For quite a few Americans, the answer is old age.Read More
We have a client at the firm who has been planning for years to retire to Costa Rica. Another client has moved to Mexico where she enjoys the fruits of her labor from a little house surrounded by, well, fruit. As the snow piles up every February here in Boston, the whole idea of escaping to another life sounds more appealing. Even those of us who can't imagine not having some sort of work during retirement are tempted by the idea of retiring to a whole new adventure. And in some cases, moving to another part of the world promises a better standard of living. So what are the practicalities of a retirement outside your home country?
Retiring abroad almost always means having financial transactions going on in two countries. Fortunately, our global banking systems have made this significantly easier than it once was. Like most immigrants/expats, you will want to do some careful planning with your cash flow. Start by keeping a U.S. bank account open to receive your social security checks (in most cases, you are still eligible while living abroad), pension checks or any other income. The same account can automatically pay any expenses you have left in U.S. dollars—these might be related to insurance policies, properties you own in the U.S., cash support for family still in the states, or just having your favorite U.S. peanut butter shipped over once a month.
Keeping all of that income and expense in the same (U.S.) currency saves you the added expense of currency exchange—and that can be a big savings. On the other side of the financial border, figure out what your monthly budget will be in your adopted country and have that automatically deposited in a local account once a month (but be sure to account, again, for the exchange rate and any bank fees).
Speaking of your monthly expenses, expect the unexpected in your new life. On one of our family's first trips to Singapore, we plunked ourselves down for lunch at a cafe designed for tourists on the island of Pulau Ubin. After giving three rambunctious children and four hungry, tired adults license to order anything and everything they wanted, we ended up with two tables overflowing with food and specialty drinks...all for a tab of about $14 bucks.
On the other hand, owning a little tin can of a car in Singapore will cost you a small kingdom. My point? Look carefully at what is and isn't expensive in your new home. Your housing or groceries might be ridiculously cheap compared to what you had at home, but your utility bills or transportation might be higher than you ever dreamed possible. And as an aside, don't expect to find cheap food in Singapore anymore—inflation can happen anywhere.
This one has been a big factor for U.S. citizens. In fact, our astronomical insurance premiums and health care costs in this country have made it almost inevitable that Americans save money on health care by going just about anywhere else in the world (why this hasn't been a red flag for us, I don't know). And the quality of health care in other countries hasn't been much of a compromise either. But you do need to know what the arrangements are in your new country before you move. Keep in mind that Medicare will not cover you abroad.
Some nations let immigrants participate in the national health system; others offer private health alternatives (often still cheaper than what we have here). Make sure you look into eligibility requirements and take into account your particular health care needs when choosing where in the country you will live; as is the case here, cities often offer more sophisticated care. And if you still need more coverage, look into international health insurance, which will cover you just about anywhere in the world (with the frequent exception of—you guessed it—the U.S.).
Surely this is the least appealing part of retiring abroad! If you are a U.S. Citizen, you will almost certainly need to keep filing a U.S. tax return, even if you don't owe anything. And you will have local taxes to think about. If your new home country has a tax treaty with the U.S., you might be able to avoid paying income taxes in both countries simultaneously. But there are all sorts of taxes to think about. For those in retirement who are buying property in their adopted nation, estate taxes are likely to be a concern. And if you have more than $10,000 during the year in almost any sort of account abroad, including an insurance policy, make sure to file an FBAR (Report of Foreign Bank and Financial Accounts). Even if you were one of those people comfortable doing her own tax returns and estate planning before, taking on the taxes and procedures of two national treasuries will probably require some professional help.
An Extra Seat At The Table
Ready to start planning your second life as an immigrant to some charming foreign nation? Research thoroughly, plan carefully and most of all, be flexible. And one more thing, make sure there's extra seat at the table for friends and family visiting from back home. After all, it gets pretty cold here in February.
The Secretary of State's Bureau of Consular Affairs has a web page to guide you through the basics of planning a retirement abroad.
Let's just assume that you've been coasting along on an all-expenses covered, cushy, employer-provided health plan. Or not. U.S. citizens are accustomed to complicated world of deductibles, premiums, and surprise charges that make up our health care system. Obviously, these pitfalls can have an enormous impact on your finances. So as people approach their sixties, we usually have them start thinking about the unique challenges of health costs after 65. Here are some of the things you need to know.
Apply for Medicare at 65 (whether you need it or not)
Thanks to one of Medicare's stranger regulations, you will want to apply during the three-month period before you turn 65 for Medicare only (you can wait to apply for social security or spousal benefits later). This is true even if you are still working and covered under your employer's health insurance policy. If you don't apply at 65, you could end up with problems when it is time to use your Medicare, including the possibility of higher premiums. Fortunately, applying for Medicare can be done pretty simply by going online here.
Medicare Might Not Cover As Much As You Think
What if...? It's a typical insurance sales opening intended to get your anxiety up so that you are more willing to buy insurance. Unfortunately, it's also a necessary question when it comes to health care. And let's face it, the likelihood that you will have not any particular medical problems after 65 is pretty small. Most people in my experience figure that Medicare will solve this problem. It does, sort of, but not the degree you'd think.
Like private health insurance policies, you will have to think about copayments and deductibles when deciding what sort of Medicare plan you want. While the government itself provides the baseline Parts A and B, private insurers offer Medigap plans that follow strict rules to fill in where the government won't. Those Medigap plans come in alphabetical order (Medicare Part B, Part C, Part G, etc...) and mean you will pay some level of premiums to get better coverage. Most people who can afford it will choose to buy a supplemental program.
You can see the problem when you look at Medicare's own partial list of things people assume are covered...but aren't:
- Long Term Care (i.e. nursing home or assisted living)
- Most dental care
- Eye examinations related to prescribing glasses
- Cosmetic surgery
- Hearing aids and exams for fitting them
- Routine foot care
Putting aside foot care and hearing aids for a minute (seriously?), the one that really stands out is long-term care—there is no Medigap plan that covers this after the first 100 days. Keep in mind that we aren't just talking about being in a nursing home; long-term care can also include home health care or a skilled nursing facility if you have a chronic illness or an accident (i.e. the broken hip). Medicare pays for your nursing care in such a situation for 20 days. After that, you get Medigap coverage for another 80 days. And then you're on your own.
How can this be, you ask? All those people who can't afford care after 100 days get routed to Medicaid. And that program is only for the financially needy. Given that the average cost of nursing home care in the U.S. was over $6,000 per month back in 2010, people who weren't financially needy when they started often become so.
The only solutions we've found to this problem so far are these: 1. be prepared to lose everything but your home and about $2,000 in cash to get covered by Medicaid; 2. avoid old age; 3. buy long-term care insurance.
I won't go into the particulars of long-term care insurance in this post. Suffice to say that it's expensive to buy and more expensive to not buy. We recommend that couples start looking at a policy as they approach their 60's and single people look a little earlier.
For more information on Medicare and its associated programs, go to Medicare's plan choices site.
For more on programs if you do need to find long-term care for someone, try this site called "Paying For Senior Care."
This weekend Bloomberg News featured an article by Suzanne Woolley about the perils and conundrums of trying to plan your finances around our increasingly long life spans. For the article, Woolley interviewed David Little, Director of the Retirement Income Planning Program at the American College of Financial Services. Unlike the standard use-your-401k, retire-later advice articles, Woolley's piece delved into how Littell was personally wrestling with decisions about home, work and family. For the next two weeks, I want to use my posts to look more closely at some of the questions raised in Woolley's article—the real decisions that make up long-term planning.
According to the article, Littell faces some fairly standard challenges when it comes to his long-term finances. At 61 years old, he earns in the low six figures and has diligently put a way money regularly in 401k's and other tax deferred accounts, but he has a partner whose recent retirement has him thinking about how he could cut back on work in a few years. More importantly, he's wondering how to account for the fact that his father, who retired at the ripe old age of 75 is now 103 years old.
Littell's father brings him (and us) face-to-face with a new reality. Most of us in GenX or the Millenial Generation have already decided that "retirement" is likely to be more of a stress-reduced continuation of our work lives, whether because we won't be able to afford a full retirement or because we simply dislike the idea of having nothing important to do for a few decades. But even as advisors like me push our client plans to the age of 99, and workers look to 70 or 75 as a more appropriate "retirement" age, life spans (and "retirements") seem to keep getting longer.
In thinking about how to address this challenge, I want to look at a short list of the tools, strategies and personal questions that will become increasingly important to all of us:
Have another topic you want to see on the list? Leave a comment or send me an email, and I'll throw that one in, too.