How to Claim Social Security, Pay Taxes When Retiring Overseas

Q&A February 24, 2022 at 04:53 PM

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With the coronavirus pandemic declining, a lust for travel and even a yearning to retire to a far-off land have reemerged.

Russia's invasion of Ukraine need not deter you from a retirement plan to live abroad, argues Kathleen Peddicord, founder of the Live and Invest Overseas publishing group, in an interview with ThinkAdvisor.

She has traveled to more than 75 countries, established businesses in seven of them, and has covered the ins and outs of overseas living for more than 30 years.

"The crisis playing out between Ukraine and Russia needn't affect your thinking about making a move overseas," Peddicord says. "You do not need to put your retirement dreams on hold."

While retiring abroad generally remains within reach despite the war in Eastern Europe, financial advisors might want to suggest that pre-retiree clients "shift their focus from Europe, depending on country, to another point on the globe," Peddicord advises.

Europe should not be written off, however.

Portugal, for instance, "remains one of the world's safest havens," she points out.

Further, "[because] the dollar is in near-record territory against the euro, Europe is more affordable" at this time, Peddicord says.

Also: "This is an opportunity to invest your relatively strong dollars in a euro-denominated hard asset — a piece of property in Portugal, France or Spain, for example," she adds.

Peddicord also stresses that Central American countries such as Panama and Belize "stand out in the current climate as top-tier leave-the-troubles-of-the-world-behind options."

In our Feb. 10 phone interview and a Feb. 24 email follow-up exchange (above), Peddicord and Lief Simon, a global property investment expert who is married to Peddicord, discuss the finer points that advisors need to know concerning the financial aspects of retiring overseas.

Right now, the couple live in Panama and Paris.

Our Feb. 10 conversation covers investing, banking, Social Security, Medicare, health care abroad, income tax planning ("You aren't going to pay double tax on any of [your] income," Peddicord informs), renting versus buying a residence — and perhaps the biggest pitfall of all:

"Currency exchange rates can go with you or against you," Simon emphasizes.

Former publisher and editor-in-chief of the International Living Group, Peddicord left in 2007, after 23 years, to start her own firm. The next year, she debuted Live and Invest Overseas.

In an enlightening side note, Simon says that the trend of the full-time digital nomad — people in their 20s and 30s working remotely country by country — has caused "the age of people moving overseas to drop tremendously."

Here are highlights of the interviews:

THINKADVISOR (Feb. 24): Is now a good time to move overseas?

KATHLEEN PEDDICORD: The crisis playing out between Ukraine and Russia needn't affect your thinking about making a move overseas. You do not need to put your retirement dreams on hold.

[Because] the dollar is in near-record territory against the euro, Europe is more affordable.

(Feb. 10): Let's talk about some specific issues pertinent to retirees living overseas. Say you've been collecting Social Security. What do you need to do to continue receiving payments?

LIEF SIMON: Hopefully, you're already having them direct-deposited into your U.S. bank account.

But there are a lot of countries where, if you're residing there, you can have your checks direct-deposited into a bank in that country. It would make it easier because the money would just show up in your local bank account each month.

Is there a drawback to that?

SIMON: The currency exchange rate and the timing of the deposit. When the check comes in, you'll get whatever exchange rate your bank is giving on dollars — which could be good or bad.

What's the best alternative?

If you keep having your check deposited into your U.S. bank account, you can decide when to transfer the funds and manage the exchange rate that way.

We recommend a foreign exchange account with Moneycorps, which we personally use, for doing that.

Suppose you decide that you want to claim Social Security while you're living abroad. How do you go about it?

PEDDICORD: It doesn't matter that you're outside the U.S. You can sign up as if you were living in the States.

There's a list on the Social Security website of the many countries where you can have your payments direct-deposited every month.

SIMON: You do have to think of the currency implications. But Panama and Ecuador, for example, use the U.S. dollar, so there's no exchange risk depositing the checks in those countries.

You can initiate your Social Security online. Or else, you can apply at the local embassy. Just tell them where you want the payments sent and to which account.

What do advisors need to know about income tax planning for clients who move overseas?

SIMON: Taxes do get complicated. It depends on the country. All countries of Central America — Nicaragua, Panama, Belize and Costa Rica — are on jurisdictional taxation, which means you're not taxed on any [income] that isn't earned in those countries.

Other countries have tax incentives to attract new residents. Some have a non-habitual resident program: If you haven't been a resident in the previous five years, you can apply for what amounts to a 10-year tax benefit for reduced taxes.

But the bottom line is that you shouldn't pick a country to move to based on taxes.

PEDDICORD: For a retiree moving overseas, it should be a tax-neutral event. You may be subject to paying taxes in the country you retire to and reside, and you may be subject to paying taxes in the U.S. on some of the income.

But you're not going to pay double tax on any of the income.

What does it mean if the country has a tax treaty with the U.S.?

SIMON: Most European countries have those. Most of them say that Social Security will be taxed by the U.S. The one exception is Italy. If you're a resident there, Social Security is taxed in Italy.

The tax treaties dictate who gets first bite of the income. If you've received income outside of Social Security, the first bite of income tax is [taken by] the country where the income is earned.

Suppose you're a high-income earner. What then?

SIMON: If you're getting lots of investment income, like dividends from owning stocks, your total income is in a much higher bracket.

So depending on the tax bands [brackets] of the country you're residing in, you may end up paying more in taxes. The threshold determines when you move into the next tax band.

Last year, you ranked the 15 top places in the world to retire in 2022. Why did you give Belize an A-plus on its income tax policy?

SIMON: They have jurisdictional taxation; so you're taxed only on the income earned in Belize. If you're a foreigner who moves there and makes no income in Belize, you'll pay no income tax in Belize.

When is the right time to tell your U.S. financial advisor that you intend to move overseas?

SIMON: After you've moved overseas! Many financial advisors, CPAs and attorneys say you can't live in another country legally or that it's illegal to own property overseas. They just don't have any idea. Those things are wrong.

Financial advisors try to talk people out of moving mostly because they want to keep [the client's assets] under their control.

But is part of why they tell them not to move simply out of ignorance about living overseas?

SIMON: Mostly. The tax guys, especially, have never dealt with this, so they don't know how to respond and would rather do it on the side of conservatism. So they tell their clients that it's a bad idea to move, or it's illegal to invest overseas.

Back to the question of when's the best time to tell your advisor you're moving abroad.

SIMON: When you start your budgeting process and then have a solid budget for your living expenses and capital costs of moving.

If you're going to apply for legal residency, that will have a cost that ranges from a few hundred dollars in a place like Colombia to many thousands of dollars in somewhere like Panama or Portugal.

Should you keep the financial advisor you have in the States or get a new one where you move?

SIMON: It depends on how you're going to structure your assets and investments.

There's no reason to get rid of your financial advisor if you've got substantial wealth and they're someone who's been doing a good job managing your million-dollar stock portfolio.

What should advisors and clients be aware of about investing overseas?

SIMON: By moving your money to another country, you [likely] won't be able to invest in U.S. stocks. If you can, it will be too expensive and not worth it. So you'd want to keep your stock-and-bond portfolio with your current advisor.

You might want to move some of your money to an offshore advisor for investments in another currency so that you can have some income in a different currency to help mitigate exchange-rate risk.

For instance, if you're moving to Europe, you might want to invest in a piece of real estate that will generate euro income.

That way, you'll have income in the currency [of where you're living] and have less exchange-rate risk month to month, year to year.

Can you add to an investment position you owned in the U.S. once you move overseas?

SIMON: That's an SEC regulatory thing. If you have an [online] account with Schwab or Fidelity, for example, and are an American who isn't a resident of the U.S., they'll freeze your account or may try to force you to close it for being a nonresident.

That's because of SEC regulations. It's silly: Just because you're not living in the U.S., doesn't mean you shouldn't be able to invest in U.S. securities.

Can one get around this?

SIMON: Schwab will open an international account for an American living overseas, but it would have a higher minimum account balance.

We advise to maintain a U.S. address and don't tell Schwab, Fidelity or whomever that you've moved overseas. Give them a U.S. address, maybe a friend's or a family member's.

If you have a physical financial advisor, [resolving this issue] will depend on the advisor.

PEDDICORD: It depends on how conservative they are. Some could just say no. Others would be fine with it.

SIMON: If you have a U.S. advisor who's on the very conservative side, they may drop you as a client.

If you want to have an active investment and not deal with U.S. SEC regulations, you can open an account with a financial manager in a place like Switzerland.

But you'll have access only to non-U.S. investments through them because while they're registered with the SEC, they don't invest anything in U.S. markets since that's not what they know.

Do you recommend opening a bank account in the country you're moving to, while keeping your account in America?

SIMON: Absolutely. If you don't open a local bank account, you'll be paying ATM fees when withdrawing cash; also, it's hard to pay local bills. Local bill-paying is the main reason to have a local bank account.

What about using credit cards?

SIMON: Keep your U.S. credit cards, because even if you can get a credit card where you move overseas, the limits are so small that they're laughable.

If you're receiving Social Security benefits and covered by Medicare, should you keep Medicare?

SIMON: You'll keep Medicare Part A [hospital inpatient] since no one pays for that as part of their Social Security package.

We recommend that you maintain Part B (outpatient services) because if you don't, when [or if] you return to the States and want to get back into Part B coverage, there are waiting periods and other potential penalties.

Can you get health insurance overseas?

SIMON: if you move to another country when you're 70, say, you're not likely to be able to get a local health insurance policy. You'll have to apply for an international policy, which will be more expensive.

How do you pay for medical care for an illness such as strep throat?

SIMON: Medicare won't pay for it. How it gets paid for depends on the type of insurance you end up carrying, or maybe you don't carry any because the cost of local health care is so cheap.

I could walk around the corner to a clinic here in Panama, have them look at my throat and pay only $30 to get a prescription. So for small things, you could just pay out of pocket. If you have an emergency, like breaking your leg, that's where a local health insurance policy, international health insurance policy or a long-term travel insurance policy, would fill the gap for covering that bigger bill.

What if you find you have a life-threatening illness and want to be treated for it in the U.S.?

SIMON: You can go back to the States and have it taken care of under Medicare.

Is it better to buy or rent a place to live?

PEDDICORD: There are pros and cons to both. Renting gives you more flexibility. And you don't have to come up with a down payment or the whole cash price. In a lot of markets, it's cash only.

Buying and selling in much of the world comes at a much higher cost than in the U.S. It's not easy. In many markets — once you've invested in a piece of real estate, you're really locked in.

Markets can be less liquid. Flipping houses isn't as common, and definitely not as cheap as it can be in the U.S.

What's on the pro side of buying a house?

PEDDICORD: Right now is really a great time to be buying real estate in a number of places because markets are undervalued and/or because the dollar is so strong against the local currency.

Also, buying, in theory, takes the cost of housing out of your monthly budget forever.

If you buy at today's exchange rate in places like Portugal or France, if the currency moves against you, you don't have to worry about your housing costs moving beyond your budget.

If you have a trust, do you have to make sure it's enforceable in the country you're moving to?

SIMON: If you're an American with a U.S. trust, there's nothing to worry about. If you're an American and have a foreign trust, you might need to dig into the inheritance tax rules in the foreign country.

If you've got that level of assets and financial complexity, speak with a tax person in the country you're moving to so that you understand the rules with regard to inheritance taxes.

What other pitfalls do you need to be aware of when moving overseas?

SIMON: I'm sure there are thousands of them.

Currency exchange rates can go with you or against you. That's why a lot of people move to a place like Panama, Ecuador or Belize because they all effectively use the dollar.

What's the situation when one dies in the foreign country in which they've been living?

SIMON: You should have a will in each country. If you've got assets in multiple countries, you want to think about how to structure them either through a trust or some other structure, an LLC, perhaps, to help mitigate probate issues for your heirs.

If you have a bank account in Panama, for example, you should have a will in Panama that says, for instance, "When I die, the [specific amount] in my Panama bank account should go to whomever."

What if you're intestate and die in another country where you've been a resident?

SIMON: If it's, say, in Colombia, then Colombian inheritance rules will apply, just like if you die intestate in one state in the U.S. versus another.

(Pictured: Kathleen Peddicord and Lief Simon)