Investing poses currency as well as other challenges for retirees in a different country. Covering all of them is beyond the scope of this writing, so we’ll focus again on the core issues.
First, real estate: investment properties typically represent a significant portion of a retiree’s net worth, often larger than their investment in publicly traded securities. If the property is not in the country where you reside most of the time, realize that you are exposing yourself to a significant currency mismatch. It could potentially affect the value of your rental income but could also result in a lower net worth if the currency of your country of residence appreciates. Most importantly, avoid funding a real estate purchase in one country with a loan or mortgage in a currency from a different country, no matter how attractive the rates may be!
When it comes to securities portfolios, we recommend investing a substantial part in assets denominated in the currency of the country where our clients reside most of the year to mitigate currency risks. This is even more important with bonds than with stocks. Emerging markets can bring additional challenges, though: depending on inflation and political instability risks, clients retiring in emerging markets may need to keep a significant portion of their portfolio in the currencies of more stable, developed countries (such as a basket of U.S. dollars, yen, or euros).
Investing can still be done through U.S.-based accounts, which is usually our recommendation. The investment marketplace in the U.S. generally provides more investment options at lower costs and better protection for investors, including against default (SIPC insurance). While U.S. open-end funds, e.g., “mutual funds”, are not available to Americans abroad, a similar vehicle, Exchange Traded Funds (ETFs), are generally accessible to non-U.S. residents. We typically use a combination of individual shares and ETFs or funds that are legally available in our clients’ country of residence, some of which have underlying assets in the same currency, to build a well-diversified portfolio.
Unlike most countries, The U.S. government collects taxes based on citizenship rather than residency of the taxpayer. Americans who retire overseas will need to continue filing a U.S. tax return and possibly another one in their country of residence. In many cases, that doesn’t necessarily mean double taxation since the IRS generally allows a credit for taxes paid abroad.
However, it depends on how foreign taxes match up against the U.S. tax code and tax treaties between the U.S. and your country of residence. These complexities call for involving a tax preparer with specialized knowledge of expatriate issues. A good source of referrals is the U.S. Embassy or U.S. consulate in your country of residence.
Social Security, Medicare, Health Care
First, you’re eligible to receive your Social Security retirement benefits if you live outside of the U.S. The Social Security Administration (SSA) no longer mail checks. Clients may have their benefits deposited directly in a U.S.-based bank account and transfer funds when needed.
Conveniently, the SSA has a correspondent bank in an increasing number of countries where American retirees live and is able to wire benefits in the local currency. This is an excellent alternative as transfer and foreign exchange fees are very attractive.
Your American spouse will receive the same survivor benefits as he or she would in the U.S. Things get more complicated if your spouse is not a U.S. citizen. Inquire about your particular situation.
Medicare doesn’t cover Americans living overseas, so you will need to buy an international policy in the U.S. before leaving. Buying one offered through your new country is typically an option after a minimum period of residency. Seniors moving abroad can opt not to enroll in Medicare or opt out if they expect all their healthcare needs to be fulfilled outside the U.S.
However, there’s no reason to decline your Medicare Part A (hospitalization) since there is no U.S. residency requirement and no premiums are attached. Part B (outpatient services), which involves the payment of a premium, can be canceled. But it might not be a good idea either if you later change your mind and return to the U.S. There is a penalty for re-enrollment. If you kept Parts A and B while away, there is a window upon returning during which you can sign up for a Medicare Advantage plan with prescription drug coverage.
To conclude, our goal in this article was merely to highlight some of the most common issues raised when retiring overseas. The bottom line is that it is best to start planning early. While the internet has a lot of information, not all is up to date or accurate, so look for reputable sources and double-check independently. Remember that even if your current U.S.-based estate, tax, or investment advisor has proven to be competent so far, a lack of knowledge of these complicated issues can cost you lots of money.
Also, be aware that when it comes to providing legal, tax, or wealth management advice to Americans living overseas, plenty of “offshore” providers don’t have to comply with U.S. laws and may have a financial incentive in the type of specific advice they provide. We recommend talking to people who have made a similar move recently and to experienced professionals who specialize in assisting with such transitions. Doing your homework can save you time, stress, and money.
This article was initially published in May 2019.