If you plan to retire abroad, you'll need to take a few extra precautions in your retirement planning to make sure everything runs smoothly. Most potential risks posed by relocating to a foreign country have simple fixes, but other situations are a bit more complicated. Keep these rules in mind to ensure that unexpected hiccups don't derail your financial plan and get in the way of your retirement dreams.
1. You can usually receive Social Security while living abroad
U.S. citizens living in foreign countries can still receive Social Security if they are eligible for benefits. But people may not be able to receive payments while they are located in one of the following countries:
- Cuba
- North Korea
- Azerbaijan
- Belarus
- Kazakhstan
- Kyrgyzstan
- Tajikistan
- Turkmenistan
- Uzbekistan
However, you can generally get any unpaid benefits upon return to a country where payments are not limited. Moreover, in several of the countries listed above, there can be exceptions that can help you get paid. The rules get more complicated for people with dual citizenship and non-U.S. citizens, but these people often meet the eligibility criteria too.
You should confirm your eligibility status with the Social Security administration prior to moving abroad. If you're already abroad, the American Embassy in your country of residence can generally offer assistance on the topic. Some other nations offer generous retirement benefits to residents, which can combine with Social Security to provide significant cash flows after you stop working.
2. You still need to pay U.S. taxes
Retirees still have income, even if they don't work anymore, and you still need to file an annual return. Federal taxes may apply to Social Security benefits, dividends, retirement account distributions, and earned income from part-time or informal work. Even income earned outside the U.S. must be reported.
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U.S. citizens who are residents of foreign countries often qualify for exclusions and credits from the IRS. Retirees are especially likely to avoid taxation due to exclusions and exemptions. Nonetheless, there's a decent chance that you'll owe money to the IRS at the end of the year, so filing is an obligation.
3. Your access to health insurance might change
Healthcare costs are a major budgetary concern for retirees, so it's important to know your insurance coverage options. Unfortunately, that can be complicated if you live abroad. Many people who retire abroad receive medical care under their new home country's programs, but that's not always the case. Foreign retirees often return to the U.S. for healthcare. It's important to recognize how your travels might impact coverage.
Senior Americans usually have some form of coverage through Medicare. Medicare Part A provides guaranteed insurance for hospital services, usually without having to pay a monthly premium. Medicare Part B for outpatient care and Part D for prescription drugs cover other medical expenses for retirees who elect to pay premiums for those plans. However, Medicare only covers medical expenses incurred abroad under limited circumstances.
Many seniors utilize Medicare Advantage plans for cost savings or care preferences, while others purchase supplemental Medigap policies for expenses that don't fall under the government plans. If you plan to retire abroad, you may want to consider enrolling in these voluntary plans prior to departing the U.S., particularly if they provide better coverage options abroad. If you return to America for care later, your Medicare Advantage rates could change, or you could become ineligible for certain coverages from supplemental gap policies. Know the risks before making a decision.
4. Exchange rates fluctuate
Exchange rates are important to any foreign resident who has built wealth that's denominated in U.S. dollars. That almost certainly applies if you worked in America and contributed to a retirement account here. You'll need local currency to purchase goods and services, and the buying power of your assets held in the U.S. can rise or fall depending on a variety of economic factors. This needs to be considered.
Monetary policy, international trade, and global capital markets all influence the supply and demand of each major currency. For the most part, the exchange rates between currencies of major developed economies are relatively stable. However, these year-to-year shifts can accumulate meaningfully over time. Extreme monetary policy responses to the COVID-19 pandemic and the 2007 global economic crisis have also fueled foreign exchange volatility, so there's no guarantee that relative stability continues.
US Dollar to Pound Sterling Exchange Rate data by YCharts
There are a few strategies to mitigate currency risk. You can open a foreign bank account, though this comes with its own set of minor complications to keep in mind. You can also change the allocation in your retirement account. Investors can hold bonds that are issued in their local currency. You can also hold international stocks that naturally hedge against foreign exchange risk.
