Critical Stuff: You’re probably living in the wrong place to retire. If you’re going to move, choose wisely, with your eyes wide open.
In This Chapter: Staying put or choosing the best place for your situation.
Most people retire where they are. A few have some idea of a magical place they want to retire to–Florida and Hawaii spring to mind. But some folks retire where taxes and living conditions are optimal. The difference can be immense. For example, my wife and I chose to live in Hood River, Oregon and Maui, Hawaii. Two wonderful places to live, but two expensive places to retire. The cost of living in Maui is high, and the income tax rates in both places are punitive.
If I had simply chosen to live across the river in White Salmon, Washington, my cost of living would be about 10 percent less because Washington has no state income tax. That didn’t look like a huge deal when we were considering quality of life issue–we wanted to live in Hood River. But when the income stops, things start getting real, and ten percent is important. Not enough to make me move, but it’s not out of the question, and if I were making the decision now I might come up with a different answer, even though we love Hood River.
Of course, your life changes when you retire, and even though we didn’t think this through, the reality is that income tax isn’t quite such a big deal when you don’t have income. That’s called retirement. And that’s what we did. So even though the ten or so years of settling in and getting truly retired (selling off the last of our business) cost us more in Hood River, Oregon versus White Salmon, Washington–we are where we want to be. We are enjoying our lives the way we want to. And now it’s not ten percent, it’s more like three percent.
Loving the place you chose to be is a big deal, and it’s worth some bucks. Choosing a place where there are people like you, interested in doing the things you want to do–that’s priceless. That’s the kind of social interaction and mental and physical stimulation that will keep you healthy, engaged and vital. Books that just talk about the money are missing the fundamental issue of WHY you want some money–so you can do what you want to do.
So understand that place ratings like the bankrate table below are mostly about places that suit the average person–they are about living, not about having a life. No surfer would live in any of the top ten states.
But still, you need to know what you’re getting into. A company called Bankrate looks at cost of living by state each year, and they look beyond that, to healthcare quality, satisfaction of the residents, crime rates, etc.. The order shifts a little year to year, and if you’re looking for the full listing or the yearly update, then click the link.
|Overall rank||State||Cost of living||Crime rate||Community well-being||Health care quality||Tax rate||Weather|
|25||South Carolina||24||48||26||35 (tie)||9||16|
So let’s talk a bit about this ranking. As you can see, I picked the 41st and 44th worst places to retire. I earned my financial moron status. But I’ve never heard anyone say “I feel so bad for you, living in Hawaii and Hood River.” From a quality of life perspective, I’d say the list is a little weird. From a weather perspective, it’s too simplistic. Hawaii ranks 32nd?? Behind places like Massachusetts–digging out from a winter of blizzards, and far behind Arizona, where you can’t go outside during the day in summer for fear of what remains of your hair catching fire?
They also look at crime on a statewide basis, ignoring the simple fact that crime tends to be concentrated. And Hawaii ranks 20th on health care, whereas anyone living here knows that the most important thing you can have in the event of a health care problem is a plane ticket to the mainland. Probably more true on Maui than Oahu, but certainly true where I live.
I’d use this chart mostly for the cost of living, where it coincides well with my experience. Hawaii–the most expensive state, and Oregon 44th most expensive. OK, I agree. Bankrate took heat previously for being so focused on the cost of living and taxes, but I think this chart wanders away from being valuable by adding in factors that aren’t representative of the areas people might move to and using simplistic factors like precipitation as indicators of weather.
Looking at this chart you can see why New Mexico, Arizona, and Florida are retirement meccas. As for the rest of the choices, I’ve spent time in a lot of those states that sit on top thanks to a low cost of living and low taxes, and they seem like they’d be brutal places to retire. Winter in Wyoming? No thanks. It’s beautiful, but the wind alone will blow you all the way to Taos.
Financial aspects and gotchas
Before you contemplate moving you need to look at your savings and some other financial issues to make certain you aren’t screwing yourself. Most issues can be resolved, but you need to pay attention and do everything right.
Bonds–If you’ve invested in laddered municipal bonds, you need to consider how a move can affect the tax-free status. If you leave the state then you might owe tax on the coupon rate of the bonds, depending on how that state taxes income or intangible assets. Might not be a big deal, but don’t let it be a surprise. For example, say you move from New York to California. Presto–now you owe California tax on the bond income.
Let’s say you choose to swap out your bonds from New York to your new home in Florida. But before you do that you need to calculate if the yield on your NY bonds minus taxes is greater than what you would get from Florida munis, and you have to include commissions and taxes on any gain in the bonds at the time of sale in that calculation. Commissions in bonds are usually 1 percent, and that’s for both buying and selling. You sell $100K worth of NY munis to buy $100K worth of Florida munis and it costs you $2K.
But then you have to ask yourself if it makes sense to keep owning munis at all. If your income has dropped precipitously with retirement, then is a tax-free muni worth the lower interest rate and higher risk such bonds carry? As a thumb rule, if you’re in the top tax bracket (about 40 percent) a taxable bond has to yield 3% more to provide the same return after tax. In the 30 percent bracket it’s more like 2%, and in the lowest brackets, there isn’t any difference. It might make more sense to move to treasuries or corporate bonds. Treasuries are lower risk, corporates yield more. Your answer depends on your new tax rate and your appetite for risk vs. reward. Better yet, switch to an indexed bond fund and reduce your risk dramatically.
You also need to look carefully at taxes and costs other than individual income tax. If you move to a place like Florida (or Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming) that have no personal income tax you have to look at other taxes. Florida taxes intangible personal property like cash, stocks, and bonds other than Florida municipal bonds. The current rate is around two bucks per thousand with the first $40K (joint filers) exempt and the next $200K assessed at $1 per $1000. So it’s not a huge tax, but it happens every year, so it compounds, and it’s not just bonds, it’s all investments. That’s how they get all those bluehairs to pay for infrastructure and services. Oddly enough there are three states that have personal income tax but do not tax out of state munis: Indiana, Utah, and North Dakota. Go figure.
Annuities–If you have money in annuities you may have bond coverage required by the state and provided by your annuity company to cover some part of your annuity in the event the company fails. Coverage varies from state to state, and some states continue coverage even after you move, but some don’t. If you consider this additional bit of security to be important, then make sure you know the rules of the state you’re leaving and the one you’re moving to. We’ll cover how to optimize this coverage later.
Moving to retire has lost favor in recent years, a lot of retirees stay close to home because of family, and then find they have less and less contact with their offspring and relatives as they age. I think it’s very useful to have a clear idea of what it costs you to do stay put and decide if it really is worthwhile. States that are attractive to retirees tend to have more opportunities for socializing with people you share a common bond with–social interaction is a very important part of a happy retirement. And for a lot of us, moving away severs or at least stretches commitments which might be good to minimize anyway. In more brutal terms, if you’re 2000 miles away you won’t be involved in all that family drama, and there will be fewer outstretched hands. Something to think about.