Do you think you might retire in another country? Are you a multinational, dividing your work life between countries? Do you work abroad to support your family, and hope to return and live near them in retirement? This guide is for you.
Even if you’re not close to retirement age, chances are you already know that cross-border finances can be complex. We spoke to experts and put together an overview of benefits, challenges, and action steps to help you plan for retirement across borders.
Retiring in another country: planning ahead
First, you’ll want to have an idea of where you plan on retiring. Then, take a look at your current retirement accounts, whether they take the form of a 401K, Roth IRA, pension plan, or something else. If nothing else, it’s a good idea to have this information handy as you research.
When planning for your retirement in a country that’s different from where you reside, consider:
- How your retirement income will be taxed;
- Age restrictions for retirement in the country; and
- The stability of the country’s economy and currency.
Let’s take a look at each of these factors.
Taxes on retirement income
When you start living off of your retirement savings or investments, you’ll want to understand how they’ll be taxed. In the U.S., once you start withdrawing from your 401K or traditional IRA after age 59 ½, your disbursements count as ordinary income. For more information about how Roth retirement accounts are taxed, the IRS offers this table.
For a different example, consider Canada, where the government provides Old Age Security (OAS) and the “supplementary” Guaranteed Income Supplement (GIS). Most of the time, income for GIS purposes is the same as your net income reported on your Income Tax return (excluding OAS). Read further details on the Government of Canada website.
While tax laws vary widely, mutual tax treaties exist to help simplify some taxes for multinationals. For instance, the U.S. has tax treaties with different countries that allow for mutual deferral of taxation on certain types of retirement and pension accounts. You can check if the countries where you live, or plan to retire, are on the treaty list.
Lastly, some countries actively seek to entice foreign retirees with special tax rates. In southern Italy, starting in 2019, the government enacted a flat 7% tax rate on retirement income for foreigners. Costa Rica is another example: at the time of this writing, the government there does not levy a tax on income earned outside of the country, including pensions or Social Security income.
In many places, there are age restrictions on retirement. You’ll want to know when you can withdraw retirement funds without a penalty. For example, in the U.S., in most cases, you must be older than 59 ½ to withdraw money from your 401K without a tax penalty.
In most EU countries, the retirement age is in the sixties. The Finnish Centre for Pensions has an updated list of European retirement ages here.
A relatively stable economy means that you can expect a currency that doesn’t fluctuate a great deal, as well as predictable rates of return on your investments. You’ll want to look at historical exchange rates to get an idea of how far your dollars, pounds, or euros, for example, will stretch in your new country. Yahoo offers research from 2020 that shows how far an average Social Security check in the U.S. goes in 35 different countries.
While many factors go into determining economic stability, they’re often similar to what determines currency exchange rates. You can read more in our guide here.
Investing in more than one country: benefits
You might consider investing in your intended retirement country now in order to build up some assets there. If you already have dual citizenship, you likely have the ability to invest in funds, companies, and even real estate in both your countries.
“It opens up more opportunities for foreign investments in your investment portfolio,” says Luis Strohmeier, partner and wealth advisor at Octavia Wealth Advisors.
He goes on to explain, “in some cases, multinational investors can reap the benefits of a tax system that might be easier to navigate and less complex than others.”
What does this mean? If you’re considered a national in a country with lower barriers of entry for investing, you might feel comfortable taking more risks. You might also find it easier to get started. In some countries, you may find there are no capital gains’ taxes, or that they’re lower, such as in Belgium or the Cayman Islands.
If you decide to invest for retirement purposes in more than one country, there will be challenges. Strohmeier says that it can be difficult because investors have to adjust to the jurisdictions in each country where they have investments.
Lauren Cohen, an international lawyer and founder of e-Council Inc., a company offering business immigrations services, agrees. She adds that it’s especially important to learn the rules mandated by each country.
“Even if you have rights and privileges in more than one country, you need to make sure you’re complying with all of them,” she says. “It’s also different when you’re investing in the country you’re living in versus the second country.”
For example, Americans who invest in foreign stocks often need to pay taxes in both the U.S. and the country of investment. This gets complex, but a good tax advisor can help you navigate. For your initial research, Investopedia offers a comprehensive guide to the taxation of foreign investments here.
Understanding government benefits
If you’ve worked in all the countries you’ve been a legal resident or citizen of, you may be eligible for government benefits. Examples include Social Security in the U.S. or the Canada Pension Plan (CPP).
Keep this in mind when planning for your post-retirement income. Be sure to contact the applicable agencies to find out what you need to do before moving countries, if you plan to do so.
In countries with nationalized public health care, you may be able to take advantage of these services as a retiree and lower your health care costs. For instance, in Costa Rica, foreigners can join their social security system for a small fee, which then provides access to many hospitals and clinics in the small Central American nation.
Hiring a professional
The truth is that navigating retirement planning for multinationals can get very tricky. Laws can change and new investment vehicles can crop up between now and when you want to retire. Plus, if you decide to invest in a country where you don’t reside, you will need to report your investment income and gains to the local jurisdiction and where you live.
Both Cohen and Strohmeier suggest at least hiring an accountant that specializes in navigating foreign investing (ideally with clients who are multinationals) to assist you. Although it may not be necessary to hire an investment professional, it can be useful if you have a more complicated retirement plan.
If you do hire someone, it’s a good idea to interview a few different people. Determine how your advisor will get paid: is it a flat fee for consulting or will they take a percentage of your investment returns?
Ultimately, planning ahead for retirement is important, even if you’re not planning to move to another country in your later years. For more great resources on retirement planning, Fidelity offers free tools at their website. You can also find many comprehensive guides for those planning to retire in another country with a quick online search.
When you hold assets in multiple countries, or divide your time between nations, you likely need to send money across borders.
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