International Retirement Migration (IRM) and the recent American Diaspora: motivations and alternatives

Laura Madrid Sartoretto
Laura Madrid Sartoretto Research Lead at Global Intelligence Unit
International Retirement Migration (IRM) and the recent American Diaspora: motivations and alternatives

International retirement migration (IRM) represents a pivotal phenomenon situated at the confluence of two significant socio-demographic trends that are transforming the global demographic landscape: aging and migration. This intersection reflects a broader shift in population dynamics, where increasing life expectancies and changing retirement lifestyles converge with the movement of people across borders, seeking enhanced quality of life in their later years.

As we step into an era where retirement security is becoming increasingly tenuous, a confluence of economic challenges and demographic shifts is reshaping the landscape of retirement. The stark reality of our time is that the world’s population is aging at an unprecedented rate. The number of individuals aged 65 and over has soared, placing an unprecedented strain on established retirement systems. World Bank data suggests that 10% of the global population, more than 770 million, is currently aged 65 and above. This proportion is expected to increase, with projections indicating that by 2050, about 16% (around 2.1 billion) of the world’s population will fall into this age group, more than a threefold increase. In the United States, the rate of aging is markedly accelerated, with the country currently having more than 17% of its population at the age of 65 years or older, an increase of almost 40% in the last three decades. This surge underscores the urgency of retirement security as a critical social challenge that will confront the global community over the next three decades.

Population_Aged_65_Above_US_World

The landscape of retirement is undergoing a profound transformation, with individuals bearing an increasing share of the responsibility for their retirement funding. This sentiment is echoed by individual investors worldwide, many of whom anticipate a lesser reliance on government pension programs and greater dependence on personal savings, investments, and workplace savings plans. The Federal Reserve Report on the Economic Well-Being of US Households concluded that younger retirees are less reliant on Social Security and pensions compared to older ones. Retirees who have diverse income streams, including employment, pensions, or investments, generally report higher levels of financial well-being compared to those who rely solely on Social Security or other public income sources.

As longevity increases, the concept of aging successfully gains prominence, influenced by factors like social connections, physical health, and cognitive capacity. However, these aspects are often challenged by financial limitations. Consequently, a growing number of retirees living abroad driven by factors such as insufficient retirement savings, escalating medical and living costs, uncertainties around social security, and a lack of skilled eldercare providers.

The increasing uncertainties around traditional government retirement benefits, exacerbated by a worldwide pension funding shortfall, have prompted many American retirees to explore alternative strategies to preserve their lifestyle in retirement. One compelling option is relocating to countries where the cost of living is markedly lower, thereby extending the reach of their retirement funds and affording them a lifestyle that might be unattainable in the United States due to the prevailing retirement savings deficit. In these cost-effective places, retirees often enjoy the dual benefits of lower living expenses and access to affordable, yet dependable, healthcare.

According to the Health System Trackers, the landscape of healthcare financing in the United States has significantly shifted over the years. The proportion of health expenditures covered by private insurance has increased from 20.4% in 1970 to 28.9% today, reflecting a growing reliance on private insurance in the overall health spending mix. Concurrently, public insurance programs like Medicare, Medicaid, CHIP, and military health services now account for 43% of total health spending, up from 22% in 1970. While per capita out-of-pocket costs have risen, their share of total health expenditures has decreased compared to the past. Despite widespread insurance coverage, medical debt remains a prevalent problem. Over 90% of Americans have health insurance, yet the burden of medical debt is substantial, affecting various demographic groups, particularly those with ongoing health issues or disabilities. The growing reliance on private insurance and significant medical debt, despite insurance coverage, exacerbates concerns about the adequacy of retirement savings.

By moving abroad, retirees find they can extend their retirement funds further, benefit from more affordable and quality healthcare, and often enjoy a better quality of life, making this option an attractive alternative to navigating the financial and healthcare challenges present in the United States. For example, Southeast Asian and Latin American countries tend to be more affordable compared to the United States. In Costa Rica, private health insurance for expats can range from $60 to $250 per month, which is significantly lower than average costs in the US. In Europe, retirees often benefit from a combination of public and private healthcare systems. Countries like Portugal, Spain, Italy, and Ireland offer public healthcare systems supplemented by private insurance options. In Portugal, private health insurance costs between $20 and $50 per month for retirees, which is considerably lower than the average health insurance costs in the US.

More economical housing options are also available elsewhere, and both renting or buying a property will be much more affordable than buying a house in the big cities in the US.

housing

Housing price indices play a crucial role across various economic sectors, serving both individual and institutional needs. Housing indices are essential for assessing homeowner wealth, guiding economic policy, influencing consumer behavior, and managing financial and construction industry risks. Such indices are also vital for individuals looking to relocate, whether for permanent moves abroad or for investment opportunities. These indices provide potential movers and investors with essential insights into property values, helping them assess the cost of living and the potential for property appreciation in different locations. For expats, they can influence decisions on where to settle, while for investors, they signal where the most lucrative real estate opportunities might be found, guiding investment strategies in the international housing market. According to Numbeo’s recent statistics on the cost of living, which, in addition to rent prices, consider general expenses, dining out, and rent, five of the world’s most expensive cities are located in the US. Notably, New York is ranked as the second most expensive city globally. The high cost of living in American cities is a driving factor for US citizens to seek relocation elsewhere where the living costs are much lower.

Moreover, the financial benefits of retiring abroad can be amplified for American retirees by choosing destinations that have favorable tax arrangements with the US or do not tax foreign income. Bilateral tax agreements can prevent double taxation of retirement income, thereby preserving more wealth for retirees. Countries such as Panama and Costa Rica in Central America and Malaysia and Thailand in Asia, which do not tax foreign income, offer a fiscal refuge for retirees, ensuring their savings and pensions are protected against high taxes. In addition, numerous countries have established enticing tax regimes to attract US expats and retirees, offering significant fiscal benefits that can reduce tax liabilities on foreign-sourced income. For instance, Portugal’s Non-Habitual Resident program provides a decade-long period of reduced or exempt taxation on foreign income, while Italy’s new flat-rate tax regime appeals to those moving to certain regions with a low tax rate on all foreign income. Similarly, Greece has incentivized retirees with a flat tax rate on foreign income, and Malta’s Retirement Program offers a favorable tax rate on income remitted to the country. Spain’s Beckham Law allows expats to pay taxes solely on Spanish-sourced income, and Ireland’s remittance-based taxation can mean foreign income remains untaxed unless brought into the country.

For US citizens, particularly retirees, these schemes can translate into substantial tax savings on pensions, Social Security benefits, and other retirement account withdrawals, potentially stretching their retirement savings further. These tax-friendly jurisdictions provide a dual advantage of financial efficiency and an enhanced quality of life, making them sought-after destinations for Americans planning their retirement abroad. This strategy of fiscal optimization through geographic relocation is becoming increasingly pertinent as retirees seek to secure their financial future against the backdrop of dwindling domestic social security benefits and the complex challenges of an aging population.

Another significant factor motivating US citizens to consider retirement abroad is the concern over violence and security within the country of relocation. In the 2023 Global Peace Index, the United States was ranked 131st out of 163 countries, indicating a decline in peacefulness, a continuing trend since 2015. This decline in peacefulness is primarily attributed to worsening conditions in the Safety and Security domain, especially regarding increased perceptions of criminality and rising homicide rates. The US experienced one of the largest increases in homicide rates among the countries assessed, with rates now exceeding six per 100,000 people. This rate is notably higher—more than six times—than most Western European countries, highlighting a significant disparity in violent crime rates between these regions.

The statistics on gun violence, as presented in recent data, also underscore a critical issue that affects perceived personal safety and quality of life. With thousands of injuries and deaths reported annually due to firearms, including a substantial number of incidents involving children and teenagers, the sense of security that many seek in their retirement years appears increasingly elusive within US borders. The significant increase in gun-related deaths in the US during the pandemic is alarming. In 2021, the total number of gun deaths reached a record high of 48,830, marking a 23% increase from 2019. This surge includes a sharp rise in gun murders, which increased by 45% from 2019 to 2021, and a 10% increase in gun suicides over the same period.

For retirees, this environment can be particularly disconcerting, prompting a reevaluation of their living arrangements as they seek safer, more peaceful environments. Consequently, many are turning their eyes towards European countries such as Portugal and Spain with lower rates of violence and higher standards of public safety, where they can enjoy their retirement years with a greater sense of security and wellbeing.

Safety, however, is not solely defined by low levels of violent crime; it also hinges on the stability of a democratic state that upholds fundamental rights, such as freedom of expression, protection of marginalized groups, and democratic participation. A growing body of evidence suggests that US nationals are increasingly dissatisfied with domestic politics, with many expressing a desire to relocate following recent elections. This trend has been particularly noticeable in the last electoral cycles, motivating individuals to seek security in more stable countries and even consider acquiring a second citizenship as a form of insurance against upcoming events that might destabilize the political and social fabric of their society. Safety, political stability, and the protection of rights are not just abstract concerns; they are particularly relevant for retirees considering relocation.

retiree

In their golden years, individuals seek to enhance their quality of life and, if necessary, are willing to move from their birth countries to achieve this balance. This decision often extends beyond mere financial considerations; retirees are increasingly attracted to destinations that offer not only affordability but also a rich tapestry of cultural experiences, favorable weather conditions, and welcoming local communities. These communities provide a sense of belonging and inclusion in their new homes, contributing to better mental and physical health, ultimately boosting life expectancy and enhancing overall quality of life. This holistic approach to choosing a retirement destination accounts for both economic advantages and the overall enrichment of life, ensuring that retirees enjoy a secure, vibrant, and fulfilling experience in their later years.