Things to Consider Before Retiring Abroad

With many Americans woefully underfunded for retirement, people are exploring retirement abroad as a way to stretch their retirement income. The Social Security Administration reports a 73% jump in the number of retired workers receiving their benefits overseas since 2000.

The cost advantages to an overseas retirement are usually the draw. Couples living in less expensive nations can find housing at a fraction of the cost in the U.S.. In some countries, medical coverage costs less than using Medicare.

Talking to actual expats is the best way of verifying the cost savings you can expect. Also, cost of living websites like www.numbeo.com collect and report typical costs for a variety of living expenses by city and country. For example, here is a link comparing typical costs in Chile to those in the U.S.

How to Receive Social Security Benefits Abroad

Receiving a Social Security benefit while living outside the U.S. can be facilitated in certain countries with an electronic transfer. A list of countries allowing the Social Security Administration to make automated payments to banks within their borders can be found at www.socialsecurity.gov by searching for “IDD countries."

Retirees living in other countries can ask for an exemption to receive a paper check instead, as the U.S. Treasury otherwise imposes the requirement of electronic transfers. (For related reading, see: 6 Countries Where You Can Live off of Social Security.)

Would-be expatriates also need to consider the matter of the host country’s tax rules to discover whether Social Security income is exempted from taxes in the host country. Usually the answer to this question depends on whether there exists a tax treaty between the U.S. and the foreign country. For this reason, it will be important to consult www.irs.govpub/irs-trty before committing to a move to a specific country abroad. 

Changes in Banking Laws Affecting Expats

Recent changes in banking laws requiring Americans to report foreign bank accounts should also be considered. All foreign accounts must be reported when filing, not just the accounts receiving the Social Security payments. Some foreign banks refuse American clients because of the extra paperwork to report the accounts for these clients to the U.S. tax authorities. Research banking arrangements before trying to move assets to the destination country. Additionally, the U.S. taxes worldwide income, including interest paid on foreign bank accounts and investments. FATCA, the Foreign Account Tax Compliance Act, became law in 2010. That means every American abroad must also declare all foreign bank accounts to the IRS. (For related reading, see: The Tax Implications of Opening a Foreign Bank Account.)

Social Security may be excluded under U.S. tax filing rules if income is low, but become taxable under a foreign country’s tax system. For residents of countries subject to tax treaties with the U.S., the first increment of foreign earned income is excluded from U.S. taxation but subject to local taxation.  Tax rules can be complex, so Americans planning a move abroad should consult with a tax professional familiar with the tax codes of both the U.S. and the destination country. Lists of such professionals can be obtained from the U.S. embassy in the destination country. 

Despite the inconveniences, moving abroad for part or all of retirement might spell the difference between just getting by or an enjoyable retirement.  As a financial planner, I advise my clients contemplating such a move to give it a trial run. That is, travel to the country well in advance of retirement to check out costs, language barriers, and the pros and cons of a move there. 

Keep Retirement and Bank Accounts in the U.S.

From the viewpoint of financial planning and tax, however, it usually pays to keep retirement accounts and major banking in the U.S. Expatriates can take income in periodic increments and should check in advance with their bank about how this may be facilitated. International banks that already have banking facilities in the destination country will probably offer the best arrangements for income transfers and online banking.

That said, Homeland Security rules make it difficult, if not impossible, for people without a U.S. address to directly invest in mutual funds or manage brokerage held investments. Putting investments into a variable annuity or in alternative yield producing assets such as rental investment property might partially solve this problem under the right circumstances.

Since the complexities of tax and banking issues can change from year to year, it would make sense to subscribe to several online forums created for expatriate Americans. One such site is http://www.expatforum.com/expats/expat-tax.

People wanting to fund retirement in the U.S. usually aim to save retirement assets that approach at least 60% of their current living expenses. If you fall short of this mark, you risk exhausting your financial reserves sometime during retirement. 

(For more from this author, see: How Your Credit Can Affect Homeownership.)

Readers are advised that securities involve risk, are not bank guaranteed, and may lose money. This is not a solicitation to buy or sell any securities.  Always consult your personal financial advisor before you invest. Please consult with an appropriate tax professional before applying any information shared in this blog to your own situation. Also discuss transfer requirements with your bank and brokerage contacts if planning to live abroad.