Retirement abroad is enticing to more and more Americans, but many of them make key mistakes that spoil their plans for a foreign retirement haven.
The Social Security Administration reports it sends benefits to more than half a million U.S. retirees living overseas. The number increased substantially over the last 10 years. But it significantly understates the number of expatriate retirees, since most have their checks deposited in U.S. accounts.
Foreign retirement is more appealing and less adventurous than it used to be. The internet and other forms of communication make the move easier and less isolating. Globalization makes an international relocation more widely accepted, and it’s generally less expensive to periodically return to the United States than it used to be. More countries have adopted policies that encourage U.S. retirees to consider them as retirement homes.
Some U.S. retirees seek the weather or culture of certain countries. The main reasons most U.S. retirees settle outside the United States are low living costs and medical costs.
Before abandoning the United States for foreign shores, be aware that despite all the progress, there still are complications and obstacles. You should study and thoroughly plan before making the move. First, I offer the same advice I give to everyone who’s thinking of moving in retirement. Get a good idea of what it will be like to live in an area all year. It is a good idea to rent for a long period or two before making a final decision.
When narrowing your choice of a foreign retirement haven, be sure to avoid these common mistakes.
Not managing currency exposure.
A country might be inexpensive today, especially when you’re spending U.S. dollars in a country with a
depreciated currency. But how long will that be the case?
Many currencies fluctuate a lot against the dollar. If you’re considering an emerging economy, fluctuations can be significant. A depreciation against the dollar of more than
10% one year can be followed by an appreciation of 10% or more the following year. When you’re earning income in dollars and spending it in a different currency, changes in currency values matter a lot.
The potential for currency fluctuations requires at least two extra steps in your retirement planning.
The first step is to look at the potential currency changes over time and determine the standard of living you safely can afford after extreme changes. Today’s costs could be 20% higher in dollars in a year or two. Take a look at historic fluctuations against the dollar and establish your spending plan with the range in mind.
The historic fluctuations still are only a guideline. Future political and economic changes could make the currency more or less volatile against the dollar. To some extent, you have to make a forecast about the currency over time.
The second step is to decide how much of your income and nest egg to keep in dollars. Social Security will pay in dollars to beneficiaries outside the United States. It also will pay benefits in a range of other currencies, and it doesn’t charge for the currency conversion.
You also could move your financial accounts to the new country and have them denominated in the currency. Or you could leave the accounts primarily in U.S. dollars and convert amounts to local currency as needed.
Whichever route you take, you’re making a bet on currency changes. That’s why some retirees choose countries that peg their currencies to the dollar or use the dollar, such as Panama.
Overlooking restrictions on moving and buying property.
Moving to most countries isn’t as easy as vacationing there. You need permission to stay long-term. Many countries place restrictions on property purchases by foreign citizens.
On the other hand, some countries encourage U.S. retirees to move there. But you still must plan and prove you comply with their requirements. Most require a minimum amount of steady income. A Social Security benefit usually is sufficient. Others require a higher income and a minimum investment in the country.
After checking property laws, be careful about buying property. The Wall Street Journal recently reported that U.S. citizens spent $100 million on properties in a planned resort retirement community in Belize that never was built and won’t be built. Scam artists look for U.S. retirees who want to move quickly to a foreign retirement haven. Take your time to know a country and find a good local adviser you can trust.
Not knowing the full story on medical care.
Medicare doesn’t cover care you receive outside the United States. If you retire outside America, you’re self-insuring for medical expenses.
Many countries outside the United States subsidize medical care for their residents, and the cost of care often is less expensive than in America. Learn the qualifications for participating in any national medical care system. You might not be allowed to participate or there might be a waiting period.
Also, consider shopping for global medical insurance that covers you in any country.
Of course, you want to investigate the quality of care as well as the cost in any country you consider.
I recommend that you strongly con-sider staying enrolled in Medicare and maintain Medicare supplement and Part D prescription drug insurance. If you drop this coverage and decide to move back to the United States later, the premiums will be much higher than they would have been, and you might not be able to obtain Medicare supplemental insurance.
Making fast decisions about financial accounts.
Most likely you’ll need a local account in the new country to pay regular living expenses. Should you close all your U.S. financial accounts and move them to the new country? It usually is best to maintain your U.S. accounts to hold the bulk of your assets and transfer money to a local account as you need it.
For example, there aren’t foreign equivalents of IRAs and 401(k)s to which you can roll over those accounts. You’ll have to take distributions and be taxed on them in the United States. There are no equivalent rollover accounts outside the country.
As a U.S. citizen, you’ll also be subject to IRS reporting on foreign assets you own. The penalties for missing a filing deadline or underreporting assets are significant. While it probably is best for you to keep most of your assets in the United States, not all financial institutions will let you.
Because the United States has been cracking down on money laundering and other activities associated with foreign financial accounts, a number of financial institutions no longer accept customers who are U.S. citizens with foreign addresses. They’ll close the accounts of any U.S. customer who establishes a foreign address. Some firms allow existing customers to keep their accounts if they move overseas but won’t let them open new accounts.
Be sure to check with your financial firms well in advance of your move so you won’t be surprised at the last minute.
Because firms change their policies over time, you might want to split your finances between two U.S. firms that allow overseas addresses.
Before settling on which U.S. firms to use, ask about the options for transferring money overseas and managing the U.S. account from an overseas location. Learn the fees for converting money into a foreign currency and for making wire transfers or using other ways to transfer money.
Check with your credit card issuers.
Some don’t charge a fee for currency conversions, while others charge fees of 1% and higher for each transaction. Your best bet might be to make most purchases through a credit card that doesn’t charge a currency conversion fee and pay the card from a U.S. account.
Overlooking some of the tax angles.
As a U.S. citizen, you owe U.S. taxes on your worldwide income and have to file U.S. income tax returns regardless of where you live in the world. You might have heard about the exclusion for foreign income and housing, but that applies only to earned income from employment or a business. It won’t apply to your retirement income.
Check the taxes in the country where you’ll be residing.
If the country has a tax treaty with the United States, you might avoid being taxed by both countries on the income. Or you could qualify for a credit on the U.S. income tax return for taxes paid in the foreign country. The new country also might have additional types of taxes, such as a wealth tax. Of course, you might have selected one of the countries that offers tax breaks to U.S. retirees. The bottom line is that the tax situation is complicated. You need a thorough understanding of your tax obligations in both countries.
Not updating your estate plan.
The U.S. federal estate tax and tax return obligations apply to the worldwide estate of a U.S. citizen regardless of where you were living at the time of your death. Also, your last state of residence in the United States might maintain that you’re still resident there and owe its estate or inheritance taxes if you maintained property or other contacts with the state.
Of course, your new host country will have its own laws about wills and estate and inheritance taxes. You’ll need an estate plan that covers both countries and probably will need a will and other Estate Planning documents for each country.
Will it always be less expensive?
Many U.S. retirees move to an area because it’s attracted other U.S. retirees and perhaps because the country is encouraging U.S. retirees. Retiree colonies become established. Over the long-term, however, those trends could change the attractiveness of the country.
In a few locales in foreign countries, an influx of U.S. retirees increased the population and the demand for real estate and essential services. The result was an increase in the cost of living in the area well above what it was when the influx started.