Tackling the financial planning headaches of US citizens living abroad
Written by Joseph Regan on June 06, 2019.
Estimates on the number of US citizens living abroad vary wildly – I’ve seen anything from 2.2 million to 9 million – but one thing we do know is that they face some serious difficulties when it comes to finances, and the situation has become increasingly challenging in recent years.
Here are the most common problems US citizens face with their financial planning, along with some solutions.
The problem: Opening a foreign bank account
The regulations and tax compliance requirements imposed by FATCA (introduced in 2010) have meant that many foreign banks are simply refusing US citizens as clients, and even closing the accounts of existing US clients. That makes life difficult as, wherever in the world you live, you need a bank account to carry out everyday transactions such as setting up direct debit bill payments and paying for your weekly shop.
The solution: Offshore banking
Offshore banks will serve the needs of US clients and the good news is that there are a lot of options out there in safe and stable jurisdictions such as Singapore, the Isle of Man or Switzerland. Contrary to popular belief, offshore banking is entirely legal although for US clients it will be necessary to file an FBAR (Foreign Bank Account Report). Many of these banks will offer a full range of financial services and accounts are available in a variety of currencies which may eliminate some of the issues of currency exchange (see below) as well as facilitating the diversification of currency holdings. And – bonus - they often offer higher interest rates than local banks. These accounts are particularly useful for itinerant expats who move around a lot as it saves them opening and closing local accounts each time.
The problem: Frozen IRAs and pensions
Horror stories abound onlilne of Americans who have accounts with companies such as Fidelity, Vanguard and Scottrade moving abroad and having their assets frozen or being forced to liquidate their holdings and pay capital gains tax. Neither of these things is conducive to nurturing your retirement nest egg.
The solution: Investment options specifically designed for US expats
Here at Infinity we have an exclusive (in Asia) partnership with award-winning investment manager Tilney which offers our clients access to investment strategies that have been specifically designed for US expats. These are non-PFIC (Passive Foreign Income Company) investments which are made via a US-based custodian and therefore avoid the punitive taxes charged on PFICs. It means that US clients can transfer frozen IRAs and continue to build wealth while they are living abroad. Tilney have devised an IRS-compliant system of tax reporting with charges similar to those levied by US financial institutions.
The problem: Currency risk
The potential volatility of currency exchange rates can pose a huge investment risk to expats. Good investment results can be easily eroded if exchange rates don’t work in your favour. It is important to try and minimise the risk while maintaining your ability to make a decent return.
The solution: Working out life liabilities and hedging for uncertainty
The notion of life liabilities is important here – if you plan to retire in the States, it makes sense to keep your assets predominantly in US dollars whereas if you are planning to live out your golden years in Asia, that might not be the best option. Of course, many people simply don’t know where they will end up – their life liabilities are uncertain. If this is the case, the best way to hedge for uncertainty is to keep a highly diversified portfolio in a variety of secure currencies.
If you are an American living in Asia and struggling with the financial challenges that poses, I would be delighted to help you deal with the complexities you face. I have lots of experience with US clients and have helped hundreds expats get their financial ducks in a row while avoiding the common pitfalls. My aim is always to ensure that the time my clients spend abroad is used to help secure their financial future rather than damage it.