Retiring Abroad? Financial Facts You Need to Know
In recent years, many American citizens have headed abroad to enjoy their retirement years. In 2018, about 423,022 retired Americans received their Social Security checks overseas—about a 38% increase from a decade ago.
The exotic locales and a luxe standard of living for less are enticing. But as exciting as the dream may be, managing your money in another country is much more complex, notes Robert Aruldoss, senior financial planning research analyst at the Schwab Center for Financial Research.
When abroad, everything from buying real estate to paying taxes and managing your estate plan typically comes with a new set of rules—and more paperwork—including 401k and IRA withdrawals, taxes, Social Security and more.
Here’s what you need to know about retiring outside the U.S.
Investigate your retirement address abroad
If you’re thinking about buying real estate to spend your retirement abroad, consider renting for a year to get oriented before making a purchase. Be sure to research forms of ownership and property titling for the country you’re interested in. For example, buying property in some countries could mean purchasing shares in a corporation.
If you plan to sell the property later on, consider the rules and regulations that apply to selling. “Some countries restrict the transfer of cash or profits out of the country so you’ll need to be extra prepared,” Robert notes.
You can find professionals through the American embassy or a nonprofit like American Citizens Abroad who can help with local real estate laws and rules for U.S. retired citizens on international currency transfers. Also, make sure to check the for visa and residency requirements.
Finally, plan visits to your desired destination in different seasons to get a better sense of what you’ll experience when living there year-round.
You still have to file your taxes from foreign soil
Even if you’re no longer earning or living in the U.S., as a U.S. citizen you’re still required to file an annual tax return. You might also be wondering what to do with your 401k when moving abroad.
No matter if you are living outside the U.S. during your retirement, you’ll still owe taxes on your worldwide income—including traditional IRA and 401(k) withdrawals, taxable pensions, and other taxable income, no matter the source. This can include up to 85% of your Social Security benefits, depending on your income level.
Even though you no longer live in your home state, you may still be required to file and pay taxes there, unless you changed your residency to a state without taxes before moving overseas. Not all states honor U.S tax treaties, so be sure to consult with a tax professional who understand state and international tax issues. Also, if you have income sourced from a business or rental property, you’ll likely need to file and pay taxes on the income generated in that state.
Avoid being taxed twice
You’ll likely have to file a tax return in your country of residence as well. How can you avoid being taxed twice? The U.S. has treaties with more than 65 countries that help you avoid double taxation in the U.S. and in your home overseas. In addition, expats can get a foreign tax credit on their U.S. return for taxes paid elsewhere.
In fact, if you earn money in the country where you have chosen to reside, you could benefit from the Foreign Earned Income Exclusion, which, in 2019, allows expats to exclude up to $105,900 of foreign earnings from their total yearly income.
Medicare for expats? How to manage your Medicare benefits
Retirees living abroad are not eligible for Medicare. But what if you visit the U.S. or decide to return permanently, as many retired expats eventually do?
To avoid a break in your eligibility (and the higher fees and penalties that come with re-enrollment), you might want to keep paying premiums for Medicare. Some Medigap policies and Medicare Advantage plans provide coverage for international travel, but just for emergencies and benefits are limited.
If you have Medicare Advantage and travel outside your plan’s service area continuously for more than six months, you will likely be dis-enrolled.
Get health care coverage overseas
Health care options are often cheaper abroad—indeed, so affordable that some expats opt to simply pay out of pocket. Still, you might want to purchase an international health plan through an American insurer or a private company with a large global network to ensure you’re covered while enjoying your retirement abroad.
You can also consider a group plan through an organization like the Association of Americans Resident Overseas or purchase an HMO-like plan through foreign hospitals. “This can be a good option, since many countries have American-trained doctors practicing in their hospitals and one of the reasons why ‘medical tourism’ has grown in popularity,” says Robert.
Set up your banking with care
The Foreign Account Tax Compliance Act of 2010 requires foreign banks to report all accounts held by U.S. citizens with balances of $10,000 or more to the federal government. This criterion has made banking and obtaining a foreign credit card more difficult for retirees living abroad. In fact, some foreign banks avoid doing business with Americans altogether. Your best bet is to consider a foreign-based branch of a U.S. bank.
Do some research in advance to help protect your money: “When conducting financial transactions and holding money in banks of foreign institutions, there are no SEC rules or FDIC insurance to safeguard your dollars,” Robert warns. There may be international equivalents, but don’t assume that the protections are the same.
Prepare to adjust your estate plan
This may come as a surprise, but your estate plan and other documents (wills, powers of attorney, health care directives) may not be valid abroad. “This applies even when you move to another state within the U.S., so you should always have your estate plan reviewed by an attorney in that state,” Robert says.
This step is even more critical when you move overseas. The U.S. Consulate, as well as American Citizens Abroad, can provide lists of local attorneys who can help. Also, make sure your family members are aware of any changes you make.
How will your income translate into local currency?
Another financial factor to consider when retiring in a foreign country is that most of your retirement income will likely be in dollars that are then converted to local currency, so you’ll be more vulnerable to fluctuations in currency markets.
“It’s crucial to take a good look at your retirement portfolio and regularly revisit your income strategy and emergency funds before you retire abroad,” says Robert. Your retirement “paycheck” may look ample while the dollar is strong, but could you weather a prolonged period of its weakness?
What you can do next
Just about every country is beautiful in the Spring and Fall—so visit potential retirement destinations in summer and winter to see if you can tolerate them at their possible worst.
Before you go abroad, learn what medical services your health insurance will cover overseas along with costs, quality, and availability of different services you may need. Wherever you go, the health care system will look different than in the U.S.
Don’t go it alone. Find good local tax professionals, insurance specialists, and attorneys to help you navigate the tax and legal complexities that come with living abroad.
Learn more about a Schwab Bank High Yield Investor Checking® account, which is linked to a Schwab One brokerage account,1 offers unlimited ATM fee rebates at any ATM worldwide and charges no foreign exchange transaction fees for purchases made with your debit card.2 The High Yield Investor Checking account is available only to U.S. residents, so it won’t be an option if you permanently move abroad—but it could be a useful tool if you live in the U.S. and travel frequently.