There are lots of articles out there telling you how to cut costs and save money. That’s great, but where do you invest that money for retirement when you’re a digital nomad?
The remote worker with a pension plan — or even a 401k — is few and far between.
Sure, we’re more likely to be the type of person who’ll spend retirement in a country with a low cost of living, rather than the US. But we’re also likely to make less money and want to retire early.
How do you save for retirement as a digital nomad? Here’s what I’ve learned so far.
Your gross income is not how much you make
If you’ve been working for yourself for more than a year, you already know that when you get a check from a client that money isn’t really yours yet.
Sure, you have to cover your business expenses, but you also have to pay taxes on it. You’ll want to estimate how much that will be and set aside enough to make sure you’re covered.
If your income fluctuates, most people divide each payment they receive to cover living expenses, taxes, and savings. You can set up different accounts for each purpose.
The obvious answer for American citizens and green card holders would be an IRA. An Individual Retirement Account is a way for people to make tax-deductible retirement contributions without them needing to be connected to a company plan.
However, there are two issues with IRAs:
- You can only contribute $5,500 USD a year, which isn’t really enough to save for retirement
- You can only contribute if you have earned income that’s taxable in the US that year
In order to contribute money to an IRA, it has to meet two criteria
- Taxable in the US
- Earned (ie. come from wages, a salary, tips, professional fees or bonuses)
If you’ve made more than the foreign earned income tax exclusion amount, the first $5,500 of taxable income can go into a traditional IRA, tax-free. Just remember that you can’t contribute more than the amount of taxable income you’ve earned, up to the maximum. Just watch out, because if you make a lot of money over the limit, you aren’t eligible.
If you don’t have earned income that’s taxable in the US, you can’t contribute to an IRA. If your spouse has earned income and you don’t work, they can contribute to an IRA for you.
You can contribute much more, up to $54k, to a SEP IRA. If you make a large amount of income one year, a SEP IRA is a great way to keep your taxes under control — and save for the future.
You don’t have to be fully self-employed to have a SEP IRA, so this works with your side gig. If you wanted, you could contribute all of your freelance income to your SEP IRA and live off of your salary.
If you have any employees, you have to make identical contributions to each account.
Employees with less than 100 employees can set up a Simple IRA. You direct your investments, giving you more choices than a 401k through your employer. You can contribute 100% of your income, up to $12,500. That’s still less than you can contribute to a traditional 401k, but it’s much more than a regular IRA. Employers are required (mostly) to match your contributions, up to 3%.
If you work for a small company that doesn’t offer a 401k, they may be willing to set up a Simple IRA plan.
If you have income from self-employment that’s taxable in the US and no full-time employees, you can set up a Solo 401k. You can deduct up to 100% of your self-employment earnings, up to $54k. Like with an IRA, you can have a traditional Solo 401k or a Roth Solo 401k.
If you’re one of the lucky ones who have a company 401k and/or an IRA, your allowable contributions are per person, not per plan.
Contributions are tax-deductible and if you’re married you can make contributions for your spouse. You just need an EIN to set one up.
The power of compound interest might be getting eaten away by high bank fees! If you have a legacy 401k or 403b from a former employer, check the fees.
You may be able to save a significant amount by moving your money from your old employer plan into a Rollover IRA somewhere with lower fees. It’s also typically a lot easier to manage your funds.
You can’t just withdraw the money from your old retirement plan and move it to an IRA. You’ll need to work with both your old and new plan administrators to roll things over without triggering a tax penalty. This is usually pretty simple, but YMMV.
No US income taxes?
If you don’t have any income that’s taxable in the US, you won’t qualify for any US retirement savings vehicles.
If your spouse does have taxable earned income in the US, they may be able to contribute for you.
One option is to save for retirement in the country you’re living in. Remember to do research both on your eligibility to contribute, the implications on your US taxes, and your ability to withdraw funds when you retire.
The other option is to forgo traditional retirement accounts and invest your retirement savings in other ways.
If you’re not paying into Social Security in the US, you won’t be able to withdraw from it later (assuming it exists at all!). Check to see if you’ll qualify for any government pension benefits in the country you’re living and working in. Some countries, like Canada, have an agreement with the US where they’ll count the years you’ve worked in both countries.
Other types of retirement investments
Those of us who’ve chosen a nomadic lifestyle are good at getting creative, which is handy for figuring out a non-traditional retirement. Even if you are able to access traditional retirement savings methods, it’s great to diversify your investments to make sure you’ll always be covered.
People don’t typically consider real estate as part of their retirement plan, but an investment property can be a great source of future income. You don’t need to find a property that’s throwing you fists full of money every month for it to be a good investment. A property that covers its carrying costs can still be a wise choice.
Think about it: if you buy it now, in 25 or 30 years the mortgage will be paid off and it will be cash flowing that amount (or more) each month. Or, if you sell it, you’ve turned your down payment into a property you own free and clear.
When you’re calculating carrying costs and potential income, be careful not to overlook expenses. There’s more than just the mortgage to pay every month, there’s insurance, property taxes, etc. Even a property that’s in great shape will need regular maintenance. There may be months of vacancy or tenants who don’t pay. Do your research to save yourself from trouble down the road.
As an absentee landlord, you don’t want to be a slumlord. You’ll need a property manager and service providers you trust to take care of any issues that come up.
Stocks, bonds, and mutual funds
Financial investments like stocks, bonds, and mutual funds are still a good bet, even if you aren’t able to benefit from tax-sheltered retirement funds. Hopefully the perks of life as a remote worker — like making your own hours, experiencing life abroad, and a lower cost of living — make up for it.
My suggestion is to work with a brokerage with low fees. And index funds, index funds, index funds!
Your own business
In addition to a business that you start and run, you can invest in another business. Beyond stocks, you can buy a portion of a privately owned business. Businesses are listed for sale all the time, you can buy anything from a bodega to the current hot restaurant and have someone manage it for you.