Moving to a tropical island or a mountaintop village is a retirement dream many adventurous baby boomers share.
More than half a million retirees have moved out of the country, and the number is growing. Some may be fulfilling a lifelong dream, while others are looking for ways to stretch the value of their nest eggs.
But be careful when you purchase your one-way ticket to paradise. Some places are better for visiting than for living long-term. Hidden costs and lifestyle changes can be a drag for those retiring abroad. And being older doesn't make coping with them any easier.
Frustrations abound for expats who face challenges that include a weakening dollar, taxes at home and abroad, and the difficulty of moving money across borders. Health care benefits can also vary widely, and they often become the biggest drawback.
"I wouldn't be surprised to find that many people return after living their early retirement abroad. . . . Once you get to your 80s and 90s, things become tougher," says David Kuenzi of Thun Financial, an investment management firm.
Glossy magazines and websites, sometimes sponsored by countries hoping to entice wealthy Americans, do a good job of selling destination retirements, especially to baby boomers. To avoid boomeranging from what turns out to be a way-too-costly vacation, here are some things to consider.
Paying your taxes
Expats who are still U.S. citizens are subject to most of the same income tax requirements as folks back home, and they must still file a return annually with the Internal Revenue Service on all money earned in the U.S. and worldwide, including income withdrawn from retirement accounts.
There are ways to claim credit for taxes paid overseas, but the individual tax laws in each country complicate the process. Be prepared to spend time and money to get financial advice in both the United States and your destination site.
While there are about 50 countries that limit this "double taxation" under existing tax treaties with the United States, you can incur taxes in the country where you reside as well as those from back home. And as long as you are a U.S. citizen, you will still need to file tax forms. A list of countries with such tax treaties is available on IRS website.
The Foreign Earned Income Exclusion (FEIE) allows individuals to exclude up to $92,900 of income earned in a new home country. The maximum amount changes from time to time to allow for inflationary adjustments. While most people living abroad qualify for these deductions, mastering the code can be a challenge. Read IRS Publication 54 to see if your income might be covered under this and other potential deductions.
Renouncing American citizenship is an option for people who want to escape U.S. taxes altogether. But the downside is that you also strip yourself of Social Security.
Access to your money
Although online banking and brokerage accounts make managing money from abroad much easier, funds cannot be sent to Cuba or North Korea, and there are restrictions on transfers to a handful of other countries. In addition, some foreign banks may hold Social Security checks for up to four weeks before they clear.
Opening a bank account in a foreign country may not be as easy you think. Some Americans have been denied access to banking services or have had existing accounts closed as a result of tightened regulations aimed at stemming money laundering and the funding of terrorism. Transfers of more than $10,000 must be reported.
Regulatory burdens also make it much more difficult for American retirees who relocate to a foreign country to keep their U.S. bank accounts without a stateside address. While banking abroad has its own set of challenges, a local credit card can help cut conversion and transaction fees, which add up quickly.
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