Many people intend to retire in the place they call home, where they have established families and friendships. But for others, the end of a career brings the freedom to choose a new lifestyle in a different part of the country — or the opportunity to preserve more wealth and protect it from taxes.
This big life decision is not all about money or the weather. Quality-of-life issues matter, too, such as proximity to family members and/or a convenient airport, access to good health care, and abundant cultural and recreational activities. In fact, choosing a retirement destination typically involves a delicate negotiation of emotional and financial issues, especially for married couples who may not share all the same goals and priorities.
If you’re nearing retirement, there’s a good chance you have at least thought about living somewhere warmer, less expensive, or perhaps closer to children who have built lives elsewhere. Here are some important factors to consider.
Cost of Living
A high cost of living can become a bigger concern in retirement, when you may need to stretch a fixed income or depend solely on your savings for several decades. There’s no question that your money will go further in some places than in others.
The cost of living varies among states and even within a state, and it’s typically higher in large cities than in rural areas. Housing is typically the largest factor — and often varies the most from place to place — but cost of living also includes transportation, food, utilities, health care, and, of course, taxes.
Selling a home in a high-cost area might enable you to buy a nice home in a lower-cost area with cash to spare. The additional funds could boost your savings and provide additional income. Moving to a more expensive locale may require some sacrifices when it comes to your living situation, future travel plans, and other types of personal spending.
Seven states have no personal income tax — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming (Tennessee and New Hampshire tax only interest and dividend income) — and other states have different rules for taxing Social Security and pension income. Estate taxes are also more favorable in some states than in others. Property taxes and sales taxes also vary by state and even by county, so make sure to include them when calculating and comparing the total tax bite for prospective destinations.
The Tax Cuts and Jobs Act limited the annual deduction for state and local taxes to $10,000. This change resulted in federal tax increases for some wealthier households in high-tax states, and it may also factor into your relocation decision.
Tips for Snowbirds
If you can afford the best of both worlds, you might prefer to keep your current home and head south for the winter. But if your choice of location is based largely on lower taxes, consider how much the costs of owning, maintaining, and traveling between two homes might cut into (or exceed) the potential tax savings.
To establish residency in the new state, you must generally live there for more than half of the year and possibly meet other conditions. You should also be aware that the tax agency in your old state may challenge your residency claim, especially if you still own property, earn income, or maintain other strong ties. If so, you may need to document your time and activities in each state and/or prove that your new home is your primary and permanent residence.
If you decide to live somewhere new on a full- or part-time basis, it may be worthwhile to rent for the first year, just in case the adjustment turns out to be more difficult than expected. You might also discuss the financial implications of a move with a tax professional.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by LFC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from LFC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. LFC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the LFC’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are an LFC client, please remember to contact LFC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services.