Ever since the coronavirus pandemic reached the United States, baby boomers have been accelerating their retirement plans, and many Americans have been migrating to new states. For retirees, the non-financial considerations of a move often revolve around weather, proximity to grandchildren, and access to quality healthcare and other services. However, if you are preparing for retirement, you should make sure you weigh the financial implications of any potential move.
Below are some financial considerations you may want to take into account before embarking on a move to another state as a retiree.
1. Income tax rates
Before moving to a new state, it’s essential to understand how much income you are likely to be generating in retirement, and it’s equally essential to understand what type of income you are going to generate. Your income as well as the type of income you receive could significantly influence your economic health after you make your move.
Even if you are not generating any employment income, you are likely generating income from various sources such as Social Security income, pension income, retirement account distributions, and various forms of investment income. Before moving to a new state, you might want to study the details of the tax code of your prospective new state first.
Many states have flat income tax rates. For example, Massachusetts has a flat tax rate of 5%. The states that have no income tax include Alaska, Florida, Nevada, Texas, Washington, South Dakota, and Wyoming. If you expect to generate a lot of income during retirement, these states should probably be on your research list.
Other states which don’t have flat income tax rates may be attractive or unattractive, depending on your level of income. For example, Iowa’s income tax rate starts at just 0.33%, but the tax rate increases to 8.53% if your household has an income greater than $73,710. At that level of income, your income taxes would be lower in California, although the marginal tax rate in California explodes to 13.3% if you are single and your income exceeds one million dollars.
Another important consideration might be the tax treatment of Social Security income, pension income, and retirement plan income. Some states treat this income just like any other source of income, while others offer preferential treatment to the income that retirees typically enjoy. For example, Illinois, which is generally not a tax-friendly state, applies a preferential 0% tax rate to Social Security income, pension income, and retirement plan distributions.
2. Housing costs
The cost of housing varies wildly from state to state and from city to city. Before deciding where to move, you will need to understand how your housing costs are likely to change. Many retirees choose to downsize and move to a place where their homeownership costs are going to decline, while others are choosing to rent.
When researching homeownership costs, make sure you consider the cost of buying a home, maintenance costs, insurance, and property taxes. Property taxes tend to vary not just by state but also by county. Insurance costs can also vary, depending upon the types of risks that are prevalent in a particular geography. If you think you might eventually want to move into a retirement community, you should do the research to understand what those retirement community costs might be for you and whether you will be able to fit them in your budget.
3. Sales tax rates
You are going to want to factor sales tax rates into account, too. Some states, namely New Hampshire, Oregon, Montana, Delaware, and Alaska, have no sales taxes, but most states have a sales tax of some kind which generally adds to the cost of living. California has the highest sales tax rate, currently at 7.5%, but California is followed closely by Tennessee, Rhode Island, New Jersey, Mississippi, and Indiana, each of which has a sales tax rate of 7%.
It’s also worth noting that, in addition to a state sales tax, many places also have a county sales tax and a city sales tax. For example, in Chicago, the combined sales tax rate from all sources is 10.25%. In other words, the sales tax research you conduct should probably be at the city level rather than the state level.
4. Financial health of the state
Thus far we have focused on current taxes, but what about future tax rates? Yogi Berra famously said, “It’s tough to make predictions, especially about future tax rates.” Well, to be truthful, that wasn’t the exact quote, but it is true that future tax rates are very difficult to predict.
One thing you can do is examine the health of the state pension systems where you are thinking about moving. According to Moody’s Investor Service and Wirepoints, the states with the highest level of unfunded pension debts include Connecticut, Illinois, Alaska, New Jersey, and Hawaii, each of which has unfunded state pensions at a level of more than 20% of their state GDP. If you are considering a move to one of those states, you are more likely to experience tax increases in the future, given the enormous financial obligations of these states.
5. Overall cost of living
We have already discussed taxes and the cost of homeownership, but it’s worth getting your arms around your budget to determine the extent to which your annual living expenses might increase or decrease in your new location. Food costs, parking costs, healthcare costs, and transportation costs can vary by location. Depending on your financial situation, it may not be necessary for your living costs to decline, although many retirees choose to move in part to reduce their annual living expenses. If your costs are going to rise, that should be okay as long as you have the financial wherewithal to fund a larger expense budget. Just make sure you have accounted for these differences before making your move.
6. Estate planning considerations
Thus far we have talked much about the financial implications of living in a particular state, but there are also important financial implications of dying in a particular state. It’s a morbid topic, but it’s an important topic, and you shouldn’t move anywhere without having your eyes wide open about the estate planning considerations of your move. If this is going to be your last move, it’s likely that the laws of your new state will apply to your estate after you pass away. If you are a high-net-worth individual, this is a consideration that might be especially important for you.
The good news is that many states do not have an estate or gift tax, which means your estate and gifts will only be subject to Federal taxes. However, if you are considering a move to Washington, Oregon, Nebraska, Iowa, Illinois, Minnesota, Kentucky, or any state to the northeast of West Virginia, you will want to speak with an estate planning attorney to help you understand the estate and gift tax implications of your move. All of these states levy an estate tax or gift tax.
Before you place a bid on that beautiful retirement home, make sure you sharpen your pencil and do your financial planning homework. Understanding the financial implications of a move is always important, and especially so if you are preparing for retirement. If you need help figuring this out, you might want to engage with a financial advisor to help you research and model the impact on your future retirement plans. Moving to a new location in retirement is an important decision, and you won’t want to make one that creates financial regret for yourself or your family.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy”, dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other strategy in the future, there are no assurances that any predicted results will actually occur.