R2I Finances - FD Laddering Strategy for INR Liquidity

Interest rates on fixed deposits (FD) in India bottomed in 2003. Over the last 40 years, the rates have fluctuated from a low of ~5% to a high of ~13% as shown in the graph below:  

Currently, the interest rates on FD are hovering at just under 10%. For R2I-ers, these rates sound excellent as the best rates for Certificate of Deposits (CD) in the US are well under 4%, not to mention the practically non-existent interest rates for savings deposits and checking accounts. Even the interest rates for regular checking accounts in India are between 4 and 6%.

Many R2I-ers opt to maintain the bulk of their assets denominated in dollars. Reasons for such a strategy include:

1. Dollar’s status as the world’s reserve currency allows for ready acceptance/convertibility of the dollar all over the world. Many R2I-ers regard themselves as global citizens with plans to travel to and live in different countries. The ready availability of dollar makes this easy. INR on the other hand is yet to be fully convertible and one has to jump through several hoops to convert rupees to other currencies, especially larger amounts.
2. As US stock markets are the most transparent and the best bet when it comes to stock investments, many R2I-ers maintain their stock investments through US market brokerages which deal primarily in dollars.
3. Retirement schemes in the US (IRA/401K) form a sizable portion of assets held by R2I-ers. Withdrawing from such accounts prematurely involves paying a 10% penalty in addition to realizing taxable income and the associated withholding. These factors act as deterrents for R2I-ers.

Also, a good portion of the reportable income of R2I-ers may be in dollars (interest, dividends, capital gains, social security/medicare payments, and earned income). In other words earnings are in USD and spending in INR. Combined, these factors leave the majority of R2I-ers vulnerable to risks associated with USD/INR conversion ratio. If INR appreciates, R2I-ers stand to lose and vice-versa. Direction of the INR against the dollar is an unknown – most currency regimes have an unwritten policy of keeping their currencies weak to aid exports. Meanwhile USD is no longer a strong currency because of the fiscal degradation in the US over the last two decades.

Many R2I-ers yearn for a strategy that ensures liquidity in INR over the long-term – one that would allow access to INR for ongoing expenses while the bulk of the liquid assets stays invested in USD through their US brokerage and retirement accounts. One tactic is to take advantage of the currently favorable interest rate and exchange rate levels in India and build a liquid INR asset-base: use savings accounts that earn 4-6% for short-term and a set of FDs that earn in the 9-10% range which mature periodically (laddering) for long-term.

Below is an FD laddering strategy to ensure rupee liquidity over the short and long-terms while earning decent overall returns. The example uses Rs 25L as the portion set aside for INR investments in savings and fixed deposits:

1. Decide on setting aside a percentage of the liquid assets in INR. This number will vary depending on one’s outlook – it can be quite high for those planning to spend most of their lifetime in India and vice-versa. Bear in mind when eligible for Social Security, those payments will be coming in USD.
2. A portion of the INR assets should be set aside for short-term needs (say 6-12 months). This money should be invested in regular savings accounts that earn 4-6%.  In this example, we set aside 20% for short-term needs for a total of Rs 5L.
3. Construct an FD ladder with the rest of the money to ensure rupee liquidity over the long-term (say 10 years). On the average, these deposits should earn between 9-10%. In the example, an FD ladder covering 10 years can be constructed by starting fixed deposits worth Rs 2L each with maturities spanning 1, 2, 3, ..., 10 years.
4.  As the FDs mature, the ladder can be continued perpetually by investing in another FD with the proceeds of the matured FD. The maturity of the new FD should be for the highest term (10 years). 

FD laddering allows the flexibility to determine what to do with portions of one’s money periodically. As long as the FD ladder is intact, there is the flexibility to reallocate the proceeds of the matured FD as you please every year. For example, if interest rate is very low or if the dollar exchange rate is very low, one can do away with the ladder and use the proceeds for current needs. The ladder also allows for assets to be invested in longer-term (10 year) FDs while allowing rupee liquidity without penalties on a periodic (yearly) basis. In an emergency, it is also possible to get access to all the funds invested in FDs: the FDs can be closed and proceeds credited at any time, although there is a penalty that reduces the interest paid. The penalty can vary with banks although the most common penalty is the following: if the interest due for the period was 9%, they will only credit 8% in case of early withdrawal. 

Related Posts:

• R2I Finances - Options to Protect Credit
• R2I Finances - Setup to Maintain Accounts in the US
• R2I Finances - FD Laddering Strategy for INR Liquidity
  

R2I Finances - Options to Protect Credit

Those with a few years of residence in the US understand the value of building credit and having a stellar credit report. A good credit score makes it easier to attain credit, mortgages, loans, etc., and that too at better rates. For R2Iers, there are a couple of choices to protect the credit built up:

1. Fraud Alerts: This allows placing an electronic red flag in the credit report – lenders are required to take steps to verify the identity of the person applying for credit in your name although the exact steps required are not spelled out. The good things about fraud alerts are that it only requires a phone call and the service is free of cost. However its ability to protect credit against identity thieves is questionable – since the identity verification steps are not spelled out, lenders can choose to ignore the alert completely, thereby compromising the purpose of the alert.
2. Credit Freeze: Credit Freeze allows blocking credit reports – this prevents identity thefts by not allowing thieves to open a new credit account or secure a loan under your name. When a freeze is in place, opening an account in your name is not allowed. Since the credit file is locked, it translates to background checks not allowed. The owner is blocked as well unless the freeze is lifted using a pin. A confusing aspect for many is that freezing credit does not restrict one from using the credit already allotted. Further, credit freeze does not affect existing lenders access to the credit report. In short, credit freezes are the most effective way to prevent identity theft. The fee was $10 per agency and a pin and advance notice was required to be able to lift the freeze (15 minutes to 10 days depending on the state). Fee waivers apply in certain states, for a senior citizen or for a victim of identity theft. To temporarily lift and reinstate a freeze, the fee was between $10 and $12.

We opted for Credit Freeze, as our intention was not to apply for credit in the US for a while. Below is our experience doing this with the three major credit agencies:

1. Equifax (Equifax Security Freeze, P.O. Box 105788, Atlanta, GA 30348. PH: 1-800-685-1111): Equifax online process was by far the easiest. The three steps involved with this online interface are:  personal info (name, DOB, ss#, address, old address), type of freeze, and payment ($10 - credit card options). Once the steps were completed, the interface returned with a pdf document confirming the freeze - Painless! The pdf doc contained the PIN required to temporarily or permanently lift the freeze
2. Trans Union (Trans Union Security Freeze, P. O. Box 6790, Fullerton, CA 92834-6790. PH: 1-888-909-8872): Trans Union’s interface was a combination of the free annual credit report interface and the account freeze interface and thus less intuitive. Nevertheless it worked. The interface transfers to an account login for the free annual credit report. There is also the need to accept two template agreements. It then came back with a payment screen ($10 - credit card and address), and finished with a ‘Create Security Pin’ screen – the security pin needs to be memorized for use when lifting the freeze at a later time.
3. Experian (Experian Security Freeze, P. O. Box 9554, Allen, TX 75013. PH: 1-888-397-3742): Experian’s online interface did not function for us. The interface took us to a set of links from which the freeze link can be chosen. Entered the personal info (name, address, DOB, ss#), the payment screen (credit card), and the identity verification segment with 5 questions. It returned with a screen that said ‘could not charge to credit card’. On the second attempt it said system error and to try again later. At last effort a different credit card was used - it went through but came back with a blank screen. We pursued the more involved mail-in option. It required submitting supporting documents – government photo ID, utility bill, along with personal info (name, address, old address, ss#, DOB) and the $10 check. Received an acknowledgment after two to three weeks with a PIN/confirmation number. That number is needed to lift the freeze.

Before going through this process of freezing credit, it is vital to check the existing credit reports to ensure there are no errors. This can be done very easily online and free of cost at the government website AnnualCreditReport.com, if accessing the website from within US. Otherwise only mail-in option is possible (details at www.ftc.gov). Hence, it is best to get this process done while still in the US.


Related Posts:

• R2I Finances - Options to Protect Credit
• R2I Finances - Setup to Maintain Accounts in the US
• R2I Finances - FD Laddering Strategy for INR Liquidity
  

R2I Finances – Setup to maintain accounts in the US

Around 6.5 million Americans live overseas – more than 2% of the population. Despite this, businesses are not always comfortable serving expatriates. Some businesses accept international addresses and phone numbers while others don’t. As noted, we setup a virtual address primarily to provide a valid US address to businesses that did not accept our overseas (Kochi, India) address.

For R2Iers (Return to India), some choices exist depending on the immigration status and plans for the future and there are different ways to set things up. Maintaining financial and similar accounts in the US after R2I is a priority for many, especially for US citizens with plans to live in different parts of the world. Our mindset paralleled this and hence we looked to maintain our US accounts while in India.

Below is a summary of our experience:

1. Government Notification: While notifications are not mandatory, it is best to notify the IRS, the state tax body, and the US consulate/embassy of change of address and residency abroad. For IRS notification, we sent in the completed Form 8882 and for the Franchise Tax Board of California, it was Form 3533. Doing so allows the tax authorities to send forms to the new address and also allows the embassy to easily track you down in case of emergencies. There is no acknowledgment with either of these forms. For US consulate/embassy notification, one can also either approach the nearest consulate with proof of citizenship (US passport) or phone in – if it is in person, passport data will be recorded at the consulate/embassy allowing for easier replacement if it is ever lost.
2. Banking: Some banks allow online change of address only within the US while some permit online change of address to an international address. Yet other financial institutions do not support online change of address at all. We did our research on this and chose to maintain accounts with two banks – one with the address set to the virtual US address and the other to our new Indian address. Two years since R2I, we still maintain the US bank account with the virtual US address (Bank of America) but has since cancelled the other one (Chase). It is now possible to switch address online to an overseas address with Bank of America.
3. Credit Cards: Our primary credit cards were a Visa Card and an American Express Card through a retailer. We expected the Amex card account to close automatically within a month of closing the retailer account. But, in reality that did not happen – the Amex account did not get cancelled until after 9 months. For its address change, we had to provide the US virtual address for their address change interface did not allow for country selection. The Visa card address change interface said to call them for an international address change – we ended up using our US virtual address, although in due course this should change. One caveat with using an overseas address is that certain US websites will reject your credit card for payments. For this reason, we have resisted changing our Visa card profile address.
4. Brokerage Accounts: Our primary brokerage account (TD Ameritrade) allowed online change of address to an international address while our secondary brokerage account (E*Trade) allowed online change of address but did not allow choosing a country. We kept both our accounts – the former with our Indian address and the latter with the virtual US address. Some brokerages allow global trading (needs global trading account) at TSX (Canada), FTSE 100 (UK), CAC40 (French), Dax (German), Hang Seng (Hong Kong), and Nikkei 225 (Japan). This is a very useful option especially for expatriates who wish to diversify their asset base away from a concentration in the US dollar.
5. Retirement Accounts: For anyone who switched employers more than once, multiple retirement accounts is a given. We had our share of multiple accounts. Here again, support for address change to an overseas address is all over the map. Some accounts accepted smoothly the new Indian address via their online interfaces. But, for certain accounts, the interface directed to call the previous employer’s 800 number. We have since managed to set it up with the right address changes for the most part. We also came to know that IRA conversions (with the same provider) using online interfaces were also not that perfect – when we first tried doing this with one account (Schwab), it returned an empty page instead of the form for online new IRA account application. Here again, we have managed to set it up after jumping through a few hoops.
6. Others: With most other accounts, it is a question of terminating them gracefully. Although one will be in a time crunch and temptation strong to not bother with such accounts, it is best to bring them all to closure. These include things like smart cards at local toll booths, move-out inspection and arrangements to refund any security deposits, cancel accounts with any wholesale retailers, cancel auto insurance policies, canceling all utilities, and other miscellaneous things such as clearing out safe deposit boxes. While this is drudgery, the good news is that closing many of these accounts will net you a refund check as they refund your deposits or other upfront security payments.

With respect to your banking and brokerage accounts, it is also good to setup electronic fund transfer between your accounts using ACH (Automatic Clearing House), which is free in most cases. In essence, as the service levels for expatriates vary widely among businesses, it is imperative to research the service level before hand with respect to one’s banking, brokerage, retirement, and other accounts and act accordingly.


Related Posts:

• R2I Finances - Options to Protect Credit
• R2I Finances - Setup to Maintain Accounts in the US
• R2I Finances - FD Laddering Strategy for INR Liquidity