Before The Great Recession, some Americans approached retiring abroad as an adventure. They could, for example, start over their lives in another culture. Others had been planning for years to return to where they had been born. And some, who had been born in the U.S., wanted to experience the land of their ancestors who had immigrated here years ago. Now, the motivation is primarily financial. The aging in the U.S. are looking for a way to live comfortably on a lot less than they had expected to have accumulated by their age. Their pensions might not have been funded. Their house and 401K might have lost value. As it turns out, their only income will be the monthly check from the Social Security Administration (SSA).
According to a Federal Reserve 2012 report, the worldwide financial downturn destroyed 18 years of gains for the net worth of the median U.S. household. Travel Market Report estimates that 3.3 million U.S. Baby Boomers plan to retire overseas. The comic film “The Best Exotic Marigold Hotel” depicts financially strapped aging British retiring in India. The joke is that developed economies are “outsourcing” their elderly to emerging nations.
There are many financial advantages to becoming an expatriate. For example, as Kiplinger reports, in Medellin, Columbia, with a population of 2.4 million, a couple can live comfortably on $1,500 a month. Healthcare is so high-quality that the city has become a mecca for medical tourism. This is key since expats lose Medicare. In George Town, Malaysia, population 740,000, a couple can live well on $1,500 monthly. The quality of health care also makes it a destination for medical tourism. Dubrovnik, Croatia, population 42,615, which also has quality health care, is more expensive. A couple will need $2,700 monthly. In all of these, expats can pay for medical care, which is relatively low-cost, a la carte rather than purchasing a health plan. However, those with severe chronic medical problems usually do not consider retiring overseas, no matter how fine the care. They have their network of trusted medical providers in the U.S. and Medicare, with a supplemental policy, will pick up a significant portion of the expenses.
Those are the unambiguous details. Then, the situation gets more complex, requiring research about a nation’s unique financial rules and regulations. One major issue is property rights, which is the cornerstone of U.S. capitalism. The real estate they buy might not be protected by law. For instance, in some nations in Central America, Americans who purchase a condo or a house may actually only own shares of a corporation. If the corporation goes bankrupt, they could lose their entire investment. Related to this is ownership of foreign securities. Actually, in some nations that could be prohibited. Where it is allowed, the protections are not as solid as those provided by U.S. regulatory bodies such as the Securities & Exchange Commission.
Another financial issue is taxes. If they retain their U.S. citizenship, which most do, they are paying taxes to two nations. This is important since, with telecommunications, some expats will continue working. Here, as is obvious, expenses could pile up in having to consult with two sets of tax experts. For those who qualify, the U.S. IRS excludes around $91,500 (that can change) of earned income through the Foreign Earned Income Exclusion (FRIE). Those claiming the FRIE will not be able to contribute to their IRA.
Estate planning, always problematic, will become much more so. Those acquiring foreign assets cannot have anything transacted through the U.S. legal system. On the other hand, trusts created in the U.S. will not be able to include foreign assets. Those determined to pass on assets to the next generation will need to consult estate-planning lawyers in both nations.
Also, there can be red-tape hassles about receiving the monthly SSA payment. Some nations prohibit the transfer of funds from the U.S. Those permitting it could delay the transaction for a month. The way around that is to maintain a U.S. bank account, with the SSA depositing the funds directly into the U.S. account. Access to the money will be through ATMs.
Clearly, there are complexities involved in planning retirement overseas. But many find those manageable. Currently, according to SSA, about 350,000 American retirees enjoy their benefits outside the U.S.