The Truth About Retiring Overseas

We’ve all heard and imagined the fantasies of living at least part of our retirement years overseas. You probably read articles and mail promotions describing overseas “retirement edens” and describing how you can live like a king on a couple thousand dollars a month. And of course, there are those fabulous tax breaks. It all can sound very attractive.

There are some good deals for Americans living overseas, and it is a good choice for some people. But before jumping into an overseas retirement location or spending a lot of money searching for one, consider these factors.

• The tax rules. Up to $74,000 of foreign earned income in 1999 is exempt from federal income taxes. In addition, you can earn a tax-free housing allowance. The problem is that the $74,000 exemption applies only to earned income, which includes salaries and self-employment income. It does not include investment or pension income. And the housing allowance applies only to amounts provided by an employer. So none of the tax breaks applies to a U.S. person who retires overseas. All of your income will be taxed by the U.S. unless you renounce your citizenship. 

  You also must examine the “low taxes” in foreign countries. Some tax free countries impose a number of other costs, especially on U.S. citizens who want to reside there. In many cases, you’ll find the low income and sales taxes are made up in other ways, such as import duties, sales taxes, and heavy taxes on utilities, among others.

• Low costs. Many people assume things are much cheaper outside the U.S. That often is not the case. In the Caribbean and many European cities it costs at least as much to live as in the U.S. But you can find genuinely lower costs in Canada and much of the Americas (thought not in most resort areas). 

  In many places you’ll find real estate and labor are quite cheap. But you might very well spend more for things you take for granted in the U.S., such as utilities, home furnishings, and many types of food. Many things you are used to might be available only by importing them from the U.S. Telephone service and the mail might be very unreliable and more expensive.

  My advice is the same as when looking for a retirement location in the U.S. Don’t get carried away by low cost real estate or a brief stay in an area. Check out all the costs of living in an area, and the availability of many goods and services you are used to.

• Other factors. A number of foreign countries have barriers to foreigners who want to establish residences. You might need to pay a fee to establish a residence. Some require you to prove a minimum income, while others require minimum investments in the country. It might not be legal for you to buy property in some countries. In others the legal system is in such disarray that it is difficult to prove legal title to property. 

  How often do you want to keep in touch with those you left in the U.S.? Consider that, then look at the cost and practicality of keeping in touch, either in person or electronically.

• Health care. American politicians like to complain about our health care system, but it is the best in the world. Many wealthy foreigners come to the U.S. for medical care, and even the non-wealthy in Canada come to the U.S. for care when they can. As you grow older health care probably will be more important to you. So check out the health care in countries you are considering. Also be aware that Medicare and many U.S. health plans don’t cover care received outside the U.S. If you regularly use prescription drugs, find out how you will get those regularly. 

  Good deals on property are available in Mexico and Canada. Real estate professionals in both countries report an increase in U.S. residents buying property. Many are buying for investment or for vacation properties. If you want to retire there, you’ll be close to the U.S. for return trips. You’ll benefit from the strong dollar and from weak currencies in those countries. But don’t be swayed by the low cost of real estate.

Check out all the factors I’ve mentioned and decide if that area really is the place for you to live.