Spain has a comprehensive pension system that covers basic expenses for everyone that meets a few basic requirements. It is available for anyone who has worked and paid social security in Spain for a set amount of years and is above the retirement age (subject to changes…unfortunately).
For this reason Spanish citizens are generally clueless when it comes to investing and saving for retirement. They don’t have to invest! But times are changing. Investing is growing increasingly important for everyone.
Why You Should Invest
USA vs. Spain
Investing as an Expat
Disclaimer: The content is for informational purposes only, you should not construe any such information or other material as legal, investment, financial, or other advice.
Why You Should Invest
There are many good reasons for you to invest even if you plan on taking advantage of Spain’s pension system.
Reason 1: Prices go up, salaries do not. Somehow, even though the average yearly salary in Spain is around 25,000 euros, housing prices have skyrocketed. I was shocked when I saw that a basic apartment in Seville would cost more than my parents’ retirement home in the Midwest.
For a basic 2 bedroom 2 bathroom apartment with outdated décor located in Andalucía, you could spend the entirety of your disposable income for your entire working life.
Andalucía is one of the poorest regions in Spain, so it’s difficult to even get the average salary, especially as an immigrant.
Reason 2: The retirement age keeps increasing. You can retire earlier than the retirement age, but you will be subject to a % penalty on your pension. If you have healthy investments, you wouldn’t have to work until the retirement age. You could rely on your investments + the reduced pension.
Reason 3: The future is uncertain. America definitely does not have a comprehensive pension program that will pay for all your expenses. If you end up in a situation where you need to return to the U.S, you would be starting your retirement savings from zero without proper investments.
Puppies: that was depressing. Here are some puppies!
USA vs. Spain
Historically, the U.S. economy is just better, and so historically, your U.S. based investments would go much further.
Here is an example. The S&P 500 is a stock market index that tracks the stock performance of about 500 high-value companies in the U.S. such as Amazon, Apple, and Google. It is considered a marker of the U.S. economy and its performance.
The graph for the S&P 500 begins in 1983 and ends in 2023 (40 years). Within those 40 years, it has increased by 2,500%!
40 years would be a typical length of period for someone to invest before retirement. If you invest $40,000 in 1983 and literally do nothing for 40 years, you will have 1 million dollars by the time you retire. This does not include dividend payments (money you receive for owning certain stocks).
The IBEX 35, just like the S&P 500, is representative of Spain’s economy. It is an index of Spain’s principal stock exchange. The difference in performance speaks for itself. Within the last 20 years, its value has increased by 11%. $40,000 + 11% = $44,444.
This is why I invest in the U.S. and will continue my investments in the U.S.
My investment strategy is quite boring. I invest in the S&P 500 and the total U.S. stock market through Vanguard Index Funds.
It can be difficult, but I try to invest and forget about my investments. The absolute worst thing you can do is make an emotional decision. In fact, above in the S&P 500 graph, you can see a large dip from Covid-19. A lot of people sold when stock values decreased, but it has more than recovered since then.
Investing as an Expat
Your job in Spain won’t offer a 401k or a retirement package.
Even though you must file taxes in the U.S. every year, you might not have taxable income. You might make too little or your tax obligation in Spain might exempt you from further payments. This would disqualify you from IRAs as well.
“To contribute to a traditional IRA, you, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment.”
https://www.irs.gov/taxtopics/tc451
How would I invest then?
If you are a U.S. citizen with a U.S. address such as your parents’ home, you can open and maintain an online brokerage account. A U.S. brokerage account would allow you to invest in U.S. index funds and stocks.
Unfortunately, many U.S. brokerage firms will not work with people living abroad. They may ask you to move your account if they find out about your foreign status, but there are still many U.S. options available.
“…U.S. expatriates may keep their US brokerage accounts and related investment accounts, such as 401k’s, Individual Retirement accounts and so on. In fact, we recommend that US citizens living abroad should keep their liquid investments in the United States. Selling them in order to move into foreign accounts could entail large capital gains tax, and distribution penalties and regular income tax if you liquidate and distribute your retirement accounts.”
Can’t I use a foreign broker? Yes you can, but there are extra rules and regulations that can apply to a U.S. citizen investing abroad. One big reason for these extra restrictions is that the government doesn’t take too kindly to citizens who hide assets abroad.
Nardisadvisors – Compliance with Reporting of Foreign Assets
The specific U.S. brokerage or trading platform you use is not so important (of course, make sure it is a legitimate company insured by the U.S government).
Buying stocks is not like buying fruit at the market. Apple stocks are Apple stocks. They are not better across the street or at a different market. Identical stocks and funds will perform the same between brokerages.
What is important is that you understand the user interface, have the options you want, and do not pay extra fees.
I use Robinhood since it hasn’t given me issues as someone living abroad. The app is easy to understand. It has extra options such as dividend reinvestment, so I can completely forget about my investments because my dividends are automatically reinvested. Most importantly, there are no extra fees.
You can sign up completely online for free, and if you use my sign up link, you will receive up to $200 in free stock.*
Online investment platform. Free sign up. No extra fees. Available for individuals based in the United States. Accessible from almost anywhere.
*You are free to sell the stock within 3 business days and withdraw the money from that sale after 30 calendar days.
Regardless of the brokerage or trading platform you use, it is important to invest and set yourself up for a healthy financial future. You don’t have to be rich or even have a good income to invest.
If you’re curious, you can use an online investment calculator to imagine your future finances. I do this as well.
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
Just a small monthly contribution grows quickly with the help of compound interest.
You will see a very pretty number after hitting calculator, but just remember that your investment returns are not tax free.
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