Many Americans dream of retiring overseas — and the dream is coming true for more of them every year. According to the Wall Street Journal, roughly 450,000 people collected their Social Security benefits outside the U.S. in 2021, up from 307,000 in 2008.
The movement is catching on — and it’s not hard to understand why.
“Retiring abroad can offer various advantages, such as lower living costs, favorable climates and cultural experiences,” said Ryan Maxwell, CEO of financial and investment research firm FirstRate Data. “However, it’s crucial to consider the financial implications involved.”
The key is to understand the hidden costs that can lead to unpleasant surprises far from home if you don’t examine all of the potential expenses before you pack. Here’s what you need to know.
The Wall Street Journal interviewed six retirees who moved to various locations abroad with savings ranging from $70,000 to $1.8 million. The overall consensus was that you don’t need a massive nest egg to live the dream of retiring abroad.
“Surprisingly, there are not many hidden costs,” said Warren Morelli, founder of The Nomad Hive and self-described “digital nomad” who has lived abroad for 15 years, mostly in Mexico.
“None that even come close to outweighing the cheaper cost of living. Visa requirements are generally very cheap, typically $100-$200 per year. Health insurance is generally quite affordable. Flights back to the U.S. tend to be the most costly expense, depending on where you are and how often you return home. I can honestly say, if you arrive prepared with insurance, visa requirements and accommodation plans, there aren’t many hidden costs.”
But planning for those contingencies in advance is precisely how to keep hidden costs from remaining hidden.
According to the Association of Americans Resident Overseas (AARO), U.S. citizens living abroad are “unfairly burdened by a complex citizen-based system with high tax preparation costs, the risk of double taxation, employment discrimination and competitive business disadvantage while receiving little of the benefits provided to citizens residing in the homeland.”
AARO takes issue with two provisions, specifically:
- The Foreign Account Tax Compliance Act (FATCA): Designed to prevent tax evasion through overseas bank accounts, FATCA sometimes penalizes law-abiding citizens living abroad.
- Global Intangible Low-Taxed Income (GILTI): Enacted to ensure U.S. multinational companies pay their fair share of taxes, GILTI can lead to unfairly high tax burdens on Americans who earn income overseas.
But even if those provisions don’t apply to you, taxes can get tricky and expensive when living abroad.
“Unless a retiree changes their citizenship, generally they are still considered U.S. citizens and taxpayers,” said Mark Steber, chief tax information officer for Jackson Hewitt. “Consequently, they are required to file their tax return and pay taxes just like if they live in the US.”
So, what counts as a taxable activity for retirees?
“Distributions from their retirement accounts — traditional 401(k)s and IRAs — are generally taxable and withdrawals are taxed as income. Part of their Social Security benefits could be taxable if the retiree has other income. Other tax implications come from dividends, distributions from annuities, as well as sales from stocks, funds or bonds. I highly recommend working with a qualified tax pro who has experience working with retirees who live abroad. Otherwise, they could risk issues with the IRS.”
According to Live and Invest Overseas, it’s possible to save up to 80% on health care costs living abroad. But with almost no exceptions, Medicare does not provide benefits outside the U.S. Anyone who has contributed for at least 10 years can still receive Medicare Part A to cover the costs of hospital stays, but to receive those benefits, they must return to the U.S., where costs are much higher.
That leaves most overseas retirees the choice of purchasing local insurance, purchasing an international plan or going without insurance and paying out of pocket. All three options have pros and cons, and costs and laws vary considerably from place to place. Some countries offer free health care, but non-citizens are often excluded and free systems are sometimes overburdened and substandard.
Although places like Dubai, Singapore, Tokyo and London can break the bank as easily as New York City, much of the world offers greatly reduced housing and living costs. The two big expenses retirees must contend with are taxes and health care, but there are other costs to consider, too.
Some countries require non-citizens to own property or meet minimum income thresholds to move there.
“Portugal, for example, is a popular retirement destination for Americans,” said Christian Simmons, a certified educator in personal finance and a financial writer for RetireGuide.com. “But you must own property in the country in order to be eligible for a visa, which could cost as much as 300,000 euros as of 2021.”
Most expats travel home with some level of frequency — and that alone can bust your budget.
“Airfare may seem like a secondary or spur-of-the-moment expense, but it can add up in a big way,” said Simmons. “While some popular retirement countries such as Mexico and Costa Rica are near the U.S., many others are much farther away.”
He cited a Hopper report showing that flights to Europe now average over $1,100 per ticket and flights to Asia now average more than $1,800 — an increase of more than $300 over last summer.
The Wall Street Journal report found that more people are retiring abroad partly because a strong dollar has made living overseas seem more affordable — but that can change with time and geography.
“Some countries may have a lower cost of living, which can stretch your retirement savings further,” said Joshua Haley, founder of Moving Astute, a site focused on moving and relocation, including to foreign countries. “However, it’s crucial to factor in potential fluctuations in currency exchange rates and inflation over time.”
Simmons agrees. “Tracking the value of the dollar against the currency of the country you are moving to can also play a role in your decision-making,” he said. “These values are far from static and you can expect swings in value throughout your retirement.”
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