By John C. Dyer, UK correspondent
It seems every summer I read an article which asserts a growing number of Americans choose to retire abroad.
I am not sure of the statistics but I can certainly understand the interest. When I decided to relocate to the UK all I could really tell you is I have had an itch to do so for as long as I can remember. Had Uncle Sam not come along in 1969 I was all set to attend the University of London on a Marshall to study economics and politics.
The draw for me was as much cultural ease, personal identity and family as a calculation of benefits. The annual “Americans retire to blank” articles, on the other hand, always cite the benefits of living in lower cost economies.
In the off chance these articles are more than puff pieces for travel agencies I thought I might share some thoughts concerning due diligence. Had I known this information before relocating to the UK last year I still would have done so, but I would have been better prepared.
Cost of Living is only one and one very temporary consideration.
Especially in this era of economic and social upheaval. Those of you who have followed my articles (or indeed the general press) know that Europe, in general, is in crisis. Particularly in crisis are Portugal, Ireland, Spain, Greece, all of which I understand have been retiree destinations, as has Egypt. We all know about Egypt.
Mexico is another destination mentioned in the articles. Although the drug wars and corruption may give some pause, I know from friends and at least one cousin who retired to Mexico that the enclaves of US retirees there feel relatively insulated. But they are not relatively insulated from cultural isolation and boredom. After a while the rush of new and exotic settles in to the day-to-day. It always does as the exotic becomes the familiar. Then the new arrival begins to feel a) out of place, b) with nothing meaningful to do, c) except with other Americans. Americans one knows, who were there throughout the ups and downs of life, are all back home. And home is where the heart is.
Taxes can have a significant impact.
One’s tax obligations are in almost all cases governed by a Tax Treaty between the US and the retirement country. While a boiler plate is at the base of all these treaties, be advised they are not the same from country to country. While all bill themselves as treaties to prevent double taxation, they are often, in fact, the facilitator of double taxation. I point this out not to argue for change but to bring it to the attention of the retiree considering a foreign retirement.
One particular clause can make a whopping difference. It is the “reservation” clause. In some treaties the US reserves the right to tax its citizens, wherever they may be, in accordance with annual changes in US law rather than the express terms of the Treaty. So, for example, under an express provision of the boiler plate Treaty social security and pensions are taxed “only” by the country of residence. But, if the particular treaty has the reservation clause I mention, despite the Treaty’s apparent meaning, IRS will expect a check. You have a US tax liability.
Watch out for the term “meaning of residence”