Co-authored by Mandy Riles, a tax manager at Wipfli LLP
The following article was prepared in collaboration with our affiliate, Wipfli LLP. With more than 2,000 associates across the United States and in India, Wipfli ranks among the top accounting and business consulting firms in the nation.
The thought of retirement can often spark a sense of anticipation and excitement. The “golden years” of your life are supposed to be a time to kick back, put your feet up, enjoy time with family and friends, and perhaps take up that one hobby you’ve always wanted to explore. Retirement is an opportunity for you to enjoy the rewards of the hard work from your career.
One of the biggest freedoms of retirement is the ability to move to that special place you’ve always dreamed of. Whether that’s a hut by the ocean or a home by the golf course, the options are endless. However, there are many factors to consider when planning around where to spend your retirement, and a lot of that planning revolves around spending.
Lifestyle and taxes have a major influence on one’s spending throughout their working career, and that also holds true during retirement. Knowing the lifestyle you want to live in retirement can provide a starting point for how much you can afford to spend. One of the best ways to maximize your lifestyle spending is to minimize the amount you pay in taxes.
Here are some ideas to consider when deciding on your dream retirement location:
Proximity to friends and family
If you plan on moving during retirement, that usually means moving away from friends and family. Couple this with a desire to travel and it becomes clear that living in a cabin 300 miles away from an airport might not be the most appropriate fit. Finding a residence that’s reasonably close to a major airport or transportation hub can make traveling much easier and less stressful, both for you and your friends and family who visit.
Many retirees find that the biggest concern for them is how to fill their days. Living in an active, social community can provide opportunities for you to interact with other retirees in your area. Whether you’re looking for local volunteer groups, sports clubs or a senior activity center, having a social community around you can help ease the transition to retirement.
Conducive to hobbies
Everybody has hobbies or activities they enjoy spending their time on. Whether it’s golf, hiking, relaxing on the beach or participating in a book club, it’s important to research if an area has the available resources for you to fill your days and do what makes you happy.
Availability of healthcare facilities
According to a recent Fidelity research study, the average couple will need $285,000 (in today’s dollars) for medical expenses in retirement. While some factors such as family history may be outside your control, this expense number can be lessened by the proximity of affordable nursing homes, hospitals and assisted living facilities. As you progress through retirement, it will become increasingly more difficult to relocate or travel to a doctor’s office.
State and local taxability of retirement income
While retirement income is taxed on a federal level at an individual’s ordinary income tax rates, there are several states that do not tax retirement or tax only certain retirement income, which is a major consideration when choosing where to spend retirement. Florida, Illinois, Mississippi, New Hampshire, Pennsylvania, Texas and Washington are among the states that don’t tax retirement income; this includes social security, 401(k) or 403(b) and pension income. Alabama taxes 401(k) and IRA income but does not tax pensions or social security income.
State income, sales and property tax considerations
Many states have no state income tax at all: Alaska, Florida, Nevada, Texas and Washington are a few. These states generally make up for their lack of income tax in other ways such as property or sales taxes. New Hampshire has no sales tax and only taxes dividends and interest; however, their property taxes are among the highest in the country. When deciding where to retire, it’s important to understand where the bulk of your income will be derived and if you plan to own or rent. Then you can make the decision whether it’s more important to live in a low property-tax state or a no income-tax state.
The estate (death) tax
Of course, we would recommend preparing an estate plan with an attorney to explore methods of reducing your estate tax exposure or avoiding the tax altogether upon your death, but it’s worth noting which states actually have an estate tax. Massachusetts, Hawaii, Washington, Oregon, Minnesota, Illinois, New York, and Maryland are among the states that do have a state estate tax. Maryland is the only state to have both an estate and an inheritance tax, which could be noteworthy if you plan on leaving your remaining retirement income to your heirs. Massachusetts and Oregon have the lowest exemption amounts at $1 million, which means that your estate above $1 million becomes taxable at a maximum rate of 16%. Limiting the amount of estate tax owed after you pass is a great way to maximize how much you can leave behind.
How do your retirement dreams affect your financial plan?
There are many unique factors to consider when thinking about how moving in retirement can affect your overall financial life. If you want to receive more insight to the potential financial impacts of moving in retirement and how that affects your comprehensive financial plan, contact a member of the Wipfli Financial Advisory team.