Everyone has this retirement dream. Transfer to that perfect place to spend your days without worries. Maybe it’s resting on the beach all day or going up the slopes. No matter how you want to spend your retirement, if you move out of state, there are several factors to consider before moving.
If you are close to retirement or are about to retire, you may be looking to reduce the size of your current life situation and take advantage of that extra money to use it for retirement income. But when it comes to taxes, cost of living, and even health care, you need to be aware and prepared before making that move.
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If you don’t know where to start, here are a few simple steps you can take to prepare for retirement, leave the state, or simply reduce your size.
1. Taxes
Taxes are usually one of your most important expenses during retirement, so the goal is to keep them to a minimum. Some taxes will always affect you, such as federal capital gains, interest taxes, and dividends. You will also be subject to distribution taxes on your traditional 401 (k) or company retirement plans; however, you can exercise some control over your taxes depending on where you move.
The Tax and Employment Cuts Act of 2017 limited state and local tax deductions, including property taxes, to $ 10,000. Those who live or want to move to a high-tax state like California may not be able to deduct 100% of state and property taxes from their federal tax returns.
In addition, eight states do not tax personal income, which could benefit someone who wants to reduce their retirement expenses from month to month. But for states that make tax revenue, not everything is the same. Some may not tax income, but interest on income. Others may exclude pension payments and retirement plan distributions.
Another important consideration is inheritance or wealth taxes. Thirty-three states do not have this type of tax, so this is something to keep in mind when moving.
If you travel internationally, please note that you will still need to file a tax return in the United States as well as a tax return in the country where you reside; however, you may opt out of the foreign labor income tax or foreign tax credit.
Remember that federal taxes are almost always higher than state taxes. Reducing federal taxes may offset local taxes depending on where you move.
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2. Cost of living
Lower or lower property taxes may seem appealing, but don’t look at your finances just in terms of taxes. You need to look at the overall cost of living in the area and the trends for the next five, 10 or 15 years. Markets that are now experiencing above-average inflation could reflect a higher cost of living in the future. This includes everything from utilities to groceries and health care.
Housing costs are also rising rapidly in low-tax states. When reducing your size, you need to consider the amount of housing you really need and the location. Can you move wherever you want and stay comfortable during retirement?
If you trust Social Security, there is an integrated cost of living adjustment, or COLA. In 2021, that was 1.3%. Not all areas of the country experience inflation equally.
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3. Changes from state to state
When comparing your home state with different states, you’ll need to consider the overall tax and cost burden. Just because a state has low property taxes or no income taxes can offset it by charging a higher sales tax, charging more for state services, or having a broader tax base for goods and services. They are more discretionary and not so fixed, but they can still enter into any retirement savings.
Another cost that changes drastically from state to state is homeowners insurance. Annual premiums can change dramatically, with average costs ranging from less than $ 500 in Hawaii to nearly $ 1,500 in Florida and more than $ 3,000 in Oklahoma. Changing weather patterns in areas recently affected by storms could increase these costs in the long run. Be sure to keep track of not only short-term trends in the state, such as the cost of living and inflation, but also long-term trends to better understand possible hidden or unknown costs, such as increased hurricane activity or reduced water use.
4. Hidden costs
Reducing the size of a condominium can provide a less expensive place to live while putting spending money back in your pocket. Be sure to take a closer look at the association fees and what they cover when you buy a condo. Sometimes these can be very expensive or may not cover everything you can imagine. You may not be able to make simple solutions yourself, and you may not have control over common areas such as patios or windows. It is important to note that some condo rates include water, garbage and other utilities, which can provide stable month-to-month costs. But costs can rise, and often do, with inflation, and there are special assessments for larger repairs, such as a roof.
Popular destinations, such as Florida, are known for high homeowner association fees with strong writing restrictions. This could be a shock and require adjustment if you are not used to dealing with such restrictions. It is also necessary to work with condominium associations and boards to ensure that facilities are maintained or to determine how resources are spent. This is not a direct cost, but it may take time for meetings and negotiations.
5. Proximity
For many, the question of where to retire comes down to two factors: location and family. Having fun somewhere during the holidays can make this place seem like the best place to retire, but vacations and daily life rarely overlap. Before you move to a new location, give it a try. Rent a place that would be a more convenient retirement place (the hotel on the beach is probably not feasible for most). How long does it take to get to the city? What types of services are available to the public? What is the feeling of the community around you? Are there better valued health systems nearby?
The pandemic highlighted the importance of being connected, so don’t forget the importance of being close to family and friends. Of course, there’s always FaceTime or email, and while these are ways to communicate, it may not be the best way to stay connected in the long run. It’s hard to put a price on time with friends or watch family members grow.
Whether you’re looking to move a state across the country or across the country, it’s never too early to start planning. While pursuing this dream retirement may be the goal, don’t overburden yourself with taxes, cost-of-living adjustments, or additional commissions that dampen your retirement years. The best strategy is to plan before you retire or work with someone who can help you navigate the various financial hardships that can happen when you move out of state. It’s an exciting new chapter, and with a little planning, it can be as rewarding as you can imagine.
Faron Daugs, CFP, is a wealth advisor, founder and CEO of Harrison Wallace Financial Group.