Retirement Planning is a Game of Chess

Keep Retirement Strategy in Mind This Holiday Season

With the holidays rapidly approaching, a goal often set during these times is to diversify your retirement funds. With retirement investment there are two main focuses: investing/saving and distribution. During retirement you are at your most vulnerable financially because a regular paycheck is not coming in. It is the longest self-imposed period of unemployment most folks face. The following is fantastic advice for when you are trying to invest.

Your retirement planned around living and may seem expensive to support. Remember, roughly 55% of folk live beyond their life expectancy. So, it is important to plan for the long haul. A long-term investment sustains a better savings, but there are risks being found there. Short-term investments usually have higher yields. It is important to balance these.

Spending now can save more money for the long road. An example of this is withdrawing properly to avoid provisional income.

Be reasonable when it comes to expectations. Historical returns may not be what your portfolio does. Returns typically fall below the average. However, this can be balance with a diversification of accounts. Though we have historically low interest rates, this means bond returns will not impact retirement much. This will affect those who have retired most.

Heedless of where you are at in retirement planning, relying solely on plans that require higher returns is dangerous. If you expect to make more in the future, that means spending much more upfront. Stocks carry a higher risk than bonds, so they will yield higher return rates. Simply put: Spending more today and expecting higher returns in the future is risky business. The risks and consequences must be evaluated on a case-by-case basis.

Strategy should always be a top priority. Diversifying your retirement portfolio is just a start. Considering all the risks you will face in retirement is the next stop. Putting all your funds in one bucket will expose you to much more risk—taxable, tax-deferred, and tax-free. Integrate different approaches and accounts to combat inflation, tax rates, rate of return, and even long-term care.

READ MORE

International Living During Retirement

After having a taste of the working life and some traveling, retirees often consider living on foreign soil. Panama and Costa Rica are the two most sought out locations for retiring outside the U.S. If you are thinking settling aboard is in your future, the following are items you should consider before moving out of the country.

Preparation

            First and foremost: simplify your financial life where possible. Condense assets and prepare to do a lot of online banking. Make sure you have online access setup for your accounts and investments that will remain U.S-based.          

            If you can, find a community of American retirees wherever you are planning to settle. Those with experience retiring in the area are your best resource. This can be done by online social groups (i.e. Facebook) or by researching.

            Prepare to spend before you even get on the plane. While living expenses may be less per month in some areas, you may have to put several months’ rent down for a home. This could be up to $5,000. That does not consider travel there and moving belongings which could easily be another $5,000.

Credit History & Banking  

            What has been a determining factor throughout life for interest rates, mortgage, car payments? You guessed it! Credit score! The credit history you have built for decades will not likely transfer with you when moving aboard. If you can before, build up a credit history there—cell plan, lease, etc. It is recommended keeping a credit card or two from the U.S. active. This way you can use these for online shopping, travel expenses. This will keep your American credit score active.

            Unfortunately, it may be easier to build a credit history overseas than get a bank account within the country you settle. This goes for getting a credit card there, too. Why? The Foreign Account Tax Compliance Act (FATCA) was enforced beginning summer of 2014. This law requires foreign banks to report any accounts of U.S. citizens. Because of FATCA, extra fees are charged if foreign banks work with Americans. Many turn Americans away. In addition, U.S. citizens must file a Foreign Bank & Financial Account report for accountability.

            With the foreign banking laws, other laws have been put in place called “anti-laundering rules.” These rules require providing proof of funds when depositing between U.S. and a foreign account. For example, if you have a large lump sum deposited into your foreign bank account from a house or business sale, you will need to provide documentation of this sale for the money to be properly deposited.

            Another matter to consider is the exchange rate for currency. If you are using an ATM for your U.S. account, what you pull and receive will be based on that day’s exchange rate. The rate may change frequently and there will be fees associated depending on what account you are withdrawing from. Before moving out of the country, find cards that have small or no fees for foreign transactions and withdrawals.

Investments & Social Security

            Top advisors recommend keeping most investments within the U.S. This allows for better reporting and efficiency fund management. Having investments in the world stock markets are riskier, with an additional risk when it comes to the currency rate. By keeping investment assets U.S-based, funds are easily be distributed and oftentimes uninterrupted. Doublecheck that an international address will not a problem. Some agencies have policies that require an American address. Retirees that have moved out of the country have reported that policies have been paid out or closed due to this; this led to tax issues and messing up the three-bucket system. Research into your policies before moving.

            Unlike the issues that investments may have overseas, social security benefits are still paid out. The funds are directly deposited into bank account. The only downside is that Medicare is not given when living aboard.

Taxes

            Living aboard comes with a double taxation price tag. Depending on the laws and other regulations, you will have to file taxes for the United States and wherever you have settled. This is heavily dependent on your financial situation. Luckily, there are some tax breaks you may qualify for living on foreign soil: Foreign earned income exclusion and foreign tax credit.

            First, as of 2021, the foreign earned income exclusion permits $108,700 per individual. A married couple filing together potentially could exclude $217,400. This income exclusion does not apply to retirees who have zero income from working—401(k) and IRA distributions are not earned income. Secondly, the foreign tax credit allows qualified foreign taxes paid to offset U.S. tax liability. The credit is what American retirees rely on the most when living aboard due to itemization.

            Remember, if maintaining a U.S. address, state and local taxes may still be owed. Make sure when you are filing and claiming deductions and credits that you have converted the dollar correctly so no errors may result in major consequences.

READ MORE