Retiring in a foreign country is a dream shared by thousands of Americans. Yet the number who actually pack their bags and cross the border to enjoy a life of leisure in a foreign country is difficult to gauge — neither the U.S. Census Bureau nor the Social Security Administration maintains comprehensive data about retirees abroad.
For those who do make the move, however, the key to financial success is planning — above and beyond the type of planning normally required to secure a successful retirement at home. The following considerations will help you lay the groundwork for a smooth transition and avoid any unpleasant surprises that might otherwise arise after the big move.
In general, the Social Security Administration (SSA) allows eligible individuals living outside of the United States to collect Social Security retirement payments in their country of residence. There are exceptions to the rule, however. Your eligibility to collect Social Security benefits overseas may be affected by your foreign citizenship status and by whether or not you receive dependent or survivor benefits. And regardless of your citizenship, the U.S. Treasury Department forbids the SSA to send payments to retirees living in Cuba, North Korea, Cambodia, Vietnam, or certain countries that were once part of the Soviet Union.
Medicare coverage usually ends when you set foot on foreign soil. If it’s impractical for you to return to the United States for medical treatment, then you should consider purchasing additional health insurance policies. Remember, too, that moving to a country with universal health coverage does not necessarily mean you will be immediately eligible for such coverage. Again, it pays to know the rules before arriving in your new country.
As far as the IRS is concerned, out of sight is not out of mind. Or, to put it in the government’s own words: “If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income.”1 That means you’ll need to pay tax on income — including taxable distributions from employer-sponsored pension plans and pensions — regardless of where you live when you receive the money.
But it’s not necessarily that simple. The United States has signed tax treaties with many nations around the world. In part, these treaties are designed to help taxpayers avoid double taxation (i.e., paying full taxes on the same income to two different governments). You should consider working closely with a tax advisor who specializes in international taxation to learn exactly how your benefit payments will be taxed in the country where you plan to live.
If your retirement assets are denominated in U.S. dollars, then you’ll need to consider the implications of spending and budgeting in a foreign currency. For example, you could opt to convert U.S. dollars to cash on an as-needed basis, or choose to make purchases on a U.S. credit card that automatically “translates” the amount back into dollars on your statement. In either situation, it pays to research which financial institutions offer the best exchange rates and lowest transaction fees.
Finally, don’t overlook the immigration policies of the country you hope to call home. The expenses and waiting periods associated with submitting your paperwork may be significant, and ignoring them could result in an unfriendly “welcome” from the local authorities on moving day.
1Source: IRS Publication 54, “Tax Guide for U.S. Citizens and Resident Aliens Abroad.”
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