Retiring abroad can be a dream come true for many Americans, offering the opportunity to explore new cultures, enjoy different climates, and potentially stretch retirement savings. But moving to a new country involves significant financial planning. If you’re considering making the leap, there are key financial considerations you need to weigh before you make this major life change. Below, we dive into some of the most important aspects you should factor into your decision.
1. Taxes
One of the biggest financial considerations for Americans retiring abroad is understanding how taxes will work. The U.S. is one of the few countries that taxes its citizens on worldwide income, regardless of where they reside. This means that even if you move to a foreign country, you’ll still need to file a U.S. tax return every year. You’ll be required to report all sources of income on the Federal 1040.
To avoid double taxation — paying taxes both in the U.S. and in your new country of residence — you may be able to take advantage of tax treaties or the Foreign Earned Income Exclusion (FEIE). Tax treaties between the U.S. and certain countries can help prevent you from paying tax on the same income twice. The FEIE allows you to exclude a certain amount of foreign-earned income from your U.S. taxable income, but this generally applies to those who are actively working, which might not be relevant for retirees. The FEIE also comes with its own sets of rules that need to be met.
The Foreign Tax Credit (FTC) allows you to offset U.S. taxes by the amount of foreign income tax you’ve already paid. The credit is calculated on Form 1116. Any unused credit will be carried forward until absorbed. One thing to consider with the FTC is that some countries taxable years are not calendar based. For example, the UK tax year runs from April 6-April 5. Be sure that your income received and taxes paid match up in the same calendar year.
You’ll also need to understand how your new country handles taxes. Some countries have low or no income tax rates for retirees, while others may tax your global income. Knowing the tax landscape in both the U.S. and your new country is essential to avoid any surprises that could erode your retirement savings. It would be wise to invest in a foreign expert tax professional who is well versed on U.S. foreign matters and the country you are moving too.
2. Income and Residency Requirements
Many countries have specific income and residency requirements for retirees looking to move there. In many cases, you’ll need to demonstrate that you have sufficient funds to support yourself without relying on local social services. These requirements can vary widely from country to country, so it’s essential to do thorough research.
Countries like Mexico and Portugal offer specific retirement visas, but each comes with its own rules. In Mexico, you can apply for a temporary or permanent residency visa, and you’ll need to prove a minimum monthly income or show a set amount of savings. Similarly, Portugal’s D7 Visa requires retirees to demonstrate stable income, such as pensions or investments, that is at least the minimum wage in Portugal.
It’s important to note that some countries may require you to renew your visa regularly or meet residency conditions, like staying in the country for a specific number of months each year. If you don’t meet these requirements, your visa could be revoked, jeopardizing your ability to stay in the country long-term.
Before choosing a country to retire in, review its residency rules thoroughly and make sure you meet the financial criteria. Failing to meet these requirements can lead to complications down the road, making your retirement less secure than you had hoped.
3. Healthcare
Access to quality healthcare is another critical consideration. As a retiree, medical care will likely become more important, so you’ll want to ensure that you have reliable coverage and access to hospitals and specialists. The availability and cost of healthcare can vary dramatically from country to country.
One of the most common misconceptions is that Medicare will cover your medical expenses if you retire abroad. This is not true. Medicare generally does not provide coverage outside the U.S., so you’ll need to explore alternative options. Many countries offer national healthcare systems, but these are often only available to legal residents or citizens. In some cases, you may be able to buy into the local healthcare system, but the coverage levels and eligibility requirements differ.
Alternatively, private international health insurance is an option, though it can be expensive depending on your age and health condition. This type of insurance allows you to access private medical care in your new country and often provides coverage across multiple countries, which is useful if you plan to travel during retirement.
Regardless of your choice, ensure that the healthcare system in your chosen country meets your needs. Consider factors such as access to specialists, the quality of hospitals, and how your pre-existing conditions will be treated.
4. Banking
Another aspect of retiring abroad is how you will manage your finances and banking. You’ll need to navigate foreign exchange rates, banking fees, and the logistics of transferring money between countries. For many retirees, maintaining a U.S. bank account while opening a local account in their new country is a practical solution.
It’s important to understand how easy (or difficult) it will be to transfer funds internationally, as exchange rate fluctuations and transfer fees can quickly add up. Some services can offer lower-cost options for transferring money internationally compared to traditional bank transfers. However, if you plan on regularly accessing your U.S. funds abroad, make sure to look for a bank or financial institution that offers favorable terms on international transfers.
Also, check if your new country has restrictions on how much money you can bring in or take out, as well as any potential taxes on foreign bank accounts. Some countries require residents to report foreign assets, which could impact your financial planning.
5. Housing
Housing costs can be one of the most significant expenses in retirement, and finding affordable housing that meets your needs is crucial. Whether you plan to rent or buy, research the local real estate market thoroughly. Some countries have lower real estate prices compared to the U.S., making it possible to stretch your retirement savings further. Others, particularly in popular retirement destinations, can be quite expensive.
If you’re buying property, be sure to understand the legal requirements for foreigners. In some countries, non-citizens face restrictions on property ownership, while others may require hefty deposits or charge additional taxes. Always consult with a local real estate expert or legal advisor who understands the nuances of foreign property ownership.
Renting might offer more flexibility, particularly if you’re unsure how long you want to stay in a specific country. Make sure to factor in the cost of utilities, homeowners’ association fees, and property taxes when calculating your budget.
Additionally, consider the long-term cost of maintaining a property. If you’re buying in a country with different climate conditions, like tropical areas, maintenance costs can be higher due to issues like humidity or natural disasters. Ensure that housing costs fit within your broader financial plan for retirement abroad.
Final Thoughts
Retiring abroad can be a thrilling and rewarding experience, but it requires careful financial planning. Understanding the intricacies of taxes, income and residency requirements, healthcare, banking and housing will help you avoid financial pitfalls and enjoy your retirement to the fullest. By conducting thorough research and consulting financial professionals who specialize in international retirement planning, you can make the most informed decisions about your future.
With the right preparation, retiring abroad can open up a world of possibilities, offering both financial benefits and the chance for new adventures in your golden years.
Ryan Egolf, is a Non-registered associate of Cetera Advisor Networks LLC, Member FINRA/SIPC.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.
