Living abroad is an exciting and rewarding experience, but for American expats, financial planning is typically more challenging compared to living in the States. This is due to cross-border issues such as currency fluctuations and living with two sets of regulations, with US expats being subject to both American and foreign tax rules. In this article, we outline the main financial planning considerations for Americans living abroad.
Budgeting and setting goals
One of the first steps in financial planning is establishing a budget and setting clear goals.
Start by evaluating your income, expenses, and savings potential to create a realistic budget that allows you to live comfortably while also setting money aside each month for the future.
Once you know how much you can save each month, define your goals, such as saving for a downpayment on a house, funding your children’s education, or building a retirement nest egg. Your financial goal should be specific, and also have a timescale.
If you are already retired, then spending and investment decisions are especially important since your income other than from investments may be limited, and inflation may have larger impact on your finances as compared to someone who is still working and whose salary may increase with inflation.
Creating a strategy to achieve your goals
Once you have defined your financial goals, it’s time to create a strategy to achieve them. Factors that affect your strategy will be your investment risk tolerance, the timescale, and your desired lifestyle, both now and in the future. You will then have to decide what to invest in, whether more growth-oriented investments like the stock market, or more income-oriented investments like bonds, real estate investment trusts and other dividend-paying securities to achieve your goals. Investments such as commodities, precious metals, rental real estate, may also be attractive as a form of diversification, a store of value, or fr income.
As a US expat, there are plenty of pitfalls in terms of investments that can trigger regulatory and tax issues, so it makes sense to work with an expat financial advisor before investing.
You’ll need to review and adjust your strategy regularly and when your circumstances change to ensure that you stay on the right path to achieving your goals.
Where to invest as an expat
As an expat, deciding whether to invest in the US or in your country of residence requires careful consideration. It can often depend on whether you’re intending to return to live in the US in the future or whether you’ve moved abroad permanently.
– If you’ve moved abroad permanently:
If you plan to live abroad permanently, exploring investment opportunities in your current country of residence can offer several advantages. Local investment options can provide potential tax benefits, and reduce losses due from currency conversions sending money internationally, both when saving and when taking distributions from your investments in the future. The risk that your investments devalue because they are in a currency that decreases in value compared to your home currency, can also be mitigated.
However, it’s important to be aware of the US tax implications and reporting obligations relating to foreign investments. The US tax system requires all US citizens to report their worldwide income and assets, including foreign financial accounts and investments. Familiarize yourself with the Foreign Bank Account Report (FBAR), Foreign Account Tax Compliance Act (FATCA), and PFICS (relating to investing in foreign mutual funds) and consult with an expat-specializing financial advisor before investing, as some foreign investments can trigger US tax reporting or even a US tax liability.
– If you’re planning on returning to the US
If you plan to return to the US in the future, it may be more advantageous to focus on investment options in the US. This is because you can take advantage of tax efficient US investment accounts, and because US investments often have lower fees as well as better investor protection.
In general, for US citizens, whether abroad permanently or temporarily, it is usually best to keep portfolio investments such as brokerage accounts in the USA to avoid PFIC issues, receive the US tax forms necessary for filing each year, and benefit from lower fees and greater investor protection. US retirement accounts generally cannot be moved outside the USA without cashing the accounts out.
For other investments, such as physical real estate for example, it may be best to keep it local for people living permanently outside the USA since there would be a source of local-currency income and it is easier to keep an eye on property if it is nearby.
Saving for retirement
The golden rule with retirement planning is the earlier you start the better, to take full advantage of the power of compounding. Where you save will depend on various factors, such as where you plan to retire, and the tax benefits of different retirement accounts in different countries. Bear in mind though that US retirement tax benefits may not be recognized by the tax system in your country of residence, and vice versa, unless explicitly covered in a tax treaty clause. If available, take advantage of any employer matching contributions and review your investment allocations regularly to ensure your retirement savings are growing steadily.
Be aware that US retirement accounts cannot be moved to another country without losing their tax-deferred status, and also non-US pension accounts cannot be rolled over to US retirement accounts. This should not deter you from taking advantage of either US or non-US tax-deferred savings accounts, especially if you are working and there is an employer match.
Setting your children up for success
For expats with children, supporting their education is often an important part of financial planning. Research educational funding options available in your country of residence, such as scholarships, grants, or international student programs. Establish savings accounts or investment plans specifically dedicated to funding your children’s education. Lastly, explore scholarship opportunities and engage with educational institutions to understand their financial aid offerings.
US college savings plans, such as 529 accounts, may be useful even if your child does not go to a US institution since there are a number of non-US universities that qualify for 529 plan tax benefits. In general, secondary education is much more expensive in the USA than in other countries so this should also be factored into your plans.
Estate planning
Estate planning is arguably more important for expats who may be subject to estate taxes in two countries if they don’t prepare. You will normally need to create wills in both countries, and also work within each country’s rules to minimize tax payable, such as by using trusts and by gifting to your heirs early. You should also check whether an international tax treaty between the US and your country of residence protects you from double estate taxation. In some countries, US trusts are not recognized or there are hereditary laws that dictate how an estate is to be partitioned. Working with a cross-border estate planning professional is key, especially for US citizens residing permanently outside the USA.
Consider international insurance
Insurance is an important consideration when relocating overseas, as US plans often don’t provide cover abroad, and in many countries, good quality health coverage in particular may not be available, at least when you first arrive. You might consider an international health insurance plan, which can cover you either in specific countries or globally and also provide repatriation to the US in case of emergencies.
Minimizing fees
As an expat, it’s important to be mindful of fees associated with banking, investing, and currency exchange. Research and compare different investments and banks to find those that offer competitive fees and services that cater to expats. When sending money internationally for example, fees can vary enormously, and there is also the impact of fluctuating currency exchange rates. Investments also have different fees that can eat into your returns if you aren’t mindful.
Seeking professional advice
Navigating the complexities of financial planning as an expat can be challenging, and seeking professional advice may save you much more than it will cost you. Engage with a financial advisor who specializes in working with expats and understands the unique challenges and opportunities expats face. Quite often, an expat specialist will have local knowledge regarding financial matters and a network of providers in cross-border tax and estate planning areas and will offer assistance in dealing with such specialists.
Many financial advisors have sophisticated financial planning software that can be a great aid in making projections and looking at scenarios such as varying investment returns or buying versus renting property or how much to allocate to certain types of investments.
US advisors, and also quite often the people that work at US brokerage firms and banks, are rarely aware of the issues faced by US citizens living abroad and how to give proper advice on such issues. When interviewing a cross-border financial advisor ask what percentage of their clients are actually expats and whether they have any clients in your country of residency. Ask also about their network of professional relationships in your country of residency – whether they have tax and estate planning people they can work with on your behalf.
Cross-border financial concerns for US expats are certainly more complex than for US residents. Setting things up properly and having the right team of advisors who understand your issues will help you avoid many pitfalls, give you peace of mind, and allow you to make the most of your expat experience.
If you have any questions about financial planning as an American living abroad, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
