Where to Retire
If you’re like most of our clients, you’ve thought long and hard about the financial aspects of your retirement. You’ve likely worked hard and saved diligently. But, retirement for each person is different. Perhaps you plan on a working retirement with a new job and less stress, focused on what you love. Or, perhaps you plan to travel, play golf, or just rock on the porch. Or, maybe you want to downsize to a smaller house, spend time with the grand-kids, or take up sky diving. Who knows? Whatever the plan, don’t forget to consider the location you plan to call home.
Where you “officially” call home can make a difference in your retirement lifestyle. Even if you plan to travel or live out of your RV, the place you officially live can impact your taxes and other living cost factors. Obviously, most people realize that retiring to California or New York will be generally more expensive than retiring to Tennessee. So, what are some of the factors to consider when picking a retirement destination?
For most retirees, the two largest expenses in retirement will be medical care and taxes. Yes, a milder climate not only means a more enjoyable tennis match, but it can also mean lower utility bills. However, lower utilities are not likely to be as big of a financial factor as other considerations. Regarding medical expenses, BenefitsPRO recently completed an analysis on healthcare costs in the US. Now, keep in mind that the analysis merely compares Medicare premiums, but this can still be a fair comparison on what average medical costs by state may be because Medicare premiums consider medical costs as a major factor. Believe it or not, the cost to have a heart attack is different in different parts of the country. So, on average, Florida has the highest Medicare premiums running 35% more than Hawaii, which has the lowest. This makes sense from a supply and demand standpoint; there are many more retirees in Florida needing medical care, which likely means there are consistent strains on supply, which in turn drives up the cost. Tennessee did not make the top ten lowest or highest for Medicare premiums.
Taxes are the other major factor for most retirees. Kiplinger recently listed six factors to consider when picking a retirement destination and each of the six factors were different types of taxes. Most retirees consider income taxes and while income taxes can be a major factor for some retirees, Sales Tax, Property Tax, and Estate Tax can be even more important. This is because once you reach retirement, you may have already earned most of your income; now it is more a matter of spending it. If income taxes are really your biggest issue, you might actually consider life outside the US. Over half-a-dozen countries actually have no income tax, but keep in mind, you’ll have to give up your US citizenship and other expenses may far outweigh the income tax savings unless your income is significant. Also keep in mind, the IRS will make you pay tax on your IRA before you expatriate, so don’t look to leaving the US as a way to avoid your Required Minimum Distribution (RMD). One income tax you may want to watch out for is income tax on certain investments. For instance, Tennessee has no income tax on earned income; however, it does have income tax on interest income over a certain level. These hidden taxes can sneak up on you and make a difference. Another somewhat hidden income tax is Social Security income tax. Some states have been moving away from taxing SS, but as of this writing, thirteen states still do tax it.
If you are less affluent, then sales taxes and property taxes will likely be more significant factors. When considering property tax, keep in mind that most often this is a function of county government rather than state or federal government. If you own or plan to own significant amounts of real property, moving across the county line could mean a significant difference. Also consider if the county/state allows for a property tax “freeze” for owners who reside in the property. This can ensure that property taxes do not go up for you.
As for sales taxes, this is a function of states and local municipalities, but usually more dependent upon the state’s rate. Again, moving across a state or county line or even out of city limits can be factor. Also be aware that the sales tax rate may vary by item. For instance, some states do not charge sales tax on food or may charge a different rate on certain large purchases.
Finally, there are estate and inheritance taxes. The difference in these two is the way they are calculated. Estate taxes are charged to the estate, but inheritance taxes are charged to the inheritor, which may have differing rates depending upon whether the inheritor is a spouse, child, sibling, or unrelated. And, not only do the rates vary, the exemption amounts (how much you can pass on without having the tax) varies by state. Some states match the federal government’s exemption, but most don’t.
In all determining where to retire is an important consideration for which weather may be a big consideration. Just don’t forget to look at the financial implications of location too. And, if you need help evaluating those consideration, call us at 877-5WEALTH.