Retiring Abroad and What It Means For Your Finances
A growing number of Americans are retiring abroad: according to the Social Security Administration, the number of retirees receiving payments outside the U.S. continues to increase. One major reason: many countries have a lower cost of living than the U.S. Expatriate retirees are also motivated by lifestyle or family reasons.
However, retiring abroad does create complex personal finance issues regarding cross-border payments, investments, taxes, and healthcare decisions. It requires proper planning and, potentially, help from legal, accounting, and wealth management advisors. Our purpose here is not to dig into the details but to focus on the broad financial implications and highlight some of the potential pitfalls.
If you’re going to spend an extensive amount of time in a foreign country, you will need a local bank account to pay your bills. The most critical issue to be aware of is the Foreign Account Tax Compliance Act (FATCA), which took effect in July 2014. It requires banks worldwide to report to the U.S. authorities the accounts held by Americans abroad.
Because the reporting requirements are very onerous, many foreign financial institutions (bank, brokerage…) will refuse to work with U.S. citizens or anyone declaring a U.S. address. In most developed countries, the solution is to work with the most prominent local financial institutions or U.S. global banks' subsidiaries such as JP Morgan’s or Citibank’s.
Another issue is the cost of currency transactions between the U.S. and your new country of residence. Foreign exchange costs can be as high as 2% or 3% when transacting through the typical U.S. or foreign bank. Note that we wrote ‘costs’ not ‘fees’. The reason is that in foreign exchange transactions, the main costs are hidden as a markup between the rate the bank pays for the foreign currency and what they charge you. Today, some reliable and trustworthy online alternatives charge a fraction of the traditional banks. So, it is essential to link your bank accounts in both countries ahead of time to allow for efficient and cheap transfers from and to the U.S.
Currency Risks When Living Abroad
Retiring abroad exposes you to currency risks much more than retiring in the U.S. This is due to mismatches between benefits, expenses, assets, and liabilities held in various currencies. For instance, your social security and pension incomes are in U.S. dollars, but if you are living in Tuscany or Provence, you will be spending Euros.
Many expatriates, however, don’t think about this mismatch until it is too late. Fluctuations in currency markets can reduce (or increase) the purchasing power of your retirement income as well as affect your net worth over time. Unfortunately, it is challenging for individuals to hedge currency risk, particularly for those retiring in more volatile emerging markets. However, some strategic adjustments and thoughtful management of your assets and liabilities can go a long way toward reducing currency risk.
First, we recommend maintaining an adequate rainy-day fund in both your country of residence and the U.S. If there were an emergency, you don’t want to have your reserve funds in a depreciating currency when you need them. Savings in both currencies are also helpful if you often travel back and forth.
Next, most of your assets should be denominated in the currency of the country where you spend the most time. If you’re going to retire in Europe, then most of your assets should be in Euros. The key is to avoid a significant mismatch between your assets and your retirement liability, i.e., the funding of your living expenses.
This article was initially published in April 2019.
Retiring Abroad Part: 2
To access part 2 of our retiring abroad series, please click here or on the button below. We will discuss investing, taxes, social security and more…