Retiring Overseas for the Adventurous Spirit

Retiring to a foreign country can be a cultural epiphany if you're seeking exotica. But without realistic expectations and careful planning, your move abroad could be fraught with frustration.

Even mundane tasks like opening a bank account or getting a plumber to fix a leaky sink could take ages for people used to getting things done quickly in the U.S.

"It's vitally important to relate your pace to the culture," says Rosanne Knorr, seasoned traveler, expatriate and author of "The Grown-Up's Guide to Running Away From Home."

Before taking the expatriate plunge, spend a minimum of several weeks in a country immersing yourself in the local culture and honing your foreign language skills, experts say.

Research your newly adopted country's health care system and tax laws. Make a good assessment of your cost of living. Such preparation will smooth out your transition, helping you avoid potentially costly pitfalls.

Following are six issues to consider before retiring abroad.

Cultural Concerns

The potential for "culture shock" tops the list of things to consider before retiring overseas.

You can enjoy the experience of discovery without having to mimic the characters depicted on wilderness survival shows -- chomping on live grubs and the like -- to fit the bill. But it helps if you're open-minded and love exploring new places.

Flexibility goes a long way, too.

"You have to have the patience to deal with different systems, and if you're an American who doesn't know the language, everything is going to take you 50 percent longer," Knorr says.

People who retire abroad are usually seasoned travelers who've spent a significant amount of time "on the ground" in a particular country.

Many people retire abroad to save a lot of money and enjoy the good life for less -- both valid reasons. But Knorr says you shouldn't expect to recreate an American lifestyle in many countries.

"If you like to eat your early bird special at 5 p.m. and in Spain people don't eat until 10 p.m., you might feel a little bit strange or you might have to find another way to eat," she says. "Some cultures appeal to certain types of people."

Land Ownership Issues

Maybe you've found your Shangri-La and are considering buying a home there. Before plunking down a huge deposit on a Caribbean villa or a French farmhouse, try renting first.

If possible, rent for more than one season. This gives you a better feel for the climate, how much utilities cost and what your community is like once the tourist crowd has evaporated.

Check currency conversions and local infrastructure as well. Roads normally traversed by draft animals and carts aren't necessarily the best for a BMW's suspension.

To find a good rental property, go to your chosen location for a few weeks, talk to people in the local expatriate community and try to develop local contacts, says Dan Prescher, expatriate, author and publisher of InternationalLiving.com, a Web resource for living abroad.

"That's how you avoid the $2,000 per month rental villas aimed at rich gringos and find the inexpensive, tidy, centrally located place that you can use long-term to get a feel for a place," says Prescher, the long-time resident of Merida, capital city of Mexico's Yucatan state.

Once you secure cheap, temporary living quarters, you can search for more permanent digs that feature the amenities you want.

However, remember that ownership laws are likely to differ from U.S. property law.

Before making an overseas purchase, hire a lawyer to represent you -- and you alone -- in any real estate transaction, Prescher says. Never hire the same lawyer used by the seller or real estate agent.

Most foreign real estate documents are not written in English, and rights of ownership vary from country to country.

In some countries -- such as Mexico -- certain areas are technically off-limits to foreigners. However, some countries have created ways around these laws to attract foreign investments.

For example, in Mexico, you can still buy property in restricted zones (such as beachfront) by creating a real estate trust known as a "fideicomiso." A Mexican-owned bank -- as opposed to a branch of a foreign-owned bank -- holds title on the property and you name yourself as the beneficiary.

Since the land is technically owned by a Mexican entity, it fulfills constitutional requirements, according to the Mexican Office of the Secretary of Foreign Affairs.

While the land is in trust, the beneficiary has rights to use and sell the property. In Mexico, the trust must be re-established every 50 years.

Other countries have their own rules regarding ownership.

In France, the Napoleonic code governs how property is inherited even when a will exists. The code gives children from the marriage priority over a surviving spouse unless a special agreement called a "clause tontine" (joint ownership clause) is written into the contract when the property is purchased.

Knorr says a few of her friends bought homes in France unaware of the inheritance laws and after their spouses passed away, the women found they could not sell their homes because children from a prior marriage were against the sale and made a claim to the property.

"People fall in love with a house and the idea of it, and they buy it without having the background on the legal tax and estate ramifications," Knorr says. "You need to consult a legal adviser who understands these issues before making a major investment like buying a house."

When buying property in any foreign country, it's important to buy from an established real estate firm (many countries do not have an equivalent to the Multiple Listing Service system used in the United States) and to make sure you get good English translations of all documents, Prescher says.

"A good lawyer working for you in a foreign country will speak English," he says.

Health Care Needs

No matter what country you end up retiring in, you'll need to know what to expect from its health care system. Is it modern? How far will you have to travel for basic medical services? Are prescription drugs widely available?

Make a thorough assessment of your own health and determine whether you'll need access to specialists or other kinds of medical care not commonly available outside the U.S.

Medicare will not pay for services or prescription drugs in a foreign country except under very specific scenarios.

Fortunately, many countries in Europe and Latin America boast high-quality health care comparable to that found in the U.S. -- and often at lower cost.

Gabriela Zabalúa-Goddard, editor of AARP's Segunda Juventud (Second Youth) magazine, says Americans hoping to maintain a youthful appearance were among the first to discover the quality of health care available in Mexico.

"The trend started with medical tourism a few years back when baby boomers were starting to go abroad to get simple surgeries like cataracts and cosmetic surgery," she says. "They realized the level of care, the price and how much further their money went, and they took the opportunity to fit in a little vacation, too."

Expatriates with permanent residence visas can take part in Mexico's IMSS, or Mexican Social Security Institute, health care system. For about $300 a year, you get full health care coverage, including prescriptions.

The upside of Mexico's IMSS system is you're never far from a participating hospital, clinic or pharmacy. The downside is that, like other large nationalized health plans, wait times at certain facilities can be lengthy.

"It's not like it's the Mayo Clinic, but it's good-quality heath care," Prescher says.

Check your private health plan, if you have one, to see if any services are covered overseas.

You may want to consider receiving basic medical services abroad and returning to the U.S. periodically for major services.

Tax Considerations

If you're retiring abroad to escape the clutches of the tax man, forget it.

"America is one of the few countries where the rules of taxation are based on citizenship rather than residency," says Joseph Sardella, a certified public accountant and tax partner at the Toronto-based accounting firm Moore Stephens Cooper Molyneux. "No matter where a U.S. citizen retires -- whether Philippines, Canada or France -- they're still subject to the U.S. tax rules."

Uncle Sam's long arms extend beyond income taxes, Sardella says. "That's not only income tax rules, but also gift tax rules and estate tax rules," he adds.

Generally, if you are a U.S. citizen or resident alien, you're required to file an income tax return whether you're in the U.S. or abroad, according to the IRS.

(A resident alien is a person granted permanent legal residency in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Service has issued you an alien registration card, also known as a "green card.")

If you earn income abroad, the IRS may allow you to exclude from income up to $87,600 of your 2008 foreign earnings.

In some cases, you may also have to file a foreign tax return as well. Fortunately, the U.S. has tax treaties with a number of countries that either reduce the tax burden for U.S. citizens or provide exemptions from paying foreign taxes.

You can find a listing of these countries at the IRS Web site.

Sardella urges expatriate retirees to hire a financial planner with cross-border experience. If you don't, you could be putting your retirement nest egg at risk by paying unnecessary taxes. You also risk running afoul of federal tax law.

"You have to have someone who is familiar with the tax treaties because once you get outside the U.S., that becomes almost 80 percent of the battle in preparing a tax return," Sardella says.

If you think you can cash out your retirement account and avoid paying U.S. taxes by renouncing your citizenship, think again.

The tax regime for high-net-worth expatriates who renounce their citizenship is even more complicated. The IRS requires these individuals to continue paying taxes for up to 10 years after renouncing citizenship (and leaving the country) unless qualified for one of two very narrow exemptions pertaining to dual nationality or age.

The rule largely applies to people with a net worth of $2 million or more on the date of expatriation or who averaged at least $139,000 (for 2008) in annual net income tax liability for the five years prior to expatriation.

A new U.S. law raises additional tax concerns for expatriates.

Passed in May, the Heroes Earning Assistance and Tax Relief Act, or HEART Act, goes a step further and imposes income tax on any net unrealized gain from a property sale in excess of $600,000.

The tax is based on the property's fair market value on the day before the expatriation or residency.

The expatriate provisions of the HEART Act were largely meant to provide revenue to pay for other benefits of the act, mostly benefiting U.S. service personnel. It is aimed at individuals of high net worth who seek to permanently escape the long arm of the IRS, rather than the average expatriate who retires to someplace like Belize.

John Olivieri, a partner with the New York law firm White & Case, thinks the act was passed to discourage U.S. citizens from renouncing citizenship in order to avoid paying taxes.

"I think the amount of people who expatriate is still very small, so it's largely symbolic," Olivieri says. "But now if you expatriate, you're essentially paying an exit tax."

Prescher contends that most expatriate retirees are not interested in making a permanent break from the U.S., and if they are, it's not to avoid paying taxes.

"The two things you don't want to give up are a U.S. mailing address and your U.S. citizenship," he says. "Those things to me are incredibly important. I'm not living offshore because I don't want to be a U.S. citizen. I'm living offshore because it's cheaper and the weather's better."

Banking Logistics

When Americans travel for a week or two, they are most likely to exchange currency to pay for things like taxis, souvenirs or dinners.

But if you're planning on retiring or spending significant amounts of time abroad, you'll probably have to open a foreign bank account.

"It just makes a lot of sense in terms of ease of moving money around," Sardella says.

When deciding how much to deposit, consider exchange rates and how much money you need to keep in a foreign account to pay bills and buy groceries.

"The U.S. dollar seems to be taking a bit of a beating right now, so if you feel the dollar keeps weakening, you might want to hold your money in euros," he says.

Prescher says he keeps bank accounts in the U.S. and Mexico because it's convenient.

"I still keep a U.S. bank account to pay bills and I also have an account in Mexico that I can move money into and out of," he says. "There are times where you want dollars and times you want pesos."

Using foreign ATMs can be tricky if you don't know what to expect.

For example, Knorr says the machines in France don't have letters on the keypads, and some don't accept PINs longer than four digits, making it difficult for people with personal identification numbers that are based on words. The default language is also foreign, so you'll have to figure out how to switch it over to English.

Fees can add up, too. Foreign ATMs often charge currency exchange fees and withdrawal fees based on a percentage of the withdrawal or a flat rate. The fees are on top of what your stateside bank charges.

Further, if you're accessing money from a U.S. bank using a foreign ATM, your bank (suspecting fraud) may freeze your account temporarily.

"If a customer is traveling internationally, we encourage them to call us before their trip and inform us of their intentions," Wachovia Bank spokeswoman Jennifer Darwin says. "This would ensure no disruption to their service."

Sardella says uncooperative ATMs and long waits in lines aren't the only issues to contend with when you open a foreign bank account.

The U.S. Treasury Department wants to know if you have any foreign bank accounts with over $10,000 in them. If you do, you'll need to report it on a Form TD F 90-22.1.

The penalties for not filing the form are stiff -- up to a $500,000 fine and prison time.

"It's to make sure you are including and reporting all your worldwide income," Sardella says.

Packing Decisions

If you're going overseas for a few months, you may be able to get by with a couple of suitcases, says Knorr. But if you're planning to retire abroad, you'll need to start packing months in advance.

"I think you should take the least amount possible," she says. "It's just easier to move around and you save money on shipping."

Prescher agrees that less is better. Bring along heirlooms and photos, and rent storage in the U.S. for any other things you want to leave behind.

You should sell or get rid of large pieces of furniture and major appliances. Now is the perfect time to have the "mother of all garage sales" and pocket some of the money toward your new furniture.

Remember to focus on why you're making such a gargantuan move in the first place.

"This is a great time in the life of someone to disengage from the material stuff and just really travel light with an open mind and see what this new opportunity may have to offer," says Zabalúa-Goddard.

Prescher says he doesn't know anybody who has retired overseas just to kick back and live off retirement income. Expatriate retirees nowadays are trying new things and getting more involved in their newly adopted communities.

"They're moving to try new stuff and reinvent themselves," he says. "They're in it for the adventure and the new horizons that are opened up by this."