WEALTH INSIGHTS

Retiring overseas: what to consider before you embark

Location, taxes, property, health care and more

Retiring overseas allows you to immerse yourself in a new culture or have fun in the sun on a daily basis — at the very least, you'll be embarking on a new adventure. However, moving overseas may also be a complex endeavor.

Reduce the complexity when you retire abroad by seeking out the advice of a knowledgeable financial advisor. Here are a few things to consider discussing before you set off across the world:

Cost of living and lifestyle

Two of the most important factors to consider are the cost of living and lifestyle. In most parts of the world, the cost of living is much lower, especially compared to living on either coast in the United States. And since you've worked hard to get to where you are today, a quieter, slower pace of life may sound really appealing.

Language plays a key role in your lifestyle, as you'll want to be somewhere that you can speak the language or at least get by. American retirees often go to English-speaking countries or congregate in enclaves abroad because it makes it easier to adjust. Adding a language barrier to understanding cultural norms and knowing how to get around when retiring abroad can get overwhelming.

Hence, Europe and Southeast Asia are very popular destinations. Central America — particularly Belize, Costa Rica and Mexico — is also popular.

Residency status

Establishing residency in a country is much easier if you only intend to live there part-time. For many countries, you can obtain a U.S. expatriate visa without needing to go through residency requirements. You're also shielded from additional liabilities and laws if you don't become a citizen. For example, if your dog bites someone in your new country and you have residency status, you could be pursued as both a resident and as a U.S. citizen.

Therefore, be very mindful about the implications of becoming a resident and consider living abroad part-time. Most high net worth clients only like to spend three to four months abroad. You can have the overseas experience indefinitely by embracing a part-time option.

Health care: in the U.S. or abroad

Health care is a huge component of your retire abroad planning. Examine the health care offerings and the level of health care of your target country. Some countries offer better health care than the U.S. and some are completely free.

For instance, one of my clients is from Taiwan. She is still a citizen and gets health care free for life. She flies back there a couple of times a year for checkups and would return for anything major. If you have great health coverage here in the U.S., you could do the same. If you want to explore your options, we can help you identify what is available then refer you to an insurance specialist.

Stateside income = less complexity

Whether or not you also pay income taxes in your new country depends mainly on where your income originates. Hence, you definitely want to realize all your income in the United States. Have your pension and Social Security deposited into your U.S. accounts and keep all your liquid assets stateside. Determine how much cash you will need and sell off assets from your portfolio when necessary.

Set up a local bank account and transfer just enough funds into it from your U.S. accounts to cover all your expenses abroad for the month. You can set up recurring transfers or do a one-time lump sum — whichever works best for you. There are no bank transfer restrictions from the U.S., but in some countries, you may have to do a wire transfer instead.

Income taxes

It doesn't matter where you live: If you're a U.S. citizen, you will pay U.S. income taxes. The only way to avoid paying U.S. taxes is to renounce your U.S. citizenship. But giving up your U.S. citizenship is a lengthy process that includes paperwork, interviews, and money. This decision should not be taken lightly. The IRS may impose an "exit tax" on you based on one of these conditions:

  1. the net value of your worldwide net worth,
  2. the average annual net income tax for the five years preceding the renouncement, or
  3. failure to certify Form 8854.

The renunciation of your U.S. citizenship is considered a triggering event for liquidation of all your assets. That means the exit tax will be computed as if you sold all your assets the day before and had to report the gains. There has been a lot of discussion around this topic, yet in my 21 years of estate planning, none of my clients have opted for this.

For state income tax, the strategy may be a two-step process for some retirees. First, they will move from their current high tax state, such as California or New York, to a location that has either a low state tax or none at all. They will stay there at least a year maybe two to establish state residency. Then, they will move overseas part-time.

Estate taxes

Almost all countries assess estate taxes – certainly in the U.S. The highest estate tax rate in the U.S. is currently 40% with an exemption of $11.58 million per person. If you owned properties in another country, you may be subject to double taxation, having to pay estate tax to both the US and the foreign country where your property is located. For example, if you move to the U.K. and buy property, you are now subject to both the U.S. and the U.K.'s estate taxes. How much depends on the country's treaty with the U.S. As of 2019, the U.S. has entered in to estate and/or gift tax treaties with 16 countries* which may reduce or eliminate double taxation. You will need to work with an international attorney in order to determine the ramifications for your particular country.

Whether to rent or buy is another big question. Buying subjects you to a different level of estate taxes. My advice is to rent unless you have family in your new home or another special circumstance.

Inform all your advisors of your desire to retire abroad. Your financial advisor will guide you through this process. We have in-house experts who can aid in crafting a plan. However, we will always refer you to external professionals for legal and/or tax advice. Cross-border planning attorneys are a great resource. If you do not have one, we will connect you to one through our network. Every region and every country is different, and these attorneys have specific knowledge that is very helpful.

*Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Switzerland, and United Kingdom.

This doesn't constitute advice on relocation to any specific jurisdiction and is not tax or legal advice.

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