December 30, 2013 — (Note: A slightly different version of this article by Topretirements founder John Brady originally appeared in the Dec. 17 USA Today).
Millions of baby boomers are starting retirement with fewer financial resources than they had planned on. The various reasons for the shortfalls represent a perfect storm for boomers: defined benefit plans are largely a thing of the past, not saving enough money, poor investments, unexpected emergencies, or losing their jobs years before the expected retirements. To maintain their current lifestyles on a reduced budget, many have decided that a tax-friendly place to retire might be the way to go. But while no one wants to pay taxes, that priority could be misplaced. Here are 5 reasons to rethink the idea that lower taxes should drive your retirement.
1. Life is short – enjoy yourself. You have worked hard all your life. So why not dare to think about retirement as a new adventure. When Topretirements.com recently asked its members what the best thing was about their retirement, none of the top 3 answers – “having less stress”, “getting to do what I want”, “having more time” – had anything to do with money. Keeping taxes low is desirable, but probably not as critical as finding a place to retire where you can enjoy the lifestyle and activities you’ve always dreamed about (see link to that survey below).
2. Reduced income means lower taxes. Once you stop working full time you will have less income to tax. Chances are that once standard exemptions are factored in your total income will be low enough, even in the few states where Social Security is taxed, that you will be liable for minimal, if any, income tax. Is it worth it to move to a new state just to save a small amount?
3. Figure out your real retirement priorities. Our article,”So Many Places, So Hard to Decide: 10 Steps to Finding Your Ideal Place to Retire“, might help you find out what your highest priorities are for retirement. Doing what you want, even if it means a slightly harder time economically, is going to be a lot more fun than saving a few bucks on taxes.
4. States and localities with low taxes might come with a lower quality of services than you are used to. Public services might be below your expectations: public libraries, community centers, universities, police departments, etc. often don’t get the financial support you might think they deserve.
5. Your tax situation in any given state is a complex picture, subject to change. It is difficult to get clear information from individual states on all the ways their tax laws could affect your situation. Taxation of pensions, retirement distributions from your 401(k) and IRA, social security benefits, and senior exemptions are all over the map. Taxes differ from municipality to municipality. Worse, as the political winds change, so can these laws.
If you do decide that moving to a low tax state is a priority
Here are some thoughts to consider:
– Weigh your other priorities first – your lifestyle dreams, climate preferences, and desire to be near your family are still important.
– Hire a tax professional to determine your potential exposure in your new state. A pro-forma tax return is the only real way to know if a new state offers a meaningful tax break.
– A tax-friendly state does make sense for certain individuals. For example if you are going to keep working, get a sizable pension, or have millions of dollars in a 401(k) plan, finding a state that goes easy on taxing those items could save you tens of thousands of dollars over time.
– Look out for property taxes. These are usually the most onerous taxes for retirees because they bear no relation to your income. Some states like California and Florida have generous property tax protections. But you don’t necessarily have to move to reduce your property taxes. Once you retire you should consider downsizing to save on all kinds of costs, not just taxes.
– Sales taxes are usually not very important to retirees. With your reduced disposable income, the state sales tax differences from state to state will be minimal, unless you are the kind of person who likes to buy a new car every 2 years. And necessities like food are usually exempt anyway.
If you have other good reasons to move to a low tax state, so much the better. But keep in mind what the wise old tax lawyer is fond of saying: “Don’t let the tax tail wag the dog”. In other words, look at the whole picture, as your quality of life is what’s important. If you are fortunate to have a lot of money, don’t let it get in the way of your happiness.
Comments? How about you, are you looking for a low-tax haven for your retirement? What do you think are the pluses and minuses of going the low tax route? Please share your thoughts in the Comments section below.
For further reading:
Best and Worst Things about Retirement: Our Members Speak
Finding Your Most Tax Friendly State for Retirement (a 2 Part Article)