Raise your hand if you’ve ever made it through a particularly stressful day at the office by doing a Google image search for “Tropical Island.” Me too. In fact, if I type the letter “a” in the search bar, Google automatically thinks I’m looking for “Aruba” (B is Belize, C is Curaçao, etc.). While I’m partial to the tropics, you can also practice this desk-top-escapism by Googling London, Paris, Sydney or any other destination that suits your fancy.
There’s just something about our fast paced lives that makes a simple life in an exotic locale sound pretty appealing. Which raises the question: Should you retire overseas? Before packing the snorkel and sun block and buying a one way ticket to retirement paradise, it’s important to do your homework and determine if the expat life is right for you.
No matter if you retire in the States or abroad, much of your planning will revolve around your retirement budget. It will influence how much you need to save, when you can afford to retire and what types of things you can afford to do.
One of the appeals of retiring overseas is finding a location with a lower cost of living than the U.S. This is particularly true recently as the poor economy has battered retirement portfolios. If you’re ready to retire, but your nest egg isn’t, one option is to delay retirement and give your portfolio a chance to recover. Another option would be to move to a location where your dollar will go further. The website Xpatulator.com will help you analyze how far your dollar will take you in hundreds of different locations.
Most retirees in the U.S. rely on Medicare to cover a majority of their health related expenses. Unfortunately, Medicare will not provide coverage for U.S. citizens living abroad. That can seem like a deal breaker to many, but there are alternatives to Medicare.
The most obvious option would be to self-insure. Healthcare costs can be significantly less in some countries and it could make sense for a healthy individual to pay for care out of pocket on an as needed basis.
Another option is to purchase local coverage (which can be very reasonable, if available) or buy an international health policy through a company like Aetna International or ihi Bupa.
If quality of care is a concern, visit Joint Commission International to learn about internationally accredited and certified health care organizations in the country that you are considering. Keep in mind that if you eventually move back to the United States and want to sign up for Medicare, you will pay stiff penalties for waiting past age 65 to enroll.
Unlike Medicare, your Social Security check can follow you beyond U.S. borders (assuming you don’t decide to retire to sunny North Korea or some other restricted country). Practically speaking, it may be easier to have your check deposited into a U.S. bank account and then access your funds using your ATM card abroad. This can help you avoid certain delays and fees if you try to have the check deposited directly into your foreign bank account. For more information, read Social Security Administration Publication 05-10137.
Calculating your tax liability can be difficult under the best of circumstances. Add foreign residency into the mix and things can get downright complicated. Generally speaking, you will be subject to the same income taxes abroad that you would be within the U.S. You may also be subject to state taxes if you are still considered a resident of a state because you maintain a house or bank account there.
If you get a job overseas to supplement your retirement income, you may be able to exclude up to $95,100 of that income from your U.S. tax bill by claiming the Foreign Earned Income Exclusion (FEIE). This can help you avoid paying taxes to both the U.S. and your new country of residence on the same income. Before moving overseas, meet with a trusted tax advisor who is experienced in foreign tax issues so you can minimize your tax bill and stay within the good graces of the IRS.
Many countries require you to obtain some form of work permit or visa before you will be able to legally work in that country. Keep that in mind as you consider where to retire. If possible, design your retirement budget so that it is not dependent on income from working. If you do decide to work, consider jobs where expats have a competitive advantage such as teaching English as a second language (ESL).
Buying property in a foreign country can be complicated. Some countries prohibit ownership by a foreigner altogether. Because of this, renting may be a better option. Either way, you should work with a local real estate agent and local attorney to make sure that any contracts are in order and that the transaction goes smoothly.
Retiring overseas isn’t for everyone, but it can be a great fit for some. If your dream retirement includes Panama instead of Pennsylvania or Uruguay instead of Utah, just make sure to do your homework and work closely with your advisers to ensure a seamless transition.
And don’t forget to send me a postcard!
I originally published a version of this article at www.fpanet.org.
How much is enough (a.k.a. How much do I need to have saved to fund my retirement)? When it comes to retirement, that’s the question I get asked the most. The answer is (not surprisingly) different for everyone. Some can live like kings on $50,000 per year. Others would have a hard time scraping by on ten times that amount. It all depends on the type of lifestyle you want to live.
Because there is no hard and fast rule, people often end up saving randomly and then hoping that it will be enough. This is a little like traveling without knowing where you’re going: Great if your only criteria is to get “somewhere,” but less than ideal if you have a particular destination in mind.
So how do you figure out how much you’ll need? Here’s a quick and easy calculation that will give you a track to run on:
Step 1: If you were to retire today, what would you want your annual income to be?
That’s a much easier question to answer than “How much is enough.” Think about your plans for retirement. Are you on track to have your house paid off? Do you want to travel more? Planning on moving to the beach? Imagine that today is your last day at work (Hooray!). Retirement starts tomorrow. What kind of annual income do you need? This Retirement Budget Worksheet can help.
Step 2: Subtract pension and Social Security income.
Take the number you came up with in Step 1 and subtract any income you expect to receive from a pension or Social Security.
Step 3: Multiply the answer from Step 2 by 25.
Research shows that if you want your retirement portfolio to last for 30 years, you should limit initial withdrawals to about 4 percent per year and then give yourself a “raise” each year based on the inflation rate. Multiply your answer from Step 2 by 25 and you’ll have a portfolio big enough to generate the income you need assuming 4 percent withdrawals.
Step 4: Adjust the answer from Step 3 for inflation.
The answer you came up with in Step 3 is the portfolio you would need if you planned on retiring today. If you plan on waiting awhile, you’ll need more money because things get more expensive over time. If you’re not retiring for another five years, multiply the answer from Step 3 by 1.22. Ten years to go? Multiply by 1.48. For 15 years and 20 years, multiply by 1.80 or 2.19 respectively.*
That’s it! You now have a rough idea of how much you’ll need to fund your retirement. And as G.I. Joe would say, “Knowing is half the battle.” The other half is saving! Touch base if you have any questions or if there’s anything I can do to help. Have a great week.
* These numbers assume an annual inflation rate of 4 percent.
Almost every ad you see or article you read treats retirement like it’s a date on the calendar. What’s your “number?” When do you want to retire? At what age can you start collecting Social Security? It’s worth remembering that retirement is not a date, but a phase of life. It’s a path you walk down, not a door you walk through. Stop planning for a day and start planning for a decade. Or two. Or three.
Greetings from the bottom of a cold, dark lake somewhere in Nebraska. What ridiculous set of circumstances brought me here, you ask? As you may remember, this month’s learning challenge was supposed to be learning how to make croissants with my wife. I had to call an audible, however, and shift to SCUBA diving so that some friends and I could make sure to have the certification process finished for an upcoming trip. Thankfully, my wife was a good sport and agreed to postpone the croissants as long as I promised not to drown.
For those not familiar with our 30-Day Challenges, here’s a quick review. In order to stay disciplined and intentional about learning new things, I do periodic “30-Day Challenges” where I will learn about something that interests me and then write about it here at the blog. Hopefully some of you will be inspired to follow along at home each month and we’ll be able to add something fun and interesting to our “life skills resume.”
For those keeping track at home, here’s our list so far:
- Learn all the countries of the world
- Learn to SCUBA dive
Why do this? One of the central messages here at Intentional Retirement is to pursue knowledge and experiences that enrich your life. I’m a big believer in the importance of learning and doing new things. It keeps your mind sharp and engaged. It helps you figure out what you like. It gives you new people to interact with and results in a sense of accomplishment and personal satisfaction. With that said, here’s the skinny on SCUBA.
SCUBA Certification: The process
Getting SCUBA certified involved a combination of classroom work, pool work and open water dives. Somewhat surprisingly (for a landlocked state), Nebraska has one of the nicest dive shops in the country. The classroom work was really interesting, covering things like equipment, skills, the science of how your body reacts underwater, tides, waves and marine life. The pool work allowed you to practice what you learned in the classroom each night and the open water dives (four dives over two days) allowed you take everything you learned and practice it on actual dives. As mentioned earlier, the open water dives weren’t in the most beautiful lake, but it was much less expensive to get the certification dives done here than on an actual dive trip.
What I learned (or was reminded of) as part of this particular challenge
Be willing to spend for experiences. Sometimes hobbies are cheap. SCUBA is not one of those hobbies. The certification is pricey. The equipment is pricey. Traveling to worthwhile dive locations can be pricey. Sometimes the best things in life are free. Sometimes they cost an arm and a leg. Don’t be afraid to spend on experiences. For more of my thoughts in this area, read:
Be willing to take risks. We all know to avoid the business end of a shark, but there are plenty of less obvious ways to get hurt diving. For example, did you know that holding your breath while ascending from a dive can cause your lungs to explode? Or that the deadliest creature in the ocean is a Jellyfish called a Sea Wasp? Each class was a reminder that diving (and life) is full of risks. But doing nothing is full of risks as well—the risk that you will lead a boring, unfulfilling life. So don’t be afraid to step out of your comfort zone and take a chance on things.
Look for complementary hobbies and skills. When we were learning about different dive locations our instructor Pat mentioned Belize, Bonaire and the Great Barrier Reef. Thanks to last month’s geography challenge, I knew where all of those places were! Pat is also a very skilled underwater photographer. Since photography is one of my other hobbies, we spent time looking at his photos and he gave me information on an underwater photography class that he teaches. Those skills/hobbies of geography, photography, diving and travel can all cross pollinate to make richer overall experiences. Look for similar opportunities as you consider the types of things that you want to learn and do.
Look for fresh perspectives. The world is 70 percent covered by water. Since I enjoy breathing, the underwater world was largely off limits to me prior to getting SCUBA certified. Now I can spend time exploring the two-thirds of the planet that was formerly a no-go zone. I’m looking forward to getting a fresh and interesting new perspective.
The croissants are still on deck, but I have a bit of travel in June, so I may not have a pastry update for you until sometime in July. In the meantime, be thinking about things that you’ve always wanted to learn. Hopefully these posts will be inspiration to start a 30-Day Challenge of your own. Better yet, email me about what you’d like to do and we can work on it together.
Have a great week and remember to keep life interesting.
Photo courtesy of Mark and Andrea Busse. Used under Creative Commons License.
As some of you may know, I write a column on retirement for the Omaha World Herald. Today’s column was an open letter to the Class of 2012. Since many of you have graduates in your life, I thought I’d pass it on so you could share it with them. Here’s a link:
An Open Letter to the Class of 2012
Also, each month I post a quick summary of the new articles at Intentional Retirement for anyone who may have missed something. May’s articles are below.
Have a great weekend! Don’t ever hesitate to touch base if I can help.