One option many Americans overlook is the possibility of spending their retirement years abroad. Moving to a new country is the beginning of a new adventure for some retirees. It is also an affordable alternative for those wanting to stretch their savings. However, there are some serious questions you must ask yourself about retirement planning for expats abroad. Which country best suits your needs? How do you ensure access to your retirement funds and draw your social security benefits? What financial policies and tax laws apply to U.S. citizens abroad?
If you already have a destination in mind, relocation guides such as this one can give you all the information you will need. If not, here is some basic information for any expat planning to retire abroad.
Social Security Benefits
Social security benefits provide financial support to the retired, disabled, and dependents or beneficiaries of a deceased worker. They should not be the sole source of income when retirement planning for expats. Instead, your monthly benefits replace a portion of your wages based on your pre-retirement income.
The amount you receive is determined from your indexed monthly earnings over the 35 years. If you worked more than 35 years, they will use the years when you earned the highest income. This can become more problematic for expats, such as myself. Since I have lived and worked outside the U.S. since my early 20s, it is going to be more difficult to accrue 35 qualifying years. In order to receive any benefits, you must have ten years of employment (40 credits) to be eligible.
The federal government uses different formulas and factors to calculate your social security benefits. This means monthly amounts will vary from person to person. The good news is that you are able to claim your Social Security benefits from anywhere in the world. As long as you have access to your domestic accounts that receive your checks, you should have no trouble getting your money. Many international banks also accept direct deposits into foreign accounts as well.
Traditional and Roth IRAs are key components of any investment portfolio. Unfortunately, there are tight restrictions on any contributions you make if you claim the Foreign Earned Income Exclusion. The FEIE is an exclusion credit that reduces your taxable income. Any amount over the yearly adjusted threshold is subject to double taxation.
For my particular case, all my foreign income is excluded. I fall below the qualifying amount of $107,600 for 2020. Therefore, none of my foreign income is eligible for IRA contributions. However, the IRS taxes any foreign income above this threshold so it is eligible. Unfortunately, all my contributions must be generated domestically and filed accordingly.
Due to financial policies for foreign banking institutions, there are severe penalties for any violations. Not only must I be careful how I fund my IRA, but I cannot legally make any portfolio changes while I am outside the U.S. This carries heavy fines and legal repercussions no one would want to face.
Probably the most important tool at your disposal is online banking. Before moving abroad, make sure you put all your accounts online and notify your bank. It is also a good idea to switch to digital correspondence. This is especially important if you have monthly bills to pay or Social Security checks to collect.
Moving abroad and retirement planning for expats can seem overwhelming at first. If you are uncertain whether it is the right decision, read through this checklist to see what it would require. You may be closer than you think.