Where should you retire?

 

Retirement & Longevity

Hint: It’s about more than the weather and scenery.

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Dreaming of a sunny retirement? Or one with a mountain view? Where you retire depends on more than the weather and the scenery. Different states have different tax considerations – and taxes can have a major effect on the quality of your retirement. Among other financial factors, local taxes should be considered as you decide where you'll spend the next chapter of your life.

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Tax considerations

 

IOne way to cut your tax bill is by moving to a state that doesn’t have an income tax. There are seven U.S. states that do not have an income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming. Washington state taxes investment income and capital gains, but only for certain high earners, and New Hampshire taxes investment and interest income but is phasing out those taxes.

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Keep in mind that wherever state taxes are lower or absent, state-funded programs may be similarly lacking. If you expect you may one day depend on certain government-supported services, you may find a state with higher taxes a smarter move in the long term.

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Avoiding destinations with a state income tax isn’t a surefire way to minimize your tax burden. WalletHub conducts an annual analysis of the total tax burden by state, measuring the proportion of total personal income that residents pay toward state and local taxes – including state income taxes, property taxes and sales and excise taxes. There are a few additional states on WalletHub’s list that keep their tax burden low, even while taxing residents’ income. According to WalletHub, the 10 states with the lowest overall tax burden, lowest to highest, are Alaska, Delaware, New Hampshire, Tennessee, Florida, Wyoming, South Dakota, Montana, Missouri and Oklahoma.

 

​Other financial factors

 

Despite any widespread myths to the contrary, Social Security is taxable income. You could pay tax on up to 85% of your Social Security income under certain circumstances, so beware of your filing status and annual income. For example, if you file a return as an individual and your adjusted gross income plus nontaxable interest, in addition to half of your Social Security income, is more than $34,000, you’ll pay tax on up to 85% of that benefit. Adjusted gross income covers everything, from wages (if you are still working) to rental income and, most importantly, any withdrawals from 401(k)s and IRAs. However, Roth IRAs are exempt.

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If you plan on working in retirement, you’ll want to take note of the second-act career opportunities in some areas. (Of course, with remote working becoming widely available, job location is not as important as it used to be.) Also important is the accessibility of quality affordable healthcare where you plan to retire – healthcare ranks third on the list of biggest expenses in retirement and may be the most important consideration as you age.

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While warm weather and a gorgeous view are the makings of an ideal retirement, don’t overlook taxes and other location-specific financial factors. Considering these may ultimately lead to a higher-quality retirement.​

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Next steps

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As you approach retirement and consider where you want to live:

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• Survey retired friends in different locales about their quality of life.

• Do your research on tax burden for your top contenders list.

• Ask your advisor to help you create a sample retirement budget.

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Sources: investopedia.com; pods.com; finance.yahoo.com; wallethub.com; visionretirement.com