9 Risks That Come With Retiring Abroad

America has numerous places for retiring, from picturesque New England towns to scenic desert destinations where Social Security will take you far in terms of covering expenses. However, thanks in no small part to social media, retiring abroad has become a craze as more and more Americans approach retirement age and consider whether to continue staying in the United States. After all, who can resist the allure of living it up on a beach in Mexico or on the Italian coast, drinking the finest wines and eating the finest foods at a possibly much lower cost? On top of that, you won't have to work because you have your pension or retirement account to see you through. Sounds like the dream, right?

For many, it is. And as some people have shown, it's attainable if you do your research and get all your ducks in a row first. Moving abroad without proper preparation is fraught with risks, including financial ones from unexpected taxes or filing requirements — either from the Internal Revenue Service (IRS) or your new host country — as well as unexpected culture shock, loss of convenience, or sudden political unrest or economic instability. Here are the risks of moving abroad and what can be done to mitigate them. 

IRA, 401(k), and 403b accounts are likely to be the main sources of income for retirees aside from Social Security, so people moving abroad should be aware that changing their country of residence might affect their ability to make withdrawals. The conditions on the retirement account can be entirely dependent on the firm managing it.

Retirement accounts are almost impossible to transfer without risking some sort of tax penalty or administrative headache. IRS compliance rules will prevent you from rolling over a retirement account to a pension plan in your new host country without risking a tax bill. If you liquidate it, you will also face a steep tax bill (including potential country-dependent double taxation), and if you withdraw before you are 59.5 years old, you will get additional early withdrawal penalties.

If you keep the account, which is generally considered the best option, know that not all brokerage firms allow clients with foreign addresses and bank accounts. In that case, the firm may liquidate your account and send you a check, which will be taxed as ordinary income. If they don't close your account, they may require withdrawals to a U.S. bank account, which then must be transferred to your new foreign bank account, which could accrue all sorts of taxes and fees. Make sure to consult with an attorney, CPA, and your brokerage firm on exactly what to expect in this regard.

One of the major draws of retiring abroad is the lower cost of living made possible by the weakness of foreign currencies against the dollar  — ergo, take living in a place like Mexico, where $1 is the equivalent of nearly 18 Mexican pesos at the time of this writing. Considering Mexico's average daily wage is 623 pesos (around $35 USD), you can see why this seems like a great deal for expats. What you can earn in an hour or less back at home is what many live on every day. Thus, a middle-class American retiree can live a life of comparative luxury in Mexico or any other country with a weaker currency if one avoids the wealthier, vibrant downtown areas of metropolitan places like Mexico City. 

The risk here is the potential for local currency to strengthen against the U.S. dollar, and it doesn't even need to reach parity to eat into your purchasing power. Say the peso were to go to just one-tenth against the U.S. dollar. For the retiree, that results in a significant drop in purchasing power when drawing from a bank account in dollars.

Conversely, Americans retiring to the Eurozone face the opposite problem. Currently, the U.S. dollar is weaker than the euro. At the time of this article's writing, for every dollar, you get 0.86 euros at the time of this writing, minus exchange fees. This is something expats must take into account, especially if they wish to retire to or near high-cost major metro areas rather than the more affordable retiree-friendly ones in Europe. Couple that with the possibility of double taxation from the retirement destination and the IRS, and you could see yourself spending way more than you bargained for.

This one is the bête noire of billionaires and retirees alike. Even if you move away from the United States, as long as you are still a citizen, you will still have to deal with America's most hated federal agency — the IRS — on top of the tax collection agency of your new country. The United States taxes people according to citizenship, meaning retirees, unless they wish to face potential charges for tax evasion or penalties for failure to file, must account for any taxes they will owe Uncle Sam. But there's more. If you keep your American driver's license, keep property in your home state (depending on local laws), keep a vehicle registered there, or have a dependent there, then you might still be on the hook for state taxes. California are is particularly notorious in this regard.

The good news is there's a way to legally avoid taxes up to a certain point. The IRS allows U.S. citizens living abroad to exclude a portion of their income earned abroad as long as it is derived from sources such as wages. Things like social security, pensions, and retirement accounts, however, are not eligible for this deduction. Given the complex and ever-growing nature of the Internal Revenue Code, it is best for retirees, especially those with complex tax situations, to consult an attorney and/or CPA before moving abroad. Because you certainly don't want to visit the U.S. and find you have a lien for unpaid taxes. And before moving, make sure you can afford to still live after taxes.

For those who think renouncing your U.S. citizenship is an easy way to leave America, the IRS, and the rest behind for good: Think again. In fact, the United States has seen a spike in renunciations among Americans moving abroad precisely for tax purposes. But as usual, it's not that simple. Renouncing U.S. citizenship can be expensive. First, Washington demands a $2,350 fee. If the U.S. government decides you are a "covered expatriate," meaning you either have $2 million or more in assets or pay at least $206,000 in tax, you face an exit tax on the combined estimated value of your assets. For a retiree who has worked all his life, this will likely be significant. Nevertheless, you will still be expected to file U.S. taxes if you receive retirement 401(k) or 403b income and face a 30% withholding on certain passive investment income. Those on Social Security may also be ineligible to receive the benefit if they live in certain countries (mostly in Central Asia). You can use the Social Security Administration's online tool to determine whether you'll get paid. Again, consult with attorneys and accountants before making such a big decision.

A U.S. passport is still a pretty powerful passport, despite not making the world's top 10, and renouncing it has consequences. Foremost is that you cannot freely enter the United States afterwards. If you establish residency in a country for which Washington requires a visa, visiting family stateside becomes more complicated. Once you give up your U.S. citizenship, unless you can prove it was under duress, there's no getting it back. Think very carefully whether the tax benefits are worth the tradeoffs of not being able to travel freely into America as before.

When moving abroad, retirees must not only factor in political instability and potential violence, but also economic downturns, inflationary shocks, and economic growth that can eat into their purchasing power. If a retiree suffers through any of the former, or the U.S. dollar loses ground to the local currency and erodes the expat's purchasing power, they might find themselves needing more money — which can most easily be made through working. However, retiring abroad can sometimes prevent you from getting a job abroad under the right circumstances.

Apart from the golden visa, which provides the wealthy access to fast-track citizenship in countries like Cyprus and Malta, for most retirees, the easiest way to get into a new country is through a retirement visa. The most popular retirement destinations, like Portugal, Italy, Thailand, and Panama, all have this category. They require the retiree to have income, usually from pensions/retirements or real estate. These visas often forbid holders from working in their new home, apart from some exceptions, like limited self-employment. Thus, if you find yourself needing more cash, your options are to either find a remote job in the United States (which opens a number of other tax issues) or apply for a work visa, which you are very likely not to obtain. Given that around 22% of the global youth population is unemployed, per the International Monetary Fund (IMF), with popular retirement destinations such as Spain hitting highs of 25% (via Trading Economics), it's easy to see the reason — these countries want to protect their own labor markets.

If you have not spent time in the target country before, you might be in for massive culture shock. For retirees, community is everything. The elderly are far less likely to develop problems like depression and can also live longer within a solid community. This might be difficult to find in a new country. Retirees have a hard time overcoming language barriers, different social norms, sense of humor, and more. Some cultures and countries might be extremely closed off to foreigners, even to those who speak the language. You may never be fully accepted into the community and might face outright hostility, in a worst-case scenario. If the local language is difficult to master, you may have trouble accessing basic services, including healthcare. 

Religion can also be a major point of contention because it influences almost everything in daily life, whether you realize it or not. A different religion means different holidays, different ideas of right and wrong, and different food. Certain places may not allow pork, alcohol or beef, or may restrict them. Often this will translate to different opinions and potential misunderstandings if you, the expat, do not take time to familiarize yourself with and respect the faith of your host country.

Finally, laws and institutions in every country have strengths and weaknesses, just like in the U.S., and this can be jarring for expats to experience. In many popular retirement destinations, you may experience culture shock when it comes to sentiments around authority figures, depending on where you are. And it's important to have a sense of local culture, especially if you find yourself in hot water. Therefore, spend time in the country beforehand, make friends, learn the language, and make sure you are aware of any potential drawbacks of actually living there.

In America, convenience is often the name of the game, especially for urbanites or suburbanites near major cities. If you move abroad, you might lose this lifestyle because the reality is that life is not nearly as fast-paced in many top retirement destinations. In other words, be prepared to ditch the culture of convenience that exists in America if you move abroad, especially if you are not moving to a major city. You won't always be able to have groceries delivered to your front door. You may not be able to have a handyman come and fix your issues or go shopping on certain days of the week, such as Sundays in majority-Christian European countries because it is the day of rest and people don't work (and many U.S. businesses may not observe this). 

While you may have access to cheaper healthcare abroad, if it's state-funded, then you might be waiting in line for a lot longer than with a private provider. These same rules can apply to infrastructure: You may not always have the best roads, most efficient bureaucracies, or access to the same variety of goods you have in the United States. For many people who crave a slower pace of life in a small European town or Southeast Asian resort spot, that may be fine. But if you must have the amenities and similar conveniences to those you have in U.S., you'll have to deal with the cost of living in larger cities.

This one pretty much goes without saying, but if you are retiring to a foreign country, there is a good chance you will be leaving behind relatives back in the United States. When you're living in the U.S., you can simply drive or take a low-cost flight to make it to family events such as graduations, weddings, and birthdays on relatively short notice, but that isn't quite so simple when you live half a world away. As a retiree in a foreign land, you will not only be experiencing culture shock, but you will also lose easy access to your family support system that you might have relied on in the States.

In practice, this will translate to choosing which events back in the United States you will attend and which ones you will be willing to miss. You probably won't be able to make it to all of your grandchildren's birthdays and graduations, nor will you likely be able to see your family that often. International air travel, hotels, and car rentals are all very expensive, and even in one of the "cheaper" retirement destinations, a vacation to such a place can still cost thousands of dollars. While you can absolutely stay in touch through videoconferencing technology like FaceTime or Zoom, if spending lots of time with your relatives — particularly grandchildren — is important to you, seriously reconsider retiring abroad or pick a country that is relatively close to the United States, such as Mexico or islands in the Caribbean.

One of the major cited perks of retiring abroad is potentially cheaper healthcare, which, for seniors who can face high expenses for medication and doctor's visits in the United States, can be an absolute blessing. This is especially true if you can move to a country that allows expats to opt into a country's national healthcare system. Quite a few do, but the individual requirements are far from uniform and are dependent on the type of visa, length of residency, and pension income. For instance, if you retire to France, you must wait three months before getting onto the state healthcare plan. In Spain, the wait time is generally around one year of residence at your stated domicile. Effectively, this means healthcare is not guaranteed right away and you should always do your research while deciding where you'd like to live.

Then there are countries like Thailand. Access to the Thai health system is not guaranteed. In order to get a retirement visa in the first place, you must have health insurance, or you will not be allowed to extend your retirement visa year-to-year unless you are married to a Thai citizen. You are generally not allowed to enroll in the country's state-run healthcare system, which is intended for Thai citizens only or foreigners on Thai work visas. All this said, even if you are retiring to a country like Costa Rica, which does allow retirees into the national healthcare system, it is always a good idea to keep private insurance. Public hospitals often tend to have longer wait times and limited English-speaking staff, so if you need access to a specialist on short notice, you have the option of a private hospital.