Retiring Abroad – Can You Afford It?

Retiring Abroad – Can You Afford It?

Retiring Abroad - Can You Afford It? | Financial Planning | ACT TWOKeep in mind that Medicare coverage usually ends when you set foot on foreign soil, so consider purchasing additional health insurance policies. You should also review any US insurance policies you plan to keep in place after moving overseas, to make sure that your relocation does not affect the coverage. Finally, the expenses and waiting periods associated with submitting your immigration paperwork may be significant, so you’ll need to plan accordingly.

Retiring in a foreign country is a dream shared by thousands of Americans. Yet the numbers who actually pack their bags and cross the border to enjoy a life of leisure in a foreign country are difficult to gauge—neither the US Census Bureau nor the Social Security Administration maintains comprehensive data about retirees abroad.

For those who do make the move, however, the key to financial success is planning—above and beyond the type of planning normally required to accomplish a successful retirement at home. The following considerations will help you lay the groundwork for a smooth transition and avoid any unpleasant surprises that might otherwise arise after the big move.

Social Security Rules Vary Based on Circumstances

With some exceptions, the Social Security Administration (SSA) allows eligible individuals living outside of the United States to collect Social Security retirement payments abroad, in their country of residence.

Your eligibility to collect Social Security benefits overseas may be affected by your foreign citizenship status and by whether or not you receive dependent or survivor benefits. And regardless of your citizenship, the US Treasury Department forbids the SSA to send payments to retirees living in Cuba, North Korea, Cambodia, Vietnam, or certain countries that were once part of the Soviet Union.

The IRS Will Still Want to Hear From You

Retiring Abroad - Can You Afford It? | Financial Planning | ACT TWOAs far as the IRS is concerned, out of sight is not out of mind. Or, to put it in the government’s own words: “If you are a US citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income.” (Source: IRS Publication 54, “Tax Guide for US Citizens and Resident Aliens Abroad.”) That means you’ll need to pay tax on income—including taxable distributions from employer-sponsored pension plans and pensions—regardless of where you live when you receive the money.

But it’s not necessarily that simple. The United States has signed tax treaties with approximately 50 nations around the world. In part, these treaties are designed to help taxpayers avoid double taxation (i.e., paying full taxes on the same income to two different governments).

You should consider working closely with a tax advisor who specializes in international taxation to learn exactly how your benefits payments will be taxed in the country where you plan to live.

Exchange Rates Fluctuate—and So Could Your Budget

finances-abroadIf your retirement assets are denominated in US dollars, then you’ll need to consider the implications of spending and budgeting in a foreign currency. For example, you could opt to convert US dollars to cash on an as-needed basis, or choose to make purchases on a US credit card that automatically “translates” the amount back into dollars on your statement. In either situation, it pays to research which financial institutions offer the best exchange rates and lowest transaction fees.

Just as important, however, is the need to understand how currency fluctuations can affect your budget, particularly if you’re living on a fixed income. If the value of the US dollar declines (i.e., “weakens” against the value of the local currency) then the purchasing power of your US income may drop significantly.

There is nothing you can do to control exchange rates, but you may want to set aside some extra money to supplement your monthly or annual budget in the event that currency devaluation causes you to “lose” money during future conversions.

Medicare and Other Insurance

Retiring Abroad - Can You Afford It? | Financial Planning | ACT TWOMedicare coverage usually ends when you set foot on foreign soil. If it’s impractical for you to return to the United States for medical treatment, then you should consider purchasing additional health insurance policies.

Remember, too, that moving to a country with universal health coverage does not necessarily mean you will be immediately eligible for such coverage. Again, it pays to know the rules before arriving in your new country.

You should also review any US insurance policies that you plan to keep in place after a move. For example, if your US homeowner’s policy requires the residence to be owner occupied, then relocation could jeopardize your existing coverage.

Finally, don’t overlook the immigration policies of the country you hope to call home. The expenses and waiting periods associated with submitting your paperwork may be significant, and ignoring them could result in an unfriendly “welcome” from the local authorities on moving day.

Points to Remember

  1. The Social Security Administration generally allows retirees to collect benefits while residing in a foreign country, but there are exceptions.
  2. The IRS expects Americans and resident aliens living overseas to pay taxes on worldwide income. However, tax treaties are in place with dozens of countries to help limit the effects of double taxation.
  3. You should consider working closely with an international tax specialist to identify the potential tax implications associated with retiring in a foreign country.
  4. Fluctuating exchange rates could affect how much local currency you are able to purchase with US dollars. As a result, you may want to protect your budget by setting aside extra money to compensate for money that could be “lost” during currency conversions if the US dollar weakens.
  5. Immigration requirements could be costly and may involve significant waiting periods. Plan ahead.

Retiring Abroad - Can You Afford It? | Financial Planning | ACT TWO

 

By Christopher Neubert

 

Christopher Neubert is the Founder of MONECO Advisors, MONECOAdvisors.com.  Contact him at Chris@MONECOAdvisors.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  The tax information provided is not intended to be a substitute for specific individualized tax planning advice.  We suggest that you consult with a qualified tax advisor.  Securities offered through LPL Financial, Member FINRA/SIPC.  Investment advice offered through MONECO Advisors, LLC, a registered investment advisor and is a separate entity from LPL Financial.

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