Retiring Abroad Is More Affordable Than You Think: Here's Why

Retirement is an exciting time for many people. After decades of working, you can live life exactly on your own terms. For some people, an ideal retirement looks like doing absolutely nothing; for others, it means picking up a new hobby; and for some, this means retiring abroad in the country of their dreams. 

While a lot of people would love to retire abroad, many believe they're not in a financial position to do so. But retiring abroad can be much more affordable than you might think.

Image source: Getty Images.

The cost of living will likely be cheaper

There are many great things about the U.S., but the cost of living is typically not one of them, especially if you live in a big city. While it can vary drastically among countries, your living expenses abroad will likely be cheaper than in the U.S.

Using the cost-of-living index from Numbeo -- a Serbian website that uses a crowd-sourced database -- here's how some countries worldwide stack up. The higher the number, the more expensive the cost of living.

Data source: Numbeo.

If you're preparing financially to retire based on the cost of living in the U.S., realizing you could drastically reduce your expenses in another country would be a gift. For instance, if you were going to need $60,000 annually in retirement domestically, you might only need $45,000 abroad. That extra 25% saved can stretch your nest egg many years.

Your country of residence may recognize Roth IRA tax benefits

The selling point of a Roth IRA is the tax-free withdrawals you receive in retirement. It's a tax break that could easily save someone thousands over time. Most countries, though not all, will treat Roth IRA withdrawals you receive while living there as taxable income. Countries that recognize the tax-free benefit of Roth accounts include Belgium, Canada, France, and the U.K.

If you plan to retire abroad, be sure to check whether your Roth IRA withdrawals will be tax-free in your new country of residence. Even if a Roth IRA isn't your main source of retirement income, the difference between owing and not owing taxes could have a big effect.

You might be able to use your HSA

Healthcare is a huge concern for aging retirees, and many countries offer high-quality services at a fraction of the cost of those in the U.S. Even better, you may be able to use your health savings account (HSA) to pay for healthcare abroad.

An HSA, available to people enrolled in a high-deductible health plan, allows you to contribute pre-tax money, invest it, and take tax-free withdrawals for qualified medical expenses.

Since an HSA is a supplement to your health insurance, the ability to use it abroad doesn't require that your resident country accept it. You can use it for qualified expenses anywhere, but there are limitations when you use it outside of the U.S., mainly regarding prescriptions.

Generally, you can't use it for prescriptions you buy in another country and bring back to the U.S. (There are some exceptions that the FDA says can be imported legally.) However, you can use it for the cost of a prescription you purchase and consume in another country.

For example, if you're visiting Brazil and get sick and are prescribed antibiotics, they will likely count as a qualified medical expense if you take the antibiotics while in Brazil. If you were to bring them back to the U.S. with you, it could disqualify them from HSA eligibility.

Healthcare is usually one of retirees' largest expenses. By using your HSA, you can cut down on out-of-pocket medical costs and put more money toward enjoying your retirement.

Dividends could cover a portion of your expenses

Investment dividends can provide good supplemental income in retirement if you give yourself enough time and reinvest them. Dividend reinvestment plans (DRIPs) allow you to reinvest dividends back into the stock that paid it out. This is usually a better long-term option than taking cash payouts because it increases your overall shares -- and, therefore, your dividends.

Let's imagine you aim to retire abroad in 20 years. If you invested $500 monthly into a dividend-focused exchange-traded fund and averaged 8% annual returns and a 3% dividend yield, here's about how much you would have in 20 years:

Source: Author calculations / Investment value rounded to the nearest hundred.

Of course, you would have earned cash from the dividend payouts over the 20 years even if you didn't reinvest them, but the roughly $21,000 you would've earned wouldn't be comparable to the roughly $110,000 difference in investment value you'd experience.

Retirement would be a good time to begin receiving your dividend payouts as cash. At $385,200 in value, using the example above, a 3% annual dividend yield would pay out just over $11,500 annually. A dividend yield of over 3.2% would pay out more than $1,000 monthly, which could go a long way abroad.