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Are you tantalized by the idea of spending your golden years abroad in a new location with a lower cost of living or a more relaxed lifestyle? It’s certainly possible, especially with a financial plan to help you transition to an international retirement.
Key things you’ll need to address include:
Here’s a closer look at each of these areas.
Accessing retirement savings abroad
“U.S. expats often face challenges in managing their U.S. retirement accounts from abroad,” said Mike Wallace, CEO at Greenback Expat Tax Services. “Before moving abroad, it's essential to set up account management details in advance, including withdrawal amounts, deposit destinations, and currency exchange.”
Check overseas access policies. Because of the costs to comply with U.S. laws, some foreign financial institutions won’t accept American clients, and American financial institutions don’t always support expatriates. Expat communities can help you identify banks and brokerages that will accept you as a client. Financial planning and tax professionals can help you create plans to move assets if needed, keeping potential tax consequences in mind.
Decide whether to open an overseas bank account. Find out what’s required to open and maintain a bank account in your destination country. Also consider account security, the stability of the country’s financial system, and the existence or absence of FDIC-like protections. Be aware that there are U.S. reporting requirements for overseas accounts (discussed below).
Also, foreign banks may not offer the speed and convenience we take for granted with American banks. For example, Wallace said, it can take weeks to open or close an account.
Research currency exchange services. Your American bank may allow you to withdraw cash from foreign ATMs at competitive exchange rates and to wire funds to a foreign bank account, but don’t assume this is your best option.
“Using newer, nontraditional bank money transfer services can be more convenient and cost-effective than traditional wire transfers,” Wallace said. “They not only transfer funds faster and at a fraction of the fees banks typically charge, they also offer surprisingly large savings of hundreds of dollars or more by offering superior exchange rates.”
Create a withdrawal schedule. Retiring in the United States might mean establishing a safe withdrawal rate and changing your asset allocation so that you can take retirement distributions under varying market conditions without jeopardizing your nest egg. But expats have additional concerns, such as fluctuating exchange rates and avoiding unnecessary trips back to the U.S. to resolve banking problems. It may be wise to work with your financial and tax advisers to plan for irregular, lump-sum withdrawals that let you take advantage of a strong dollar without creating excessive tax liabilities.
Getting health care outside the U.S.
More affordable health care can be a big draw for retiring outside of the United States. Regardless of whether that’s one of your motivations, you’ll want to learn about your health care options in your destination country before moving there.
Understand Medicare restrictions. Medicare doesn’t cover Americans abroad except in very limited circumstances. You’ll need to decide whether to enroll in Medicare at all. While Medicare Part A is free for retirees with at least 40 work credits, Medicare Parts B and D have monthly premiums. It might make sense to avoid these expenses if you’re making a permanent move overseas. But know that if you change your mind, you may pay penalties on Medicare Parts B and D premiums for the rest of your life.
Research public health care. Countries that offer “free” health care fund their systems with taxes. Foreigners who haven’t paid into these systems may not be eligible to use them. If you will have access, find out what the system’s limitations are. For example, how long will you wait to see a primary care physician? A specialist? You’ll also want to learn about the quality of dental and vision care, and for any conditions you have or may be susceptible to.
Research private health insurance. Regardless of whether your destination country has a public option, you may want private health insurance. One possibility is to get a plan through a carrier that offers medical insurance geared toward expats and frequent travelers. Be aware that private plans may limit coverage or impose long waiting periods for pre-existing conditions and mental health conditions. They also may not accept applicants past a certain age.
Learn about local drug laws. Medications that many Americans use regularly and legally — stimulants, opioids, and marijuana, for example — are illegal (even with a U.S. prescription) or harder to obtain in many countries. Others may be easier to obtain abroad, but may come with the potentially deadly risk of being counterfeit. Find out what will be required to obtain your regular medications in your new country or to bring them with you from the United States. Discuss alternatives with your doctor if necessary. Try those alternatives to assess their efficacy before moving to a country that doesn’t allow your regular medications or makes them harder to get.
Evaluate long-term care. In the United States, obtaining long-term care through a nursing home, assisted living facility, or home health aide is considerably expensive. Find out what options exist in the country you want to move to, what their reputation is, and how much long-term care costs.
Update your estate plan. Work with an experienced attorney who understands the laws of your destination country to update your estate plan. The will, power of attorney, and trust documents you may have established in the United States may be invalid or tricky to implement abroad. (Related: Married to a non-citizen? 3 estate planning traps)
Budgeting
It’s important to get a realistic idea of what it would cost you to retire in your ideal community abroad. Here are some key considerations.
Research retirement visas. Learn about the requirements to move to the countries you’re considering — including any income or asset requirements — and examine whether you can meet them. Consider consulting an immigration attorney.
Take a relocation tour. An extended trip to any area you’re considering is the best way to discover whether you really want to live there and what neighborhoods suit you best. If you enjoy the experience, this trip will also help you budget for housing, household services, utilities, groceries, entertainment, transportation, and health care.
Review retirement assets. Project retirement income streams from your 401(k), IRA, Social Security, pensions, annuities, rental income, and other sources. Plan for best- and worst-case scenarios under different market conditions and spending needs. A MassMutual financial professional can help with these projections and discuss the results with you.
Consider currency fluctuations. Research how much the exchange rate typically fluctuates between your destination country’s currency and the U.S. dollar. Work with a financial professional to create a strategy for managing these fluctuations, as they’ll affect how far your retirement savings go.
Look into work options. If you haven’t saved an ideal amount for retirement, consider ways to earn additional income in your new country. Keep in mind that U.S. citizens are subject to income tax on their worldwide earnings. There’s no getting out of this requirement without renouncing your citizenship.
Estimate taxes. Research tax implications for expats in your chosen country. Find out how Social Security, retirement distributions, capital gains, and other forms of income will be taxed by the United States and your new home country. Discuss tax diversification with a financial professional.
Complying with tax laws and reducing tax liability
Retirement may allow you to escape from work, but it won’t get you out of dealing with taxes. One of the least appealing aspects of retiring abroad may be learning about a new country’s tax system plus how U.S. tax laws apply to American expats. At a minimum, here’s what you’ll want to be aware of.
1040. To stay compliant with U.S. tax laws after moving abroad, you’ll need to continue filing annual U.S. tax returns. However, you’ll have until June 15 instead of April 15 to file.
Foreign tax. “An expat’s retirement income will generally be subject to tax in their resident country and the U.S.,” said Nicolas Castillo, a Certified Public Accountant at expat tax service provider Bright!Tax.
Foreign tax credit. “U.S. citizens usually avoid double taxation due to the foreign tax credit, which offsets taxes paid in one country with those due in another,” Greenback’s Wallace added.
You may be able to claim this credit if you live in a country that has a bilateral tax agreement (tax treaty) with the United States.
FATCA. Under the Foreign Account Tax Compliance Act (FATCA), you may have to report your foreign assets to the IRS even if they don’t affect your tax liability. This would mean filing IRS Form 8938, Statement of Specified Foreign Financial Assets.
“U.S. citizens with ownership, a beneficial interest, or signature authority over foreign assets and investments, including foreign bank and financial accounts; or ownership in foreign business entities, other types of foreign entities, or foreign branches, will have special reporting considerations,” said Ed Borgstrom, a CPA and the owner of Borgstrom Accountancy Corporation in San Ramon, California.
“This can include an interest in a foreign corporation, partnership, sole proprietorship, foreign trust, or foreign retirement plan or account,” he added. “Receipt of foreign gifts or bequests may also be reportable to the IRS.”
Failure to file could cost you $10,000 in penalties. Continued failure to file could cost you up to $50,000.
Report of Foreign Bank and Financial Accounts (FBAR). If your foreign financial accounts total more than $10,000 at any point during the calendar year, you may be required to file FinCEN Form 114 with the Financial Crimes Enforcement Network, which is part of the U.S. Treasury Department. As with FATCA, you can face steep penalties for failure to file.
Foreign real estate, vehicles, and cryptocurrencies are not subject to these requirements, Castillo said. Keeping money only in U.S.-based accounts is a valid option to avoid FATCA and FBAR reporting requirements.
Foreign earned income exclusion. “The foreign earned income exclusion is designed for earned income, which typically excludes retirement income, like pensions, annuities, or Social Security benefits,” Castillo said. But if you’re planning to work abroad, you may be able to exclude up to $120,000 from your income on your U.S. tax return. The exclusion does not lower your tax bracket.
Tax requirements in your new country. “Many retirees focus on U.S. tax obligations but fail to fully appreciate the local tax laws, which can dramatically impact their overall financial health,” Castillo said. “Similarly, retirees may misinterpret the interaction of local tax laws with the U.S. tax treaties. Each treaty is highly nuanced and should be evaluated on a case-by-case basis for accurate and reliable tax planning.”
Proactive planning with both U.S. and local tax advisers can help you understand your potential tax obligations. A financial professional can help you understand the implications of these obligations for your financial security throughout retirement. (Learn more: Tax considerations for retiring abroad)
Conclusion
Creating a plan to retire abroad is exciting. It can also be more complex than planning for a stateside retirement. Reach out to a MassMutual financial professional if you’d like help with your retirement planning process.
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