Move over, Florida. Mountaintop hideaways, tropical islands, seaside fishing villages and country villas are luring more Americans beyond the comfortable borders of the United States.
The falling cost of international travel, the widespread adoption of technology, and the strength of the U.S. dollar have made it possible for more Americans to retire abroad, says Olivia Mitchell, who heads the Boettner Center for Pensions and Retirement Research at the Wharton School of the University of Pennsylvania.
In fact, the Social Security Administration sent out payments to 380,000 retirees living in other countries in 2014, according to the Miami Herald. That’s a 50% increase over the previous decade.
“If you are the adventurous type, retiring abroad can have a lot to offer,” Mitchell says. “But if you don’t plan well, it can be disastrous.”
Retiring abroad isn’t necessarily all walks on the beach. It means adopting a whole new set of financial rules. Making the move abroad shouldn’t be done without thorough planning on the part of retirees and their financial advisors. Here are some things retirees should keep in mind before selling their belongings and buying a one-way ticket to paradise.
The Tax Man Followeth
First things first: It’s essential that retirees understand leaving the United States does not exempt Americans from their U.S. tax obligations. Serious pitfalls can occur if you don’t understand and plan for the tax implications at play, Mitchell says. Those implications can be ruinous, “derailing your retirement plans,” she says.
That means retired expats must still file annually with the IRS, even if they move all of their assets to a foreign country. And depending on where they land, they may still have to fulfill the tax obligations of their foreign country of residence.
Is Your Social Security Secure?
Advances in technology have made it much easier for expats to conduct routine financial transactions. Retirees can arrange to have their Social Security benefits deposited directly into their bank accounts. And most of the time, U.S. citizens find that their Social Security benefits will follow them wherever they live.
There are some exceptions, however. The Social Security Administration won’t send payments to beneficiaries in Cuba and North Korea. It also won’t send payments to people in Georgia, Kazakhstan, Moldova or Ukraine, among other countries. Knowing whether you can count on this income source has enormous ramifications for savers planning for retirement.
Don’t Bank on It
Winnie Sun, a founding partner of Sun Group Wealth Partners in Irvine, California, has clients in countries from Austria to Japan. The first thing she advises them to do is have a strong U.S. footprint. That means keeping the bulk of assets at home and keeping their savings in U.S. or international banks.
“The U.S. financial and banking system is generally the safest and most reliable in the world. And reliability matters when moving abroad,” she says.
But don’t stop there. Investigating everything from whether your will is legally enforceable to local traffic laws and licensing requirements can save you and your family a world of hurt and frustration, Sun says.
Planning and having open and constant communication between the retiree and financial advisor “can mean the difference between a calm retirement and a calamity,” she says.
Home Sweet Home
There’s a big difference between a vacation and permanent residency when it comes to understanding and living in a new culture. Although many countries eagerly welcome expats, you’ll need to comply with residency requirements. Some countries require you to earn a specific amount of income every month to qualify for residency.
For example, Mexico’s low costs and proximity to the U.S. make it a popular destination for retirees. However, the Mexican constitution bars foreigners from directly owning property within 62 miles of any border and within 31 miles of the coast. Property purchases in these areas must be done through a trust that gives a bank title to the property. Even Western countries like France have rules about how foreigners can purchase homes, Mitchell says. Homelessness isn’t a surprise any retiree wants to receive.
You Can’t Count on Medicare
Americans are living longer than ever. For many pre-retirees and their financial advisors, figuring out how much they’ll need to save for health care costs can be the toughest part of retirement planning. For retirees venturing abroad, there is an added wrinkle: Medicare, the U.S. government health plan for people aged 65 and over, does not cover health care overseas.
“We highly recommend that you get health insurance to cover private medical and dental treatment and for medical evacuation to the United States, just in case,” the State Department’s guide to retiring abroad says.
Many countries have national health systems, but be sure to investigate eligibility and quality beforehand, Sun says. This is especially true if the retiree requires special medications or treatments. What’s more, local environmental conditions, like dust or mold, may contribute to some health conditions.
The Bottom Line
Retiring abroad is possible, but it requires significant planning and preparation. And getting professional help will go a long way toward avoiding headaches. Even then, Sun and Mitchell both suggest spending six months to a year on an extended vacation before pulling the trigger and officially relocating.