Guide
What will my foreign pension be worth when I retire?
Multiplying by today's exchange rate is fine over a year and badly wrong over thirty. What moves in between is the inflation gap between the two countries.
You worked somewhere for a decade and built up a pension there. Or you kept an account in the currency you earned in, meaning to deal with it later. Now you want to know what that money is worth when you retire somewhere else, in a currency you actually spend.
The tempting move is to multiply by today's exchange rate. Over a year that is fine. Over thirty it is the main thing you have got wrong, because the exchange rate itself is not going to sit still.
Why the rate moves, in one sentence
If prices in one country rise faster than in another, its currency tends to lose ground at roughly the difference between the two rates. Written out, the drift per year is (1 + home inflation) ÷ (1 + foreign inflation) − 1. Economists call the idea purchasing-power parity. It is not a law, and it is badly behaved over short periods, but over decades it is the least unreasonable thing to assume.
Take a euro-area retirement at a long-run 2.0% and apply that formula to three currencies, using the reference inflation rates the app ships with. Each row starts from 1,000 a month and shows what it is worth in euros of today's purchasing power.
| Pension paid in | Inflation | Drift a year | In 10 y | In 20 y | In 30 y |
|---|---|---|---|---|---|
| Polish złoty | 3.9% | −1.83% | 831 | 691 | 575 |
| Pound sterling | 3.1% | −1.07% | 898 | 807 | 725 |
| Swiss franc | 0.6% | +1.39% | 1,148 | 1,318 | 1,514 |
The złoty pension loses about 43% of its purchasing power over thirty years before its own indexation does anything for it. The Swiss one gains about half again, for exactly the same reason running the other way: Switzerland's inflation is lower than the euro area's, so under parity the franc appreciates. Under the purchasing-power-parity assumption used here, lower inflation than in the spending currency implies a tendency for a currency to appreciate over the long run. That is the assumption's implication, not a law of economics. The table holds these rates constant for thirty years; the app instead glides each country from today's inflation to its long-run rate over the first few years, so its own figures will differ.
The honest caveats
Parity is a claim about the middle of a very wide distribution. Real exchange rates wander a long way from it and stay there for a decade at a time. Valnivo therefore spreads its simulated runs either side of the parity line using a volatility figure per currency, and reports a range rather than a single number. The middle line is the 50th-percentile simulated outcome: half the simulated runs end above it and half below. It is not a forecast or a prediction of what will happen, and not a promise.
Two more things this does not capture. Most state pensions are indexed to their own country's prices, which offsets part of the drift, and by how much depends on the indexation rule rather than on the exchange rate. And the app and its projection model no tax, which for cross-border pensions is decided by a treaty between the two countries and can change the answer substantially. The Luxembourg and French income-tax calculators are separate estimates, and neither applies a treaty.
How to set this up in the app
The projection works in one currency, so set your base currency to the one you will be spending. If the pension is a pot with a value today, such as an account or a fund, add it on the Money screen as a holding in the currency it is held in, with its country, and add that country on the Countries & rates tab so it carries its own inflation rate. The projection then converts the holding on a rate that drifts with the inflation gap rather than on today's rate held flat, and the country breakdown at the horizon shows how much of your future is exposed to that currency. A pension paid to you later is income from the month it starts, entered on a future with the Stop working life event or in the retirement planner. That figure is typed in your base currency and the exchange rate does not move it, so convert it yourself, for instance with the table above.
Run it on your own figures
Valnivo is a free financial planning tool that projects your income, spending and savings over 10, 20 and 30 years. It handles money held in several countries and currencies, and it is private by default. It holds a rate of inflation for every country you use and a rate for every currency, so the arithmetic on this page runs on your numbers instead of an example, and it shows what changes if you save more, stop earlier or prices rise faster. Nothing leaves your device without a press of a button.