It’s not uncommon for American expats to have no official retirement accounts available. Many foreign countries, small, non-profit organizations, and the like don’t have pension funds, 401ks or 403bs where you can invest for your retirement years.
To worsen matters, I’ve had to tell many clients that they can’t invest in an IRA if they are excluding all of their income with the foreign earned income exclusion (FEIE).
So what’s a teacher or preacher to do while on foreign soil? How can nonprofit workers save for retirement without access to conventional retirement accounts? The answer is really, really simple.
Use Taxable Brokerage Accounts
I know what this might sound like to some of you. You think a “brokerage account” must be some investment scheme sold to you by a financial services company or representative. It sounds complex, seems tax inefficient, and probably has hidden fees as well. Well, it can be all of those things if you want, but it doesn’t have to be.
It’s not complicated
Taxable (or after-tax) brokerage accounts are underappreciated – even by Americans in the States! We feel safe in our IRAs, 529s, and so on, but these are all relatively new, specialized accounts. Before those were created, there was the generic, taxable brokerage account people could use to save and invest for decades, and it worked!
They are no more complex than an IRA or 401k. In fact, they are often simpler to maintain, because there are no limits, minimums, tax barriers, etc. to consider. You can contribute (which we highly recommend) and withdraw at any time (which we would like to discourage for the most part). Complexity isn’t a problem.
Tax efficiency can be a huge problem in a taxable account if you think you are some kind of wiz-kid, day-trader. If you like selling in and out of stocks and funds on a regular basis, the taxes are gonna hurt, and you are likely to have to report them in both the US and in your home country. Forgetting about the possible fees here, the taxman on both sides of the ocean will likely be asking you to dig in your pocket for loose change. If you like paying short-term capital gains taxes, you are welcome to do that, but we’d much rather encourage a buy and hold strategy. If you are buying the proper funds and holding them for years and hopefully decades, even taxable accounts can be incredibly tax efficient.
It’s practically free
As a financial advisor, I can introduce you to dozens of other advisors who would be happy to charge you 1% or more every year in order to put you in funds with high fees that will almost always underperform the market. If that’s what you want, just ask!
But if you are willing to act on a few pointers, you can do this yourself. You can do this at very, very low cost to the point of almost being free from the likes of Fidelity, Schwab, and Vanguard. You need no minimum to get started, can stop and start contributions at any time, and have easy access to the funds in the event of an emergency.
Low-cost, broadly-diversified Exchange-Traded Funds (ETFs)
When you buy low-cost ETF’s, which are very similar to low-cost mutual funds, at a fee-conscious brokerage, you are simply participating in the growth of the worldwide capital markets.
These are funds, as the name suggests, that are traded on the major stock exchanges. They are simple, tax efficient, and low-cost to the point of almost being free.
What’s more, investing in low-cost, broadly-diversified ETFs is a proven way to generate investment returns that are the same as the stock market over the long run. You aren’t trying to be clever and beat the market. This isn’t speculation or guessing or gambling. You are simply buying a tiny portion of thousands of companies in the US or, better still, across the globe, so that you can participate in the growth of the global market for the long-haul.
My biggest recommendation
If you decide to invest in actively managed mutual funds or, better still, in ETFs
My biggest recommendation to people of all types – unless they are already in their retirement years – is to always be saving for your future. And when I say always, what I mean is a-l-w-a-y-s! Even if you do not have access to a traditional US style retirement plan, you can still save using an after-tax brokerage account. Start with what you’ve got and keep saving and investing without regard to the status of the markets or the types of accounts you have.
Don’t put this off. If you decide to deal with this later, a couple of weeks can turn into a couple of months which turns into a year or two. And still no account and no savings! If you don’t have an investment plan, carve out 1 to 2 hours a week of research to get your account going. Once it is up and running, you can relax and get on with your life. But make it a priority now instead of sometime later.
My dear expat friends and clients (as some of you are), the key to retiring well is not in the kinds of accounts we have available to us, or how much our income is, or choosing the right funds (unless you do something tragically wrong). Time and time again we see that the one key to retirement is how much we save and invest each month. It’s time to get started!
Mark Mason helped with this article.