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Portfolio Management (Including 401ks or IRAs) While Retiring Abroad

June 7, 2023

Investment Management for American Retirees Abroad

When Americans abroad encounter FATCA and other compliance hurdles, it often leads them to the conclusion that most income producing investment activity will be more efficiently conducted through U.S. accounts. Managing investments through U.S. accounts, however, does not require retaining a U.S.-centric investment strategy.

Indeed, in planning a retirement abroad, investors need to think very differently about their investment strategy. Standard approaches offered by U.S. financial institutions are usually not optimal. An American retired abroad is wise to diversify away from excessive concentration of their portfolios in purely U.S. investments. This guide will show how this can be done, safely and compliantly, to boost investment returns and mitigate against the risk that a decline in the value of the U.S. dollar or of U.S. assets may undermine a retiree’s financial security.

The elements of sound portfolio management – proper diversification and periodic rebalancing combined with cost and tax efficiency – are equally important after retiring abroad as they are during years of wealth accumulation. However, tax and compliance circumstances change once a retiree moves abroad.

The optimal selection and allocation of types of investments within a portfolio changes, if they are used to fund a retirement outside the U.S. dollar economic zone. These issues have major implications for investment portfolio management. This section and the following sections set out the principles and practices of an effective portfolio investment strategy for American retirees outside the U.S. Above is the asset allocation of a typically “American” diversified portfolio. While it has some foreign stocks, they are a small portion of the portfolio. Below is a portfolio that is globally diversified for a typical expat retiree in order to mitigate country and currency risk.

Rethinking Asset Allocation for Americans Retiring Abroad

Most traditional U.S. portfolio managers and investment advisors take an overly U.S.-centric approach to portfolio construction. At best, most make a modest allocation to non-U.S. stocks, and non-U.S. bond allocations are usually “currency hedged.” Excessive focus on U.S. investments limits an investor’s ability to mitigate fully financial risk. In contrast, broad global portfolio diversification helps mitigate financial risk. This is particularly true for Americans living outside the United States, where the cost of living is less tied to U.S. economic and market cycles.

On the other hand, Americans may remain more tied to the U.S. than local citizens of their country of residence. Ultimately, the optimal portfolio strategy is to diversify broadly across a range of global financial assets that will assure a steady stream of retirement income and capital appreciation without being tied to the economic fortunes of only one country, one region or one currency.

An Optimal Portfolio for Americans Abroad

An optimal portfolio for Americans abroad should be broadly diversified across U.S. and global stock and bond markets. Real Estate Investment Trusts (REITs) and in some cases commodities/gold are also recommended for a small portion of the portfolio because of their risk diversifying qualities and their low correlation with the U.S. dollar. These principles have been shown to achieve high returns, while limiting risk and volatility and protecting the purchasing power of retirees whose expenses are not primarily linked to the U.S. dollar.

Mutual Funds, ETFs or Individual Stocks and Bonds?

Mutual funds are generally the least desirable investment vehicles for American retiring abroad. Most U.S. mutual funds have covenants in their prospectus that prohibit their distribution to investors residing outside the United States. Furthermore, U.S. mutual funds may trigger punitive taxation in other countries (e.g., the UK, Ireland).

Building a portfolio of individual stocks and bonds is an acceptable alternative to mutual funds because they are less likely to trigger punitive and complex reporting in the U.S. or other tax jurisdictions. However, designing, building and managing a portfolio of individual stocks and bonds that captures the benefits of a global, multi-asset class portfolio diversification is difficult and expensive. Investors who forego funds and invest in individual stocks and bonds are commonly overconcentrated by sector or geographical area, thereby subject unnecessarily to increased risk and volatility.

Given these limitations, Americans abroad will find that U.S.-listed ETFs are usually the most effective building blocks for a modern investment portfolio, especially when the account holder resides outside the U.S. A well-chosen selection of ETFs will typically be very cost and tax efficient and is far less likely to trigger compliance problems or punitive taxation in the country of residence.

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This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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