Saturday, August 30, 2014

Why I Chose Panama (Over Costa Rica, Mexico, or Canada)

By Mark Nestmann
In my consulting practice, I’m often asked about my own “Plan B” – what I plan to do when the s**t hits the fan (SHTF) in the good ol’ US of A. And of course, why I chose that plan.
In my case, it’s Panama. I’m now a permanent resident there and will pick up my cedula – my national ID document – next month.
In choosing Panama as my personal “bug out” location, I went through a comprehensive evaluation of that country versus several other possible alternatives. Here are the criteria I reviewed
  • Availability of permanent residence. You may have to demonstrate only some minimal level of income in some countries to obtain a residence visa. Others require a guaranteed pension or an investment. You may or may not be required to be physically present in the country for a specific number of days to maintain legal residence there.
  • Ability to work or start a business. Most countries don’t make it easy for new residents to work for a local employer. Often there is a separate process to obtain a work permit in addition to a residence permit. Some classifications of residents, such as the pensionado schemes in many Spanish-speaking countries (including Panama), don’t allow you to work at all.
  • Freedom vs. security. In some respects, you have the greatest freedom if the police force isn’t that efficient – or if you can simply buy your way out of a traffic ticket or other interaction with the authorities. But the lack of effective policing will embolden would-be criminals. What’s more, if you can bribe your way out of a problem, so can anyone else. And in many countries, a foreigner will probably lose in any grudge match against a local.
  • Cost of living. In many countries, you can live very inexpensively if you’re willing to live as the locals do. But if you expect the same amenities in your adopted country as you have back home, you may pay dearly for them.
  • Property rights. Are property rights enforced? This is especially important in real estate transactions, but it also applies to bank or trust accounts and even to your personal property.
  • Right to privacy. You may have fewer privacy rights outside the US than within. For instance, many countries require foreigners to register with police within a few days of their arrival.
  • Infrastructure. This covers anything from the availability of ATMs to health care. It also includes transportation, utilities, Internet, etc.
  • Language. If you choose a second residence in a country where you don’t speak the official language, you’ll have to rely on other expats and anyone who can speak English. If you can shop, order food, ask for directions, and carry on a simple conversation in the local language, you’ll find it much easier to live in your adopted country.
  • Attitude toward foreigners. Your nationality, skin color, accent, religion, or any number of other factors can prejudice locals against you. In some countries, foreigners may be targeted for crime.
  • Taxation. Most countries impose tax on the worldwide income of anyone who lives there more than six months per year. However, a few countries tax only local income, exempting income from other countries.
  • Availability of citizenship and passport. Will your adopted country award you citizenship and a passport after you’ve lived there a certain number of years?
  • Dependence on/vulnerability to the US. This isn’t necessarily an easy criterion to assess, but the last thing you want is to choose a bug-out location that has an SHTF crisis at the same time as the US.

Why Panama Fits the Bill

Panama passed most of these tests with flying colors. A residence visa doesn’t require you to live in Panama; you need to spend only one day per year in the country to maintain your resident status. But if there’s an SHTF moment in the US, I can spend as much time as I want in Panama.
I received a “citizens of friendly countries” visa. This visa gives me the right to work, invest, or conduct a business in Panama. The easiest way to qualify is to form a Panamanian company and deposit $5,000 or more in a local bank account.
After five years of legal residence, I can acquire Panamanian citizenship and passport. Physical residence for at least part of this time is required, as is proof of some degree of integration within Panama and Spanish language proficiency. One drawback: Panama doesn’t allow dual citizenship, although this prohibition isn’t stringently enforced.
The financial privacy laws in Panama are very strong, although an increasing number of exceptions apply to investigations by foreign tax authorities, especially the IRS.
Infrastructure wise, Panama isn’t quite up to First-World standards. I would probably buy a backup generator, if the dwelling I lived in didn’t have one already, to deal with the frequent electricity outages. On the other hand, the transportation, medical, and Internet infrastructures are excellent.
Panama’s official language is Spanish. I can get around Panama City, the capital and largest city, without speaking Spanish, but elsewhere in Panama, English isn’t widely understood.
As a middle-aged white male, I’ve never encountered prejudice in Panama. On the contrary, the locals are usually quite solicitous toward me. That may be due to the fact that Panamanians have been dealing with American visitors for more than a century… or because they associate gringos with money… or both.
Panama is one of those rare countries with a “territorial” tax system. Generally speaking, that means you pay tax only on income you earn within Panama. That’s not especially helpful for US citizens like me who are taxed on our worldwide income, wherever it’s generated. However, in combination with the foreign earned income exclusion (FEIE), a US citizen generating earned income outside the US or Panama can afford a high-quality lifestyle and pay little or no income tax. (Note that the FEIE does not apply to dividend or entrepreneurial income or capital gains.)
If you’re a US citizen or green card holder living and working outside the US, the FEIE exempts the first $99,200 of your annual earned income from US income tax. If your spouse accompanies you overseas, you can double this exemption and jointly earn up to $198,400 annually, free of US income tax obligations.

The Drawbacks to Living in Panama

Panama does fall short in some areas. Corruption and crime – including crime aimed at foreigners – are a problem. Police investigations leave much to be desired, unless you have contacts with political “pull.” I’ve also heard some horror stories from expats about the lack of clear title to property in some parts of the country, especially so-called “rights of possession” properties. But if you’re purchasing property in or near a city, you can get clear title.
In addition, while Panama historically hasn’t had an especially high “nanny state” quotient, that’s starting to change, thanks to newly inaugurated President Juan Carlos Varela. One of his major initiatives has been to impose price controls on basic food items, which have already led to shortages.
I also gave a lot of thought to how Panama will be affected during an SHTF event in the US. Panama uses the US dollar as its official currency, so a sudden devaluation of the US dollar would lead to serious inflation in Panama for anything imported into the country. But Panama could decouple its parallel currency, the balboa, from the dollar if circumstances required it to do so.
Panama’s namesake canal is inextricably linked to the US, even though the US relinquished all rights to it in 1999. However, the US retains the right to act against any aggression or threat directed against the canal. For me, it’s reassuring to know that the world’s most powerful military stands ready to defend the most important source of revenue in my adopted country.

Other Options

Of course, Panama wasn’t the only country I considered as a second residence. I also looked at Canada, Austria, Mexico, and Costa Rica, among others.

  1. Canada. I rejected Canada because it’s difficult to qualify for residence, and once you do qualify, you have to live there most of the time to maintain “resident” status. Canada also has a cooler climate than I prefer and imposes tax on worldwide income.
  2. Austria. Like Canada, it’s difficult to qualify for residence in Austria if you’re not a citizen of another EU country. It’s also cold for much of the year, and tax is imposed on worldwide income.
  3. Mexico. While Mexico hit on most of the same points as Panama, if you live there for more than six months annually, you must generally pay tax on your worldwide income. I recently learned that there are some ways to mitigate this, so if I were only now starting my bug-out research, I’d definitely give Mexico a second look.
  4. Costa Rica. Again, Costa Rica hit on most of the same points as Panama. But I’m not comfortable with the fact that Costa Rica has abolished its military. This renders it vulnerable to border incursions, such as a series of raids carried out in recent years by Nicaragua along these two countries’ mutual border. 
Mark Nestman writes the Nestmann Notes.


  1. "But I’m not comfortable with the fact that Costa Rica has abolished its military." - This is Costa Rica's highest selling point!

    1. Only if private ownership of weapons is encouraged, or mandated.

  2. Just wondering why you didn't consider Chile? I've read positive reports from Americans who have relocated there.

    1. Chile appears to be turning socialist:

  3. My wife and family and I have been living in a gated beachfront community on the northern coast of the Dominican Republic for 11 years, and I can truthfully say that these have been the best 11 years of my life. We are retired, and the low cost of living for us reflects the absence of everything (regulations, high labor cost, high taxes, high property costs, insurance costs) that makes nearly all things in the usa expensive.

    I would recommend that anyone approaching retirement consider the northern coast of the Dominican Republic.