In our careers, we have seen clients retire both inside AND outside our borders. A common question we sometimes get asked is whether the grass is greener outside the US from a financial perspective – does it make financial sense to retire abroad, and is it difficult to do so? In this article, we will look at the financial implications of retiring abroad, as well as what steps you need to consider in order to do so.
Bali is the new LA, or is it?
The concept is appealing – move outside our borders and live on a fraction of the price of what you can in the US. Thus, you go online, find a cheap place in Costa Rica, and decide you want to visit your hopeful newfound home. Thus, you get on a plane, stay on a hotel to San Jose, and soon you are in paradise. You visit your new foreign residence, and fall in love. You purchase the home on the spot. 3 months later, you move into your new home, and realize immediately you made a mistake – the bugs, sweltering heat, lack of comforting American privileges (from Whole Foods to Home Depot).
This is why the first step I would take is to visit several of the locations you are considering, choose the number one option on your list, and instead of finding a place to buy, you should find a place to rent first. When I say rent, I mean you should rent for a longer period of time – 3 to 4 months, and in doing so you can get an idea as to whether you can run your own little cost/benefit analysis. You can thus determine the difference between going on a vacation and falling in love and actually living somewhere and falling in love, as there is a significant difference. The last thing you want to do is uproot your home in the US, as this can be a very expensive process – you will not only have to sell your home (and pay the fees associated with this), but also pack all of your belongings and ship them to another country, which can be very costly. If you have now made a mistake, you will need to sell your abroad residence and move BACK to the US, which will double the mistake, as well as waste precious time in your retirement.
Is bread cheaper in Istanbul?
Before you decide to move or possibly even rent in a foreign country, you should see whether you have the financial means to move in the first place. You should conduct research to determine whether your expenses will be more or less abroad. This will depend on the purchasing power between the dollar and the currency in the foreign country – I.E., what is the difference in prices between Toledo, OH and Toledo, Spain? This will provide some broad strokes to see whether you can truly afford to move to such country.
There is a fantastic website which will compare your city’s costs with another city’s (even foreign) – numbeo.com. On this site, you can compare not only costs for typical living expenses (food, gas, etc.) but also healthcare, and you can also see comparisons on crime, traffic, and quality of life as well, all of which should factor into your decision.
There is not only the current cost of goods in the country you are considering but also the fluctuation in the country’s currency. This is really true of more developing nations whose currency is not very stable, but it can also affect more stable nations. The following can get a little technical, but it is important to explain it. For example, when Anthony studied abroad in Italy in 2007, each Euro was worth $1.37 – thus he had a very expensive semester abroad since the purchasing power of his dollars were not as valuable in Euros (while an exchange rate gain of a currency is not a perfect relationship with purchasing power, they tend to move in the same direction). However, now is a good time to be in Europe – each Euro is worth $1.08 dollars, thus the dollar has strengthened against the Euro and the dollar’s purchasing power has increased as well. However, while the Euro/dollar exchange rate has remained somewhat stable – many of the developing nations can have several hundred point swings in a single year, and even positive dollar gains against a currency can cause its own problems. For example, Indonesia in the late 1990s had a huge fluctuation in its currency – they had a currency deficit from $5b in 1997 to an estimated surplus of $3b in 1999. This caused a huge food shortage, massive unemployment and widespread bankruptcy, and lead to riots/social unrest as a result – thus even a gain in the dollar can have negative ramifications. Thus, the more stable the currency, the better off you will be.
Other Financial Issues to Consider
There are a host of other issues to consider when deciding to live your Golden years abroad. We break down each of them in more detail below:
- Healthcare: As is the case with getting older, healthcare costs will naturally rise. Thus, it is critical to understand the healthcare system in your newfound home country, not only from a financial perspective but also in terms of quality. Medicare will not cover living abroad, and most healthcare insurance carriers will not either. You have several options that should be considered, each of which makes the most sense in certain circumstances:
- Go Without: You can consider simply living abroad with no insurance at all. This may be the case in which the dollar goes a very long way and healthcare is very affordable – for instance, Thailand is known as being a very inexpensive place for healthcare, and many expats simply pay as they go and have an emergency reserve for catastrophic situations. This, for the most part, is not the best alternative in most situations since healthcare costs vary wildly depending on the situation, but it is an option.
- Local Health Insurance: Just as it sounds, you can obtain local health insurance in your new country. These policies can be quite inexpensive, and can make sense if you know with certainty that you will live the rest of your life in such country – most of these policies will not cover you outside of their borders, so it is critical that you feel at home in this new country.
- International Health Insurance: For those specific situations where you plan to hop around countries, this can be a nice alternative. These are generally US policies for those living abroad, and thus tend to be much more expensive than local coverage. However, these are the most reliable of options and provides you with the chance to move as you please around the globe.
- Taxes: Do you believe that if you move abroad that you do not have to pay US taxes? You would be wrong. If you are an American with income abroad, you will need to file two tax returns – a US return as well as a foreign return. The US individual income tax operates on a 'worldwide' basis, meaning taxable income must be reported on your Form 1040 regardless of geographic source, thus you will be “doubly taxed.” However, luckily those individuals living abroad will receive relief in the form of foreign tax credits. This is easier said than done - the IRS may reject a taxpayer's claim for this credit unless they can provide official documentation establishing that the foreign tax was, in fact, paid. This often creates timing problems where the taxpayer has yet to receive the necessary documentation by the time the U.S. filing deadline rolls around. Given the intricacies of this very issue along with the differences between US and foreign tax laws, it is important to have a CPA in the US and an accredited tax professional abroad so that you file in the most efficient manner possible – I would recommend NOT trying to do this yourself!
- Banking: We in the US take for granted how efficient our banks are, from ATMs being everywhere to wire transfers/automatic payments. We truly do have the best banking system in the world (except maybe Switzerland!) and the first time you may see this stark difference is when you deal with the operations of foreign banks. That does not mean you shouldn’t have a bank account abroad, however, as this should be a first step before moving – you will need a bricks and mortar place to deposit and withdraw money without hassle. If you do not have a local bank, you may have to pay ATM fees every single time you withdraw money. You can also consider a checking account which has no foreign transaction fees across the globe – there are a few cards which provide this service, and this may be a good idea regardless. You can then transfer money between your US and foreign bank without worrying about being hit with fees. Just like at home, if you are able to set up automatic withdrawals, you should absolutely do so. If you are in an unstable economic environment with no international banks, you may want to keep the majority of your cash in the US for safety as well.
- Investments: We would recommend keeping your investment accounts at home, unless you are in a very stable foreign environment. You should also make sure that your accounts will not incur any issues with having US accounts while living abroad (some US brokerage agreements may not allow it, Vanguard for instance). There is not much of a need to house your investments abroad (and as explained below can lead to a royal pain) – most transactions can be done online, and if you keep a US checking/savings you should be able to transfer monies from your investments to your US bank without a problem. Also, you house your investments overseas, FATCA requires extensive record keeping and reporting based on the Passive Foreign Investment Corporation (PFIC) rules. These rules apply to all mutual funds, hedge funds, cash management products, and foreign pension plans housed in foreign countries. Investments that fall under PFIC rules are taxed at a much higher rate - upwards of 35%. That's a much more difficult pill to swallow than the tax rate associated with long-term capital gains.
- Property: You should research the ins and outs of owning property abroad – how does the process work? Is there any specific ways in which a foreign country penalizes foreigners for owning property in their country? Is there any specific ways in which the foreign government can take property from you? What are the tax implications of property ownership in the foreign jurisdiction? We would recommend answering these questions and have the ownership completed prior to selling your home in the US (if possible). We would also recommend obtaining a local attorney who understands real estate ownership in their jurisdiction - do not take the seller’s word for it!
Of course we are here to help! If you have any questions, feel free to reach out to Anthony or I – this is a big decision, and walking through the implications with a professional is critically important.
Karen L DeRose is a registered representative of Lincoln Financial Advisors Corp.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies.