Although retirement is a time that many of us are looking forward to, there is nothing that can ruin the bliss of newfound leisure more than not having enough money to do all the things you’ve dreamed of doing. And if you’re on a fixed income, the only way to do more is to spend less.
One way to make your dollars go further in retirement is to move someplace with a low cost of living, particularly if you currently live in a place where tax rates are high.
So how do you find a place to live that will leave more money in your pocket? Don’t just look at a locality’s median home price. Even if the average home sells for $150,000 doesn’t mean the region is less expensive. Take a long, hard look at the state’s tax structure: Does the state tax pension income (including civil service or military pension income)? If so, by how much? What about Social Security income? And how high are the property tax rates?
Which are the most affordable states to retire to, and which states should you avoid? We’ve started your homework for you:
Least Affordable States to Retire To
5. Vermont
The Green Mountain State is known for having steep income taxes, particularly for the higher income brackets. It also taxes most retirement income, including Social Security income.
Although in most states, local district taxes support local schools, in Vermont, the state imposes a property tax that is used to support the schools. This “education tax” is levied in addition to the property tax levied by the local government. Thus, it should come as no surprise that Vermont’s real estate tax rate is the eighth highest in the U.S. at 1.69 percent.
4. Minnesota
The Land of 10,000 Lakes may offer nature lovers plenty of outdoor opportunities, but they’ll take a hit to their bank accounts if they retire there. For example, Minnesota’s state sales tax is 6.875 percent – compare that to the national average of 5.457 percent.
Just like the federal government, Minnesota taxes up to 85 percent of Social Security benefits. Pensions are subject to taxes as well. The state does offer a senior citizen tax deferral program for property taxes, but it’s basically just a loan. You’ll still have to pay the taxes eventually.
3. California
It should come as no shock to you that California made this list. Sure, you can enjoy some of the world’s best weather in California, but you’ll pay dearly for it. California has one of the highest income tax rates in the country, and the only forms of retirement income exempt from taxation are Social Security and Railroad Retirement benefits.
California’s real estate tax is limited to 1 percent of the home’s full value, but the home’s full value may be adjusted upward by 2 percent each year. And given that the average home in California costs around $456,800 (more than twice the national average) you could end up paying a substantial amount in property taxes alone. In addition to all of this, the statewide sales tax is 7.5 percent, with some local sales taxes pushing the combined rate as high as 10 percent.
2. Connecticut
Connecticut, too, has some of the highest real estate taxes in the nation, with property assessed at 70 percent of Fair Market Value. Although it does allow a 50 percent exclusion for military pensions, there are no tax credits for other types of retirement income.
The state also grabs up a portion of Social Security benefits for taxpayers with a federal adjusted gross income of $50,000 or more ($60,000 for married couples filing jointly). And although there is no inheritance tax, estate taxes apply for transfers of estates valued at $2 million or more. To top it all off, the Connecticut’s state sales tax is 6.35 percent.
1. New Jersey
New Jersey has the highest effective real estate tax rate in the nation. And although it doesn’t tax Social Security and military benefits, the top income tax rate is 8.97 percent, and the sales tax rate is 7 percent. If your total annual income is less than $100,000, New Jersey does allow you to exclude up to $20,000 of annuities, IRA withdrawals or taxable pensions.
New Jersey has a transfer inheritance tax, though it does not apply to property passing to a spouse, parent, child or stepchild, grandchild or charity. However, the state does have a separate estate tax on gross estate values exceeding $675,000.
Most Affordable States to Retire To
5. Alaska
Chances are, you’ve never even considered Alaska as a retirement option, but if you settle in the temperate archipelago around Juneau, not only will you find a balmy maritime climate (and yes, there is snow in the winter, but it’s not bitterly cold), you’ll also find great tax benefits for retirees.
Alaska has no income or sales tax, and even better, the state will send you a check every year as a perk from the Trans-Alaska Oil Pipeline, from which every resident benefits. The per-person dividend was $2,072 in 2015. There are real estate taxes here, but homeowners 65 and older (or surviving spouses 60 and over) are exempt from taxes on the first $150,000 of their home’s value.
4. Mississippi
If you’re looking to escape harsh winters forever, consider relocating to Mississippi, which also has the lowest cost of living of any state in the country at 13 percent below the national average. In Mississippi, all forms of retirement income are exempt from taxation, including Social Security income, regardless of how much total income you’re bringing in. Any remaining income that isn’t exempt is taxed at a maximum rate of 5 percent.
Mississippi also has one of the country’s more favorable property tax rates, with the average annual property tax coming in around $778. The median home value is $113,000. Sales tax is 7 percent, but prescription drugs, utilities, fuel, and newspapers are all exempt.
3. Florida
It’s not just the year-round sunny, warm weather that attracts retirees to Florida. The Sunshine State has long been a haven for seniors, likely because there is no state income tax. Thus, not only is your retirement income tax-free, but if you decide to work a part-time job in retirement, the state won’t tax those earnings, either.
Florida also has no estate or inheritance tax. But choose where to settle carefully: Miami, for example, has a pretty pricey cost of living. For the lowest cost of living, look for a residence in the Panhandle region.
2. Alabama
Not only will you enjoy a mild climate in Alabama, but you’ll also enjoy keeping most of your retirement income. Most pensions here are completely tax exempt, and that includes civil service and military pensions as well as Social Security income. Most other forms of retirement income are tax exempt as well. Even better, homeowners age 65 and over don’t pay state property taxes, although individual localities may impose such taxes.
1. Wyoming
The often-overlooked Equality State is a great retirement destination. It greets you with a big, blue sky and wide-open prairies, mountains and canyons. If that’s not enough, Wyoming also has no income tax, no estate or inheritance tax, and the state sales tax is 4 percent.
The median home value here is $192,600, and real estate taxes are the eighth lowest in the country. Wyoming sports the nation’s fifth lowest crime rate, as well. However, if you need to buy health insurance on the individual market, know that Wyoming’s premiums are the third highest in the nation.
We have just retired to New Hampshire and love it. When looking for housing you need to do your homework on local real estate taxes.
Summer in Ohio, winter in S Texas. Low electric bills in summer. Ohio has great weather in summer. Low heating bill In winter, S Texas has mild winters.
Where does Virginia rate
I retired in Michigan and moved home to West Virginia. Lots of beautiful places to visit and wonderful people to talk to. Seems doable on a fixed income.
I used to have a lot of relatives in the Thermopolis, Wy area! Some might still be there. A lot of family on my mom’s side.
That was very interesting, always wanted to know where’s the cheapest place to live.
Thermopolis. We lived there 20 years. C.eanst air and healthy hot springs!
Please tell me few towns outside Jacksonville! I am looking right now to buy a home! South East or South West of Jax. , toward St John or St Ausgustine! ThankYou