I’ve given myself a fun assignment this time around as we look forward to 2022. No worries about where the stock market may be heading after a great bull run off of the panic lows brought on by the pandemic in early 2020. No wondering what sectors or asset classes look primed to perform, or fizzle, in 2022 in this article. What a relief to not have to worry that my market predictions committed to writing will come back to haunt me next year… Those are all on my mind every day, of course – occupational hazard! On this occasion, I’ve decided to turn my focus to dreams of ideal expat lifestyles instead.
I thought it might be a good time to consider where investors might decide to go and live off of the nest egg they’ve accumulated over their lives, particularly after the good market years we’ve had. Or where they might go after cashing out on the massive appreciation in the U.S. homes. Lately, the employment numbers are suggesting that many, including a surprisingly high number of Americans that are still in their traditional “working” years, have decided not to return to the office and prefer retirement, or some form of quasi/semi-retirement, instead. I talk to such people on a weekly, usually daily basis, so I have at least some perspective to offer on the subject.
As an expat financial advisor, I get the privilege of helping Americans game plan for these types of life-changing moves. This can be incredibly satisfying work, meeting so many different people with diverse backgrounds, financial circumstances, and lifestyle objectives and helping each one of them map out a sustainable long-term plan that allows them to accomplish their dreams of living their new adventure abroad. I thought it might be worth discussing some of the top destinations where Americans, still working or in retirement, seem to be going, and just comment on a few of the considerations that might factor into their planning once they decide on these new residence countries.
This is by no means an exhaustive list of great destinations for expats, and I’ll admit there is a bias toward destinations both within our advisory experience and that offer financial efficiency (bang for the buck) on top of quality of life that will intrigue potential American expats. Additionally, the options needed to include a couple of great places to work (office or remotely) and not just retire. Accordingly, I’ll discuss five top destinations in alphabetical order rather than any particular ranking.
When I think about retiring abroad on a tight budget, my mind immediately turns to our southern neighbor (Mexico), and their neighbors (Central and South America). Many of the positives that expats can find in Costa Rica apply to a good deal of the countries in the region. However, we’ve narrowed the list to five countries and the Americas deserve a spot, and it goes to Costa Rica.
One thing that may concern would-be expats is political/military stability. No one wants to buy a property abroad and then find their new residence country embroiled in civil war or border conflicts – talk about disrupting the quality of life! As far as that risk goes, Costa Rica seems like a Latin America best bet in terms of political/military conflict and is often hailed as the “Switzerland” of Latin America. Let’s assume that’s not for the great skiing and hot chocolate and simply because Costa Rica has no military and, instead, focuses on education and healthcare.
From a tax perspective, Costa Rica seems better than Switzerland … by a long shot. If the U.S. expat’s income comes from all U.S. sources, they should not incur Costa Rican income taxes. If the expat is working while resident in Costa Rica, the income tax rates in Costa Rica are usually lower than effective U.S. tax rates. Since U.S. citizens and permanent residents (green card holders) still have to pay income taxes, but can use the foreign earned income exclusion and/or foreign tax credits to offset U.S. tax liabilities, working in a lower-tax country like Costa Rica isn’t likely to increase the overall income tax burden for Americans by much, if at all. Property taxes are also pleasantly low, at 0.25% of the property value.
But what also makes Costa Rica truly attractive is that those after-tax dollars go further than they would in your typical tropical or oceanfront paradise. Costa Rica is famously affordable in terms of good housing (renting or owning) and your other typical expenses to enjoy a suitable quality of life. The healthcare system in Costa Rica is considered quite good and affordable. Once an expat becomes a legal resident of Costa Rica, they can participate in a government-run health system by choosing either to pay cash or purchase private insurance. Either way, expect the prices of good healthcare to be lower – much lower, than here. Finally, Costa Rica is known to have a relatively straightforward residency program for expats, which might check another very important box for Americans looking to venture abroad.
France offers a wide range of lifestyle choices from the bustling cultural epicenter of Europe (Paris) or vibrant Lyon, to less urban, pastoral fare throughout the nation and, of course, the relaxing and sublime Mediterranean southern coast. There is something for everyone’s budget in France in terms of where to live, and great food and wine to make whatever lifestyle the expat wants all the better! The variety of regions within France is truly magnificent, including Spanish influences in the West and German influences in the East. Living in the center of Western Europe also opens the door to affordable and convenient trips to the rest of the continent, too!
French taxes would normally give Americans a fair amount of sticker shock. If you live and work in France, there’s no getting around that issue. However, and to the surprise of many, France can be a very, very attractive option for U.S. expats in retirement. The secret ingredient to an affordable francophile retirement lies in the fine print of the income tax treaty between the U.S. and France. Americans enjoy substantial treaty relief from French income taxes on most of their U.S.-source income – from their pensions and Social Security to their dividends and capital gains on U.S. stocks, their interest payments from U.S. bonds, and their rental income from U.S. properties to boot! A word of caution for affluent Americans who want to spend the entirety of retirement in France: the inheritance tax treaty is not similarly generous. If leaving a legacy to your family is a priority, keep that in mind. If it is not, France is calling you, but perhaps leave your tacky American tourist outfits behind.
We’re big fans of diversification at Walkner Condon and it seemed unfair to ignore Asia’s treasure trove of quality expat offerings. If you pursue the publications on best destinations to live, it’s clear that Asia has many quality offerings, including Vietnam, Thailand, Singapore, Hong Kong, Taiwan, and, of course, Malaysia. Based on a sampling of expats that I talk to, the pandemic has altered the atmosphere in Singapore in terms of visa processing and genuine openness to immigration. When it comes to Hong Kong and Taiwan, the current positioning of the Chinese government is hard to ignore. Accordingly, while I have great fondness and familiarity with these destinations, I can’t give them a current top-five ranking.
Malaysia edges out the neighboring competition for consideration as a top-five expat destination in the world and the Asian representative on our list for 2022. It has a highly educated population with a tremendous healthcare system. Kuala Lumpur may be one of the most underrated (and/or least discussed) cities in the world – a financial/economic powerhouse that offers a high quality of life and great opportunities to work. A recent survey of 15,000 expats ranked Kuala Lumpur as the best city for expats, citing its relative affordability, livability, and ease of settling into life there. For those seeking refuge in natural beauty, from green pastoral hillsides to beaches and unspoiled islands, Malaysia has something unique to offer you.
One of the attractions from our perspective is the territorial approach to income taxation in Malaysia. For a U.S. expat living in Malaysia, this means that income generated outside of its borders will not be subject to Malaysian income tax. This is a recurring theme in our rankings and for good reason – Americans always have to deal with U.S. federal taxes no matter where they live, so why not find a country of residence that does not add to the burden! While those who work in Malaysia will be subject to taxes on their earnings, the Malaysian income tax system is progressive but relatively compatible with U.S. federal income tax rates (30% maximum on income above approximately $500,000), so the net tax burden of Malaysian taxes should be minimal for most expats working there.
Other strengths of Malaysia include the fact that expats give the country high marks for ease of immigration (the visa process) and transition. You can get by with English in most places, too. If you decide to move there, you’ll find a population that is very accepting of expats. It’s been a haven for Americans and Brits in particular for decades, so you may find a social community to help guide you as you transition to life abroad, too!
Portugal has a long tradition as a favorite host to European (particularly British) retirees who want to remain in Europe but desire a friendly culture with an attractive budget so they can stretch their pensions further. Over the past couple of years, Americans have finally caught on to the fantastic value and tremendous quality of life that beckons in Portugal. Without any doubt or close second on or off of this list, Portugal has trended higher and higher for Americans looking to move abroad.
Portugal offers one of Europe’s greatest concentrations of English-speaking expats along the southern coastline (especially the Algarve region). But Americans seem to be moving in droves to Lisbon, the beautiful coastal area of Cascais just to the north of Lisbon, Coimbra and Porto as you journey further north, and Setubal should you prefer to live just West of the capital. Moreover, Portugal has become more than a retirement destination for Americans, but also for younger families that have careers that allow them to perform their work from anywhere (e.g., consultants and “digital nomads”). Portugal ranks high on Europe’s relative affordability scale, with very reasonable and good health care. Like France, Portugal has a relatively laid-back culture where people enjoy long, relaxing meals with good wine and a general zest for life.
This infusion of expats to Portugal is no accident. Rather, it is the byproduct of a concerted effort by the Portuguese government to inject their economy with affluent foreigners. At the heart of that effort is an immigration policy that includes a Golden Visa program, whereby foreigners wanting to live in Portugal make investments in property or Portuguese-based funds that are committed to developing the country. The other important component is, not surprisingly, very friendly taxation policies to make living in Portugal more financially attractive. First, Portugal has abandoned death taxes and has neither an estate tax nor an inheritance tax. Retirees looking to leave a legacy to their families will find this advantageous to the estate planning dilemma presented in most western European countries. Second, and perhaps more significantly, Portugal has rolled a tax regime that is wildly popular with expats known as the “non-habitual resident” (NHR) program.
Originally, Portugal’s NHR program enabled expats to avoid Portuguese income taxes on almost all non-Portugal source income. There are exceptions beyond the scope of this discussion. It is noteworthy that the NHR program was slightly modified in 2020 to place a 10% flat tax in Portugal on foreign pension (e.g., 401k, defined benefit pensions, IRAs, and Social Security) distributions. However, for Americans, who pay U.S. income tax on their income from all worldwide sources, the 10% Portuguese income tax on pensions produces a foreign tax credit that reduces U.S. income liability by the amount paid to Portugal, so this is usually not a true fiscal burden for U.S. expats that wish to retire in Portugal. The tax break also extends to those who wish to live and work in Portugal, because the NHR program will lower the Portuguese tax on wages/earned income that is Portuguese-sourced to an attractive flat rate of 20%.
The NHR program is available to be claimed during your initial year of Portuguese tax residency and extends for the first 10 years of tax residency. Thereafter, expats remaining for longer will be subject to normal Portuguese tax rates on income from all worldwide sources. Those tax rates currently run progressively higher than comparable U.S. federal income tax rates, so plan accordingly. For those envisioning a retirement that begins with an overseas adventure and plenty of travel around the European continent, Portugal and its NHR program are more than worthy of further investigation!
UNITED KINGDOM (UK)
Dreaming of retirement in a tropical paradise? Looking to learn a new language and immerse yourself in a completely different culture? If the answer to these questions is a “hard no,” then the United Kingdom may be your best bet as the overseas destination of choice. Besides the kinship with America, if you were concerned over the last few years that Brexit would destroy the nation … so far, it hasn’t.
It’s no surprise that the United Kingdom remains, as always, a haven for U.S. expats. It’s simply an easier cultural transition, and the amount of business transacted between the former colonies and Britain means that immigration between the two allies solidifies the UK as an attractive landing spot for Americans abroad. Of all the residence countries that my clients call home, it is also the one where the “dual national” status – holding both the U.S. and residence country passports – is most common. Much like the United States, the United Kingdom offers a diversity of urban, suburban, and rural locations, and the cost of living can vary dramatically depending on the lifestyle that best suits the expatriate.
The United Kingdom also offers the expat adventurer some potential tax relief through the remittance basis of taxation. That’s sometimes helpful because UK income taxes are usually more onerous than American expats may be accustomed to. However, this tax status is complex with a myriad of special rules. To be brief and overly general about the remittance basis of taxation, expats can elect freely in any of their first seven years as a UK tax resident to pay UK income taxes on only (1) their UK-source income, and (2) the income that they remit (bring over) to the UK. If an expat is either (a) planning on staying in the UK for a relatively short period, and/or (b) has the bulk of their income coming from non-UK sources, this can be an attractive incentive indeed. Otherwise, if you are (a) working in the UK, and/or (b) planning to remain in the UK longer term, the remittance basis of taxation may not be your cup of tea. Be sure to work with a very good tax expert that can advise on your U.S. and UK income taxes before deciding on whether to make that election and how to navigate your money movement across the Atlantic thereafter!
Sorry if the last paragraph made your head hurt or put you to sleep … the financial advisor in me precludes an article fit for a travel magazine. At the end of the day, our international team loves learning about our clients’ collective and unique experiences living abroad and we aim to help them stretch their accumulated wealth as far as possible wherever they may settle. Taxes, housing costs, general cost of living, healthcare quality, and cost all should factor into the analysis. There are so many great choices to consider for an American contemplating a move overseas, so we recommend both an open mind and that the would-be expat does their homework ahead of time. Let us know if we can help in that regard.
This piece is part of Walkner Condon Financial Advisors’ 2022 Investment & Market Outlook Guide. You can read the entire guide by clicking the image above or by clicking here.