The Nuts and Bolts of Retiring Abroad
In the first two parts of our series on retiring abroad, we helped you determine whether you’re a candidate for retiring out of the country and pointed you in the direction of your ideal destination. Today, we tell you what you need to know before you go.
It's not just postres and piña coladas once you move. As a foreigner living abroad, you'll face some unique administrative headaches. But these general rules of the road can keep the hassles to a minimum:
Embrace renting. Yes, in many areas, real estate can be very inexpensive relative to U.S. prices. But Bryan Hancock, founder of wealth management firm Timberchase Financial in Birmingham, Ala., with many clients living abroad, counsels against buying property overseas. "From a financial planning perspective, there is no benefit," he says. In many places you won't be able to get a mortgage—because you are a foreigner or don't have earned income—so you'd tie up a big chunk of money in the home. There's also incredible risk in signing a contract in a foreign language. Plus, purchasing a home could impede your flexibility: "Being able to grab your bag and just go can be valuable," Hancock says.
If you absolutely, positively want to buy, at least rent for the first year. That gives you time to make sure you're sold on the country and zero in on the area you want. Hire a local attorney to make sure the requisite paperwork—especially title—is in place, says Kathleen Peddicord, author of How to Retire Overseas.
Keep most of your cash stateside. After all, you can't get more sleep-at-night security than knowing your money is parked at a federally insured U.S. bank. If you're moving to a country with a low cost of living where cash transactions are the norm, keeping American bank accounts and accessing money through an ATM may be your best bet for day-to-day expenses. Ideally, though, you'll want an institution that rebates foreign ATM fees. Schwab and TD Ameritrade rebate fees internationally for certain accounts. Citibank has a global footprint and thus may have ATMs in your destination.
Opening a local checking account and transferring money from your U.S. accounts to pay for your expenses may make more sense if the country is not cash-centric or your costs are higher. But be ready for a lengthy setup—in person. "In some countries the banking system is a lot like the face-to-face relationship banking in the States in the 1950s," notes Dan Prescher, an editor at International Living.
American citizens abroad can typically have Social Security payments direct-deposited to a foreign account. While you can do the same with IRA or 401(k) distributions, you shouldn't. David Kuenzi, founder of Thun Financial Advisors, which specializes in planning for Americans abroad, warns that this triggers a 10% withholding tax.
Leave investments at home too. And manage them electronically, suggests Kuenzi. He says foreign-based mutual funds are typically more expensive than U.S. options. And you could create tax headaches by buying or selling securities overseas. For example, an investment that's tax-exempt in another country may be considered taxable by Uncle Sam.
Get the right credit card. You'll want to have plastic in your wallet without a foreign transaction fee—or else you'll end up paying 1% to 3% more on all your purchases. Capital One and Discover don't levy the fee on any of their cards. But if you also want to earn travel rewards to pay for your flights back and forth, your best bets would be the Barclaycard Arrival Plus World Elite MasterCard (annual fee of $89, waived the first year) or Chase Sapphire Preferred (annual fee of $95, waived the first year). Both were 2014 winners of Money's Best Credit Cards of 2014 in the travel rewards category, and neither has a foreign-transaction fee.
Get covered. U.S.-based health insurance coverage, including Medicare, typically doesn't extend across borders. While medical costs are often lower in other countries, you'll still probably want a policy to help you pay for care.
Square up with Uncle Sam. The U.S. is the only major country that bases taxation on citizenship, not residency. If you've heard griping about this, it's from working expats earning high incomes abroad. They are likely to be taxed where they are living, and any amount over the U.S. foreign earned income tax credit—$100,800 in 2015—is also taxed by Uncle Sam. Retirees are unlikely to have that much earned income generated abroad.
You do, of course, still need to pay your U.S. taxes and may have local tax to deal with as well; plus you'll have paperwork to fill out if you have more than $10,000 in foreign accounts. Chances are you will not face double taxation; in most instances any foreign tax paid can be credited on your U.S. tax return. But it's complicated, and even if you love your current CPA or have been a serial DIYer, Kuenzi recommends working with an accountant who has experience with expats.
Be sure you can stay awhile. Being a tourist works only for so long. In most countries, a stay beyond 30 to 90 days requires a residency visa. Research the requirements at the website of the country's U.S. embassy or consulate.
Some countries roll out the red carpet for retirees with money to spend: Panama and Ecuador offer retirement visas to anyone who can show a modest guaranteed income, such as Social Security.
In other countries, landing a residency visa can test your patience. Susan Korthase, who with her husband has happily settled in the seaside town of Cascais, Portugal, describes dealing with Portuguese bureaucracy as a "living hell." (She's now something of a visa whisperer for other Americans there.) No matter where you're headed, hiring a local lawyer is vital, says Peddicord.
For the Korthases, that visa hassle was a small price to pay for the dream they're now living. They spend their days immersed in the local culture through volunteer work: Susan helps fix English translations on tourism materials, while Craig coaches for the Lisbon Devils, part of a league feeding the Portuguese interest in U.S. football. Plus, "we have the sea outside our door, a boat in the marina, and kilometers to walk every day," says Susan. They're so at home now, she adds, "even short visits to the U.S. make us anxious to return to Portugal."
Previously in the Guide to Retiring Abroad:
The Secret to Retiring Richer Than You Actually Are
The Best Place in the World for You to Retire
The 10 Best Places to Retire Abroad
Dealing With Health Care Costs Overseas