From the sugary-white beaches of the Dominican Republic to the snow-capped mountains of Bavaria, wanderlust-minded Americans are spending their retirements abroad.
According to the Association of Americans Resident Overseas, 5.4 million Americans live abroad, a number that will likely continue to increase as more baby boomers hang up their lanyards and retire.
While it’s easier than ever to handle personal responsibilities digitally, Americans who retire abroad should take specific steps to manage their money overseas, especially as local tax, banking and investment rules will differ from those in the U.S.
To streamline the responsibilities of money management in your new country of residence, apply these strategies:
— Be aware of currency risk.
— Focus on health care.
— Build a cash reserve.
— Figure out Social Security.
— Understand your tax obligations.
— Buy housing locally.
— Do your due diligence.
Be Aware of Currency Risk
One key issue to consider when retiring abroad is currency risk.
“If you’re on a fixed income, a change in the dollar’s value could create budget problems,” said Kathleen Peddicord, founder of Invest Overseas, an online platform that provides information about living abroad, in an email. “One way to help reduce the risk of currency fluctuations is to buy your home overseas. Housing is a big percentage of the cost of living, and you take ongoing exchange rate concerns off the table for that part of your budget by buying.”
Ideally, you should begin investing overseas before retirement. “That helps create additional cash flow for retirement while also helping to mitigate the effect of currency fluctuations,” Peddicord said.
[How to Start Investing and Saving for Retirement With Little Money]
Focus on Health Care
Many Americans may not realize it, but Medicare does not cover Americans who live outside the U.S., although some supplemental plans might apply for travel or short periods.
“You have to check your policies, and it’s best to consult with a health insurance agent who understands Medicare and international insurance options to create the best combined plan for your situation,” Peddicord said.
Health insurance options depend on the country you’re moving to and your age, but U.S. retirees in a foreign country generally have several options through local and international insurance.
“Those on Medicare should most likely keep it for when they travel home and find either a travel policy, local policy or an international policy to cover emergencies outside the U.S.,” Peddicord added. “It’s nice to be able to return to the U.S. and access Medicare for nonemergent care.”
Build a Cash Reserve
To build a larger post-career reserve fund abroad, diversifying your investment portfolio is key.
“Your portfolio should include a mix of local and international investments to safeguard against currency fluctuations and inflation,” said Philip Wentworth, Jr., cofounder and CEO of Rockerbox Tax Solutions in Dallas, in an email. “It’s critical to also factor in the cost-of-living adjustments based on your chosen locale to stretch your retirement dollars further.”
Remember that exchange rates and inflation can significantly impact your retirement savings abroad.
“Keeping a portion of your investments in U.S. dollars or in assets that historically hedge against inflation, like certain types of bonds or real estate, can be a protective measure,” Wentworth said. “Your investment strategy might shift abroad, focusing on stability and accessibility.”
Ensuring that part of your investment portfolio generates income is essential. “That’s especially the case as you navigate the unpredictable nature of living costs in a new country in your 60s, 70s, and 80s,” Wentworth added.
Understand Your Tax Obligations
Undoubtedly, tax implications can significantly affect your financial stability abroad.
“Understanding the nuances of the United States’ worldwide taxation system and how it interacts with local tax laws is crucial,” said David Brillant, a tax, trust and estate lawyer at Brillant Law Firm in Walnut Creek, California, in an email. “Leveraging tax treaties and understanding the specific tax obligations in your country of residence, as well as the United States, can mitigate the risk of double taxation.”
Your tax obligations for living or retiring overseas will vary by country.
“As an American, you’ll be required to file a return with the IRS no matter where you’re living or for how long you have lived outside the United States,” Peddicord said. “Additionally, your retirement income is taxable in the U.S. the same as if you lived in the U.S.”
One benefit is that you’ll no longer be eligible for state taxes if you move permanently overseas. “In countries that tax residents on their worldwide income, which is most countries, you’ll have to file a tax return in that country, as well,” Peddicord noted. “We recommend getting tax advice in the country you’re planning on moving to before you move so you can organize your affairs if there are any tax mitigating options.”
Arrange for Social Security Income
Social Security isn’t affected by moving overseas except in some rare cases.
“For example, you can’t keep getting Social Security if you move to Cuba, Iran or North Korea,” Peddicord said. “You can have your Social Security deposited into a local bank account in many countries, but the bank options are typically limited, as you have to have an account at the bank the Social Security Administration has an agreement with.”
Certain conditions of your Social Security benefits may depend on the country where you’ll be living. “The SSA has a Payments Abroad Screening Tool to help figure out your Social Security status abroad,” said Martha Shedden, president and cofounder of the National Association of Registered Social Security Analysts in Capitola, California, in an email.
[READ: What Is the Full Retirement Age for Social Security?]
Buy Housing Locally
For housing, take your time to make sure you are happy with your chosen country as well as the city and neighborhood before buying, Peddicord said.
“The transaction costs of buying property in another country can be high — much higher than in the United States — so buying and then quickly reselling because you don’t like where you are can translate to a big financial hit,” she said.
If you have an investment property in the U.S., nothing needs to change unless you manage the property directly yourself, in which case you’d likely want to hire a rental manager before you move away.
“You can continue to manage any U.S. investment portfolios from anywhere in the world as if you were still in the States while diversifying into other currencies and markets,” Peddicord said.
Do Your Due Diligence
When creating retirement income strategies overseas, working with a trusted financial advisor, a tax specialist and an experienced estate planning professional is highly advisable.
You’ll need all three to cover your needs as a retired American living abroad.
“Take building a post-career reserve fund,” Brillant said. “That foundation revolves around the strategic use of estate planning and tax-efficient investment practices, which requires professional assistance.”
For instance, structuring investments through vehicles recognized and treated favorably in both the U.S. and the country of residence can optimize tax outcomes.
“I’ve advised clients to utilize trusts that are designed to minimize their global tax liability, ensuring that their savings aren’t eroded by taxes,” Brilliant noted. “This is complemented by creating a balanced, globally diversified investment portfolio that accounts for currency risk and inflation — two factors that can significantly impact retirees living abroad.”
Additionally, maintaining a blend of income-generating investments and liquid assets is crucial in managing exchange rate fluctuations and the inevitable expenses. “Each decision must be informed by a comprehensive understanding of both the U.S. and local financial systems to ensure a stable and prosperous retirement abroad,” he added.
More from U.S. News
Is a 60/40 Portfolio Appropriate for Retirees?
How to Create a Retirement Budget
Why a Stable Value Fund Belongs in Your Retirement Portfolio
How to Invest When You Retire Abroad originally appeared on usnews.com
Update 04/09/24: This story was published at an earlier date and has been updated with new information.
