Money

Friday, August 8, 2014

5 reasons not to retire in the U.S.

When it comes to retiring, more baby boomers are finding greener (and cheaper) pastures overseas.
More than half a million retirees receive their Social Security benefits abroad, according to International Living, a monthly newsletter focusing on retiring overseas. The Social Security Administration currently sends 613,650 retirement-benefit payments outside the U.S., more than double the 242,128 benefit payments sent abroad in 2002. And even that data likely under-represents the actual number of Americans retired overseas, says Dan Prescher, 60, special projects editor of the newsletter. (International Living gets much of its financial support from advertisers who sell overseas real estate to retirees, and other services for those wishing to relocate.)
“San Diego has some of the best weather in the world but most people can’t afford to live there,” Prescher says. He and his wife, Suzan Haskins, live in Cotacachi, Ecuador, and say most ex-pats there have monthly expenses (including rent) of $1,500 to $1,800. “We don’t need heat, we don’t need air conditioning and our electricity bill is $24 a month,” Haskins, 58, says. They live on the equator at 8,000 feet above sea level, so the sun rises at 6 a.m. and goes down at 6 p.m. every day, so it rarely gets too warm or too cold. Haskins adds that they live in a small town where crime isn’t a major concern for them. Their Internet costs about $28 a month and that includes a landline phone.
Of course, boomers abroad who want to work part-time or operate a business still have to pay income taxes — even if they live in the Cayman Islands or St. Kitts and Nevis, which have no personal income taxes. “The U.S. is one of the few countries on the planet that taxes its citizens on income no matter where in the world it’s earned, so we file our U.S. taxes every year, as all U.S. citizens must no matter where they live,” Prescher adds. In fact, some 1,000 U.S. citizens and green-card holders gave up their citizenship in the first quarter of this year to avoid taxes and move abroad, even though acquiring citizenship in another country can often be a complex and expensive process.
Here are 5 reasons not to retire in Florida, or anywhere else in the U.S.
Also see: 7 top nations for dodging taxes
1. Property taxes are often lower overseas
“Despite historically low inflation, the cost of living in the U.S. is almost out of control,” says Joshua Kadish, partner of wealth management firm RPG-Life Transition Specialists in Chicago. Mean property taxes in New York state are $5,040, and they’re $7,318 a year in New Jersey, which has among the highest taxes in the country. Alabama ($631 a year) and Louisiana ($823) have the lowest, according to a study by the Urban Institute and Brookings Institution. Average annual property taxes are $1,997 in Florida.) “People want a nice lifestyle and it’s hard if you are relying on Social Security and small savings,” Kadish says. (Prescher and Haskins pay $53 annually in property taxes.)
Read also: Retirement: getting by on $1 million
2. You’re only a Skype or FaceTime away
Technology has made it easier to stay in touch, says Charles Sizemore, a financial adviser in Dallas. Although it’s no substitute for playing ball with your grandson in the backyard, with social media, cheap phone calls, and even Skype and FaceTime, retiring boomers can watch their grandkids grow up from thousands of miles away, he says. “Boomers have always been a little more adventurous that the generations that preceded them. This is the generation that gave us Woodstock and the counterculture movement.” There’s also more reason to Skype: 67% of travel advisers say the cost of international travel has risen this year versus last, according to the American Express Travel Survey.
3. Escape from political drama in Washington
The battleground between the political and ideological forces of right and left in the U.S. can be exhausting for everyone else, says Brian Neal, financial adviser at Hefty Wealth Partners in Auburn, Ind. “Our society is getting a little nervous watching the tug of war going on in Washington,” he says. This was brought home by the shutdown in the federal government for 16 days last October, he adds. If people are not happy with whoever occupies the White House, it’s easier to move if they can afford it. President Obama has an approval rating of 43.2% for his 22nd quarter in office, less than Ronald Reagan (64%) and Bill Clinton (61.6%) at the same time, according to a Gallup poll released last month, but more than 35.8% for George W. Bush and 26% for Richard Nixon.
4. Concerns over health-care costs
About 60% of boomers used the word “terrified” to describe their concerns over health-care costs after retirement, up 30% over the last year, according to the most recent survey of Americans over 50 by Nationwide Financial, a provider of savings and retirement products. Costs of many procedures are far higher in the U.S. than abroad: For example, total cost of a knee replacement is $25,398 in the U.S. versus $12,589 in the Netherlands, $8,100 in Spain and $6,015 in Argentina, according to a global survey of medical procedures by the International Federation of Health Plans. And even retirees covered by Medicare or other insurance will carry some of the burden in the form of out-of-pocket costs.
5. Your dollars go further, farther from home
Americans’ dollars have more buying power in countries with a favorable exchange rate. Michael Ward, CEO of Europe and North America at USForex, an international money transfer service, notes that Americans abroad will only get around 75 euro cents on the U.S. dollar. However, the Czech Republic is not part of the Eurozone and, therefore has a more favorable exchange rate. Costa Rica, Argentina and Mexico are other countries with a good exchange rate and lower cost of living than the U.S., he says. For the truly adventurous, the U.S./Australian dollar rate has greatly improved over the last year, Ward adds.

Monday, August 4, 2014

"Neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers." That's the clear message in the opening lines of the 2014 annual reports of the Social Security and Medicare boards of trustees.
The program in most jeopardy is Disability Insurance (DI), which is part of Social Security. The trustee report estimates the DI trust fund will be depleted late in 2016. Considering both Social Security retirement and disability benefits, the report estimates that the combined trust fund will be depleted in 2033.
This doesn't mean Social Security benefits will stop altogether in 2033. If these trust funds are depleted, according to current law, Social Security benefits must be reduced to the level that's supported by the amount of FICA taxes being collected from workers at that time. The trustee report estimates that tax income will be sufficient to cover about three-quarters of all scheduled benefits at that time.
But there's no doubt that benefit reductions of about 25 percent will be very disruptive to retirees because Social Security benefits are the largest source of income for most of them.
The trustees also report that the Medicare Hospital Insurance (HI) Trust Fund will be depleted in 2030. At that time, dedicated revenues, which cover hospital and inpatient expenses, will pay about 85 percent of projected HI costs.
Part B of Medicare covers physician and outpatient expenses. General government revenues pay for about three-quarters of Part B, while premiums collected from current retirees pay for the rest. The trustees project that Part B costs will increase from 1.9 percent of GDP in 2013 to about 3.3 percent by 2035. The trustees also project that total Medicare costs, including both hospital and Part B outpatient services, will increase from 3.5 percent of GDP in 2013 to 5.3 percent of GDP by 2035.
The long-term deficit of Social Security's retirement and disability benefits is about 2.88 percent of taxable payroll. This means some combination of tax increases and benefit reductions with a total value of 2.88 percent of pay would put the program into financial balance. The long-term deficit of the HI program is about 0.87 percent of payroll.
While the dollar numbers of the deficit are staggeringly large, when expressed as a percentage of payroll, it seems that finding benefit reductions and tax increases in the magnitude of 2.88 and 0.87 percent of pay should be possible.
In 2013, the combined cost of the Social Security and Medicare programs equaled 8.4 percent of U.S. GDP. The trustees project this total cost will increase to 11.5 percent of GDP by 2035 and 13 percent by 2088. Once again, while the dollar amounts are very large, it seems that some combination of tax increases and benefit reductions with a total value of 3.1 to 4.6 percent of national output should be possible.
The Social Security projections depend on a number of demographic and economic assumptions about the future that may -- or may not -- turn out to be accurate. The projected Social Security and Medicare shortfalls are large enough that long-term funding challenges are likely, even under future scenarios that are more favorable than the assumptions the actuaries used.
Therefore, we shouldn't just hope and wish that the funding problems will somehow go away. It's dangerous to think that the projections are just a bunch of meaningless numbers.
But exactly why should we believe the board of trustees? Because they're smart people who take their job seriously.
Of the six trustees, four serve as a result of their position in the federal government: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human services, and the commissioner of Social Security. The president appoints other two trustees with Senate confirmation. They are Charles P. Blahous, a research fellow at the Hoover Institution, and Robert Reischauer, president emeritus of the Urban Institute.
Actuaries who work in the Social Security Administration do the work of preparing these projections. I've met a few of them, and I've found them to be very intelligent people who know their subject very well. They're dedicated public servants who are keenly interested in the long-term viability of Social Security.
Citizens and lawmakers alike would do well to pay attention to the clear messages from the trustees report. The conclusion of the report's cover letter says it well:
"Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare."
Lawmakers, are you listening?