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London Calling: Should You Retire Overseas?
By: Financial Planning Association
Raise your hand if you've ever made it through a
particularly stressful day at the office by doing a Google
image search for "Tropical Island." Me too. In fact, if I type
the letter "a" in the search bar, Google automatically thinks
I'm looking for "Aruba." B is Belize, C is Curaçao and so on
through Zanzibar. There's just something about our fast paced
lives that make a simple life in an exotic locale sound pretty
appealing. Before packing the snorkel and sun block and buying
a one way ticket to retirement paradise, however, it's
important to do your homework and determine if the expat life
is right for you.
No matter if you retire in the States or abroad, much of your planning will revolve around your retirement budget. It will influence how much you need to save, when you can afford to retire and what types of things you can afford to do. One of the appeals of retiring overseas is finding a location with a lower cost of living than the U.S. This is particularly true the last few years as the poor economy has battered retirement portfolios. If you're ready to retire, but your nest egg isn't as big as it used to be, one option is to delay retirement and give your portfolio a chance to recover. Another option would be to move to a location where your dollar traditionally goes farther. The website www.xpatulator.com will help you analyze how far your dollar will take you in hundreds of different locations.
Most retirees in the U.S. rely on Medicare to cover a majority of their health related expenses. Unfortunately, Medicare will not provide coverage for U.S. citizens living abroad. That can seem like a deal breaker to many, but there are alternatives to Medicare. The most obvious option would be to self-insure. Health care costs can be significantly less in some countries and it could make sense for a healthy individual to pay for care out of pocket on an as needed basis. Another option is to purchase local coverage (which can be very reasonable, if available) or buy an international health policy through a company like Aetna International or ihi Bupa. If quality of care is a concern, visit www.jointcommissioninternational.org to learn about internationally accredited and certified health care organizations in the country that you are considering. Keep in mind that if you eventually move back to the United States and want to sign up for Medicare, you will pay stiff penalties for waiting past age 65 to enroll.
Unlike Medicare, your Social Security check can follow you beyond U.S. borders (assuming you don't decide to retire to sunny North Korea or some other restricted country). Practically speaking, it may be easier to have your check deposited into a U.S. bank account and then access your funds using your ATM card abroad. This can help you avoid certain delays and fees if you try to have the check deposited directly into your foreign bank account. For more information, read Social Security Administration Publication 05-10137.
Calculating your tax liability can be difficult under the best of circumstances. Add foreign residency into the mix and things can get downright complicated. Generally speaking, you will be subject to the same income taxes abroad that you would be within the U.S. You may also be subject to State taxes if you are still considered a resident of a state because you maintain a house or bank account there.
If you get a job overseas to supplement your retirement income, you may be able to exclude up to $95,100 of that income from your U.S. tax bill by claiming the Foreign Earned Income Exclusion (FEIE). This can help you avoid paying taxes to both the U.S. and your new country of residence on the same income. Before moving overseas, meet with a trusted tax adviser who is experienced in foreign tax issues so you can minimize your tax bill and stay within the good graces of the IRS.
Many countries require you to obtain some form of work permit or visa before you will be able to legally work in that country. Keep that in mind as you consider where to retire. If possible, design your retirement budget so that it is not dependent on income from working. If you do decide to work, consider jobs where expats have a competitive advantage such as teaching English as a second language (ESL).
Buying property in a foreign country can be complicated. Some countries prohibit ownership by a foreigner altogether. Because of this, renting may be a better option. Either way, you should work with a local real estate agent and local attorney to make sure that any contracts are in order and that the transaction goes smoothly.
Retiring overseas isn't for everyone, but it can be a great fit for some. If your dream retirement includes Panama instead of Pennsylvania or Uruguay instead of Utah, just make sure to do your homework and work closely with your advisers to ensure a seamless transition.
FPA member Joseph R. Hearn is the Vice President at Teckmeyer Financial and author of the books If Something Happens to Me and The Bell Lap: The 8 Biggest Mistakes to Avoid as You Approach Retirement.