July 31, 2018 — Although “low taxes” was the third most important consideration for finding a place to retire in our recent Topretirements.com survey, we know there are a lot of baby boomers who have set moving to a low tax state as their most important goal. Although for some that might be a valid objective, we are not so sure that for the majority of folks it should carry so much importance. This article will explore 6 reasons why.
It is a sad fact that about half of retirees do not have sufficient financial resources to maintain their current lifestyle once they retire. There is no shortage of reasons for these financial shortfalls, some of which include: not saving enough money, poor investments, divorce or widowhood, having to take care of adult children or parents, medical situations, or losing a job before expected retirement. For these people, maintaining a comfortable lifestyle is going to take some adjustments. That probably means finding a cheaper place to live, and could also mean working longer than they had planned. But, avoiding taxes will be the one issue they generally don’t have to worry about.
There is another segment of retirees for whom moving to a low tax state is a possible consideration. These are the lucky people who will have significant retirement income, most likely from a pension. But while no one wants to pay taxes, making that as priority #1 could be a mistake. Here are 6 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 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.
2. Reduced income means lower taxes.
Once you stop working full time you will have less income to tax. Particularly for people who do not have a traditional pension (or a very small one), chances are income taxes will not be a big issue. Even in the few states where Social Security is taxed, once standard exemptions and deductions are factored in your total income will probably be low enough that you will pay very little, if any state income tax. If that is the case for you, 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. Retiring to a place where you can do what you want, even if it costs a little more, is going to be a lot more fun than saving a few bucks on taxes.
4. Don’t asssume a state’s tax reputation applies to your situation. Taxes in any given state will apply to your situation in complex, ever-changing ways. It is difficult to get clear information from individual states on all the ways their tax laws could affect your situation. The taxation of pensions (and from what source – private, state, municipal, military), retirement distributions from your 401(k) and IRA, social security benefits, and senior exemptions are all over the map. Standard deductions and exemptions can be a crazy quilt that defies easy categorization. Taxes differ from municipality to municipality too. So just because you heard a state isn’t tax friendly doesn’t mean that will be the case for you. Hire an accountant to do an analysis for you before you make any big moves.
5. 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, community colleges, recreation departments, public safety departments etc. often don’t get the financial support you might think they deserve. Although having good public schools might not be a direct issue for you anymore, they are a good support for property values and a sense of community.
6. Property tax is the one tax you can’t argue with.
The one tax that is not dependent on your income is the property tax. If you are currently paying high property taxes and your retirement income will be a lot lower than it is now, you have a very good reason to look for a solution. After all, who wants to pay high property taxes if it means cutting your lifestyle. High property tax states like NJ, NY, and those in New England are seeing a retirement exodus because of that. But moving out of state is not the only option. You can downsize, move to a less expensive house, or rent (property taxes have to be paid by your landlord, of course, but if you can convert your home equity to cash you have more money for lifestyle).
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 very important.
– A pro-forma tax return is the only real way to know if a new state offers a meaningful tax break. Hire a tax professional to determine your potential exposure in your new state.
– 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.
– 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)