Retiring abroad: ugly reality

During the past decade, many Americans decided on retiring abroad. Almost everyone cited a high cost of living as a main reason, in particular the rising cost of health care. It is not a secret, that average US citizen does not have a luxury to save the amount of money, required to live comfortably at the familiar place without a job. One way to escape the high cost of living always was to move into less expensive area within the US. For example, people from San Francisco Bay Area often move north into the state of Oregon or Washington, to reduce daily expenses while keeping descent quality of life. Among east cost population, Florida and Texas has been quite popular for retirees due to the mild climate and zero income tax. But not anymore. Current situation in health care, including shrinking choices and rising prices, especially in lower cost areas forces people to look outside of US. Actually, there are plenty of Americans who currently live abroad. Most of them are happy with their choice, but things are changing rapidly. In this article, I wanted to share some information collected from different sources, including my own experience dealing with realities outside the US.

First, a few words about the cost of living and health care cost. While the cost of living may not be dramatically different in most developed countries, health care cost is definitely lower than in US. There is also a public health care system in place in many countries, which is free for all residents. Although it might be not a primary reason of moving abroad, it is still an important factor in financial planning. But do not expect free health care upon arrival: US retirees are likely not eligible for public option, because they never worked and never paid taxes into the system. Still, private insurance has very reasonable pricing and doctors are available immediately or on very short notice. In fact, health care quality in almost 40 countries is better than in US. These are the countries typically recommended to US retirees due to the reasonable cost of living, easy immigration process and excellent health care quality reported for year 2017: Spain, Ireland, Malta, Portugal. But things are changing: growing number of native retirees and high number of refugees are dramatically shifted existing landscape across many countries, especially within European Union where the highest quality health care has been traditionally delivered.

Another important aspect of moving abroad is a tax law, specific to the country of choice. US citizens are required to pay taxes, no matter where they live. At least, they require filing a tax return every year. The good news is, that there won’t be any federal tax on earned income up to $101,300 (as of year 2016). But this income must be earned. For example, capital gain, ordinary dividends or rental income are not earned income, and tax must be paid in full. This is all about federal tax. As regarding state and local taxes, it depends. Renting out a house while living abroad typically means paying property tax to the county, where house is located, along with federal and state taxes on rental income. Normally, people do not require paying other state and local taxes, if they do not physically present in the state. Different states has their own rules and regulations. For example, California may still consider you as a resident, if you have a rental property and regularly come to the state to manage this property. Alternatively, California may consider you as non-resident, if you hire a property management company: in this case, non-resident tax return is required.

While living abroad, it is still beneficial to maintain US home address. Some brokerage companies (like Fidelity, for example) are known to close accounts for those living outside of US. Banks and credit unions are less likely to close account in this case, but they still keep sending mail and some include credit cards or other useful documents. Smaller banks may have problems to send mail for the address outside of US. Of course, you can provide the relative’s or friend’s home address for that purpose. But in the later case, you automatically pass a presence test in respective state where relative or friend lives, and required to file a resident tax return for the state. In order to avoid that, it is better to establish a virtual home address with company like US Global Mail for example. For the charge of $10 per month or more, they provide a service to collect and scan the documents received on your name. Also, the good news is that these companies provide a home address in the states without personal income tax, such as Texas. Even those renting out a property in California are not required to pay state taxes on capital gain or ordinary dividends in California or any other state in this case.

Another important consideration is a foreign bank account. In order to live in other country, bank account is essential for the normal life. Which likely mean to establish a temporary or permanent residence in that country, unless you are a dual citizen of US and the country of actual residence. Typically, residency application require sufficient funds to be present in account, to make sure the retired person has enough money to live. US bank account can not be used for that purpose. Meantime, it is important to know that US citizens much report any foreign accounts which has at least $10K in combined value for any period, while account is active. This is known as FBAR filing requirement, and implemented to ensure tax compliance by the citizens living abroad. But unfortunately due to the FATCA (Foreign Account Tax Compliance Act) requirements, many foreign banks refuse to open bank accounts for US citizens. Moreover, some existing bank accounts are being closed. There are disturbing news coming in particular from EU countries about this matter. According to FATCA, all foreign banks are required to disclose financial information about Americans with money, residing outside of US. Apparently, banks are afraid of serious penalties imposed by IRS. By that reason, it is important to learn which banks still open accounts for Americans and even open it in advance, before the actual move.

As regarding credit and debit cards issued in US, situation is clearly not in favor of people moving abroad. The good news is that most credit cards will work outside of US, as long as you notify card issuer about the change of your location. The bad news is that most cards will charge a foreign transaction fee. There are certain credit cards which do not impose the fee, and some debit cards which actually refund ATM charges to owner. It is very important to choose the appropriate card carefully, if you plan to use it outside of US for an extended period. There is also one other problem: all cards expire one day. As of now, pretty much all billing and payment operations can be completed online. But the replacement card will be sent to US address, whatever is registered with card issuer. There are some banks, which can send the card to non-US address, using DHL for example. These banks need to be verified in advance, to make sure the card arrive in mail on time. But remember: you do not want to give non-US address to the companies like Fidelity, to avoid brokerage account closure. Even better idea would be to make certain arrangements, before moving abroad: close those cards which are not in use, and ask to issue a brand new card for those in use. Some cards are issued for two years, others for five or even more years. Anyway, there will be an extended period, before card expired. Finally, there is an option to issue a credit card in the foreign country: American Express for example provide such service. However, conditions may be quite different from US and credit history loss is possible.

In addition to the troubles discussed above, there is one other serious challenge: double taxation. As I already mentioned before, all US citizens are required to file a tax return with IRS, regardless of their income. They still require paying taxes in the country of residence, if they live in that country for more than half a year. Fortunately, there are tax treaties in place between US and most other countries, which effectively eliminate double taxation. This would mean, that for those Americans paid some amount of money in compliance with US tax code, can subtract this amount from the taxes they are required to pay in their country of residence. Of course, both US and foreign tax returns are getting more complicated and the help of professional tax adviser may be required.

Bank accounts and double taxation can be a problem, especially taking into account that most countries require more than $10K in account to establish a residency. Are there any solutions? One solution can be to actually live in two or more countries, without applying for residency in either of them. Most countries does not consider anyone a resident for tax purpose, if he or she physically present for less than 180 days in that country. Therefore, the best idea may be to live half a year in one country and another half a year in other country. There are certain countries such as Canada, Mexico or UK, which allow US citizens to stay up to 180 days without applying for residence permit. In fact, Americans may re-enter Canada every 180 days, as long as they do not overstay. However, most countries within EU has a 90 days rule. According to the rule, US citizens can stay up to 90 days within each 180 days in a country as a visitor. Then, it is still possible to live in two countries: one within EU and other is not, but traveling between them within each 90 days. Also, there are countries like Georgia or Palau which allow Americans to stay indefinitely as non-residents!

What is our conclusion? It is definitely possible for an average American to live in foreign country, and there are certain benefits of doing that. But before making decision to move, it is important to understand all challenges and specifics for living outside US, and be prepared to adjust the life style and expectations.

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