Millions of Americans move abroad each year. If you’re considering being one of them, be sure to avoid the most-frequent financial mistakes of emigrating Americans.
Though the politics of moving abroad attract a lot of headlines, only a small number of the four million or so U.S. citizens living abroad left for political reasons. Most often, people leave the U.S. to retire, take a job, attend school, or have an adventure.
The Social Security Administration says it send benefits to more than half a million U.S. retirees living overseas. But the number of expatriates retirees probably is higher, because it is believed that most have their benefit checks deposited in U.S. accounts.
The main reasons most U.S. retirees settle outside the U.S. are lower living costs in general and medical costs in particular.
Foreign retirement is more appealing and less adventurous than it used to be thanks to technology and other changes. In addition, more countries have adopted policies that encourage U.S. retirees to retire there.
Yet, there still are complications, obstacles, and traps.
As with anyone considering changing their residence in retirement, learn what it will be like to live in an area full time. It’s a good idea to rent for a long period or two before making a final decision.
Then, avoid these common financial mistakes.
Not managing currency exposure. When you’re receiving income in dollars and spending it in a different currency, changes in currency values can really affect your cost of living, for both good and bad.
A country might be inexpensive for Americans today because its currency depreciated against the dollar. But how long will that be the case?
The potential for currency fluctuations requires at least two extra steps in your retirement planning.
The first step is to consider historic currency changes and potential future fluctuations. Then, when establishing your base standard of living be sure it’s one you could afford after extreme currency changes against the dollar. Today’s costs could be 20% higher in dollars in a few years. The currency fluctuations are a separate consideration from local price inflation.
The second step is to decide how much of your income and nest egg to keep in dollars.
If requested, Social Security will pay benefits in a range of currencies, and it doesn’t charge for currency conversion.
You also could move all or some of your financial accounts to the new country and have them denominated in the local currency. Or you could leave the accounts primarily in U.S. accounts in dollars and convert amounts to local currency as needed.
You could make a bet on currency changes. Or you could split your accounts so you aren’t hurt badly no matter which way the dollar moves against the local currency. To avoid the issue, some retirees choose countries that either use the dollar or peg their currencies to the dollar, such as Panama.
Overlooking restrictions on moving and buying property. Most countries require special permission for citizens of other countries to reside there long-term and have restrictions on real estate purchases by foreign citizens.
On the other hand, some countries encourage emigration by U.S. retirees. But you still must plan so you comply with the requirements. Most require a minimum amount of steady income. A Social Security benefit might be sufficient, but some countries require a higher amount. A minimum investment in the country also might be required.
After checking property laws, still be very careful about buying property. Scam artists look for U.S. retirees who want to buy property quickly in a foreign retirement haven. They sell interests in developments that never will be built or run other scams against people who don’t do their homework. Take your time to know a country and find a local adviser you can trust.
Not knowing the full story on medical care. Medicare doesn’t cover care you receive outside the U.S.
But many countries outside the U.S. subsidize medical care for their residents. Even in countries that don’t subsidize medical care, the cost often is less than in the U.S.
Learn the qualifications for participating in any national medical care system. As a non-citizen you might not be allowed to participate or there might be a waiting period. Of course, you want to investigate the quality of and access to care in any country you consider.
Also, consider shopping for global medical insurance that covers you in any country.
I recommend that you strongly consider staying enrolled in Medicare and maintain Medicare supplement and Part D prescription drug insurance. If you drop this coverage and later decide to move back to the U.S., the premiums will be much higher than they would have been and you might not be able to obtain Medicare supplement insurance.
Making fast decisions about financial accounts. Most likely you’ll need a local account in the new country to pay regular living expenses. Should you close all your U.S. financial accounts and move them to the new country?
You won’t be able to move some accounts without a heavy tax bill. For example, there aren’t foreign equivalents of IRAs and 401(k)s to which you can roll over the accounts tax deferred.
Also, as a U.S. citizen you’ll be subject to IRS reporting on foreign accounts you own. The penalties for missing a filing deadline or underreporting assets are significant.
For these reasons, many expatriates prefer to hold the bulk of their assets in U.S.-based accounts and transfer money to a local account as needed.
Further complicating the decision is some U.S. financial institutions no longer accept customers with foreign addresses, because the U.S. has been cracking down on money laundering and other activities associated with foreign financial accounts. Some institutions will close the accounts of any U.S. customer who establishes a foreign address.
Be sure to check with your financial firms well in advance of any move so you won’t be surprised.
Because firms change their policies over time, you might want to split your finances at two U.S. firms that currently allow overseas addresses.
Also ask about options for transferring money overseas and managing a U.S. account from an overseas location. Learn the fees for converting money into a foreign currency, making wire transfers, and transferring money in other ways.
Check with your credit card issuers. Some don’t charge a fee for currency conversions, while others charge fees of 1% and higher for each nondollar transaction. Your best bet might be to make most local purchases through a credit card that doesn’t charge a currency conversion fee and pay the monthly balance from a U.S. financial account.
Overlooking some of the tax angles. As a U.S. citizen, you owe U.S. taxes on your worldwide income and have to file U.S. income tax returns regardless of where you live in the world. There are exclusions for foreign-earned income and housing allowances, but they apply only to earned income from employment or a business, not retirement or investment income.
You’re also likely to owe taxes in the country you’ll be residing in. If the country has a tax treaty with the U.S., you might avoid being taxed by both countries on the income. Or you could qualify for a credit on your U.S. income tax return for foreign taxes paid.
The new country also might have additional types of taxes, such as a wealth tax. Of course, you might have selected one of the countries that offers tax breaks to U.S. retirees.
The bottom line is that the tax situation is complicated. You need a thorough understanding of your tax obligations in both countries.
Not updating your estate plan. The U.S. federal estate tax also applies to the worldwide estate of a U.S. citizen regardless of residence at the time of death. Also, if you maintained property or other contacts with your last state of residence in the U.S., it might maintain you’re still resident there and owe its estate or inheritance taxes.
Of course, your new host country will have its own laws about wills and estate and inheritance taxes.
You’ll need an estate plan that covers both countries. You might need a separate will for each country or one that meets the requirements of both countries.
Assuming it always will be less expensive. Sometimes an influx of U.S. retirees increases the demand for real estate and essential services in a locale in a foreign country. The cost of living for U.S. expatriates increases. You might not be able to forecast this, but it’s a possibility to keep in mind when considering an area.