6 Tips to Help You Plan Your Retirement Abroad
Faced by a high cost of living in the United States, many baby boomers are choosing to retire overseas, where life has the potential to be less expensive. In 2022, more than 700,000 people received their Social Security checks abroad, up from less than 400,000 in 2000.
While retiring abroad may seem like a dream, there are important considerations to keep in mind before you make a move. Following are six tips to help you plan for a retirement overseas.1
#1 – Consider your retirement goals.
The most important question to ask yourself before retiring abroad is, “What do I want my retirement to look like?” If your main goal is to spend time with family and friends, you may not find happiness living so far away. On the other hand, if you hope to experience new cultures and travel extensively, you may be ready to move abroad.
As you’re considering your options, make sure to regularly revisit your retirement goals. Are the decisions you’re making in line with those goals? For example, if your goals include traveling extensively, you may decide to rent or purchase a smaller, lower-maintenance home rather than a sprawling estate. If you have specific medical concerns, be sure to choose a country that has adequate medical facilities and healthcare coverage to meet your needs.
#2 – Take a test drive.
One of the best ways to avoid regret is to test a new location before you commit. Once you have an idea of where you’d like to retire, plan an extended stay or two before you solidify your decision. Doing so allows you to experience the pros and cons of everyday living to help ensure you’re comfortable with the lifestyle and costs of the country you’re considering.
Depending on where you hope to retire, it may make sense to visit at different times throughout the year to make sure you’re comfortable with the seasons. For example, life in Costa Rica is very different during the wet season versus the dry season. Many towns in Europe become overcrowded with tourists during summer months and are relatively quiet in the winter. If you only experience one season before moving overseas, you may be quite surprised by the difference a few months can make.
It can also help to navigate your new country’s visa requirements before committing to a move. You may need to provide documents such as your passport, a criminal background check and proof of income or savings as part of the visa investigation process.
#3 – Understand currency risk.
One important consideration many potential U.S. expats tend to overlook is currency risk. This refers to the risk that your assets/investments could be significantly diminished by changes in the exchange rate between the U.S. dollar and your local currency. If you hold assets in U.S. investment or bank accounts, you may need to use them to pay for daily living expenses once you move abroad. When you exchange that money from U.S. dollars to your local currency, you could be exposed to an unfavorable exchange rate, which can diminish the purchasing power of your assets.
The greater the amount of money you’re transferring, the greater your currency risk. For example, say you wish to purchase a home in your new country of residence, but to do so, you need to access funds held in your U.S. investment account. At the time you make an offer on the new property, the exchange rate is favorable for your transfer. However, by the time you’re ready to close on your home abroad, the exchange rate has fluctuated greatly, requiring you to withdraw more assets than you had planned on in order to afford the purchase. This type of situation can have a significant impact on your long-term financial health.
#4 – Assess your retirement timeline.
The big question to ask yourself is whether you plan on spending the rest of your life living overseas or if you hope to move back to the United States at some point. One main reason to consider your future plans is to determine whether it makes sense to enroll in Medicare Part B or continue paying its premiums while you’re living overseas. If you decline Part B coverage while living abroad then later decide to return stateside, you’ll likely be subject to a 10% late enrollment penalty for each year you would have been making payments.
Your retirement timeline should also inform your decision of whether to purchase real estate in your new country of residence. If you plan to return to the United States within a few years, you may be better off renting. That’s because there are added complexities associated with owning a property overseas as a U.S. expat, including the impact of foreign exchange rates on the value of the property and added tax complexities when you eventually sell the property.
#5 – Check your expectations versus reality.
It’s important to consider whether your expectations of living abroad are in line with the reality of your move. While many U.S. citizens decide to move abroad for lower housing and healthcare costs, some are surprised to discover that the cost of living is higher after accounting for taxes in their new country of residence.
Because U.S. taxes are based on citizenship, not place of residence, you’ll still need to file a U.S. tax return while living overseas. Assuming your country of residence has a tax treaty with the United States, you may have protection against double taxation; however, it’s always wise to seek the assistance of a qualified tax professional to fully understand your potential tax implications prior to moving overseas.
#6 – Have a financial advisory team in place to help navigate your move.
Having a qualified team of financial professionals in your corner can help ensure a smooth transition and help you avoid common mistakes as you plan your move abroad. At a minimum, be sure to work with an international fiduciary wealth advisor, tax advisor and estate planning attorney who have experience helping Americans navigate the unique financial challenges they face when retiring to a foreign country.
If you’re thinking about the possibility of retiring overseas, Creative Planning International can help you maximize your wealth and avoid costly mistakes. We specialize in helping U.S. expats and cross-border families navigate the complex interaction of multi-jurisdictional tax and regulatory regimes and develop custom wealth management strategies to meet their unique needs. Because we serve in a fiduciary capacity, you can be confident we’re acting solely in your best interests.