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Taxes and retirement income propel moving abroad

In 2012 an estimated 3.3 million baby boomers prepared to move abroad for retirement according to Forbes. The global trend is largely propelled not only by new retirees but slightly younger generations hoping to retire some place they can afford even if it means going overseas. In the past, most people who bought a home planed on paying off the mortgage by the time they reached retirement. While this may be an important part of preparing for your future, homes and marriages now days rarely turn out the way we expect. Nearly 61% of married couples these days have had student loans, more than one marriage, more than one home, had paid toward childcare or alimony, sent the kids to college all at one point or another in their lives. These bumps in the road don’t exactly make it easy to save for retirement. Even if you have avoided these bumps, most common retirement investments such as IRAs and 401k don’t pay out what they promise no matter if you have managed to sink a good amount of money into it.  Let’s look what happened to the average retirement investments in the US also known as the 401k plan that most people participated in and why the financial picture did not turn out the way it was promised to be.

In the past 15 years during stronger economic conditions, it had become clear that the 401k or IRA had failed to provide investors with a strong return for retirement investment leaving them with a smaller monthly budgets in the future than they hoped for. The average 401k  return for the last twenty years has been less than 3.5%.  Keep in mind the annual inflation cost are 2.9%. In the US you receive pretax deductions between $1-4,000 per year. Now let’s say for some really rare reason you were able to save up one million dollars in your 401k plan. You won’t, very few people have, but lets say you do. And by some rare genius way you are able to get a 7% annual yield, (I doubt this will ever happen) That means you make $70,000 a year. So if took you 30 years to generate a million in your account, then you would have now saved $90,000 in taxes. From the $70,000 a year income you would receive from your 401k, $15,000 a year would be paid back in taxes. That means in six years, you just paid the government that $90,000 dollars from your tax deductions, back. Yes the $90,000 tax exemption that took you 30 years worth of saving.

In reality, you are never going to get a 7% yield from a 401k plan and the average monthly income from a 401k is panning out to $20,000 a year and the same goes for IRAs. Even hidden fees for 401 investment administration cost are taking a bite out of your investment profit.

Moving abroad is attractive considering it is possible in many countries including the UK and US for permanent overseas residents to be exempt from income tax depending on how much income you receive per year. Please read the article on Understanding expat taxes for more information. Incomes can stretch a little further when you choose to live in a country like Panama for example; they do not tax your foreign income and have a very low 2.1 property tax. As you can see from the 401k scenario as mentioned before, the 90,000 you had to pay back to the government could buy you a large beautiful 3 bedroom home with a view, paid off.

For many baby boomers, cashing out and keeping their hard earned retirement money is the only way to enjoy a reasonable lifestyle in the future. For many people, moving abroad for retirement, is the solution and it has developed into an international trend.  Not everyone has the courage to pick up and move and leave family and friends behind but for those that can adjust to a few changes it is possible to make your money and budget stretch.

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