Note: This is our 2012 list, which was updated in March, 2014. See our “Worst States for Retirement for 2014” article.
January 10, 2012 — There are plenty of best places to retire lists. But how about the places where it’s not such a good idea to retire? Last year our “worst 10 states” list caused quite a sensation, so we are back at it again for 2012. The purpose is to try to help baby boomers understand where, all other things being equal, they can enjoy their hard-earned retirement without taking on more problems. To make sure you don’t miss updates to this and other lists like it, sign up for our free weekly “Best Places to Retire” newsletter. And of course, don’t miss our 2012 list of the 10 Best States for Retirement.
Your retirement is unique
Every individual has to consider his or her own criteria for identifying the worst or best states to retire. One of the most important factors for anyone is proximity to family and friends. So, if you want to be near your grandchildren the worst state on our list could be the best state on your list. Likewise, you might not share the same considerations we used to develop this list. Tax issues might be most important for you, or you might not care about spending winters in a warm state. Our 2012 list is based on 5 considerations that we think will be important to most people, but freely admit that these factors could be totally irrelevant to many other folks.
Our Top Weighting Criteria
This year we expanded the criteria we used from 3 to 5 factors. The factors for 2012 are: Fiscal health, property taxes, income taxes, cost of living, and climate. Each criterion was worth up to 1 negative point. If these are not key factors for you, your list might look very different. Also new this year is a page where you can customize your “worst states” list by eliminating criteria that might not be important to you. You will find detailed explanations of these factors along with our sources following the list. The negative point range this year went from 4.05 for #1 CT to 2.45 for #10 WI.
The 10 Worst States for Retirement – 2012
Three new states made our list this year: Vermont, Minnesota, and Maine. That means that 3 states were lucky enough to leave the list: Ohio (low property and income taxes), Nevada (in terrible financial shape but no income tax and low property taxes), California (bad financial shape and high property taxes, but almost no income tax on our prototypical couple, plus a great climate). The additions and subtractions do not necessarily mean that these states got worse or better since last year; that probably has more to do with the changes from our new rating factors. And, since the data is always trailing, the ratings might not be a perfect reflection of today’s reality.
1. Connecticut. We actually had a numerical tie for 1st place. CT won the tie-breaker because it has much higher property taxes, income taxes, and cost of living than Illinois. Most pension income is taxable, although there are some significant exemptions for social security, depending on income. CT had the 3rd highest tax burden of any state in 2009. The Nutmeg State does have considerable charm and some terrific places to live like the resurging city of New Haven, the quaint village of Stonington, or upscale Madison.
2. Illinois. Illinois (along with Nevada) faces serious economic troubles. Its pension funding, deficit spending, unemployment, and foreclosure rates are among the worst of any states. The state began to address its problems last year when it raised income tax rates. Although Illinois does not tax most pension or social security, other earnings and investment income are taxed at a fairly high rate thanks to its 5% flat tax rate.
3. Rhode Island. The Ocean State has severely underfunded pension/health liabilities and budget deficits. It has the 5th highest median property taxes paid. Our prototypical couple would face much higher income taxes here than they would in most other states. It does have some great places to live like in the bustling city of Providence, or along its extensive coastline and numerous bays and harbors in towns like Westerly.
4. Vermont. The Green Mountain State has very high median property and income taxes, with a top 10 cost of living. Winters here are better for skiing than golf.
5. Massachusetts. In the Bay State our prototypical retiree couple would face property taxes that are among the highest of any state. Even though social security income is exempt, income taxes would be high for our couple because of the flat rate applied to other earnings. Most government pensions are exempt, but private sector ones are taxed. The cost of living is high. See reviews of great places to retire like the college towns of Williamstown or Northampton.
6. New Jersey. New Jersey residents are the biggest losers when it comes to property taxes – the median property tax in the Garden State is the highest in the U.S. at $6579. It also has the highest tax burden (as reported by the Tax Foundation), a large budget deficit issue, and a very high cost of living. New Jersey has both an estate and an inheritance tax. On the plus side, it excludes most pension and social security income for couples making less than $100,000.
7. Minnesota. Another newcomer to our list, Minnesota, would impose the 4th highest income tax on our prototypical couple. That is mostly due to the absence of any pension or social security exemptions. Property taxes are just below the top 10. Minnesota has a large budget deficit issue. Anyone care to winter in Minnesota?
8. New York. The Empire State was essentially tied with #9 Maine. We broke the tie because New York has the 4th highest median property taxes and one of the highest tax burdens. Surprisingly, the state did not earn any negative points for income taxes, since it offers generous exemptions for social security and pensions, along with a high standard deduction. Its cost of living is one of the highest, plus a very cold winter climate. On the plus side, New York’s Governor Cuomo is waging a campaign to limit property tax increases and improve the state’s fiscal condition. College towns like Ithaca can be awfully nice though.
9. Maine. Maine’s property taxes are much lower than New York’s, while Maine’s income tax on our prototypical couple would be about $1000 higher. Winters are even colder, but cost of living is lower. Maine’s governor has vowed to try to exempt retirement income from taxation, although nothing has happened on that front yet.
10. Wisconsin. Property taxes are among the highest in the country. It has a high foreclosure rate. Wisconsin’s high income taxes are mitigated somewhat for retirees because social security income is exempt and because there is a high standard deduction. Madison, of course, is a great place to live.
See our entire list of great places to retire by state.
Criteria used in developing this list
Fiscal health. Just as the U.S. government is spending more than it takes in, many of the 50 states have serious financial problems of their own. “The Widening Gap:” from the Pew Center on the States provides a good understanding of the problem. To determine the fiscal health component of our rankings we used 4 inputs this year: deficit, unfunded pension liabilities, unemployment rates, and foreclosures. Why do we think these are important things to rate on, you might ask? Just think about the turmoil Greece and Spain are experiencing as they are finally start to address their deficits and borrowing. Social services are being cut, taxes are being raised, and there is civil unrest. Similarly for states that run into financial trouble, the pain will be acute when the piper is paid, and you probably don’t want to be part of it. We combined these factors; if a state was in the top 10 for all four problems it received 1 negative point in the rankings (.25 each).
Property taxes. In our opinion property taxes are usually the most oppressive taxes for retirees, since they can be so high in some states and bear no relation to one’s income. The 10 states with the highest property taxes were awarded 1 point on a sliding scale, with New Jersey actually earning 1.1 points since its median taxes are so much higher than any other state.
State income taxes. We think too many baby boomer retirees focus too much attention on state income taxes as a reason to move. That’s because unless you have a lot of income, they are not a factor. In our analysis we created a hypothetical couple that has $70,000 in earnings from social security, pension, earnings, and retirement savings; equal to the top earning quartile of people 65+. Using data from the Congressional Research Service we assumed this couple received 20% of its income from social security, 23% from pension, and 47% from earnings and investments. We used those inputs to estimate income taxes for each state at tax-rates.org. Obviously, your earning profile will probably be different. If your joint earnings are significantly below $70,000, this rating component is probably not significant. Here is where you can see the ratings with this component eliminated. The 10 states with the highest taxes on this factor earned up to 1 negative point.
Cost of living. Most people retiring today are very concerned about how they are going to make it work financially. We awarded states with the highest cost of living 1 negative point.
Climate. We believe the majority of today’s retirees have a bias towards places with warmer winters. States north of the Mason-Dixon line were awarded a negative 1 point for their colder climate. (See also our 2011 article – “Worst Places to Retire for Weather and Natural Disasters“)
You can customize your “worst states” list by using the rankings on this rankings page.
Other criteria for identifying the best or worst retirement state:
While our rankings concentrated on fiscal health, taxes, cost of living, and climate, here is a more complete list of possible criteria for developing your personal rankings of retirement states and towns:
– Proximity to friends and family
– Sales taxes (Not usually a deal breaker, but annoying)
– Inheritance and Estate taxes (Some states have neither, a few have both)
– Education including colleges
– Cultural resources
– Natural disasters
– Fitting in socially, politically, religiously
Should the States Be Trying to Attract Retirees – and What Should They Do?
There are some states that actively try to attract retirees – notably Texas, Louisiana, West Virginia, Mississippi, and Tennessee. They have bought into the idea that the “mailbox” economic value of retirees (the pension and social security checks arrive in the mailbox) is as important as attracting new industries. Most of those retirees are being recruited are coming from the high tax states up north, only a few of which are actively trying to stem that tide. Property tax freezes for seniors, taxation of pensions and social security, and investments in infrastructure are some ideas that could help states in the northeast and midwest avoid losing valuable citizens whose retirements are being compromised by indifferent legislators. Share your ideas with them, and us!
More about our sources and criteria:
Pension/Health Funding and Budget Deficit data – Pew Center
Budget Deficit data – Center on Budget and Policy Priorities
Unemployment data – Bureau of Labor Statistics
Foreclosure rates – CNBC.com
Property Taxes – Tax-rates.org
Income taxes – here we used the income tax calculator from Tax-rates.org
Cost of Living – Missourieconomy.org
Tax Foundation Tax Burden by State
Tax Friendly States
The Most Important Issue Might Not Be What You Think
Our 2011 List of the “100 Best Retirement Towns”
Best Retirement States for 2012”
For a completely different look at the worst and best states, see this Bankrate.com article
We were happy to have seen this article extensively quoted by Yahoo.Finance, Money.msn, MarketWatch, and AOL.DailyFinance.
What do you think about our criteria and our rankings? Did your state make the list, or did it deserve to? Please share your opinion in the Comments section below.