An increasing number of Americans are choosing to experience different cultures and lifestyles by moving abroad in retirement. In 2019, a total of 431,883 retired beneficiaries received their Social Security checks from abroad. That’s up almost 40% in the last decade.
While making the move to live overseas can be an exciting new chapter in retirement, planning ahead to manage your finances is essential. Adding a new complexity into the retirement planning process requires more research and guidance to create a savvy financial plan.
Thinking of making the leap to live somewhere else after you’re done working? Here’s what to consider first.
1. Will you be semi-retired or fully retired?
Working in retirement sounds like an oxymoron, right? However, many people choose to continue to work past the traditional retirement age, whether that’s for financial or personal purposes. If you have plans to work at least part of the time in retirement, keep in mind this might not be an option overseas if you need to obtain a work visa.
That means you’ll likely have to prepare to be fully retired and without work after you move abroad. If you move to a country with a lower cost of living, you can reduce your living expenses and make your savings stretch further each month. But you should put yourself in the best position possible to do this, which includes maxing out your 401(k) to save enough money for a retirement where you don’t need to work. The maximum you can contribute to your 401(k) is $19,000 annually if you are under the age of 50.
2. Prepare for taxes
Can you avoid taxation on your income by moving abroad? Short answer: no. All American citizens need to file U.S. taxes whether they reside in the United States or not. While your retirement income and Social Security are exempt from state tax if you move overseas, you must still pay federal taxes on your total income. Keep in mind, if you’re renting out a property or still earn funds from a business in the United States, then you would likely be taxed on the state level for this income as well, unless you live in a state that doesn’t have a filing requirement.
If you move to a country that doesn’t have a tax treaty with the United States, there is a chance you could be taxed in both countries, so be sure to talk to a tax professional in advance of your move. If you do earn income in a foreign country, you could qualify for a foreign earned income exclusion, which would exclude this amount from your United States taxes. In 2021, the limit for a foreign income exclusion is $108,700.
3. Budget for health expenses
While statistics show that consumers under age 65 spend about 20% less annually than their younger counterparts, they spend 32% more annually on health care than other Americans. While health care in the country you are moving to might be socialized for citizens or permanent residents of that country, the quality of health care can vary drastically by region. Not just that, but private health care costs could turn out to be more expensive than you expect, and coverage might be more limited than what is available through Medicare.
Many expatriate retirees pay for Medicare Part B and private health insurance, often adding an option to be airlifted to the United States in case of an emergency. However, private insurance policies often have an age limit. One popular policy by GeoBlue only offers insurance to those 74 years old and younger. You can also consider a group plan through the Association of Americans Resident Overseas.
While you might feel comfortable covering small costs out of pocket, it’s the large expenses to be wary of, and these expenses tend to increase as you age. If you want to live overseas permanently, consider also the cost of nursing care and end-of-life care.
4. Don’t rely on your credit score in a foreign country
When you move abroad, you won’t have any credit history built up in your new country. While some countries could take into consideration your American history, most of the time this won’t be the case. This could make it challenging to obtain credit for purchases such as auto loans or a credit card.
Finding a foreign branch of an American-based bank could be the easiest way to obtain credit fast. However, U.S.-issued cards could have hefty foreign transaction fees. You’ll need to research how to build credit in your new country, since this process can be location-specific. Keep in mind: you’ll also want to continue maintaining your U.S. credit score in case you want to return home for any reason.
Many people dream of moving abroad for retirement, and if that’s your goal, it’s certainly possible to obtain. It simply requires advanced planning and more research than a traditional retirement in the United States. Consider that while you might save money in some areas, such as living expenses, you could end up paying more in other areas, such as for health care or taxes in a country that does not have a tax treaty with the United States.
Jolene Latimer has her master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.
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