absolute growth in expenses in the second example is still greater due to the much larger base upon which the growth is occurring.
Even though the second apartment is growing at a slower rate in relative percentage terms, it’s actually becoming more expensive in absolute terms over the long run, which is all that matters in real life. This can be extrapolated across my entire base of expenses, as that base is about 1/3 of what it would be in the States.
And even if I were to push Thailand’s rate well past 5%, it’d be hard to think of any realistic scenario in which my aggregate costs over my lifetime, on this lifestyle, don’t come out (significantly) less over here.
What’s really unfortunate is that any $1,500 one-bedroom apartment in any nice city in the US is probably going to see its rent increase at a rate that’s quite a bit higher than 2% annually, making the numbers/comparison that much more egregious.
Even if Thailand’s inflation rate became outrageous, I’d still probably come out way ahead in terms of lifetime aggregate costs across my spending, on an apples-to-apples basis.
But this doesn’t seem likely to occur.
And my passive income is steadily growing anyway, providing a fantastic buffer against such an unlikely occurrence.
Lastly, one has to believe that it’s just as possible that the inflation rate in the US picks up at some point in the near future, keeping the numbers in my favor.
Geographic arbitrage is a powerful thing. And it has frankly neutralized inflation for me in practical terms.
Maybe Thailand returns to higher inflation in the future. Maybe it doesn’t. Maybe the US returns to a higher inflation rate in the future. Maybe it doesn’t.
The reality is that the inflation rate in Thailand as it sits now is actually lower than what I can see in the States. And the real-life costs (rent, food, etc.) in the area I live in over here are exactly the same as they were in May 2016, back when I first visited the area.
Even if Thailand’s inflation were to exponentially increase, my aggregate rise in absolute costs wouldn’t be that great due to the much lower base upon which the growth/change is occurring.
And Thailand doesn’t exist on another planet. The inflation here doesn’t happen within a vacuum. If Thailand’s inflation jumps to 7% annually or something crazy, it’s likely that a lot of other places are also experiencing a high level of inflation. And that likely means that my dividends (funded by profit, which is affected by prices/inflation) are growing at a faster rate, too.
Moreover, the very nature of dividend growth investing means any advantage I’m currently experiencing (the current difference between my portfolio’s dividend growth and Thailand’s current inflation rate) provides me a hell of a near-term tailwind to make the long-term average/spread look very nice.
The bottom line is that I’d much rather experience a Thailand inflation rate that’s 300 basis points higher (or even 500 basis points higher, for that matter) than what you might have in the United States due to the advantageous spread in aggregate costs over my lifetime.
But what’s fantastic about it is, I’m actually witnessing firsthand an inflation rate that’s lower than what’s transpiring in the States – and that’s on a much lower base.
I also keep in mind that my worst-case scenario with all of this is very limited. If Thailand’s inflation rate were to increase to insane levels, one can simply move to an area of the country that’s potentially experiencing that in a less direct manner. One could also adjust their lifestyle accordingly. Or one could acquire a cheap plane ticket and go elsewhere. Fear doesn’t hold me back.
But if I were to ever fear inflation, it’d be the inflation in the United States.
What do you think? Do you worry about inflation? Why or why not?
Thanks for reading.
Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net.
P.S. If you’re interested in becoming financially independent at a young age, or if you’re interested in moving abroad to take advantage of the concepts I just laid out, check out some resources that I’ve personally used to achieve financial independence in my early 30s.