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Moving with $ but no income

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ScoobyDoo
7/29/2019 11:38 EST

Hello All,

I am grateful for all of you who post here trying to help! My husband and I really want expatriate and we have been looking at Cuenca for years. I see that most people have some type of pension/SS etc, but we do not. What we do have is a chunk of money. I saw in the CD thread that banks offer 8.5% and wondered if there was a max for deposit. Could we just deposit money and live off of the interest? Do you trust the banks enough for that? Do you keep your money in the US?

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gyuris
7/30/2019 13:59 EST

Yes in theory you can live off the interest of your principal, if your CD investment is large enough. However there are several caveats you must know:

The first two have to do with bringing in a large amount of cash into Ecuador.

- Generally speaking, any amount of money that you transfer into Ecuador will have to pay a 5% "currency exit tax"penalty if and when you want to transfer it back out of Ecuador. As long as it stays in Ecuador, there is no problem with taxes, as there is no "entry tax". The "currency exit tax" only comes into play when you are trying to take the money back out.

- In case you were not aware, if you are a US national, you must report any foreign financial account you own to the IRS, when the aggregate sum of the currency in all your foreign accounts exceeds $10,000 at any time during the fiscal year, That is the law.
Next come some caveats about the Financial institutions and the CD itself:

- The regular commercial Banks here will never offer you 8,5% interest., they will offer maybe 4-5% at best.
It is the *Credit Unions* (called Cooperativas here) that offer the high interest rates. One example is Cooperativa JEP, which is the largest in the country.., but there are many others, just like there is a plethora of Credit Unions in the US. Just make sure you pick a large one that has been around for a while.

- Commercial Banks here (and most eveywhere) are cold impersonal and their customer service sucks. Cooperativas here are very friendly and cater to Expats with at least one investment advisor fluent in English.

-As far as I know there is no upper limit to invest in CDs at the largest Cooperativas, however, the prudent investor will limit his investment to a maximum of $32,000 per each cooperativa or in any bank (including any and all accounts on the same institution). Why? because of the COSEDE depositor's insurance (COSEDE is similar to the FDIC in the US) . The COSEDE insurance upper limit is $32,000. Anything above $32,000 in all accounts in the same institution is not insured!!! So the prudent strategy is to distribute your investment in several Cooperativas so there is never more than $32,000 total at any time in any institution. (this insurance limit increases a bit every year.) The insurance includes any and all accounts in one institution, i.e. it includes the SUM of the CD and Savings account.
If for instance, say you have $100K to invest, then you ought to buy three $30,000 CDs in three different Cooperativas and one $10,000 in a fourth Cooperativa. This way your investment is completely covered, by leaving a little room for the savings account deposits. This is strategy will maximize you return with practically zero risk, in the very remote case the Credit Union defaults into bankruptcy.
Some people will tell you that 6 years ago a major Credit Union called Coopera went bankrupt and that it stiffed its depositors.... not quite correct. I can tell you that 100% of its depositors that had under the $30,000 amount insured limit in the institution got 100% of their money back in about a month or so. The depositors that ran into problems were those that had investments over that limit, so the lessons learned there is never to go over the insured limit by one penny.
Since then there have been no major Cooperativas that have gone bankrupt in Ecuador. There have been some itsy-bitsy Cooperativas that have gone bankrupt, but those all dealt with micro deposits and micro-loans to poor rural folk, and did not cater to the expat community, like the majors do. So nothing to fear there.

- Most of the Cooperativas pay competitive rates, ranging anywhere from 8 to 9.5%, if you invest in a CD of at least one year to maturity. Usually the minimum to invest in a CD is a few hundred dollars. For example Coooperativa JEP has a minimum of $100 to invest in a CD, and offers a graduated scale ranging from 5,5% interest for a up to a <60 day CD, all the way to 8.5% for a >360 day CD.

So, as an example, say you have $100K to invest in a CD at 8.5% for one year, (this would give you $100,000 x 0.085 = $8500 in interest per year, which you can withdraw at any time after it is deposited in a lump sum.

- The interest earned on the CD is not compounded, it is simple interest..
At the maturity date this interest will be deposited in a lump sum into a savings account that you must open at each Cooperativa.

- The Interest earned in Ecuador is not taxed here in Ecuador.

_ Watch the CD maturity dates carefully. At maturity, you will have a 7 day window to either withdraw your CD or let it rollover into another year, and you won't be able to touch it for the entire year until the next maturity.

- In case of a financial emergency you will not be able to withdraw the CD before its maturity date, even if you are willing to pay a penalty. What the Cooperativa will offer you is an emergency loan for up to a 80-90 percent of the CD value using the CD as a collateral. Of course the loan interest will cancel out your interest earnings and then some.
Best strategy would be to stagger the CD maturity dates so not all the CDs mature at the same time and you won't have to recur to this.

Bottom line, in my opinion the Cooperativas are a wonderful thing,.... I ask you, where else can you earn a steady & guaranteed 8.5% interest rate with virtually zero risk (due to your deposits being fully insured).

The stock market will not do that, it will never offer a steady return and is never guaranteed, and works with zero insurance. And investing in Real Estate for income is quite risky here, as there are no fair controls, especially if you don't know the lay of the land and don't know the people that are selling. or renting, plus it offers no liquidity. and no insurance.


That's all the advice I have for now. Feel free to ask more if you have any more questions.

Best of luck to you,
A.T.
++++++++++

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kdeh2
7/30/2019 16:56 EST

Great advice! Thank you for taking the time to share it.

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Johninnv
7/30/2019 20:02 EST

Very good information from gyuris with a couple of things.....guyris stated that the big banks will offer you 4-5% MAX. I was offered 6,5% just a year ago at Banco del Pacifico and 7% if I would put in $100,000. I opted for Progresso Co-op and 20 de Octubre co-op and got 9.5% and 8.75% respectively. Second, guyris also stated that you can only get your interest payout in a lump sum at maturity, but all three co-ops where I have CDs 'will pay your interest monthly into your savings acct if you set it up that way. Doing that you can then buy smaller CD's every few months with the accumulated interest and "almost" make it like compound interest. One of the co-ops (Progresso) even automatically deposits the interest monthly into my Banco del Pacifico savings acct.......I think they charge me $1.50 to do that. The rest of the info from gyuris is accurate........the first completely accurate post regarding these issues that I have seen on any of these forums!

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Kimac
7/31/2019 10:01 EST

Really some good, detailed info here from people who have done their homework and have the DISCIPLINE to manage these things. That's not something that I'd assume most people are up to, even when you gave such a concise roadmap, essentially.

One thing I'd also add, based on conversations I've had with other expats on these matters. Some people come here thinking they are somehow beyond the IRS of the US. They are wrong. When you set up an account in a commercial bank here (I don't know about the cooperativos), you have to also complete an IRS form XXXX (I didn't write the # down). At least this was true of Banco Pincinchi and Produbanco, two of the stronger local banks.

Your income in Ecuador will be reported to the IRS, even as you will later be required to declare that income on your US return, just like with a US bank.

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Restingnow
7/31/2019 13:25 EST

Plenty of helpful info posted here. Nice.

Also there was an article in the 3/1/19 edition of Cuenca High Life news (IMF requires Ecuador to increase tax revenue but tax on sending funds out of the country will end), stating that the exit tax is being phased out over the next 4 years. Good news if you need it someday.

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gyuris
7/31/2019 14:21 EST

Johninnv:
Thank you for the corrections and updates.
In Ecuador, I have worked with two Cooperativas,: JEP (8.5%) and Alianza del Valle (9.5% after $50K and > 1 year). Both have been wonderful institutions.
I have not seen recently any Coop interest rates above 9.5% for any amount and for any maturity time. But of course these things can vary with the money supply and with the credit market conditions,

I don't doubt that one might find some smaller Banks (not Cooperativas) that pay slightly higher interest rates than the 5% I quoted, but the 5 major banks (Pichincha, Internacional, Pacifico, Guayaquil, and Produbanco) all pay in the lower ends of the interest range for "normal or average" expat depositors (generally below $100,000, and most being in the $25K to $50K range) these all pay at around 5%, plus or minus 0.6% .
All banks have a progressive interest tables. For instance Banco Pichincha (the largest bank in Ec) begins at 2% for CDs of less than $5K and 30-60 days, ... and go all the way to 5.5% interest for CDs >$500K and >one year. Another example would be, Banco Guayaquil which has very similar tables but the amounts vary slightly, beginning with CDs of >$1000 for <60 days at % 1.8 interest, ... and with the highest interest being for CDs of >$360K and >1 year, at 5.6%.
But they are all similar.


So the range of interest rates can vary widely depending on the 1) amount, and 2) the maturity length of the CD . However, unless it is for a Real Estate purchase or Corporate investment reasons, I really doubt that many expats will risk bringing in their nest egg of $360,000 to $5000,000 and deposit it all of in an Ecuadorian bank or Cooperativa. Sure, it might be tempting because of the good interest rates, but I would err on the side of caution. But that's just me.

As far as the compounding, yes, as you mention, you can play with that, by staggering the CDs, and pretending that it was "compounding", but it is not really compounding as you well know.

Regarding your options of what frequency to make the deposits of the interest, be it monthly, or every two months, or quarterly, or at maturity, ... that does vary with which institution you choose to make the deposits in. For instance, at the time I opened my CD at JEP they only offered one time deposits of all the interest at maturity. My other Cooperativa, "Alianza del Valle", does offer all the options, monthly to quarterly to yearly, etc.

One other thing I learned from the Financial Advisor at the Cooperativa recently: In my earlier post I was incorrect with the 7 day window to cancel the CDs after maturity. That was incorrect... scratch that.
The rule is that 5 calendar days BEFORE maturity you must go in person to the Cooperativa and sign paperwork telling them that you do not wish to renew the CD. If you don't do this, then they will assume that you want to renew and they will renew it for the same period as before on the very same day it matures. So, you must be careful with the maturity dates and remember hat you must make any changes FIVE CALENDAR DAYS PRIOR TO THE MATURITY!
"Calendar days" means exact days, so if your CD matures on a 15 of February, then you must go make changes before the 10th of January. Weekend days do count in this instance.

Secondly, I was also told that in case of "proven extreme emergency" there is a way to cancel your CD and withdraw the principal, but you'd forfeit the entire the interest earned for the investment period.
So, non-emergency cases for withdrawal like; say you found a better deal somewhere else, or you want to buy a car, or a house, or just because you want to ... do not count. It has to be really emergency cases like a legal or medical emergency or an accident, or some such.

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ScoobyDoo
7/31/2019 14:42 EST

OUT STANDING. Thank you ALL for the responses. People like you make me think we are making a good decision. We work hard, and help people too. Good to know there are still folks like us out there.

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ScoobyDoo
7/31/2019 14:44 EST

OUT STANDING replies! Thank you!

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gyuris
7/31/2019 15:07 EST

CORRECTION on the month.:

...."so if your CD matures on a 15 of February, then you must go make changes before the 10th of *FEBRUARY.*
Weekend days do count in this instance."

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gyuris
7/31/2019 15:57 EST

Kimac:
Very true... the long arm of the IRS will find those that try to evade their US taxes by hiding income and foreign accounts. ...

There are several example of such folks from Ecuador who, after a few years traveled back to the US for a family visit, and were arrested by the US Marshals at the airport upon arrival.
The worst thing is that the IRS will freeze all their US bank accounts , so they don't even have access to the money to be able to hire legal help to defend themselves.

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mayeca1517
8/5/2019 19:39 EST

KEEP YOUR MONEY IN THE STATE, SAFE, THERE IS SO MUCH GOING WITH THE GOVERNMENT

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Dansace
8/15/2019 09:34 EST

You can get an Investor visa by placing money in a CD in an Ecuadorian bank or co-op. As mentioned in other replies, I wouldn't get any CD for more than what would be insured. Banks and co-ops do fold here occasionally. We bank with Schwab, which refunds any ATM fees. I have an Ecuadorian bank account just to have a supply of liquid cash in the country, but that's mainly for getting services like my fiber optic internet which required a local bank account.

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