Most Important Best Place to Retire Criteria: Taxes, Affordability, or Location?

November 23, 2009 - It’s impossible to see into the minds of our readers to try to assess their motivations in finding their best place to retire. We do, however, have some evidence based on which of our articles get read the most. No surprise, articles on low-tax states and most affordable always attract many readers. As in that rude truism, “It’s the Economy, Stupid”.

One of our pet peeves is the overemphasis that many people place on low taxes as a retirement criteria. In this article we will argue why overall affordability and location should be more important than blind allegiance to the “lower taxes is better” search priority.

First, with the exception of property taxes, most taxes are based on your income. If your retirement financial position hasn’t worked out as well as you wanted, then income is what you tend not to have. So paying taxes on that lack of income shouldn’t be much of a problem. If you choose to live in a state that doesn’t tax social security income that’s a plus, but not an overwhelming factor. Some examples might help illustrate the point. Assuming that you will get $20,000 from social security a year, at a typical state income tax rate of 5% you would pay $1000 in state income taxes before exemptions. Not trivial, but perhaps not a big-enough reason to move to a different state. The potential payoff gets better in a state that also doesn’t tax pension income. Assuming you also get a nice pension of $20,000, you will save an additional $1000 in states that exempt that form of income.

Unless your investment portfolio is very large and very successful, the taxes on your dividends and interest income are going to also be very small. If your $100,000 portfolio could throw off $5,000 in income, then that would mean another $250 in taxes. Sales tax is not that big a factor either. Assuming you spent $20,000 a year on taxable items (food, clothing, and some other items are often exempt), that would be another $1000 you would save if the state sales tax was 5%.

Seven states have no income tax, while 5 have no sales tax. Alaska, the most expensive place to live in the U.S., is the only state with neither a state or an income tax. You can find a complete list of states that do not have income or sales taxes at our “Most Tax-Friendly States“. The Tax Institute has a good approach to this issue, where they look at overall tax burden (where all taxes are combined). The 3 states with the lowest tax burdens are Alabama, Delaware, and Tennessee.

Another factor about taxes is that most, but not all of the time, taxes are associated with services provided. The low tax states have typically lagged behind in support for schools, libraries, social services, etc. Be prepared for fewer services in lower tax states, a factor which sometimes results in lower property values and appreciation. Taxpayer revolts about tax increases and service cuts can lead to social and inter-generational strife, as we saw last week in the California university system.

Property tax is to a certain extent a regressive tax - it is based on the value of your home or property, not your income. So if you continue to live in your current home after retirement, but now have a greatly reduced income, don’t expect to see your tax bills correspond to your changing ability to pay. If you pay high property taxes now and are worried about money, it makes sense to either downsize in your current community or move to state or town where property taxes are lower.

Overall affordability. To us, overall affordability is a better criteria for selecting a new retirement town or state than is tax-friendliness. Is real estate less expensive, allowing you to maintain your state of living but take equity out of the home you are selling? Are income, sales, and property taxes lower? Is the overall cost of living (energy, food, services) lower? Is there a chance to work part-time to make some income? The combined weight of these factors can be a lot more important than tax reasons alone. You can use this site, your library, and government sites to get a handle on overall affordability.

Location. In our opinion location should be the number 1 priority in your retirement decision, assuming you have sufficient income to have several options. People who retire near their children or friends are often happier than those who decide to move far away from them. Obviously if you or the children/grandchildren are willing to travel, that could be less of an issue. What is the community like - is it pretty, the homes well-maintained, and the zoning strong? Weather, climate, and available activities associated with particular locations are also important in letting you pursue the lifestyle that keeps you busy, active, and fulfilled.

Bottom line: We are of the opinion that life is meant to be lived. So basing important retirement lifestyle decisions on taxes is like having the tail wag the dog. Please be sure to contribute your comments and opinions in the comments below.

For further reference:
20 Most Affordable Places to Retire

With Some States in Trouble, Be Careful About Worst States to Retire

Deciding which state you ought to retire to is hard enough. First you have to find the right climate, tax structure, environment, culture, crime, etc. But with the economic recession of the last few years another factor enters in - is your state in financial trouble so deep it might not be able to dig itself out (think worst states to retire)? The Pew Center on the States issued a report last week that should be enough to give you pause before you move to a new state, and might even convince you to move out of others.

The Pew Center named 9 troubled states in addition to California in its report, “Beyond California: States in Fiscal Peril”.

The top 10 Troubled States in the report are:
- California
- Arizona
- Florida
- Illinois
- Michigan
- Nevada
- New Jersey
- Oregon
- Rhode Island
- Wisconsin

These states’ budget troubles can have significant repercussions for retirees as well as general residents. Everyone in an affected state will be displeased to see higher taxes or fees; layoffs or furloughs of state workers; longer waits for public services; more crowded classrooms; higher college tuition, and less support for the poor or unemployed. But retirees could also see reductions of favorable treatment for retirees (such as property tax or income tax relief) as well as declining property values. Intergenerational strife is another possibility, as young families and seniors square off over education budgets.

California appears to be teetering on insolvency at times. “But while California often takes the spotlight, other states are facing hardships just as daunting,” said Susan Urahn, managing director of the Pew Center on the States. “Decisions these states make as they try to navigate the recession will play a role in how quickly the entire nation recovers.”

In the report, Pew’s researchers identified factors that have contributed significantly to California’s difficulties, then determined the degree to which other states are experiencing the same challenges. These factors are: (1) loss of state revenues; (2) the relative size of budget gaps; (3) increasing joblessness; (4) high foreclosure rates; (5) legal obstacles to balanced budgets—specifically, a supermajority requirement for tax increases or budget bills and (6) poor money-management practices.

While the rest of the states share important characteristics with California, they may not be destined to follow in the Golden State’s footsteps. Some of these states already have responded aggressively to their budget crisis, although it is too soon to tell whether their actions will put them on solid fiscal footing.

“The 10 states are hardly the only ones at risk in this time of record-setting revenue drops, high unemployment and far-flung fallout from the housing bust and credit crisis. Virtually all states have been stressed by the downturn,” Urahn said. “We expect that when state lawmakers next spring turn to crafting their new budgets for 2011, many will confront an even tougher set of challenges. States already have made significant cuts, revenues continue to drop, and stimulus funds will be running out. ”

The Pew Center identified 4 trends running through the economic troubles of these 10 states:
- Unbalanced economies
- Revenues and expenditures out of alignment
- Limited ability to act.
- Putting off tough decisions

States’ fiscal situations are widely expected to get worse even if the national economy starts to recover. At the end of 2010, federal stimulus money that helped states meet some of their expenses will begin to run out.

Bottom line: The Pew Center emphasizes that some of the 10 states are making moves to solve their problems. There are plenty of other states that are also in trouble, and they might not be working on their problems. The point is that you should think twice about the state you might be considering moving to. Keep tabs on their fiscal health to make sure they are headed in a positive direction. If they are not, maybe you should reconsider moving there. Likewise if you live in a state with problems and were already thinking about moving out - maybe this is a good time.
For more information:
Read the full Pew report

Existing Homeowners to Be Eligible for Tax Credit

Nov. 5, 2008. Much to the glee of builders, bankers, and real estate agents, the bill to extend the tax credit for new home buyers was passed by both the House and the Senate. President Obama is expected to sign the legislation very soon.

But wait, there’s even better news! Under the new law existing homeowners, not just first-time buyers, will be eligible. The legislation is expected to help keep recent economic momentum going, perhaps not at Cash for Clunkers levels, but positive nevertheless.

The National Association of Homebuilders (NAHB) was very pleased with the news. NAHB Chairman Joe Robson commented: “We commend lawmakers for acting in a bipartisan manner to extend the first-time home buyer tax credit beyond its Nov. 30 deadline and expand it to a wider group of home buyers. The tax credit has proven to be a powerful economic incentive. Today’s action by Congress will further stabilize housing and the economy by creating new jobs, stimulating home sales, reducing foreclosures, cutting excess inventories and stabilizing home prices.”

The new law continues the $8,000 credit for new home buyers who purchase their homes by April 30 and close on them by June 30, 2010. A new twist is that now existing homeowners buying a new home as their principle residence are also eligible for a tax credit, $6,500 in their case. The new bill expands income eligibility to individuals making up to $125,000 and $225,000 for couples. Existing homeowners will have had to have lived in their old homes for at least 5 consecutive years out of the last 8.

Bottom Line:
If you were thinking about buying your retirement home but were on the fence, and you have income you would like a credit against, this might be just the incentive to pry you off. Buy early and avoid the rush!

Meet the New Boss - Your HOA

NOTE: This is the first of 3 part series about Home Owners Associations. This article introduces the topic. The 2nd in the series feautures a very helpful interview with Joe West, CEO of the Community Associations Network about the issues buyers should know about Home Owners Associations before they sign on the dotted line. Part 3 focuses on the transition from developer-run HOA to one controlled by the HOA. Many people moving into an active adult community will find new meaning in the lyrics from that great 70’s song by The Who, “Won’t Get Fooled Again”. In the song the punch line is “Meet the New Boss, Same as the Old Boss”. That’s where Pete Townsend warns that “the new revolution” might not be any better than the last one. The parallel for baby boomers moving into a 55+ development applies to the Home Owners Associations (HOAs) that govern most these communities - be careful what you are buying into.

The subject of Home Owners Associations is a very complex one and cannot be adequately covered in one short article. In this piece we will try to lay out some of the broader issues that you should be aware of when moving into a community governed by a Home Owners Association.

If you have been living in the suburbs in a single family house for the last 30-some years, you might not be prepared for the minutiae that your new Home Owners Associations is lord over. To name just a few such rules:
- Dress code in public areas; joggers must wear shirts, cover-ups in common areas, etc
- Pets can’t weigh over (25, 40, ?) pounds
- Number and breed of pets is restricted
- Use of common areas like pools, picnic areas, and trails prohibited after (9, 10, ? PM)
- Renters must rent for at least (1, 3, ?) months (or no renting at all)
- Renters cannot use certain facilities on same terms as owners
- Parking restrictions apply by location or type of vehicle
- Guest restrictions
- And on and on and on

This is not a piece against Home Owners Associations. They are an important and welcome component to successfully living in a 55+ or condominium development. These organizations are essential to the effective operation of any community: they set the rules, enforce compliance, manage the assets, and look out for the financial and legal well being of their communities. The people that volunteer for these boards tend to be unsung heroes - they work hard and they spend a lot of time unraveling really thorny questions. Far too often their only reward is to be interrupted and criticized everywhere they go by someone whose narrow self-interest was affected by a policy or rule.
Some folks have a constitutional inability to live around rules. Those people might want to think twice before moving into a community with an HOA, because the association is going to have a lot to say about what goes on (or doesn’t go on) in their new community. As an extreme example, if they want to have junk cars or funny lawn ornaments in their yards, or have a pen full of barking beagles, an organization with an HOA is a bad fit.

Regardless of whether you go into your new community positively or negatively disposed towards HOA’s, here are some considerations you should keep in mind.

1. Due diligence. Before you buy your new home find out as much as you can about your HOA. Read the rules, check out the minutes, and assess the financial condition of the HOA. This step is crucially important so you are not surprised later on.

2. Be aware of the law. Some states, notably Florida and California, have extensive laws regulating Home Owners Associations, while other states have almost no law on the subject. You should be assured that your association is following both the regulations and best practice. For example, you generally have a right to prompt and accurate minutes of official HOA meetings.

3. Learn about the problems your community might be facing. Some issues to be concerned about: foreclosures or delinquent dues; excessive litigation with neighbors, former owners, or tenants; overdue major maintenance items (and funding thereof).

4. Who are the people on the board? It is always wise to meet with at least some of the current board members. Ask them about the big issues facing the community and get a sense for their qualifications and ability to handle them. The quality and expertise of the board is extremely important to handle the significant issues they face.

5. How effective and how prepared is the HOA for handling troublesome issues? Until you move into a community you probably aren’t aware of all of the issues that need to be managed - it can be almost as complex as running a small town or a very large business. Some of these include:
- Major maintenance sinking funds (money put aside for future major projects like paving, roofs, elevators)
- Annual fee increases, assessments, and budgets. What is the history of increases? Look for an organization with steady, modest increases and an absence of unexpected assessments. Erratic fees and unpleasant surprises are usually a sign of ineffective management
- Insurance. Is the HOA adequately covered for legal and natural disasters? Are they paying too much or have the wrong policies in force?
- Pets. Few issues cause more trouble between sometimes oblivious owners and touchy non-owners. Sizes, breeds, numbers, access to facilities - the potential areas for conflict are legion
- Renters. How long (or how short) can they stay, do they have equal access to facilities?
- Visitors and family members. What are the rules about visitors, especially younger people in a 55+ age restricted community?
- Facilities. Go to just about any facility (swimming pool, exercise room, etc.) within an active adult community and look for the list of rules. Dollars to donuts the list of potential infractions will be long and onerous. That’s because someone, somewhere, was inconsiderate. Once they annoy the wrong person, a rule will come out to try to control that issue.
- Water leaks. In many communities water leaks, particularly in unoccupied units, are a major issue. Are there policies and procedures for prevention and remediation?
- Environmental problems. Mold, asbestos, chinese dry wall, leaking oil tanks, natural disasters - all of these issues must be handled intelligently.
- Personnel. An HOA usually has employees - sometimes a facilities or property manager, a business manager, security guards, maintenance personnel, clubhouse and possibly restaurant workers. Does the HOA hire effective managers and monitor and review their performance?
- Rule making history and enforcement. An effective HOA has to be a bit like Solomon. They must have specific and general rules in place to cover most contingencies, and be prepared to reasonably address problems that come up unexpectedly. Look out for long lists of petty rules that try to cover every narrow issue that ever emerged. On the other hand when truly troubling issues come up, like one we know of where a disturbed adult child continually harassed his neighbors, is the board up to the task of removing the source of trouble?

6. New communities often have a bigger challenge. A new development generally forms an HOA soon after the first owners move in. At the beginning there might not be a big talent pool to draw from, and there is no institutional experience. So the new HOA’s track record might be rocky at first.

7. Be prepared to serve. Like we said earlier, there is no great reward for serving on a volunteer HOA board. But somebody has to do it to ensure the success of the community. Particularly if you have management, legal, or building related skills; and especially if you have common sense, volunteer to take your turn on the board. Someone has to run the place; you might as well know the person doing the job!

For further Reference:
Part 2: What You Should Know about Your New Home Owners Association
Wikipedia article on Home Owners Associations (very good)
Community Associations Network
Community Associations Initiative
When Active Adult Communities Go Bad