Note: See latest version of “Best States for Retirement – 2014“.
March 29, 2011 — No article we have ever written attracted more attention than our “Worst States for Retirement“. Ever since the list came out last December it has been fiercely debated. In the end we think we accomplished our goal: we were able to get people to think about some of the important factors they should consider before they choose their best place to retire. This article will update the reverse of that article – the best states for retirement.
Rather than produce one ranked list of states for this article, which is always arbitrary, we will list a number of the best retirement states on the basis of economic factors: taxation, fiscal health, and cost of living. Note that in our opinion, state economic factors are not the only and are usually not the best criteria for selecting a retirement town. Other factors such as climate, physical and political environment, healthcare, and proximity to relatives and friend are normally much more critical. For the purposes of this article, however, those factors are so personal that we don’t feel it is our place to rate them for you – you know what you are looking for on these preferences. Some people want to live in a warm climate, while others hate high temperatures and/or humidity. When it comes to environment, some folks want mountains, others want the ocean or a lake, and yet others prefer a city. Some seek out a liberal political and religious landscape, while others prefer the opposite. As we try to stress over and over again, your personal criteria for retirement are much more valuable than…
The principal taxes are those on income, sales, and property. Fuel, cigarette, and inheritance/estate taxes are facts of life, but are generally not that significant or different among the states. If you are a retiree with a modest income, an income or sales tax probably won’t effect you too much. But if you have a sizable pension or other income sources, the income tax might be particularly important to you. If you rent or own a modest home, property taxes will not have much effect on you. But if you own a valuable house but don’t have a lot of income, property taxes could consume a significant part of your cash. As you will see, the tax mix gets even complex, and is very related to your own situation. Therefore our recommendation is that if taxes are very important to you, study this information and select states that be favorable to your needs.
Income Taxes. These states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire only tax certain amounts of dividend and interest income.
Income tax on pensions. These states do not tax federal, state, and local government pensions: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York, and Pennsylvania. Most of these states also exclude all or most private retirement plan income (except for Kansas and Massachusetts). There are some additional states that do not charge income tax on military pensions.
Income tax on social security. The majority of states do not tax social security income. The ones that do are: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont, West Virginia, and Utah
No sales tax. Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect sales tax. Note that many states permit cities to add to the sales tax.
Property tax. The 5 states with the lowest per-capital property taxes are: Alabama, Arkansas, Louisiana, Mississippi, and West Virginia. On the other hand, most of these states are often criticized for not spending enough on public programs such as education. Some of the highest property tax states (in terms of taxes paid as a % of income) are New Jersey, New York, Pennsylvania, Texas, Connecticut, Illinois, and New Hampshire. Many states have limits, or circuit breakers on how much people over 65 pay on property tax, or how much property taxes can go up for anyone (Florida, for example). These protections are worth knowing about (Contact the state Department of Revenue for more).
2. Fiscal Health
In our “Worst States” article we singled out Illinois, California, New York, and a few other states for the precarious state of their finances. To do that we relied on data from the Pew Center on the States Report on the States: Beyond California. We believe fiscal health is an important consideration in selecting a retirement state. States in trouble will have to do something to get their affairs in order. That could include cutting important services and it could mean raising taxes. Both could cause people to leave the state, reducing property values and making it that much harder for the people who remain.
The Pew Center compared all U.S. states to California, using its dire fiscal situation as the benchmark. It assigned California an index of 30 on a variety of economic factors such as budget gap, unemployment rates, and bond ratings. The U.S. average was 17. States which had an index lower than 17 were in very good financial health compared to CA and the rest of the states. The 6 strongest states, with indices below 10, were:
3. Cost of Living
According to MERIC (Missouri Economic Research Information Center), these are the states with the lowest cost of living indices as of the 4th quarter of 2010. Note that sometimes a low cost of living corresponds to low economic activity, which might mean it is hard to find a good job in these states. There are other cost of living considerations as well, for example: states in hurricane alleys or flood zones usually have high very high property insurance rates.
Putting it all together
States with low taxes and fiscal strength. Only 4 states made our ultimate category – they have low taxes (for retirees at least) combined with very high fiscal strength:
West Virginia (low property taxes)
Wyoming (no income tax)
Pennsylvania (low income taxes for retirees, but relatively high property taxes as a % of income)
Texas (no income taxes for retirees, but relatively high property taxes as a % of income)
Low tax states in terms of income, sales, or property taxes We included here states that do not tax pensions or social security. States whose fiscal health is worse than the U.S. median were excluded. States with unusually low cost of living have an *.
For further reference:
Most Tax-Friendly States
2009 Best Retirement States
Worst States for Retirement
What do you think?
As you can see from this article, choosing a retirement state for economic reasons is not that simple. To make a smart decision you need to weigh a lot of factors, which we hope we have outlined for you here. So what do you think – will you pick a state because of its financial health or tax treatment of retirees? Or maybe some other reason – perhaps not even considering the state situation – but rather choosing on the basis of some more local factor, like it has the college town you’ve always loved. Let us know in the comments section below.