What are your retirement aspirations?
Aegon’s retirement readiness survey asked more than 100,000 people across 15 countries to find out. When asked this same question, 63% of participants said traveling.
12% turned their love for travel up a notch by noting that they’d like to live abroad, and the ex-pat trend isn’t slowing down. As of December 2019, nearly 340,000 retirees receive Social Security benefits abroad.
It’s not hard to see the draw for these adventure-seeking retirees. Scenic drives, picturesque architecture, scrumptious food, and strong espresso – there are certainly benefits to an overseas retirement plan. Whether you’re a sun and sand type of retiree or a posh city dweller, foreign soil can burnish your golden years.
But remember, vacations aren’t the same as a one-way ticket.
Before you pack your bags for good, be sure to consider the following.
Want to retire early?
Understand Residency Rules
Planting your retirement roots abroad goes well beyond packing your things and purchasing a ticket. How can you make your new country “home”?
First, determine how to establish residency. Many countries require you to obtain a visa, whether travel or retirement-specific, to reside for an extended period. But, each country operates differently.
Some, like Panama, offer a retirement visa; others, like Mexico, offer a temporary residency visa (lasting four years) or permanent resident visa. Visa and residency requirements are all country-specific. Denmark, for example, doesn’t offer retirement visas so the only option for Danish-hopefuls is to gain a long-term visa in the following categories: student, worker, or marriage. Visas may come with other conditions like passive income streams, earning limits, the ability to own property, and more.
Each country will have its own rules and stipulations for long-term guests. Be sure to do your research to keep your retirement plan above board. The Department of State offers great online resources to check out your potential retirement spot including passport information, required vaccinations, health considerations, customs information, as well as other travel rules and restrictions.
Do You Have to Give Up US Citizenship to Retire Abroad?
The short answer: no.
You can still retain US citizenship and retire abroad so long as you apply for the right visas and properly pay your taxes.
What if you want to renounce your citizenship? While you can do so, the decision is permanent and cannot be undone. You may also be faced with additional US tax obligations, meaning you won’t be off the hook that easy.
To confirm your decision, you’ll need to file US tax Form 8854. You may also have to pay an exit tax if you meet certain criteria. The exit tax often impacts people with over $2 million in assets. It considers the gain of all your assets including pension funds and other deferred compensation. As this can be incredibly complicated to fill out, we recommend consulting your tax professional.
Keep in mind that permanent residency in another country isn’t synonymous with citizenship. Carefully examine the rules in your desired country before making any drastic citizenship changes.
Can You Still Work if You Want?
Many retirees are extending their working years either out of passion or financial necessity. Those retiring abroad should pay special attention to work requirements and restrictions in their new place of residence.
You may need to obtain a special work visa to earn above certain income limits. Some countries even moderate the types of jobs foreign residents can take up.
The bottom line? Do your research and know the rules in your target area.
Build a Strong Tax Plan
Just because you retire abroad doesn’t mean your obligation to Uncle Sam is fulfilled. You will still be required to file taxes in the US and, in some cases, in your current country each year. Income streams like pension funds, 401(k)s, Social Security, and other retirement assets are still taxable in the US based on your tax bracket.
The good news? Your earned income abroad will likely be safe from US taxes. You may also be eligible for different tax credits and deductions like the Foreign Tax Credit, designed to offset taxes paid on income earned in a foreign country.
The US also has tax treaties with many foreign countries such as Australia, France, Italy, and Spain, providing a more temperate tax climate for retiring ex-pats. If retiring abroad is high on your priority list, it’s important to work with a tax professional who specializes in foreign tax laws and regulations. Working closely with your planner and CPA to create a custom tax plan can help ensure you’re paying the right taxes and that you maximize your income in the new country.
Account for Changing Healthcare
Traditional Medicare doesn’t cover foreign medical expenses. While some supplement plans offer funds for foreign travelers, none are currently designed for overseas retirees. Ask yourself:
- Do you have any pre-existing conditions that would make it more challenging to receive care outside the US?
- Are you seeing specialists and are there similar pros in your desired country?
- What prescriptions do you take and are they transferable?
- What type of healthcare system does your desired country have?
- Are there high-quality hospitals and care near where you’re planning on living?
- What is protocol in the event of an emergency?
Health coverage abroad could be less expensive, depending on the country and its healthcare system. It’s important to note that you can use your HSA funds for foreign expenses as long as the treatment is legal in both countries. Depending on your custodian, there might be a surcharge for foreign expenses, some as high as 1% to 3%.
Before moving abroad, be sure to prioritize your long-term health. While you may be in tip-top shape now, as you age there will likely be changes to your health situation. You’ll want to live in a place equipped to give you the care you need and deserve.
Create a New Cash Flow Plan
The way you spend money may look different in a foreign country – some expenses may increase where others may decrease. Perhaps you’re moving to a spot where the cost of living is significantly lower but you have your eye on renting prime beach real estate. Your rent may be higher but other elements like groceries, utilities, entertainment, and more could be quite less.
Consider how your spending habits will change and adjust your retirement spending plan accordingly. Ideally, you’ll be retiring somewhere with a lower cost of living to make up for increased taxes, travel, and other expenses. But if you’re moving to a place where the cost of living is comparable or even higher (like Australia or Denmark), your savings should reflect the new type of costs you could incur.
You’ll also need to establish a new bank for more day-to-day cash flow needs (and likely to secure long-term residency visas). But it’s also smart to maintain relationships with US banks and financial institutions to help manage your money.
Properly managing your cash flow will be essential to keep your nest egg working for you while building your new home abroad. You must also decide how much money to keep in the US dollar and how much to transfer to your new country’s currency. In general, it’s often best to retain most assets in the US dollar and convert to local currency as needed. Work with your wealth team to find a balance for both the short- and long-term.
Plan for Increased Travel Costs
Isn’t retiring abroad all the travel you’ll need?
Many retirees abroad have family in the US or other parts of the world they will likely want to see. A plane ticket from Florida to Chicago is much more affordable than one from Spain to Chicago, for example.
Consider the following:
- How often could you afford to “go home” and visit friends/family in the US? Is that enough for you and them?
- Traveling at peak times like the holidays can increase costs, which may mean you can’t spend as many holidays with family.
- Have you accounted for travel and medical insurance?
- Do you have pets/animals? If so, how would that responsibility factor in?
- What additional travel do you plan to do while overseas?
Retirees in Europe and Asia may also want to visit other countries and islands that border their new digs, making travel an even more central part of their life and budget.
Be sure to build these additional travel costs and excursions into your savings plan – you may end up needing a lot more savings to travel the way you’d like in retirement.
Embrace New Culture and Lifestyle
Retiring abroad can give newbies culture shock. Leisurely exploring the cobblestone streets of Venice as a tourist looks entirely different as a resident.
You should think critically and carefully about why you’re drawn to a particular country, city, and region. Everything you do in retirement, especially if it involves a change of passport, should be done with thoughtfulness and intention.
Think through the following questions:
- How will this move impact your retirement plan?
- Why is living abroad so important to you and how will it help you fulfill your goals and dreams?
- Do you have enough money saved to live the life you want in this new country?
- Are you prepared for this immense lifestyle and cultural shift?
- Will you need to learn a new language? How much preparation can you do before your move?
- What safety considerations and precautions should you take before moving?
Work With a Financial Team You Trust
Managing your money abroad can be a tricky task. Between foreign income, visas, taxes, and retirement income, there are many considerations. It’s critical to work with a team that intimately knows your finances to help you build a thoughtful, comprehensive plan.
Moving abroad is a major life change and should be done with mindful preparation. Abacus can help create a plan for the retirement you desire, whether at home or abroad.
Does your retirement plan require some revisions? Schedule time to talk with an Abacus advisor today.