February 12, 2016 — In looking for your best place to retire it is nice to know that there are some states that really want you. They have taken concrete steps to make themselves more desirable for retirees. These states (and many towns) know that the homes retirees buy and the money they spend locally can be an important, and clean, industry. They call it the “Mailbox Economy” – where the local industry takes the form of the pension, 401(k), dividend/interest, and Social Security checks that arrive in local mailboxes and bank accounts every month. Some of these states might come as a surprise.
We developed this list of the top 10 retirement states in two ways. We first attacked it from the negative angle – ruling out states with factors that tend to repel retirees. Then we considered some of the positive things states do to attract people in retirement. Note as always that everyone’s situation is different – for various reasons these states might not be right for you. For example if your income or estate is small, taxes aren’t one of the factors to consider. If you love a particular state or you want to be near your grandchildren in another, those are important considerations. Likewise the availability of healthcare and climate should be considered.
10 States That Do the Best Job of Attracting Retirees
Our list includes most of the states that have no income tax, with two exceptions. We excluded Washington (high estate taxes on relative small estates), and Alaska (an expensive place to live and very cold in winter). Here are the 10 Best States to Retire by our criteria (the links for each state will take you to a mini-retirement guide):
– Florida. No income or estate tax. A top notch program to protect homeowners from property tax increases. Not to mention a warm winter climate.
– Nevada. No income tax, no income or estate tax
– South Dakota. No income tax, no income or estate tax
– Texas. No income, estate or inheritance taxes. A Certified Retirement Community program
– Wyoming. No income tax, no estate or inheritance taxes
– Louisiana. Certified Retirement Community program, no estate or inheritance taxes
– Mississippi. Certified Retirement Community program and some of the lowest property taxes in the nation, no estate or inheritance taxes
– North Carolina. Certified Retirement Community program, no estate or inheritance taxes. Out of state retirement income is generally taxed
– Tennessee. Retire in Tennessee Program, no no estate or inheritance taxes
– West Virginia. Certified Retirement Community program, no estate or inheritance taxes. Social Security is taxed, however, so that is a potential negative.
In addition to the two other states without an income tax, Alaska and Washingon, some other states are attractive for tax reasons. Georgia offered a very generous $65,000 per person retirement exclusion in 2015, and it might increase this year. Kentucky allows a $41,110 per person exclusion. Almost every state offers some type of break for people over 65, although most are fairly small.
Having developed our top 10 list, this next section will show you the logic for how we developed it.
Obvious problem states
An easy list of states to exclude are those that tax Social Security benefits, since there are only 13 of them. They are: CT, CO, KS, MO, MN, MT, ND, NE, NM, RI, UT, VT, and WV (some of these exclude a portion of these benefits). Although the taxes you pay Social Security are probably not going to be too onerous, taxing those benefits does not make a “retirement-friendly” statement.
Contenders – Those with No income tax
There are seven states that have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Obviously that makes those states attractive to retirees interested in minimizing taxation. Tennessee and New Hampshire are also considered tax friendly because they don’t tax earned income. However, since they do tax some interest and dividend income, which is often an important source of support for retirees, that by itself doesn’t propel them to retirement-friendly status. For retirees with significant pension income, however, TN and NH might be appealing.
Some other states are welcoming to retirees with pensions, although what they include and exclude can be tricky (military, government, and in-state pensions are most often excluded in whole or part).
Homestead and other Property Tax Exemptions
Although almost all states and many cities have some type of program to control or reduce property taxes on people over 65, most of them are extremely limited and pertain only to people with limited incomes. However a few have taken action that protect practically everyone, not just those with low incomes or over 65. Two of the most far-reaching programs are in California and Florida, and they definitely help retirees. It is worthwhile checking when considering a state or municipality to see if you might qualify for property tax relief – it can make a difference.
California’s Proposition 13 restricts annual increases of assessed value of real property to an inflation factor, not to exceed 2% per year. However if you sell your home and buy a new one the taxes will be computed on the value at the time of purchase, so the law tends to discourage people from moving. Florida’s Save Our Homes program limits the annual increase in assessment so that it does not exceed the lower of the following:
a. Three percent of the assessed value of the property for the prior year; or
b. The percentage change in the Consumer Price Index (CPI)
Estate and Inheritance Taxes
Since retirees are in the last third of their lives they should be thinking of their estates. Fifteen states and D.C. have an estate or inheritance tax; New Jersey and Maryland have both. A few of these are in synch with the federal estate tax; they come into play with estates over $5.450 million (2016). However some, particularly in the Northeast, start taxing estates at much lower levels. Those states should not be viewed as retirement-friendly, at least for people with larger estates. They include Connecticut, Illinois, Iowa, Kentucky, Maine, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington.
Encouragements that go beyond taxes
Six states have established Certified Retirement Communities to encourage retirees to settle in their states. Those programs typically require each city to meet certain criteria including affordable cost of living, low taxes, low crime rate, quality medical care, recreation, educational and cultural opportunities – and most importantly, a warm, inviting community spirit. Those states include Texas (with almost 50 cities in the program), Louisiana (5 towns), Mississippi (15 towns), West Virginia (6 areas), Tennessee (19 rural and urban communities), and North Carolina (13 communities). Kentucky had a certified program but it appears to be inactive.
You might find some of these states more or less attractive for your retirement. Florida and Nevada have no problem attracting retirees to their tax and weather climates. Many of the other states on our list are there because of the things they have done to promote retirement as an economic development strategy. But regardless, you can be confident that these states want retirees and have many good reasons for you to retire there.
Comments? What do you think? In your experience do these states strike you as retirement-friendly? Do you know of other states we should have considered? Please share your thoughts in the Comments section below.