Cheryl Spielman, partner in Ernst & Young’s Human Capital practice, spoke with PLANADVISER.com and offered some insight about retiring in another country.
Of course, tax considerations are one large concern. If retirees do not give up their U.S. citizenship or green card status, they still have an obligation to file a tax return in the U.S., Spielman said. If a client thinks retiring in a low-tax jurisdiction will help them, it might not, she added.
Pensions and 401(k)s add another layer of considerations for people who wish to retire abroad. “What they need to understand is, how do my pensions get taxed in the location where I’m retiring?” Spielman said, noting it differs on a country by country basis. There could be a special tax treaty between the country that’s giving the pension and the foreign location.
The tax concerns might be why Spielman said retiring abroad is not something happening in waves. Several hundred retirees each year renounce citizenship. “It’s not something you see people doing in mass amounts at all,” she said. In 2008, 231 American citizens renounced citizenship (although not necessarily retirees), which was down from 470 in 2007, according to Ernst & Young, citing IRS statistics.
For those who do wish to retire in another country, family ties can often be a draw. Also, some people just fall in love with a country while visiting or working abroad. “At the same time, we have seen non-U.S. individuals consciously make the decision where they want to retire because of the tax environments,” she said. For instance, Switzerland has long been hailed for its favorable tax environment.
The annual Global Retirement Index, published by International Living, ranked Mexico as the most affordable place to retire, followed by Ecuador, Panama, Uruguay, and Italy. (The U.S. is ranked number 21.) The index does not mention consideration of retirement benefits, although it does say it takes into account “government provisions that make moving to and living in each country easier and more affordable for foreigners,” such as property tax rates.
So far, the U.S. has not been a bad place to retire, which might explain why droves of people are not retiring abroad, Spielman explained. But that could change. “I think we’re first going to see a shift after taxes get much higher,” she said. “We’ll probably see people make different decisions.”