Friday, December 25, 2020

Planning for Retirement in the US as an Expat




For those foreigners who have lived and worked in the US for a while, retirement in America can be a great option. Planning for retirement as an expat takes forethought and careful financial planning. For many the process takes years. Fortunately, there are many ways for foreign nationals to have a comfortable retirement in the US.

401(k)


This falls under the ‘Defined Contribution’ type of retirement plan. Expats who have not yet secured a permanent residence can also invest in 401(k). This avenue lets investors set aside a part of their pre-tax income for retirement. 

It has the added advantage of reducing the taxable income. At the time of signing up, investors have options such as mutual funds, bonds, and stocks.

Sometimes employers match their employees' 401(k) contributions up to a certain percentage. For example, a foreign national working in the US for a local employer earns $50,000 annually and contributes $2,500 (5%) per year into his 401(k). 

If the employer contributes another 3%, the employee gets an additional $1,500 added into the plan per year.

Another option is the Roth 401(k) plan. It differs from the 401(k) in that it is funded with after-tax dollars. Roth 401(k) is gaining popularity because it comes with tax-free withdrawals.

IRA


Individual Retirement Accounts (IRAs) work much the same way as 401(k) plans, except for two key differences. First, 401(k) accounts are maintained by employers whereas IRAs are opened by individuals. 



People usually go to asset management entities or brokerage firms to start an IRA. Second, 401(k) plans restrict investments to a single option – stocks, bonds, or mutual funds. 

An IRA allows for a more diversified investment mix under one account. It can also include real estate investments. Note that IRAs are taxable at the time of withdrawal.

Pension


A large number of expats in the US send money online to invest in various retirement plans in their home countries. For those planning to retire in America, investing locally can make more sense. 

Pensions are among the simplest retirement schemes for expats who are formally employed by US firms. These require no major investments on part of the employees. 

Employers who maintain pension funds give fixed monthly benefits to their employees after retirement. The pension payment is determined by the annual salary during employment and the tenure of service. Pensions offer much better benefits to those who have been in long term employment.

Pension is generally calculated at 1.5% of the average annual salary times the number of years of service. For example, someone who earned an average annual salary of $60,000 over 25 years of service will receive a monthly pension benefit of roughly $1,875 after retirement. 

This figure may appear underwhelming. However, for most expats this is not the sole source of income. They look upon pension as merely an additional income. It is commonly combined with social security benefits and other forms of income.

Social Security


Expats who are in the US for the long haul are entitled to receive Social Security benefits. The amount of benefit is determined by credits an individual has accrued over the period of their working years. 

These credits can be re-calculated after each month. The Social Security Administration offers a Retirement Calculator on its website. Individuals can readily determine the age at which their desired benefit amount will become available.




However, first, you must contribute to the Social Security fund. Both employers and employees must pay 6.2% of the annual wages, up to a maximum of $137,700. Self-employed persons are required to contribute to the entire 12.4%. 

Further, individuals must accrue 40 credits to be eligible for social security benefits. 1 credit equals 1 quarter of a working year. One must work for 10 years to be eligible to receive these benefits.

The retirement age in the US is divided into slabs. This is also applicable to foreign workers. For persons born between 1943 and 1954 the full retirement age is 66. For persons born between 1955 and 1960 the full retirement age gradually increases by 1 year till it reaches 67. 

Individuals can opt for an early retirement age of 62. However, this will bring a reduction of up to 28% in the monthly benefit payouts.

Fixed income annuities


This is a type of insurance contract that may be used toward retirement benefits. Individuals can buy fixed income annuities from insurance firms and contribute to their post-retirement incomes with monthly payments. 

For instance, a person who wishes to retire at 65 starts investing $500 monthly at age 30. This person will receive an annuity payout of about $540,000. This sum can be withdrawn in monthly, quarterly, or annual payouts as a fixed income. 

Furthermore, contributions to fixed income annuities are not capped like IRAs or 401(k). One can invest in annuities without limit. For comfortable retirement experts suggest investing at least 5% of your annual salary into fixed income annuities.

About the author:


Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.



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