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How to Invest When You Retire Abroad

Jeff Brown

Moving abroad requires preparation.

Americans of a certain age are flocking to warmer, cheaper countries for retirement. By all accounts, many are thrilled with the choice, but experts warn costs may be higher than advertised and the foreign economy and political stability can change. So the move to expatriate status should be weighed carefully, with special attention to living costs, banking and investments. Exact figures are elusive, but in 2016 the State Department estimated that 9 million U.S. citizens were living abroad. Most likely, only a fraction are retirees but the books and websites aimed at retiring abroad suggests this is an option for a growing number of Americans seeking lower costs, better weather and adventure.

Have a larger reserve fund.

All investors are advised to have emergency funds insulated from market volatility, but it can pay to have a larger fund when facing the uncertainties of living abroad. "A larger sum of money should be put aside for countries that have higher political instability or higher inflation," says Stephanie Hammell, investment advisor with LPL Financial in Irvine, California. Tenpao Lee, economics professor at Niagara University, suggests exchanging a year's worth of cash when exchange rates are favorable. "Select a larger, national, or international bank to handle your cash management," he says. "International banks usually allow you to have several accounts (set up) in various currencies and the ability to transfer money between accounts."

Medicare and Social Security can be affected.

"Medicare does not cover health care costs incurred outside of the United States," says Frederic Behrens, a specialist in living abroad at Round Table Wealth Management in New York City. "It may be important to purchase an international health insurance plan or anticipate out-of-pocket health care costs." Some retirees return to the U.S. temporarily or permanently for major medical care, but it would pay to have a game plan before giving up a U.S. home to relocate. Social Security benefits, often subject to income tax in the U.S., are also taxed by some foreign countries, Behrens says. That may be offset by credits the U.S. grants for foreign taxes paid.

Taxes can be taxing.

U.S citizens owe the IRS a return and tax payment regardless of where they live. In addition, pension benefits and investment income from retirement accounts and taxable accounts may be taxed by the host country. But there's good news, too, says Michael Tanney, managing director of NYC-based Wanderlust Wealth Management: "Most often, countries where U.S. citizens decide to retire have tax reciprocity with the USA," Tanney says. In effect, the U.S. reduces the tax bill by the amount paid to the host country, but it's important to know ahead of time if this will be so.

Think about your cash flow and housing.

Hammell says expats should also be careful how they move cash to the new residence for ordinary spending. Using a foreign address for transfer of your retirement dollars by bank transfer or check could trigger an automatic 10 percent U.S. tax withholding. As for housing, "We usually recommend renting not owning property when you move," says Rebecca Hall, Reston, Virginia-based advisor with Ameriprise Financial. "Property ownership in some countries can have estate tax or inheritance tax implications, and it is much easier to get out of a rental if moving abroad was ultimately not the right decision."

Watch exchange rates and inflation.

Inflation has been tame in the U.S. for many years, but prospective retirees likely recall the horrors of double-digit price increases when they were young. And that's nothing compared to hyperinflation experienced in some other countries, such as Venezuela. Keeping assets in the U.S. can protect the nest egg from inflation in the host country. But since routine expenses will be paid in local currency, day-to-day expenses might skyrocket and assets purchased with local currency might plunge in value. Fluctuations in exchange rates can have the same effect as inflation.

Examine your investing strategy.

Hammell says retirees should re-examine their investment strategy before moving. "The plan should be set before you retire abroad to your country of choice, taking into consideration your new living expenses, any possible income from a part-time job you might take on there, and differences in taxes and currency risk," she says. "As changes occur, such as higher risk factors, then the plan should be modified accordingly to be more conservative."

Manage your investments.

Most experts recommend keeping the bulk of assets in U.S. financial institutions, for tax reasons, safety and to enjoy continued growth or dependable income. "Expats with U.S. financial accounts are protected by the same U.S. government institutions that protect investors at home such as the SEC, FINRA, FDIC and SIPC," Behrens says. "Further, by keeping assets in the United States, expat retirees avoid exposing assets to currency depreciation, fraud, potential confiscation and other surprise issues that may exist in an unfamiliar new country of residence." Shifting assets to foreign holdings can also cause complex tax problems on the U.S. return, he adds.

Plan for your U.S. ties.

Most expats don't unplug from the U.S. completely, so it's important to account for financial obligations left behind, Tanney says. That could include things like mortgage payments and other expenses on a home kept in the U.S. "Make sure to simplify and streamline your financial responsibilities stateside before heading across any borders," Tanney says. "By reducing your complexity, footprint, and expenses, you drastically increase your ability to manage your economic life from anywhere in the world."

How to manage your invest while living abroad.

Investors should consider these points prior moving out of the U.S.:

-- Have a larger reserve fund.

-- Medicare and Social Security can be affected.

-- Taxes can be taxing.

-- Think about your cash flow and housing.

-- Watch exchange rates and inflation.

-- Examine your investment strategy.

-- Manage your investments.

-- Plan for your U.S. ties.

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