It’s a dream for many: after years of hard work, they can finally travel to far-off lands and enjoy the rest of their retirement without worrying about finances. With some planning beforehand, the dream of retiring abroad can become a reality.
Whatever the reason for retiring abroad, getting finances in order before boarding the plane is the best chance at a secure, comfortable and adequately funded retirement. We explain how to retire abroad, and when and where to begin your financial planning.
Retirement planning for expat hopefuls
It’s never too early to start planning for retirement abroad—but before you do, it’s important to perform thorough research or obtain professional guidance to first understand social security and pensions in your home country as well as the destination country. And if you haven’t chosen a destination country, now is the time to decide.
Some of the best places to retire are the countries with the lowest cost of living—and the lowest taxation rates. United States citizens, as they are subject to taxation no matter where they live, should examine the tax treaties in place to ensure they avoid double taxation when dipping into retirement funds. The US has tax treaties with most other European countries; other nationalities should examine the taxation laws of their new country, as that is where they will be taxed.
Retirement options for expats depend, in part, on their native countries: in the United States, for example, there are numerous options for American citizens to receive retirement benefits, including but not limited to pensions, which have largely fallen out of favour; social security, which everyone receives provided they have paid into social security for a number of years; individual retirement accounts (IRAs), of which there are several different types; and employer-established 401(k)s. Receiving these funds abroad is possible, but can be tricky.
British expats, on the other hand, have access to the Qualifying Recognised Overseas Pension Scheme (QROPS). QROPS was set up specifically in response to EU regulations in 2006, and assists British citizens who have built a pension fund in the UK but who wish to retire abroad. However, QROPS comes with some difficulties, too: the cost of transferring the pension and loss of some UK benefits.
However, individual situations vary, and personalised guidance is always recommended before making the move.
Pension plans and retirement planning for expats
Younger people who become expats long before they wish to retire—and want to do so in their new country—can begin contributing to their new country’s social security scheme. However, these social security payments often do not amount anywhere near the equivalent of the income once earned, and should be supplemented to ensure there is enough money to last the entirety of the retirement.
Supplementing social security with an international savings account or offshore retirement plan can ensure that you are not left with nothing at retirement age. It is especially pressing for freelance or otherwise self-employed individuals, since they have no direct employers through which they can contribute to a pension fund.
However, international savings accounts can be fraught with premiums and complex regulations that may not benefit retirement in the long run as they will cost far more money than any savings it would accrue. In addition, for American citizens, any foreign savings accounts may be subject to intense scrutiny—resulting in potential Internal Revenue Service (IRS) audits—and higher fees.
Retiring in your home country after working abroad
The opposite situation can also ring true: expats who have spent their working lives abroad may want to spend their retirement in their home countries. For expats who have earned money and contributing to a pension fund, it can be difficult to transfer the money to your home country without the help of a professional.
Each country has its own rules and regulations, so research must be done on an individual basis in order to determine whether your social security or pension fund can be transferred to another country. For example, the US does have a totalisation agreement with Belgium, but having a Belgian pension may reduce the amount of the benefits from the US social security—it depends on the individual circumstances.
Though the information is available, many people would benefit from reaching out to a financial planner specialising in retirement for expats.
You should consult your financial, tax or legal advisers for information concerning your own specific tax/legal situation.