March 17, 2018 — The most frequent question we get asked at Topretirements is, “what is the best place (state or city) to retire”. Interestingly, the negative of that query, what is the the worst place for retirement, sparks even more (morbid) curiosity. Seems like our Members want to know where to avoid almost as much as they would like to know the best places to retire.
This article presents our 4th list of the worst states for retirement, which we have been publishing since 2008. But before we get to that list we have one important thing to stress – everyone’s retirement situation is different. A one-size-fits-all approach will not provide the right answer for you. Your geographic and climate preferences, the kind of activities you enjoy, where your friends and family live – all of those considerations and more are far more important than any list you might come across, including this one. All of the states on this list have many beautiful towns where you could have a splendid retirement. For a counterpoint see: “10 Best States for Retirement – 2018“.
Factors we considered – and the new tax law
As far as this list is concerned, what makes a state unattractive for retirement primarily has to do with taxes and cost of living. Our list does not consider more subjective factors that might be far more important to each retiree.
The Republican led tax changes that go into effect in 2018 made a lot of blue states even more unappealing to retirees. Massachusetts and California, which joined the list this year, are good examples. Under the new federal tax bill only $10,000 of state taxes (property, sales, and income combined) can be deducted from your federal taxes beginning in 2018. Previously, those deductions took some sting out of the high taxes paid in many states. Now, for people with expensive homes and/or high incomes, almost every bit of those taxes hurts even more. The new deduction limits are also affecting property values in states with high taxes. For example, Moody’s Analytics estimates that average home values in CT might decline 5.6 percent in 2018.
High Property Taxes. If you own property, you can’t avoid these taxes. No matter how high or how low your income, you will pay taxes based on the value of your home. Since retirees generally don’t have a lot of income, this is our number 1 negative consideration.
Taxation of Social Security & Pension/Retirement Income
Thirteen states tax Social Security, four of those are on our top 10 list.
Your pension and other retirement income might be a bigger factor to consider. The type of retirement income, and where it comes from, has a big effect on state taxation. For example, is it from in or out of state, federal, a military or other government pension, or a distribution for an IRA or 401(k)? State taxation of pensions and distributions from 401ks, IRAs, etc. is all over the map, difficult to research, and changes frequently. Even more people are likely to be affected by the taxation of retirement benefits such as the Required Mandatory Distributions (RMDs) that you must start taking the year you reach age 70.5. On these matters you should use a tax professional to help make sure you get the most accurate information.
Cost of living
It looks like about half of retired baby boomers won’t have the resources to sustain the lifestyle they had in their working days. If you are going to have trouble making it in retirement, it makes a lot of sense to look for a place to retire where your scarce dollars will go further.
Low Estate and Inheritance Taxes
Millions of boomers have accumulated substantial estates, thanks to hard work and/or good fortune. Assuming you want to pass much of that on to our heirs, the presence and severity of any estate and inheritance factors should be considered. Fortunately for most people in that situation, the 2017 tax changes increased the federal taxable thresholds to $11.2 million per couple – now only the wealthiest people have to worry about paying federal estate taxes. However, a handful of states continue to have estate or inheritance taxes that kick in at much lower thresholds, and that can be an important consideration for the fortunate few.
Our rankings explained
This list is ranked with the amount of property taxes paid as the #1 consideration, with state income taxes for retirees the #2 reason (we used www.Tax-rates.org and other sources listed at end). To get a more complete picture, look at the pluses and minuses we have provided for each state – and rank them based on your own situation. For example if you are going to receive a large pension and are very concerned about how it will be taxed, stay away from states that will tax it. The same goes if your other income will be high, because you are now limited in what you can deduct from your federal taxes. See the end of article for links to the sources we used in this study.
1. New Jersey
Negatives: Highest property taxes in nation – the median tax paid is $6579. Taxes pensions. The State has an inheritance tax (the estate tax is repealed as of 2018). At 8.97% on incomes over $500,000 it has one of the highest marginal tax rates. Also has one of the highest cost of living (41 out of 51). It has the lowest pension funding in the country.
Pluses: The Garden State has perhaps the highest exclusion for all types of pension income, up to $100,000. Unfortunately if you income goes over that by $1, the exclusion goes away totally. Social security benefits are not taxed. Not to mention some of the world’s great beaches. NJ has a senior tax freeze program but it is hard to determine if that results in meaningful savings.
Negatives: Has the second highest property taxes paid in the nation, $4738 per year. Homes are generally expensive here, that means people pay a lot of tax. Estate taxes are high, although the exemptions are scheduled to match federal ones by 2020. Top marginal income tax rate is 6.99%, the lowest is 3%. Social security and retirement income is taxable for higher income residents. Cost of living is high (43rd of 51). Its credit rating is lower than most as its pension funding levels are ranked one of the worst in the country. The State has had great difficulty agreeing on a balanced budget.
Positives: CT has the highest personal exemptions in the country ($24,000 for a couple, although it starts to be phased out on incomes over $48,000).
3. New York
Negatives: Because of the high cost of housing Empire State residents pay an average $3755 in property tax each year, and in fancy suburbs the average is much higher. NY has one of the highest marginal tax rates of any state at 8.82%. New York has improved its estate tax situation: for people who die after Dec 31, 2018 the Basic Exclusion Amount is $5.250 million. Very high cost of living (48 out of 51).
Pluses: All government pension income, including social security income, is exempt.
4. Rhode Island
Negatives: Ocean State residents pay the 4th highest property taxes in the nation with a $3618 average. Social security and all retirement benefits are taxed. The estate tax starts on estates of more than $1,500,000. Marginal income tax rate of 5.99% on incomes over $139,400. High cost of living (#42). The state’s finances are under duress from deficits and pension funding – it has the 6th lowest pension fund rating in the country.
Positives: Its many bays, harbors, and oceanfront property make living near the water very easy.
5. Massachusetts comes back on our Top 10 Worst Retirement States list this year because of its high property taxes – residents pay an average $3511 per year.
Other negatives: Although Mass. has only one income tax bracket, it happens to be the highest base rate of any state on our list (5.1%). There is an estate tax on estates over $1 million. All private pension income is taxed. High cost of living (ranked 45th).
Positives: Does not tax Social Security, military, or government pensions. Ranked as the best run state in New England (12th overall U.S.)
Negatives: The State has high property taxes (average is $3507).The State has a high flat income tax rate of 4.95%. There is a tax on estates over $4 million. The State has the lowest credit rating in the nation. Its sales tax is very high at 8.64%.
Pluses: Almost all retirement income including social security is exempt from taxation. Cost of living is about average. Has some property tax breaks for seniors.
Negatives: Hard hit by the new tax bill, this state made the list this year for several reasons. The average property tax bill in the State is high at $2839 per year. California has the dubious distinction of having the highest marginal tax rate in the nation (13.3%). Couples with income over $59,978 will pay 6%. Pension income is taxable. Expensive: ranked 49th of 51 states and DC for cost of living. Los Angeles housing market is ranked the most unaffordable Metro in the country.
Positives: No tax on Social Security income nor estate tax. If you can afford to live here the State has a wonderful climate. It is ranked the 14th best run state. Proposition 13 sets appraised value of your home at what you paid for it, plus 2% max. annual increases. Thanks to Propositions 60 and 90, taxpayers over 55 can transfer some of that benefit to a new home.
Negatives: Very high property tax as a % of home value (4th). Social security and pension income are taxed. The marginal tax rate is 6.84%, which starts at a very low $59,660 for couples. There is an inheritance tax. There are no exclusions for pension or other retirement income.
Pluses: The 13th lowest cost of living in the country. Ranked by 247wallst.com as the 6th best run state in the country.
Negatives: High property taxes (9th highest as % of home value). Social security and pension income is taxed.There is a high marginal tax rate of 8.95% (on incomes over $416,700, but 6.8% on couple’s income over $63,350). Estate tax on estates more than $2.75 million. High cost of living (#41).
Pluses: It is a beautiful state with nice people! Its mountains and forests provide outstanding recreation. Ranked 19th best run state on the basis of unemployment rate, pension funding, credit rating, and poverty level.
Negatives: The 5th highest property taxes in the US as a % of home value (average of $3007). Retirement income is taxable. Relatively high marginal income tax rate of 6.27% on couples with income over $29,960 (and the highest rate is 7.65%).
Pluses: No tax on social security or military pensions. No estate or inheritance tax. Rated 20th best run state in the nation.
Most of the reasons why states made our 10 worst list have to do with money and taxes. There are more important considerations to think about, however. Use this list as a guide, but pick a place to retire based on the whole picture. Note that state tax laws change frequently and without much notice – be sure to check with state tax sites to get the most up to date information.
When deciding where to retire we urge you not to just focus on the negative. There might be many positive factors that will be more important to you, such as:
– Warm winter climate
– Good medical care
– Where your children, family, and friends live
– Where you have always wanted to live
– Recreational and cultural opportunities
– Natural beauty
– Low risk of natural disasters
Comments? Do you agree with this list, and if not, what states do you think are the worst for retirement? Do you have any other information about these or other states that would be interesting for this discussion? Please share your thoughts and experiences in the Comments section below.
Sources used to prepare this article:
How Does Your State Compare – 2017
State taxation of retirement income. This has a tool that lets you compare several states – very useful!
For further reading:
100 Most Popular Places to Retire – 2017
Many Southern States See New Tax Bill as a Boon to Their Economies
Insights From Fiscal 50’s Key Measures of State Fiscal Health
Worst States for Retirement – 2014 Edition 180 Comments!