Retirees Relocating Overseas Have Currency Risk Issues to Contemplate

Americans in their fifties have lost much of the equity value in their homes, as well as in their saving and investment accounts, due to the severe economic downturns endured over the past decade.

Retirement planning is now more difficult than ever for this generation, causing many to contemplate moving overseas where the cost of living is not nearly as high, as it is in the states. There is also a subset of retirees that want to return to their homeland, necessitating a major relocation move, in any event.

For both groups that want to move overseas, financial planning for retirement suddenly takes on a much broader scope of issues. Will I still have obligations to fund in the U.S., like education for offspring, a second home, or rental property? How and when will I transfer my retirement earnings and investments to another country? How will foreign exchange rates impact my plans? What kind of tax returns will I have to file?

These are just a few of the many questions that will come up regarding a move overseas. Health care is another area to review, for one. The tax issue should be discussed with professionals, acquainted with these types of situation. As for the first three queries, here are a few points to consider:

Liability Status before and after the Move: Everyone’s financial condition is different. Only you can answer what obligations will remain stateside after your relocation, but you need to put a plan down on paper because it will affect what you do with your other investments or in what currency you will want to collect your social security, retirement annuities, or other income producing securities. The objective here is too leave enough in the United States to handle your Dollar-based obligations. By doing this, you will avoid costly wire transfers later on or potential risk from foreign exchange rate movements that are not in your favor.

Transferring Money between Countries: Mailing a monthly check to a foreign country is fraught with problems, and there are a few restricted countries where mail delivery is actually forbidden. As of February of 2013, the Social Security Administration (SSA) can make automated bank transfers to 47 countries. They pick up the cost, and if the destination currency is not pegged to the Dollar, their currency exchange rate will better than what you may be able to get at a bank. Bank wire transfers are also very costly. Large fees are charged for both sending and receiving, and forex markups tend to be high, as much as 3% to 5% and higher. The best alternative, if the SSA option is not available, is to have funds deposited in a U.S. account, then to use an ATM card to make foreign withdrawals. Some cards have higher fees than others, but you want to use a debit card, not a credit card, for this transaction or any other purchase transaction.

Hedging Foreign Exchange Rate Risk: In January of 2000, the Euro and Dollar were roughly at parity, but today it takes about $1.30 to buy one Euro. In other words, if your were living on a fixed dollar pension and had retired to Germany, you would have lost 30% of your purchasing power over the intervening period, not something that is easily made up at an advanced age. Hedging is the art of protecting against these types of exposures, but the process is complex and not always perfect. Consult a professional before embarking on any hedging plan.

Retiring overseas may require more planning, but the issues are solvable.

Article by Tom Cleveland of Currency risk can be an important factor for retirees, but it can also arise for investors and companies. For more information on currency risk, click here to view.