Retiring abroad? Five things to consider

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 06/30/21

Beautiful scenery, a better quality of life, and inexpensive living sound like ideal elements for retirement.

An increasing number of Americans are looking to pursue these goals outside of the United States.

A recent survey found that 13% of U.S. workers and retirees hope to live in another country in retirement (Aegon Center for Longevity and Retirement, June 2021).

They are not alone. The interest in retiring abroad has grown in recent years.

More individuals are researching

In 2020, International Living, a website focused on living and retiring overseas, reported a surge in visits to its “How to move out of the U.S.” information page. Between May and August, traffic to the page increased 945% compared with the same period in 2019.

Spain was the most researched country, followed by Belize, the site reported.

Many retirees are already living their dreams. According to the Social Security Administration,

more than 431,000 retired U.S. workers living overseas received Social Security benefits (as of December 2019, latest data available). Nearly 50,000 retirees were living in Japan, another 70,000 in Canada, 32,000 in Mexico, 25,000 in Germany, and nearly 20,000 across Central America and the Caribbean.

Retirees are finding that there are many countries where they can live comfortably on $2,000 per month or less.

How did they get there?

The process begins with research and lots of planning. Before choosing a location, pre-retirees need to ask themselves what they are comfortable with in terms of spending, adapting to a new culture, and managing the distance from family and friends. Additionally, do their plans entail relocating to another country full-time, or just part of the year?

Visiting the country before moving is a critical step. Make sure to fully research the level of political and economic stability of a potential destination. The U.S. State Department monitors and publishes updates regularly and offers a guide on retirement abroad, with key considerations such as visas, safety, and emergency preparedness.

Some key considerations for retirement abroad include (but are not limited to):

1.Healthcare and costs. Those retiring abroad should research whether they need to purchase additional coverage through private insurers, and whether it makes sense to enroll in Medicare as well. For example, if planning on living abroad entirely, it may make sense to not enroll in Medicare Part B to avoid the premiums.* For those looking for supplemental coverage to standard Medicare, most Medigap plans provide coverage for foreign travel, but this is less common with Medicare Advantage plans.

2. Visas and other legal documents. Some countries offer special retirement visas that may allow individuals to work. Existing legal documents, such as wills and trusts, should be reviewed before moving overseas.

3. Residing abroad. Research the real estate market and understand the local laws around property ownership and renting. Determine whether to rent out your U.S.-based residence if you still maintain one.

4. Earning income. Many retirees want to continue working. This may include part-time work or starting your own business. Research the rules for earning and reporting income.

5. Finances and taxes. U.S. citizens need to pay taxes no matter where they live. However, the United States has bilateral income tax treaties with some 70 countries to help workers avoid double taxation. Some countries, but not all, recognize the tax preferences of retirement accounts. The United States also has estate tax treaties with 14 countries. Those maintaining financial accounts with foreign institutions will need to be aware of the Foreign Account Tax Compliance Act (FATCA), which requires reporting on foreign-held financial assets directly to the IRS. When choosing a foreign bank or institution, retirees need to make sure the firm has the necessary resources to maintain FATCA compliance. While it likely makes sense to hold three to six months of emergency, liquid reserves in local currency with a foreign bank, many retirees will opt to hold a majority of their financial assets with U.S. firms. Lastly, choose a credit card with no foreign transaction fees that is widely accepted and monitor exchange rates to optimize any conversions to local currency.

The IRS provides information about taxes for individuals living overseas in its “Publication 54, Tax guide for U.S. citizens and resident aliens living abroad.”

The IRS also has a page dedicated to tax deadlines, filing forms, and information about tax credits and deductions.

Consult financial experts

There are multiple planning issues involved. With different laws in other countries, it is important for those planning to retire abroad to meet with a financial advisor who is familiar with their financial situation and retirement plans. Tax laws vary and can also make it complicated for investors to meet their financial goals. Seek help from a tax professional. Investors may need guidance planning ahead and learning about strategies that may help them mitigate taxes and preserve their retirement nest egg. There are also estate attorneys who specialize in cross-border planning.

With proper planning, workers thinking about retiring abroad may be able to optimize their savings and live their dreams.

*Since there is typically no premium, most retirees should automatically enroll in Medicare Part A (hospital coverage) when reaching age 65. Retirees moving abroad who choose not to enroll in Medicare Part B need to be aware that late enrollment penalties may apply if they choose to enroll in Part B in the future.