Personal Peace & Prosperity Index

Have you heard of the famous PPP (Purchasing Power Parity) index or its ruff-collared cousin “Big Mac Index” developed by The Economist magazine? It is designed to compare the equivalent cost-of-living across countries based on a consumption of selected goods and services. This is a widely accepted method to compare the earning power of a job across different countries, rather than using currency exchange rates. Simply put, the Big Mac Index is a comparison of the price of McDonald’s Big Mac hamburger (presumably identical in quality) between two countries to arrive at the PPP rate of the currencies. So, if a Big Mac costs say $2.50 in U.S. and say, £1.50 in U.K., the PPP rate is 2.5/1.5 = $1.67 to a British Pound. However, £1 buys nearly two dollars today, so by this measure the Pound is over-valued! While PPP is a useful parameter in macro-economics, my issue with it is its relevance to globally-mobile professionals or even retirees wanting to spend their sunset years in another country. The problem with the Big Mac Index or even the PPP is that life and choices we make as individuals are not identical across countries even though we may be at “parity” in the sense of the PPP index. This comparison becomes even more meaningless between a developed country and a developing country. An average American may choose to have a Big Mac, French fries and Coke for lunch everyday but an average Chinese or Indian may prefer a street vendor’s fried rice and a cup of tea for lunch. Moreover, a trip to the local McDonald’s is a common man’s sojourn in U.S. but is still a privilege of the well-heeled or high earning individuals in India.

Based on World Bank’s data on Nominal and PPP-based Gross Domestic Product (GDP) data on U.S. and India, the PPP of a U.S. dollar is about 10-12 Indian Rupees (INR). A classic interpretation of this would mean that the purchasing power of a person earning $20,000 per year in U.S. is the same as a person earning about INR 0.2 million in India and that a person earning $100,000 annually in U.S. would find equivalent lifestyle at INR 1-1.2 million. Can this be true? I doubt it. I would rather buy the PPP comparison at lower income levels than higher levels. I believe that at higher income levels, the aspirations and lifestyle expectations become more aligned regardless of which country a professional works in. Moreover, non-essential goods and services tend to be priced closer to each other across countries, so the 10-12 ratio may apply for a decent haircut but not for say, air tickets. I know from personal experience that I can get a similar quality haircut for INR 100 in India that I can get at a discounted hair salon for $10 in U.S., so the ratio works there. Even a discounted airfare between two cities in India (say, Mumbai-Chennai) is about INR 7000 ($160-$175), whereas for flying similarly distant cities in U.S., I only pay about $150-$200 round trip. The PPP ratio is completely irrelevant in this case. However, is it not reasonable that a high income earner in both U.S. and India may prefer to enjoy personal air travel at least once a year? At less than 0.2% of annual income, air travel is about 4 times more affordable to the U.S. professional earning $100K per year than the “parity” Indian. So, the high-earning Indian may be at parity as per PPP index, but knowing the disparity in affordability of a simple convenience such as air travel, you can bet that he will not feel ‘on par’ with his American counterpart. After all, our sense of peace and prosperity is not based on absolute numbers but relative affordability of the goods and services of relevance to us. This is especially important for people wanting to retire in a foreign (or home) country based on the earnings and assets from a home (or foreign) country.

I wonder whether we should consider a new “PPP” – Personal Peace & Prosperity index. If you are a U.S. based professional wanting to retire abroad, it does not matter what the ratio of hamburger prices between U.S. and your destination of choice is. It also does not help you much to know the traditional PPP measure because we saw earlier that INR 1-1.2 million/year in income does not mean a “parity” lifestyle with US$100,000/year. Then, how does a prospective retiree get a sense of peace and relative prosperity - a more relevant measure of retirement happiness - in the retirement destination of their choice?

To estimate your new “PPP”, you must compare how your sustainable income (from your net assets) compares with that of employment-based earnings in the country of your choice. Let me explain. If you are a professional earning $100,000 per year in U.S. and have say, $300,000 in investable assets at the time you are contemplating retirement abroad, you need to ask yourself the following questions:

1. What is the sustainable or safe withdrawal rate (SWR) considering the number of years you plan to stay retired? SWR is the percentage of your portfolio that you should withdraw during your first year of retirement, adjusted for inflation annually. For more on SWR, see here. Let’s say the SWR is 4%.
2. What does the SWR mean in terms of real dollars for your portfolio? For 4% SWR in the above example, you can count on $12,000 (0.04 x $300,000) as income during the first year from your portfolio. Convert this figure into the currency of the country where you intend to spend your retirement. For India, at current exchange rates, it works to about INR 0.5 million.
3. Where does the withdrawal income figure in your chosen country’s employment data? First, find a professional group in your retirement country that is high-earning (say IT professionals for India). Why a high-earning 'peer' group? Because your sense of relative prosperity will come from being able to fit within such a group versus other others in your chosen country. If your aspirations are considerably more modest, you may choose to compare yourself with the average salaried class.
4. Consult salary surveys of the chosen peer group and figure out where your withdrawal income figure would fit in that salary survey. Using the above example, and the 2005 salary survey data (most recent available for free) for IT professionals in India, an income of $12,000 (~INR 0.5 million) per year is comparable to an IT professional with 5-10 years experience. Comparing with the range of incomes in the same salary survey would also tell you that 52% of professionals in this high-earning group earn more than INR 0.5 million. This determines your “peace” level as a retiree knowing that your passive income places you about the middle of a high earning professional group. For some of you, the same “peace” may require that your passive income put you in the top 10% of this comparison group, which in this example is an income of INR 1-1.5 million ($24,000-36,000).
5. To complete the picture, you should then determine how much income is required in U.S. to place you at the same level. For example, a median IT professional with 5-10 years of post-college experience may earn about $70,000 per year in the U.S. To generate this level of passive income, your net assets must be at least $1.75 million (70,000/0.04), which is almost 6 times what is required to be in the same personal peace & prosperity (PPP) level should you choose to retire in India.

That’s it. You now know your own Personal Peace & Prosperity (PPP) rating based on your actual net worth and expected passive income, matched with the ground reality of where that income will place you among the aspiring working class in your chosen retirement locale.

I can see some of you calculating ratios here to wrongly conclude that my new PPP concept is nothing more than a USD: INR ratio of 5.8 ($70,000/$12,000). Don’t use such short cut formulas. The ratio of 5.8 is just what it has worked out to be for the specific example discussed above. If you follow the approach I outlined above, you will arrive at a new PPP unique to your situation and expectations. And isn’t that the whole point of doing this analysis? There is no one-size-fits-all approach as the traditional PPP or Big Mac index suggests. The only cross-country comparison that is relevant is one that is tailored to your asset base, risk tolerance and lifestyle expectations matched to the country where you expect to live the rest of your life. The new PPP is personal and designed to give you a sense of peace and relative prosperity during your sunset years.

Expecting to transplant an opulent Western lifestyle to India or the other extreme of aiming to live like a home-grown ‘average’ retiree are both unreasonable in my opinion. As a future transnational retiree, the realization that my passive income puts me in the middle of a high-wage profession aspired to by the country’s best and brightest, is far more comforting to me than knowing I can buy two Big Macs for the same price as one in the U.S.