“Often when you are at the end of something, you’re at the beginning of something else.” – Fred Rogers
My wife and I started traveling together early-on in our budding relationship. Back in the mid 90’s we had been dating for only three months, when she suggested a trip to the Yucatán Peninsula, in Mexico. I was a young man - twenty-one years old and had not travelled much outside the United States. Despite my nerves, we went on that trip together as planned. To this day, my decision to join her has been one of the best of my life.
My wife is an adventurer. She loves travel, seeing new places and meeting new people. Adventure does not come as easy to me, but she did pass along the travel bug. As a result, our lives have become enriched, fulfilled and maybe even more fun.
Although, we have no plans on retiring to live abroad in the future, many people do find the adventure appealing and hard to resist. I get it.
With that said, most of us are not in our early 20’s, which is just another way of saying as we get older, life can become more complex, which then requires extra thought and planning for successful outcomes.
Instead of writing about financial markets this month, I thought a change of gears would be nice. The below article originally published in Barron’s, highlights the planning and considerations future retirees should take into account, before sailing into the international sunset.
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Thinking of Retiring Overseas? 8 Things to Do Before You Pack Your Bags
By Cheryl Winokur Munk
Barron’s
August 8, 2024
For more Americans, retiring outside the U.S. has become a reality and not just a pipe dream.
The number of retired workers receiving Social Security benefits overseas increased from about 320,000 in 2009 to about 450,000 in 2022, according to the Social Security Administration. The ranks of all adults who would like to make a move are growing, too. Thirty-four percent of Americans who responded to a recent Monmouth University poll expressed interest in settling outside the U.S. That is roughly triple the percentage 50 years ago.
Yes, moving to a Portuguese fishing village or town in Tuscany can be a dream come true, but failing to plan ahead—a process that can take 18 months or more for immigration, tax planning, and financial planning—can have unforeseen, and potentially devastating, consequences.
That’s because there are specific rules and regulations based on jurisdictions, treaties, and individual circumstances such as the amount of time spent in a country, the level of wealth, and the types of assets held. These rules take time to navigate and there can be a lot of paperwork and advance tax and estate planning required.
“Planning to be a U.S. citizen living abroad or as an expatriate is so complicated,” says Susan Black, managing director and wealth manager at Boston Financial Management. “It should not be a capricious act taken on an emotional whim.”
Here are eight considerations for people contemplating an overseas retirement:
Tax planning is critical. One of the biggest mistakes people make is failing to understand that they are likely to have a new tax residency. They assume the way they were taxed in the U.S. is the way they’re going to be taxed in another country, says Alex Ingrim, senior investment analyst at advisory firm Chase Buchanan. Each country has its own rules on what fulfills the requirements of tax residency, so understanding the minutia is important, he says.
If someone does fulfill the requirement of tax residency, the next step is to refer to the double taxation agreement between the U.S. and that country to understand which country has the primary right to tax under different circumstances. It’s important to find competent advisors, with local expertise to guide you. “The rules are really intricate, especially in some countries,” he says.
Here’s just one example: If you have a Roth IRA and move to Canada, the government there will consider your account a “pension” and in most cases won’t subject it to taxes. But it’s crucial that you file a one-time election after you arrive to defer taxation on any income accrued in your account before your move. You must also stop contributing to the account once you arrive in Canada. Otherwise, you can be subject to annual taxes on income accrued in your Roth after your first contribution in Canada.
Maintain access to the U.S. financial system. For a host of reasons, including access to retirement assets, people retiring overseas will likely still need to keep some of their assets in the U.S. This, however, may require them to switch banking or brokerage providers because some providers won’t work with people who don’t have a U.S. address, Ingrim says.
A client who signed on with Ingrim after moving overseas was recently told by his U.S. financial provider that his brokerage account was being liquidated and the proceeds would be deposited into his banking account with the same company. Advance planning can reduce the potential for tax or other financial consequences, Ingrim says.
Understand the potential investing ramifications. Some investments that people have held for years may no longer be available if they retire overseas, says Stephan Shipe, owner of Scholar Financial Advising in Winston-Salem, N.C.
He worked with a couple who had sold their house in the U.S. and were living in Spain. They wanted to open an investment account in Spain, but they didn’t have access to the index funds they had when they were in the U.S. because they no longer had an address there. Shipe came up with a workaround that allowed the couple to buy a basket of stocks to mimic the desired index funds. But he recommends people moving abroad consider the potential investing ramifications ahead of their move to avoid headaches and potentially tax issues.
Currency translation. Another consideration could be the retiree’s buying power in another country, based on currency rates, with the understanding that rates tend to fluctuate, Shipe says.
He has a client who chose his desired location based on where the dollar was then strongest. A few million in the U.S. was the equivalent of $20 million or so from a buying perspective.
Although that sounds good, people have to consider whether the exchange rate is likely to last and what it will mean to their portfolio if the tide shifts, Shipe says. The client had flexibility to move if the situation warranted, but Shipe tells people to stress-test their financials to make sure their retirement nest egg will be protected if something changes unexpectedly.
Don’t be rash in renouncing your U.S. citizenship. Black worked with a couple planning to renounce their U.S. citizenship after moving to Europe. She advised them to reconsider because doing so would have left them with a tax bill of several hundred thousand dollars based on their real estate holdings and exit taxes. They took her advice and avoided the severe tax consequences.
Health and Social Security benefit considerations. If you’re thinking of living abroad, Black recommends consulting the IRS, Social Security and Medicare websites to get specific information on how your benefits could be affected.
Many people just assume they can go back and forth between the U.S. and their new country as often and for as long as they want, but that may not be the case. It depends on the country and can be very nuanced, she says.
Couples also have to think about the quality of healthcare in the new country given that more health issues tend to crop up later in life.
Know what you’re getting into with life insurance. Black worked with a couple who loaded up on U.S. life insurance before moving to Europe, thinking the proceeds would go tax-free to their children upon death, similar to if they had stayed in the U.S. But they didn’t consider the possibility that beneficiaries might have to pay an inheritance tax, which can be the case in certain countries, she says. “Don’t make assumptions,” she cautions.
Pay attention to estate planning. Estate planning can also be complicated by moving overseas. Some countries have restrictions on who can inherit, for example, and it’s a bad idea to leave that to chance, Black says.
Shipe routinely tells clients that foreign countries have “no incentive whatsoever to follow U.S. law. You’re playing by their rules; they’re not playing by your rules.”
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To clients and friends – if the international life is calling and you’d like to consider moving abroad, feel free to reach out to me for referrals to tax planning advisers and estate planning attorneys. In this instance, a little preparation and knowledge can go a long way.
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After a decent sized stock market correction, which began mid-July and accelerated throughout early August, equities have largely rebounded and are now just a bit below peak levels.
No one knows for sure what the catalyst of the selloff was (many market commentators cited the Japanese Yen carry trade), but what is more certain is a lot of dry tinder in the form of higher stock prices combined with investor complacency made things more vulnerable in general.
Although growth, employment, inflation and company profits are decelerating, some investors appear to be betting things aren’t headed in an unmanageable direction and take comfort in believing the Federal Reserve will assist financial markets via easier monetary policy. To some extent, I think that is a fair bet for now.
Nevertheless, I prefer to be safe than sorry. This is why equity allocations for most client portfolios are still modestly below strategic targets. Equity concentrations remain in large capitalization technology, real estate related industries, utilities, and financials.
Intermediate and long-term maturity U.S. Treasury bond hedges have been working recently and I suspect will continue to work during equity drawdowns, as long as the market is not spooked by higher inflation.
Lastly, I’ll repeat my advice around investing into the upcoming elections from my most recent quarterly client letter - The wild card on many investors’ minds is the upcoming presidential election and with it the evolving political uncertainty.
Now, as in the past, I am advising clients to do their best to tune out the noise. Successful long term investors try to keep politics and emotions from affecting their financial decision making. As the election cycle continues to move forward, we can bet the noise will only get louder. Therefore, over the coming months we should all strive to keep calm, carry-on, and stick to the game plan.
Sincerely,
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
A referral is the best compliment.
Feel free to forward this email to family and friends.
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Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.
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