By Bob Carlson
Retirement outside the U.S. is more appealing and less adventurous than it used to be. That might be why the number of Americans retiring outside the U.S. increased substantially over the last 10 years. The Social Security Administration says it sends benefits to more than half a million U.S. retirees living overseas. But that understates the number of American retirees overseas, because many retire overseas but have their benefits sent to U.S. addresses or financial accounts.
While there are benefits to retiring overseas, there also are complications. A foreign retirement haven can be spoiled if key mistakes aren’t avoided.
Not managing currency exposure. Many currencies fluctuate a lot against the dollar. When you’re earning income in dollars and spending it in a different currency, changes in currency values matter a lot.
Look at the history of currency fluctuations against the dollar. With some currencies you’ll find changes of 20% or higher over periods of one to two years. That means your cost of living can fluctuate, both up and down, by that amount. Include that in your spending plans.
Also, decide how much of your income and nest egg to keep in dollars.
Social Security will pay in dollars to beneficiaries outside the U.S. It also will pay benefits paid in a range of other currencies and won’t charge for the currency conversion.
You also could have your financial accounts denominated in the local currency or leave them primarily in U.S. dollars and convert amounts to local currency as needed.
Whichever route you take, you’re making a bet on currency changes. That’s why some retirees choose countries that peg their currencies to the dollar or use the dollar, such as Panama.
Overlooking restrictions on moving and buying property. Many countries place restrictions on property purchases and long-term residence by foreign citizens. On the other hand, some countries encourage U.S. retirees to move there. But you still must plan and prove you comply with their requirements. Most require a minimum amount of steady income. A Social Security benefit usually is sufficient.
After checking property laws, be careful about buying property. Take your time to know a country and find a good local adviser you can trust. Many real estate scams are perpetrated against U.S. retirees overseas.
Not knowing the full story on medical care. Medicare doesn’t cover care you receive outside the U.S. If you retire outside the U.S., you’re self-insuring for medical expenses.
Many countries subsidize medical care for their residents, and the cost of care often is less expensive than in the U.S. Learn the qualifications for participating in any national medical care system. You might not be allowed to participate or there might be a waiting period.
Also, consider shopping for global medical insurance that covers you in any country.
Consider staying enrolled in Medicare and maintaining Medicare supplement and Part D prescription drug insurance. If you drop this coverage and decide to move back to the U.S. later, the premiums will be much higher than they would have been and you might not be able to obtain Medicare supplement insurance.
Having the wrong financial accounts. Most likely you’ll need a local account in the new country to pay regular living expenses. But it’s usually best to keep most of your assets in U.S. accounts and transfer money to a local account as you need it.
Keep in mind there aren’t foreign equivalents of IRAs and 401(k)s to which you can roll over those accounts. Also, as a U.S. citizen you’ll be subject to IRS reporting on foreign assets you own. The penalties for missing a filing deadline or underreporting assets are significant.
Because the U.S. has been cracking down on money laundering and other activities associated with foreign financial accounts, a number of financial institutions no longer accept customers who are U.S. citizens with foreign addresses. Be sure to check with your financial firms well in advance of your move so you won’t be surprised at the last minute.
Learn the fees for converting money into a foreign currency and for making wire transfers or using other ways to transfer money. Check with your credit card issuers for their fees on currency conversions.
Overlooking some of the tax angles. As a U.S. citizen, you owe U.S. taxes on your worldwide income and have to file U.S. income tax returns regardless of where you live in the world. You might have heard about the exclusion for foreign income and housing, but that applies only to earned income from employment or a business. It doesn’t apply to retirement income.
Check the taxes in the country you plan to reside in. It’s best to consult with experts on both countries.
Not updating your estate plan. The U.S. federal estate tax and tax return obligations apply to the worldwide estate of a U.S. citizen regardless of where you were living at the time of your death. Also, your last state of residence in the U.S. might maintain that you’re still resident there and owe its estate or inheritance taxes if you maintained property or other contacts with the state.
Of course, your new host country will have its own laws about wills and estate and inheritance taxes.
You’ll need an estate plan that covers both countries and probably will need a will and other estate planning documents for each country.
Believing it always will be less expensive. Over the long-term, the things that drew you to a foreign country could diminish as more U.S. retirees move there. In a few locales in foreign countries, an influx of U.S. retirees increased the population and the demand for real estate and essential services. The result was an increase in the cost of living in the area well above what it was when the influx started.
Bob Carlson is the editor of Retirement Watch.
Credit: Forbes, www.forbes.com