Investment Strategy

04/17/08 - Considering Retiring Overseas?

By: Robert Gordon, CFP®, AIF®

In search of a better overall quality of life, an increasing number of Americans are choosing to retire overseas. I witnessed this first hand while living in Costa Rica as a Peace Corps volunteer in the 1990s. The decision may be appropriate in some cases but careful analysis is critical to making this strategy work over the long term.

Cost of living ranks high as an initial motivator for the decision to relocate overseas. With the average Social Security recipient receiving just $1,007 per month1, it is easy to see how, especially for those with limited retirement savings, it's becoming increasingly difficult to retire comfortably here in the United States.

Another major motivation is adventure. Travel is one of the most commonly anticipated retirement activities. South America, the Caribbean and Central America are some of the most popular destinations for Americans owing to their proximity and familiarity. Mexico unofficially boasts an expatriate retirement community of over 150,000 and Costa Rica claims over 30,000.

Retiring abroad is more complex than simply selecting your hot spot and buying a quaint casita. Financial considerations are some of the most complex the expatriate retiree will face. These factors typically spell the difference between surviving and thriving in your chosen paradise.

Prepare a Budget

How much will you need to live on? This is actually the same question you need to answer for your retirement here in the States. I would recommend setting that number at the same amount you would require here in the U.S. on the premise that ideally, your standard of living, be it in Phoenix, Arizona or Alajuela, Costa Rica, will be the same. Granted, you should be able to obtain the same standard of living for less in your chosen country, but you cannot be sure until you are actually there. Make a few trips to the target country, city or town. Stay for an extended period of time surveying the expenses and interviewing other expats in the area. Make a few local acquaintances in the city or town where you hope to reside. They will have great information on local customs, the best places to buy groceries, etc. Increasingly, you can make contact with relocation consultants through the local U.S. Embassy or the local chapter of the American Chambers of Commerce (frequently referred to as AmCham) who will be able to provide much of the information you will need. Not surprisingly, the first year is typically the most expensive because of relocation and settlement costs. With proper pre-retirement planning, you should see living costs drop significantly after the first year as you become more comfortable with your surroundings.

Consider Taxes

Do I have to pay taxes? The answer is yes. If you are a U.S. Citizen, you are responsible for taxes on your worldwide income and estate. You may even be responsible for state taxes depending on your residence status. In addition, you may also be required to pay income taxes on your U.S. source income in your new country. As a retiree, presumably all of your income will come from U.S.-based sources such as Social Security, IRAs and other retirement assets. Some more adventurous retirees get involved in real estate investments and other ventures in their new country. The United States has tax treaties with more than fifty countries. Generally, the treaties call for each country to credit the amount of tax paid to the other country. It is important to seek good counsel in this area as mistakes can be very costly. Some countries, such as Panama and Costa Rica, have created Pensionado ("Pensioner or Retiree") programs which provide incentives to prospective expat residents. Panama's program includes: no taxes on foreign-earned income, no property taxes for 20 years, discounts on airline tickets and healthcare expenditures and more. Care is required as these benefits can typically disappear at the whim of the government. For example, Costa Rica has been a very popular destination for North American and European retirees and the country has significantly reduced the benefits through these programs for new immigrants. Check IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad at http://www.irs.gov. Also, each country has different estate laws, so make sure your foreign property is titled correctly and that your estate planning documents properly recognize your residency status and situs of your assets. Be sure to seek competent counsel both in your target country and in the U.S.

Getting the Money

How will I get my money? Fortunately, banking systems have evolved significantly over the past 20 years. In many of the most popular expat countries, there are accounts available in U.S. dollars as well as local currency and you can convert your dollars to the local currency at any time. If you plan to relocate to a rural area where ATM or bank access is limited, you will certainly find it expedient to establish a local bank account with some amount of funds in the local currency. However, if you will be in an urban area, you may find it just as convenient to simply withdraw funds in the local currency in small amounts, thus maintaining a stable value of assets and avoiding currency fluctuation. Many of the large money center banks have offices in multiple countries, though that does not guarantee you will be able to access U.S.-based accounts through them as banking regulations vary. Frequently, it makes sense to have some money in a local bank. A few countries such as Ecuador and Panama use the U.S. dollar as their official currency. Many others, particularly in Central America and the Caribbean, informally use the U.S. dollar. In fact, prices are frequently quoted in the local currency and the U.S. dollar and some retailers and service providers will prefer to be paid in U.S. dollars. You can collect Social Security anywhere, but it is easier to have the money deposited into a U.S. dollar-denominated account. The Social Security Administration provides details on receiving your payments while you are outside the United States at http://www.socialsecurity.gov/foreign.

Alongside financial considerations are health care, safety, language and family relationship considerations. If you think figuring out our healthcare coverage here in the U.S. is a mess, try sorting it all out in another language! This is an area that requires specific expertise and, if you have pre-existing conditions, you will definitely want to sort this out before you travel even for an extended vacation. With some exceptions, Medicare does not cover you outside of the U.S. for emergencies and you should consider purchasing a private policy (more info at http://www.medicare.gov and type TRAVEL in the search box). Needless to say, it won't be cheap but you will be grateful if you ever have to use it. In some cases, you will have the opportunity to buy into or otherwise qualify for coverage in the host country's national healthcare system. My own experience in Costa Rica was quite good but I had the benefit of the U.S. government's buying power since the Peace Corps is part of the Department of State. I did have one occasion to visit a rural hospital with an emergency and it was OK, that is if you don't mind waiting hours and hours and hours... Do not be intimidated, but also do not underestimate the complexity of this decision.

Lastly, let me take this opportunity to recommend the U.S. Peace Corps as an excellent option for adventure and service internationally as a retiree. You can find out more at http://www.peacecorps.gov in the Who Volunteers section.

1 "Could you survive on Social Security?" by Liz Pulliam Weston on MSN Money March 22, 2007