By Faron Daugs
Everyone has that dream for retirement. Moving to that perfect place where you can spend your carefree days. Maybe it’s lounging at the beach all day or hitting the slopes. No matter how you want to spend your retirement, if you’re moving out of state there are several factors to consider before relocating.
If you’re near or at retirement, you might be looking to downsize your current living situation and leverage that extra money to utilize for retirement income. But when it comes to taxes, cost of living, and even healthcare, you’ll need to be aware and prepared before you make that move.
If you don’t know where to start, here are a few simple steps you can take to prepare yourself for retirement, moving out of state or simply downsizing.
Taxes are typically one of your biggest expenses in retirement, so the goal is to minimize them as much as possible. Some taxes will always impact you—such as federal, capital gains, taxes on interest and dividends. You will also be subject to taxes on distributions from your traditional 401(k) or company retirement plans; however, you can exercise some control over taxes depending on where you move.
The 2017 Tax Cuts and Jobs Act capped state and local tax deductions, including property taxes, at $10,000. Those living or looking to move to a high-tax state such as California might not be able to deduct 100% of their state and property taxes on their federal returns.
Furthermore, eight states don’t tax personal income, which could benefit someone looking to reduce their month-to-month retirement expenses. But for states that do tax income, it’s not all equal. Some might not tax income but the interest from income. Others might exclude pension payments and retirement plan distributions.
Another important consideration is estate or inheritance taxes . Thirty-three states don’t have these kinds of taxes, so this is something to certainly consider when looking to relocate.
If you are moving internationally, keep in mind that you will still have to file a tax return in the United States as well as a return in the country you reside; however, you might qualify for the Foreign Earned Income Tax Exclusion or the Foreign Tax Credit.
Remember that federal taxes are almost always higher than state taxes. Reducing any federal taxes might offset local taxes depending on where you relocate.
2. Cost of living
Lower property taxes or no income tax can seem enticing, but don’t look at your finances solely in terms of taxes. You’ll need to look at the overall cost of living in the area and trends over the next five, 10 or 15 years. Markets experiencing higher than average inflation now might reflect higher cost of living in the future. This includes everything from utilities to groceries to healthcare.
Housing costs are also rising rapidly in low tax burden states. When downsizing, you’ll need to be thoughtful about how much house you’ll really need and the location. Can you relocate to where you want and still be comfortable through retirement?
3. Changes from state to state
When comparing your home state to different states, you will need to look at the overall tax and cost burden. Just because a state has low property taxes or no income tax, they can make that up by charging a higher sales tax, charging more for state services, or having a broader tax base for goods and services. These are more discretionary and not as fixed, but they still can eat into any retirement savings.
Another cost that changes dramatically from stateto state is homeowners’ insurance . Annual premiums can change dramatically with average costs being less than $500 in Hawaii to nearly $1,500 in Florida to over $3,000 in Oklahoma. Changing weather patterns in areas recently impacted by storms could drive these costs up over the long-term. Make sure to track not only short-term trends in the state such as cost of living and inflation but also longer-term trends to have a better understanding of potential hidden or unknown costs such as increased hurricane activity or water usage reductions.
4. Hidden costs
Downsizing to a condo could provide a less expensive place to live while putting some spending money back in your pocket. Be sure to take a closer look at the association fees and what they cover when purchasing a condo. Sometimes these can be very costly or may not cover everything you would imagine. You might not be able to make simple fixes by yourself and conversely you might not have control over common areas such as patios or windows. It’s important to note that some condo fees do include water, garbage, and other utilities, which can provide stable costs month-to-month. But costs can, and often do, go up with inflation and there are special assessments for bigger fixes such as a roof.
Popular destinations, like Florida, are known for high homeowners’ association fees with strong deed restrictions. This could be a shock and require an adjustment if you’re not used to dealing with these types of restrictions. There’s also the need to work with condo associations and boards to make sure facilities are maintained or to determine how resources are spent. This isn’t a direct cost but could require time for meetings and negotiations.
For many, the question of where to retire comes down to two factors: location and family. Having a great time somewhere during a vacation might make that location seem like the best place to retire, but vacation and day-to-day living rarely overlap. Before going to a new location, give it a test run. Rent somewhere that would be a more practical retirement location (the hotel on the beach probably isn’t feasible for most). How long does it take to get into town? What types of services are available to the public? What is the sentiment of the surrounding community? Are there top-rated healthcare systems close by?
The pandemic highlighted the importance of being connected, so don’t overlook the importance of being close to family and friends. Of course, there’s always FaceTime or email and while those are ways to communicate it may not be the best way to stay connected long-term. It’s difficult to put a price on time with friends or watching family members grow.
Whether you’re looking to move a state over or across the country, it’s never too early to start planning. While chasing that dream retirement might be the goal, don’t overburden yourself with taxes, cost of living adjustments, or additional fees that will dampen your retirement years. The best strategy is to plan before your retirement or work with someone that can help you navigate the various financial unknowns that might happen when moving out of state. It’s an exciting new chapter, and with some planning, it can be as fully rewarding as you imagine it to be.