Retiring Abroad: What Are The Financial Consequences You Need To Consider?

By Rebecca Lake. May 7th 2016

If your retirement plan involves spending your days restoring a Tuscan villa or enjoying the scenery at a Parisian café, you’re not alone. According to U.S. State Department, there are currently an estimated one million retirees living abroad. Retiring to a foreign country is an opportunity to experience new things, expand your knowledge and see different parts of the world. While retiring abroad may be the fulfillment of a lifelong dream, it can quickly become a financial nightmare if you’re not prepared. Before you sail off into the sunset, you need to carefully consider the potential financial consequences of overseas retirement.

Healthcare Costs

While you may qualify for Medicare to cover your health care expenses, this coverage does not extend to other countries. If you’re injured or become ill, you may have to pay out-of-pocket for medical care. Depending on where you’re living, your health care costs can quickly add up. If you’re covered under an insurance plan other than Medicare, you should contact your insurer to determine whether your policy will cover you while you’re outside of the country. Generally, health insurance providers may offer temporary international travel coverage but these policies are only available for a specific length of time.

There are companies that currently offer international health insurance to expatriates living abroad; however, these types of policies can carry premiums that are substantially higher than traditional health care coverage. In addition, if you become seriously ill and need to be transported to the U.S., this can cost upwards of $50,000 according to the State Department. If your international health insurance policy doesn’t cover medical evacuations, you could be facing a hefty bill, which can quickly drain your retirement savings.

Currency Fluctuations

Retirees living abroad also need to be aware of the potential for fluctuations in the currency market which can affect their retirement nest egg. This typically occurs when your expenses are in one currency but your savings are in another. If the currency that encompasses the majority of your savings loses value against the currency of the country in which you’re living, the impact is similar to inflation in that your buying power is effectively decreased. While currency fluctuations can occur over a period of years, they can sometimes occur much more quickly, leaving you ill-prepared to deal with the sudden drop in your money’s value.

According to Bloomberg, the best way to insulate yourself from currency fluctuations is to keep six months of living expenses in the currency of the country in which you’re living. This way, even if the bulk of your savings are in your native currency, your purchasing power will remain the same. Keeping a portion of your retirement savings in the U.S.can also be helpful if you retire to a country where inflation is high since your money isn’t losing any value.

Cost Of Living

The next thing you need to consider before moving overseas is how much your cost of living will increase or decrease. While some countries can be relatively inexpensive, others may require a reevaluation of your budget. When choosing your retirement destination, there are a number of factors you need to consider in order to determine whether it’s truly going to be affordable.

First, you should add up all of your assets to calculate what your projected monthly income is going to be. Then, you need to research how much it’s going to cost you to live in a foreign country. In addition to factoring in costs for housing, utilities, health care, food and clothing, you also need to consider other expenses such as travel costs and recreation. Overlooking costs or underestimating your expenses can put a strain on your budget that can effectively cancel out any cost of living advantage you might enjoy.

Tax Consequences

Finally, retirees should consider the tax implications of moving abroad. While you may no longer live in the States, your tax obligation to Uncle Sam remains intact. If you earn income in overseas, this income is subject law and you may also have to pay taxes to the country where you’re living. Depending on your situation, you may be able to qualify for the Foreign Earned Income Exclusion (FEIE), which allows you to exclude some or all of the income you earn abroad from taxation in theU.S.

In order to qualify for the FEIE, you must be a U.S.citizen residing in a foreign country for an uninterrupted period lasting a minimum of one full tax year. The FEIE exception also applies to Americans who live overseas for minimum of 330 days in a calendar year. As of 2012, the Internal Revenue Service limits the Foreign Earned Income Exclusion to $95,100. This figure is adjusted periodically to account for inflation. You may also be able to qualify for the Foreign Housing Exclusion and Deduction if you paid for housing expenses from employer-earned income or self-employment income. If you plan to continue working part-time after retiring abroad, you should consult a certified accountant or tax attorney to evaluate the potential tax implications of doing so. (For help on how to choose a tax professional, see How To Select The Best Income Tax Preparer.)

Transforming your retirement dreams into reality requires careful planning and a thorough evaluation of your priorities. When considering a foreign retirement, it’s important to look at it from every angle to ensure that your finances can stand up to any potential challenges you may encounter.


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