Many of us have probably vacationed in a tropical paradise or a quaint French hamlet and thought, “That does it: I’m retiring here!” Some actually follow through on that daydream. Just this year, I had two clients retire to Portugal. They’re living their dream retirement, and it was all made possible because they considered all the factors of retiring outside of the United States.
As with traditional retirements in the U.S., retiring outside of the country requires careful monetary planning. In fact, you’ll need to consider further factors in addition to the regular retirement finance concerns.
Foreign retirement often manifests in cycles, or what you could call fads. People retire to a low-cost-of-living country with great weather and culture, then tell all their friends what a fantastic time they’re having. Before long, the story spreads, and suddenly hundreds or even thousands of retirees per year are flocking to that low-priced paradise.
This creates a problem we don’t often see with traditional retirements within our nation’s borders: rapid inflation. As more expats, especially those who are wealthy relative to the local population, flood into a country, demand for goods and services rises, which means prices rise alongside them. This often isn’t much of a problem for the wealthier expats, but for those counting on a low-cost-of-living retirement, those retiree-invasion price increases can represent a real threat to their retirement savings.
A great example is Cabo San Lucas. Cost of living in the southern Baja city used to be exceedingly low, making it financially almost as attractive as the beautiful scenery and weather. Decades of expats flocking to the city, however, have increased the cost of living to a level comparable with many areas inside the U.S.
That’s why it’s an excellent idea to plan as though the current cost of living in your destination of choice will not always stay as low as it is right now. By being prepared for significant cost increases over the course of your retirement, you can spend a lot less time worrying about money and a lot more time enjoying your golden years. Proper planning for rapid inflation means you'll avoid one of the worst-case scenarios of seeing your retirement savings succumb to rising costs. If inflation remains low, your plans won't go to waste; you'll simply have more money than you expected. That’s a good problem to have!
It’s vital to remember that you must continue filing U.S. tax returns even if you’re living outside of the States. As long as you are a citizen of the United States, you are expected to continue paying taxes!
Many who retire outside of the country change their state of residence to a low-tax state. This doesn’t mean you have to own a house; it’s often enough to simply have a mailing address. Some states allow you to declare residency as long as you maintain a mailbox within their borders and spend a set amount of time in that state.
For example, as long as your home is not in another U.S. state, South Dakota only requires you to spend one night in the state every five years to establish residency there. You would then pay South Dakota income taxes, which is to say none. You’d also be responsible for paying South Dakota-based Social Security taxes, which are also zero. In short, you’d be responsible for federal taxes and not much else!
Believe it or not, retiring beyond our borders carries a more significant risk than running out of money or running afoul of the IRS. Never forget how good our medical care is here! It’s important to consider whether there is adequate medical care in another country to take care of you if your health should take a turn for the worse.
You will also generally have to pay for medical care yourself; most foreign locations do not accept Medicare so, despite still being eligible for it, it’s unlikely you’ll be able to use it without traveling back to the United States. The good news is that medical care outside of the United States is often less expensive than that within the borders, but you’ll want to carefully research your retirement destination to verify both the quality and cost of medical care.
These tips just scratch the surface of what you need to consider when retiring outside of the country. It’s important to get this right! The last thing you want is to spend your time and money moving out of the country only to discover it’s not as you hoped it would be. Consult with a financial advisor before finalizing your plans. We can help make your expat retirement happy and less stressful by planning for all the possibilities that come with a retirement abroad.
#RetirementPlanning #FinancialIndependence #Investing #AssetPreservation #Retirement
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.