In planning for retirement, most people rightly concentrate on whether or not there will be enough money to support themselves in a comfortable fashion throughout their remaining lives. But financial considerations are just one of the concerns that people face when looking at their retirement planning. Where to retire is often given a lower priority, which is a shame, since there are states that may be more attractive than others when it comes to retirees.
Retirement Factors To Consider
Apart from the straightforward questions of whether you can afford to retire, there are several other factors you should consider. Here is a brief, non-inclusive list of items for your attention. It is not meant to be an exhaustive list, nor is it in any order of priority; it should nevertheless give you a sense of the issues you should consider when getting ready to retire.
Many retirees want to live in a state that has a temperate climate, while others really enjoy the winter. If you are one who enjoys a winter-free climate… or want to live near the water… or build a house on 20 acres… those will most likely dictate the starting point of your decision making. One suggestion might be to purchase or rent a property in your initially chosen area—to try it out on a part-time basis for a year or so—before selling your existing home and moving there permanently.
Cultural And Other Activities
Do you enjoy the theater? Music? Film festivals? Golf? Biking? Fine dining? Museums? Do you want to be close to an airport? When you consider the wide variety of retirement communities, make sure they have the cultural, physical, and environmental elements that you enjoyed while you were working. If you love the theater but move to a community where the nearest one is 45 minutes away, that may not meet your needs. If you are an avid bicyclist, be sure to look for a “bicycle friendly” area. If you enjoy mountain climbing, a flat, mid-west location might not fit the bill, either.
Do you have family in one part of the country, and want to be located nearby? Of course, “nearby” has different meanings for different people… and you and your children may even differ yourselves. For some, it can mean anyplace in the same state… or within an hour by car… or in the same city. You might think that living in the same development as your daughter would be great, but your daughter is thinking that the same state is really “nearby” enough. Be sure that you and your family are on the same page in terms of what that means, or it can have disastrous, uncomfortable results.
Ready access to good, high-quality medical care needs to be considered in determining a location in which to retire. You may love rural Alabama, but if there are no local hospitals nearby and you need to drive two hours to see a physician, it might not make sense to live there as a retiree. This is doubly true if you have an existing, chronic condition that needs to be periodically monitored by a physician. When you start investigating possible retirement locations, be sure to research the medical facilities available. (This may also include access to independent or assisted living facilities.) The decision should include somewhere that offers more than one option for both a healthcare facility and a more advanced living arrangement, to give you some flexibility in the future.
The Cost of Living
California may meet your needs in terms of weather and for access to high quality health-care, but it is a very expensive state in which to live, and may be out of your reach in terms of cost of living and real estate. Not only does it have one of the highest income tax rates in the nation, but homes are expensive… food is expensive… gas is expensive… everything is expensive.
Be sure to look at not just income tax rates, but the general cost of living. If you are adamant about retiring to California—or to some similarly priced area—be sure to discuss this with your wealth manager or advisor, so you can build the extra expense into your plan and be prepared when the time comes.
Income Tax Rates
There are seven states that have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two states—New Hampshire and Tennessee—only tax dividend and interest income if it exceeds certain limits. But there is no free lunch, so while Texas may have no state income tax, their property taxes may be significantly higher than neighboring New Mexico. Research is important. Don’t just assume that a state without an income tax is automatically less expensive than a state with an income tax. Consider the general tax environment in the state you’re considering and have your wealth manager run a few scenarios for you with various home sizes and areas—these rates can differ depending on the existing tax base, and the population trend, in a given area.
Taxation of Pension Plans
Pension plan income is not treated equally in all 50 states with regard to taxes. And a military or government pension is not necessarily treated the same as a private corporation’s pension plan payments, either. For example, Connecticut, Hawaii, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, Ohio, Pennsylvania, and Wisconsin do not tax military pensions. Pennsylvania and Mississippi exempt all retirement income—including IRA and 401(k) distributions—from taxation. Delaware excludes $12,500 of dividends, capital gains, interest, rental income, and qualified retirement plan distributions once you reach age 60. These regulations are controlled at the state level and will impact your overall cost of living in the long term. Have your wealth manager review the state requirements for exemption and use that information to help shape your selection of states in which to retire.
Taxation of Social Security Benefits
Thirty-six states and the District of Columbia do not tax Social Security income. The states that do tax it include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Depending upon your level of benefits, this can add up to quite a sum if your retirement is a long one.
Sales Tax Rates
There are five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—that do not have sales tax. California is the nation’s highest at 7.25%. Four other states—Indiana, Mississippi, Rhode Island and Tennessee—have a 7% sales tax rate. Remember, these are state sales tax rates. Some cities and counties, such as Chicago, impose additional taxes (which for Chicago, brings it to 10.25%). These are taxes on goods and services you actually use, so you have a bit more control over the impact of these taxes. Nevertheless, it adds significantly to the general cost of living over time.
Property Tax Rates
Tax rates can and do vary state by state, and in some instances, even within the state. Louisiana has the lowest average property tax rate in the nation—0.18% of property values—while New Jersey is the highest at 1.89%. If you are over 65 in Washington, D.C., for example, the “senior citizen exemption” reduces your property taxes by 50%. This tax can have significant impact on your need for capital in retirement, especially if you purchase the property with proceeds from your pre-retirement home and don’t take out a mortgage.
Many people have their property taxes rolled into their mortgage payments or escrowed, and haven’t had to consider their tax rate for many years. The local multiple listing service includes tax information when you work with a realtor to view and select properties to buy; be sure to find this information on the property you’re interested in before you make a purchase.
Retirement Location Resources
There are social factors, family factors, and quality of life factors that all need to go into the decision-making process when it comes to retirement. If you are considering relocating when that time comes, it is never too soon to start your homework.
One great general resource is the Retirement Living Information Center. They have all sorts of information about taxes, senior housing, jobs, and public aging resources, listed by state. Kiplinger’s November 2018 article entitled “State by State Guide to Taxes on Retirees” is another great resource, as is AARP. Local Chambers of Commerce for the area can also provide information on tax rates, activities available, climate data, popular pass-times, local features, and geography that will be helpful in making the final decision on where to live in retirement.