5 Thoughts on Why Taxes Are the Worst Reason to Pick a Best Place to Retire
Category: Financial and taxes in retirement
December 30, 2013 — (Note: A slightly different version of this article by Topretirements founder John Brady originally appeared in the Dec. 17 USA Today).
Millions of baby boomers are starting retirement with fewer financial resources than they had planned on. The various reasons for the shortfalls represent a perfect storm for boomers: defined benefit plans are largely a thing of the past, not saving enough money, poor investments, unexpected emergencies, or losing their jobs years before the expected retirements. To maintain their current lifestyles on a reduced budget, many have decided that a tax-friendly place to retire might be the way to go. But while no one wants to pay taxes, that priority could be misplaced. Here are 5 reasons to rethink the idea that lower taxes should drive your retirement.
1. Life is short – enjoy yourself. You have worked hard all your life. So why not dare to think about retirement as a new adventure. When Topretirements.com recently asked its members what the best thing was about their retirement, none of the top 3 answers – “having less stress”, “getting to do what I want”, “having more time” – had anything to do with money. Keeping taxes low is desirable, but probably not as critical as finding a place to retire where you can enjoy the lifestyle and activities you’ve always dreamed about (see link to that survey below).
2. Reduced income means lower taxes. Once you stop working full time you will have less income to tax. Chances are that once standard exemptions are factored in your total income will be low enough, even in the few states where Social Security is taxed, that you will be liable for minimal, if any, income tax. Is it worth it to move to a new state just to save a small amount?
3. Figure out your real retirement priorities. Our article,”So Many Places, So Hard to Decide: 10 Steps to Finding Your Ideal Place to Retire“, might help you find out what your highest priorities are for retirement. Doing what you want, even if it means a slightly harder time economically, is going to be a lot more fun than saving a few bucks on taxes.
4. States and localities with low taxes might come with a lower quality of services than you are used to. Public services might be below your expectations: public libraries, community centers, universities, police departments, etc. often don’t get the financial support you might think they deserve.
5. Your tax situation in any given state is a complex picture, subject to change. It is difficult to get clear information from individual states on all the ways their tax laws could affect your situation. Taxation of pensions, retirement distributions from your 401(k) and IRA, social security benefits, and senior exemptions are all over the map. Taxes differ from municipality to municipality. Worse, as the political winds change, so can these laws.
If you do decide that moving to a low tax state is a priority
Here are some thoughts to consider:
– Weigh your other priorities first – your lifestyle dreams, climate preferences, and desire to be near your family are still important.
– Hire a tax professional to determine your potential exposure in your new state. A pro-forma tax return is the only real way to know if a new state offers a meaningful tax break.
– A tax-friendly state does make sense for certain individuals. For example if you are going to keep working, get a sizable pension, or have millions of dollars in a 401(k) plan, finding a state that goes easy on taxing those items could save you tens of thousands of dollars over time.
– Look out for property taxes. These are usually the most onerous taxes for retirees because they bear no relation to your income. Some states like California and Florida have generous property tax protections. But you don’t necessarily have to move to reduce your property taxes. Once you retire you should consider downsizing to save on all kinds of costs, not just taxes.
– Sales taxes are usually not very important to retirees. With your reduced disposable income, the state sales tax differences from state to state will be minimal, unless you are the kind of person who likes to buy a new car every 2 years. And necessities like food are usually exempt anyway.
Bottom line
If you have other good reasons to move to a low tax state, so much the better. But keep in mind what the wise old tax lawyer is fond of saying: “Don’t let the tax tail wag the dog”. In other words, look at the whole picture, as your quality of life is what’s important. If you are fortunate to have a lot of money, don’t let it get in the way of your happiness.
Comments? How about you, are you looking for a low-tax haven for your retirement? What do you think are the pluses and minuses of going the low tax route? Please share your thoughts in the Comments section below.
For further reading:
Best and Worst Things about Retirement: Our Members Speak
Finding Your Most Tax Friendly State for Retirement (a 2 Part Article)
Comments on "5 Thoughts on Why Taxes Are the Worst Reason to Pick a Best Place to Retire"
David says:
Unfortunately, Taxes in NJ are a real concern for most seniors. Some adult community residents are paying over $10K/year in taxes and it is not uncommon to see taxes rise over 10% in a year. So it's not so much the community as it is how the township is run which determines the tax rate. Even so, fixed income residents do need to consider this since seniors are living longer and their dollars need to last.
splashgirl386 says:
All good points....what you really have to think about is the type of lifestyle you are looking for. What my husband and I have discovered after retiring at a young age to Florida is that the states and counties make up for any low taxes in one area. For instance, we don't pay state income tax but our fees for registering our cars, the county's gas taxes, etc. all are high because the revenue has to come from somewhere!! If we had it to do over, we'd probably do a few things differently but we're enjoying our lives and adjusting as we go along. As for sales tax, I disagree. Essentially, sales tax is a user tax. When we retired, we acquired more interests and hobbies. In pursuing those we spend money and that is taxed!! What is most important, really, is lifestyle. Obviously, there are states that have very large tax burdens and for those of us on a fixed income, not too appealing. But, thankfully, there are plenty of places to live where the overall tax burden is less.
Billy says:
To splashgirl: What would you do differently?
cherie says:
Very good article! Especially point #1! Life is short and putting things off until tomorrow works for housework but not for enjoying Living! (unless you really have a thing about housework and then call me!)I might also add that some states (or commonwealths!) are sneaky about how they label taxes. In PA, my "property" tax is only $1500/year BUT my SCHOOL taxes are almost $5000!! So when you ask a homeowner or realtor about the taxes, make sure they tell you about all of them, not just the ones labeled "property."
SingTokyo says:
Well thought and well written article. Nowadays there is too much emphasis on lowering taxes. You get what you pay for. During retirement years comfort and enjoying life should take precedence.
Ed LaFreniere says:
I think sometimes long-term thinking will lead to better decisions. Say, for instance, that you have a $400,000 house. If you sell it to move, you'll lose $30,000 in closing costs, including real-estate commission. You may have to pay another $10,000 to move all your possessions to the new place. Unless you're going to downsize and buy a $200,000 house, it may take decades of lower taxes to compensate for what you just lost getting out of town. And if your current residence is in very good shape but you'll have a lot of work to to on the new one, that's more money, too. I agree wholeheartedly with those who are suggesting that money alone should not be the main factor in moving. You also need to be happy in your new environment and have a great social support group, too. So much to consider ...
Bubba Bull says:
I'm about 2.5 years away from full retirement and I disagree with the title/premise of the article. In my case I started my retirement relocation search by looking at the most retiree tax friendly states. Then I looked for places that would fulfill point #1. I wanted to stay on the east coast and be on the water, but Florida was too hot and my wife and I didn't like the idea of having to get out of town every time a hurricane came along; so we decided lake front would be a good choice. Then I looked for a community with a social infrastructure. I found that older, established, usually gated communities had the clubs and organizations that sponsor social interaction. Then I looked for a community that would have something for both my wife and I. A fitness center with organized classes such as Zumba and Yoga for both of us and a higher education institution nearby where my wife could take courses that interested her. We ultimately settled on South Carolina near Clemson University. An added plus was seeing that Consumer Reports rated the health care facilities in the area as some of the best in the country.
Mac says:
I confess, this article and it's predecessor in USA Today gave me a chuckle when I read them. The "worst reason to pick a best place to retire" -- surely you jest. Taxes are a controllable cost of living, and unless one is so financially secure that living costs are not a consideration, then choosing potential retirement locations factoring in taxes is indeed a very responsible part of the process.
To add onto a few of the 5 points above, Life is Short -- Live a Little. If selecting a retirement location results in living costs -- i.e. taxes -- that impinge on the quality of life, it was a foolish choice regardless of how "nice" the destination is. Most folks I know would like to expand their spendable income, not reduce it.
"Reduced income means lower taxes". . .not necessarily. Once retirees hit 70.5 and the resultant RMWs from their IRAs, their taxable income may increase. If one foolishly chooses a location where the state taxes retirement income, they may find themselves paying actually higher taxes.
"States and localities with low taxes might come with a lower quality of services than you are used to." Again, maybe, but likely not. It is an unfortunate fact that states with the highest tax rates are typically the most fiscally mismanaged -- take IL (my home state), CA, and NY for examples. In many cases, higher taxes buy the residence higher levels of graft and corruption, not necessarily more/better services than their lower tax-paying neighbors.
The final point about tax situations being a complex subject is not exclusive to any state / location. Part of any good financial planning process should be at least an annual review of one's tax liabilities, with specific actions steps made to minimize the impact of those -- especially in retirement. That's just good financial management, period.
Not giving high consideration of tax consequences in retirement location planning reminds me of the old saying, "a fool and his money are soon parted".
Pat says:
I got a chuckle from the part of the article where you state the top 3 things “having less stress”, “getting to do what I want”, “having more time” have nothing to do with money. Try enjoying them when you have no money. :lol:
Howard says:
Why would I move anywhere that would tax my retirement pension? It's my hard earned money and I'd prefer to keep it all. It's just as easy to find a place that offers no retirement pension taxation.
Steve says:
Good advice, I am in final prep for retirement. The things I looked at:
Cost of living of permanent home base vs. current home and how the factors compared. For instance, what was the main cost component and could I affect it. I where I am going has a lower cost of living (live in San Diego) but not by much; however, the main cost factor was housing and I could impact that with a significant downsize in housing--which I am doing.
Secondly, do I have the revenues to cover my anticipated base expenses--check!
Thirdly, do I have the revenue to cover my anticipated fun expenses--check!
Fourthly, do I have the savings cushion for the unexpected--check!
I ran tax scenarios from various states using the housing, sales, and income taxes on my anticipated revenue streams and while there was a difference, it, for me was not significant. I mean you can live in Alaska and get a check for oil revenues which is in effect a negative tax but the problem is, you go to bed and when you wake up, you're in Alaska--not for me!
sunlovingal says:
REALLY? ....No Thanks...I'll stay in my TAX Friendly State..Delaware, and spend my Extra money on what I Want and not what I HAVE to..sorry but this article is not very smart!
Doro says:
I agree with Pat. Trying to live on a shoestring in retirement will increase stress, not reduce it, and things we enjoy --such as travel--- cost money and if one is forced to continue to work, even part time in retirement then "having more time" goes out the window, too. We live in Texas where there is no state income tax, but property taxes are outrageous. We will be selling our house when we retire and moving somewhere with lower property taxes.
Steve says:
I live at the intersection of 3 states, so I can pretty much pick my sales and fuel tax based on where I see the best value. I get a little better break on property taxes in AZ than in NV, and we won't even talk about CA! But the main reason I located here is to have a small town atmosphere with better entertainment and leisure activities than available in many major cities. Just see this publication they put out every week here: http://laughlinentertainer.com/
Steve says:
Life is about trade offs. States with inheritance taxes or high estate taxes think that they've not sucked enough blood from me during my working years. My interactions with various state governments in high tax states haven't left me yearning for more "services." "Services" are mostly an excuse to buy votes from guilty or non-productive people.
Jon says:
Taxes taxes taxes, when it is all said and done what one state saves from income taxes they gain from excise taxes. This is the cost of doing business as a state. Some states do have lower infrastructure costs or manage their budgets better than others but when you factor in ALL the taxes they seem to weigh in about the same. It does make for a great news article however. Steve is correct! If you want to play the tax game, live in a city that is located near an adjacent state. Live in the low property tax state and shop in the state that has a lower excise tax. Tailor how you live and what you own to make the most of your tax breaks. The most important thing is to just live where you can enjoy life and resign yourself to taxes. Remember that taxes pay for services that come back to you. Many lower tax states have little to offer in the way of roads or services.
Bill says:
As Jon said, taxes pay for services. Except for some extremely high taxing states, you get what you pay for. Something else to consider is the fiscal health of the state you are living in. Some states are in deep financial crisis, even with hig taxes. I would like to see a ranking of states by fiscal health. We hear of states like Illinois and California that have large problems financially. But many states are in good shape, which does impact our quality of living.
Larry says:
Taxes should be part of the consideration before relocating in retirment, BUT ONLY as part of caculating cost of living and the lifestyle you want. As Steve wrote, do you want to wake up in Alaska, even if it's the cheapest state? Those who referenced that no-income-tax states like Florida must make it up somewhere are spot on. You can live less expensively, say, in one of the Carolinas than in Florida even though the former do have income taxes, once you calculate the cost of living comparisons. John Brady is essentially right that taxes themselves should not be the top consideration in choosing a retirement location; but as part of the overall cost-of-living equation, they are important. Most of us will find, though, that the differences in the cost of comparable real estate one state or even one county to the next is more meaningful.
Elaine says:
Like everything on topretirements, it is hard to judge strictly by state since local taxes can vary alot. But even by state, your situation will differ from mine...most of my retirement will be a combo of SS and IRA...IRA taxation will be important to me...
BUT THE BIGGEST CHALLEMGE is that state tax situation can change. Should it be considered, yes, should it be your first priority? probably not.
want to see how a states fiscal health compares? However, use with caution. http://247wallst.com/special-report/2013/11/21/the-best-and-worst-run-states-in-america-a-survey-of-all-50-2/
What to learn a lot, but not necessarily user friendly try PEW...lots of info by state
Old Nassau says:
With respect to South Florida: high auto, very high home insurance, A/C in the summer. Balanced by no heating bills; cheap fresh produce at roadside or open-air markets and stands; many hospitals, doctors, health-care plans, and 55+ communities. If possible, be a snowbird, spend 4-5 months up north.
Mark P says:
To Larry: Alaska isn't so bad, shortly before we went up in the early 80's EVERYTHING cost 50% more. Over time while we were there it was 21% more. It is now closer to 10% in Anchorage, not much more than other places in the US. Caution tho...altho winters are mild in Anchorage (it is still cold, but milder than many other places than the US) the winter is long and dark. But the lack of taxes since they tax oil gives you an economic advantage you don't get in the lower 48. Again cold, long and dark winters.
Jean C says:
TO: Mark & Larry Alaskan winters, loooong and dark...yep! I would say cost of living is more like 20% more in Anchorage than the lower 48. Fuel, housing, and health care seem to drive up the cost of living. Also, additional costs of mail order shipping from those companies that do not think Alaska is part the United States. Lol
Mark P says:
Our company tried for a long time to eliminate the 21% cost of living for a very long time. There were companies bring in double decker barges and freight HAS come down. Body shops I hear no long have a surcharge on parts that used to be 20-30& more. They are charging the same as Seattle. The add'l pay at our company up there is only 10% higher which is probably comparable to Seattle. Your can next day ship Fed EX (there is a really big terminal near the Anchorage airport) But nest day is really two days. Years ago the union couldn't get an agreement with UPS, unsure of their status today. The Post Office quite often is your best bet up there.
Jim says:
Sorry, but just have to correct your Bottom Line quote... It should be "Don't let the tax tail WAG the dog"
Editor's Note: Thanks Jim for letting us know, that was a silly mistake. (Now corrected)
elaine says:
Interesting article on state taxes. The methodology doesn't make it as relevant to retirees as some studies, but still interesting.
Godsgirl says:
Bill and Jon, you are correct, you get what you pay for.
Living in TN, esp in rural areas, you can't expect too much. Make sure you take a good long look at everything but the beautiful countryside before making a decision.
ella says:
Hi Godsgirl,
I looked for, but couldn't find, Bill and Jon's original post; so i'll address my question to you. I am looking to retire possibly to rural TN, and the beauty of the area would be my first determination as to where to live. (Data from Sperlings being used to help me fine tune.) What is it you know that i don't? I would be ever-so-grateful for any wisdom you could share with me now to help me possibly prevent a mistake later. Thanks so much!