At Polaris, we're all about healthy financial planning, and often that means saving substantially in retirement accounts like a 401(k) or Roth IRA. However, not all of your savings should always be tucked away in an account specifically designated for retirement. Especially for American expats, often there are specific reasons why you should look into a brokerage account, instead.
What is a Brokerage Account?
Brokerage accounts are simply investment accounts. They can hold stocks, bonds, mutual funds, ETF's or even just plain cash. The difference between a brokerage account and other types of investment accounts is that a brokerage account doesn't have a specific designated purpose, while many other account types are created for a particular use. For example, an IRA's purpose is to save for retirement, and a 529 Plan is used to save for education.
IRA's, 529 Plans and other special-use accounts typically have tax incentives for using them, but they also tend to have tax penalties for using them differently than what they're designed for. Brokerage accounts, on the other hand, don't have any specific tax benefits, but they also don't have penalties for using them in a certain way. They can be used to save and invest for anything you'd like, and this is one of their main benefits: flexibility.
Expats Need Financial Flexibility
Anyone could use financial flexibility, but Americans living abroad often need it even more than the typical person. Here are a few of the reasons why expats need additional financial flexibility:
Purchasing a home. Many expats begin life overseas by renting, but eventually they may want to own a home in their new country, back in the United States, or both. They'll need cash available to be able to make a down payment.
Unforeseen Travel. At times needs arise that require travel - whether it's in the budget or not. This can be to seek medical care, take care of a family situation, or simply to take advantage of a once-in-a-lifetime opportunity, but unexpected travel requires access to funds.
Moving expenses. Packing up an entire life and shipping it across the ocean is expensive, and sometimes comes when we don't expect it. Whether the move is back to the U.S. or to another location, it has to be accounted for financially.
Changing circumstances. Shifts in the political climate, global economics, a sudden pandemic, or other changes can require significant funds to navigate well.
The financial term for flexibility is liquidity. Liquidity means being able to access your funds quickly and at (or near) their actual value. The typical example of an asset that isn't liquid is real estate. Buying or selling real estate is time-consuming, expensive, and may or may not happen at a good price. If a person had a sudden need for cash and was forced to sell a home, for example, they might be forced to wait a long time to find a buyer, or perhaps take a lower price on the sale in order to find a buyer more quickly.
This is why a brokerage account can be such a helpful asset for someone with higher liquidity needs. Typically, the investments in a brokerage account can be sold and the cash used within a matter of days, much faster than a real estate transaction. And, as we mentioned earlier, brokerage investments can be accessed without the tax penalties that would come from using retirement funds prior to age 59 1/2.
Growth is Important
Some might ask, "If flexibility is so important, why not just keep cash?" After all, there's nothing easier to access than plain, simple cash. And the truth is, you should! The typical person should keep 3-6 months of expenses sitting in cash in case of an emergency. However, there's a problem with keeping too much money in cash: it doesn't tend to grow very well. Interest rates on a bank account are usually some of the lowest returns out there, and if you'll need that money years down the road, there's a good chance it won't even keep up with inflation. That means you'll have even less spending power than when you started.
In a brokerage account, you have the opportunity to invest those funds, so you'll reap the reward of whatever stocks, bonds, ETF's, etc. that you choose to invest in. That means there's a good chance that you could keep up with inflation or do even better. Do note that investment always means risk, so it's at least possible that you could lose money. But on the whole, investing is often a smart way to improve your spending power and build wealth.
Finding the Right Brokerage Account for Expats
For American expats, choosing the right custodian for their brokerage account can be a challenge. In general, there are three major considerations in choosing the right provider.
Availability based on your location. A slew of recent laws around the world has made investing overseas more difficult, and as a result, some investment firms have closed their doors to international investors, or significantly reduced their offerings. You'll need to start by locating firms that are open to working with people in your area.
Fees. Investing has costs, and not all firms charge the same amounts for the same services. Always make sure you know how you're being charged for services.
Access to investments. Depending on where you live in the world, your access to investments could be different. Mutual funds and ETF's, in particular, tend to have restrictions based on location, which may require a change in your investment strategy. Also, not all investment companies offer the same investment options on their platform. You'll want to make sure you have access to the investments you prefer on the platform you choose.
If you'd like to speak to a financial advisor that specializes in working with American expats, please feel free to contact us below. We'd love to hear from you!