How — and where — you choose to spend your retirement will depend on your personality, goals and financial situation. For some, that means retiring abroad. At the end of 2021, more than 443,000 retired workers were collecting their Social Security benefits while living in another country, according to the Social Security Administration. That number has been on a steady increase, up almost 5 percent since 2018.
So, where’s the best place to retire outside of the United States? Housing, health care and the overall cost of living can be markedly cheaper in other countries but every country is different and, from a financial perspective, that can be especially pertinent when it comes to your tax obligations. Bright!Tax, which provides tax guidance to expats, puts Panama, Costa Rica, Portugal, Malta and Mexico at the top of the list. Its rankings are based on cost of living, health care, safety and visa requirements.
The truth is that while you're planning your dream retirement, you’ll need to consider a host of factors and make a solid plan before you pack your bags. Here are some of the main factors to consider.
What to consider before you retire abroad
Choose a destination
Why not start with the fun part? Take some time to think about where you want to live. That may be a charming European town, an exotic beach, or a cosmopolitan city. While it’s easy to get lost in the daydream, be sure to anchor your vision in reality. What will your day-to-day life there actually look like? It’s wise to make several visits so you can be familiar with its pros and cons.
You’ll also want to think about proximity to family. Retiring to a gorgeous far-flung country might make you feel lonely if your children and grandchildren are on the other side of the globe. Which is why it isn’t surprising that Canada is the No. 1 country where Americans are collecting Social Security checks abroad, according to recent government data. Japan takes the second spot, followed by Mexico, the United Kingdom and Germany.
Learn a New Language
Your retirement destination may require you to brush up on your language skills. That can be challenging for a number of reasons. Older learners may find it difficult to pronounce new sounds and master a new language’s syntax and grammar rules. Of course, anything’s possible when you’ve got the right teacher. That may be a language-learning app, virtual or in-person classes, or private tutoring.
If you aren’t keen on learning a new language, you might consider retiring to an English-friendly country — you can find a list on the EF English Proficiency Index.
Assess the Impact on Your Taxes
Moving somewhere that has a relatively low cost of living might not mean much if your tax liability increases. Edward Renn, a senior equity partner at international law firm Withers Worldwide, drives home the importance of meeting with a qualified U.S. tax expert before moving. It’s also a good idea to find someone in your destination country who can offer up local tax advice. Whether or not the country has a tax treaty with the U.S. will play a big role. If so, you may be taxed at a reduced rate or be eligible for certain tax exemptions.
“Different countries treat retirees differently,” Renn says. “Costa Rica, Panama, Greece, Portugal, Malta and Ecuador are countries that actually give you almost a ‘golden visa’ to go live there, and they give you tax breaks and protections. Other countries are relatively different and don’t try to accommodate.”
No matter where you want to retire, Renn says that most Americans will continue to have a tax reporting obligation (unless their income falls below the threshold to file a tax return). He adds that if you’re living abroad, you’ll likely have a foreign bank or brokerage account with more than $10,000 in it at some point. That must be reported as well.
Be aware of the foreign earned income tax exclusion
Here’s a bright spot: Retirees who plan on working or freelancing during retirement may be eligible for something called the foreign earned income exclusion. It allows you to exclude up to $120,000 from your taxable income in 2023.
“You might also qualify for certain foreign housing credits as well, but you need to check the treaty and look at the local law,” Renn adds. “Some localities tax virtually nothing, and some want to grab as much as they can. So you have to figure out how it’s going to work.”
Understand how retirement distributions will be taxed
If you’re planning on tapping funds in a stateside 401(k) or traditional IRA, you can expect to be taxed on that income, too — unless there’s a tax treaty that gets you out of it. You might also have to pay taxes on Social Security income.
You’ll likely be taxed on U.S. rental income
If you maintain a residence in the United States, and that investment is generating income, Renn says you’ll probably owe U.S. taxes on that money. The local government may also take a bite if state taxes apply.
Make a plan for your health care
Access to quality health care is always important, especially as we age. Americans can opt into Medicare at age 65, but foreign medical services are excluded.
“Most of the time, Medicare isn’t going to do anything for you abroad,” Renn says. “You’ve got to figure out your health care costs and where your health care services are going to come from.”
Renn says he has had clients who originally planned on living abroad permanently, but then decided to move back to the U.S. after encountering a health issue. If you’re moving to a country that has affordable health care, it can be tempting to defer Medicare — but Renn cautions that you could be penalized for it with higher premiums later on.
Some foreign countries, including Portugal and Costa Rica, are known for their stellar health care. You’ll want to research the health care situation in your new country and make a plan before moving.
Button up your estate planning
Whether you retire in Europe or Florida, estate planning is necessary. Renn suggests updating your will, health care proxies, trusts and powers of attorney before moving out of the country. You might also team up with a professional in your new country who understands the local laws. That way you can have peace of mind knowing that if you eventually pass away outside of the U.S., your wishes be carried out.
You’ll want a competent attorney and tax advisor in your corner who specialize in international matters. From taxes to estate planning, taking the time to research and plan for your departure can help smooth the transition — and set you up for your next big adventure abroad.