By Katia Stern
We are frequently asked what the implications are for moving from one state to another during retirement. While there are many important qualitative factors to consider when planning to move, let’s look at some of the quantitative factors that often play a role in this decision.
While the reasons for wanting to relocate will vary, the primary question that arises is what the cost-of-living would be in various states. To answer this question, the key expense categories that need to be considered are income taxes, property taxes, housing costs, and cost of goods.
We will start with one of the biggest factors: income taxes.
Below, we see a heat map of the top individual income tax rates across the country:
It is important to note that these are the top income tax brackets and not effective rates. Income received during retirement can vary greatly across individuals depending on Social Security benefits, pension benefits, and portfolio income. Therefore, the effective rate at which one is taxed can vary greatly across states at different income levels. An example of this can be seen below:
In addition to income taxes, there are other factors that contribute to overall cost-of-living. Below is a chart showing estimated cost-of-living in states with a high proportion of retirees. The chart looks at income taxes, property taxes, sales taxes, cost of goods, and housing expenses. As mentioned above, it is important to note that the effective income tax calculation will vary based on taxable income, and this is meant to be used as a guide to see the potential differences across states.
We can see from the above that beyond income taxes, housing expenses are among the largest differentiators in living expenses.
If someone owns their home and does not have a mortgage, the cost of home ownership is going to be a smaller factor than it would be for someone who has a mortgage or who rents. Property tax laws vary across states too. Using California as an example, while the average effective property tax rate is 0.77%, Prop 13 has allowed many homeowners to pay less than this if they purchased their home years ago.
Because these variables will differ across individuals, it is important to look closely at the ones that will change and those that will be most impactful for each specific household. Therefore, when analyzing potential cost savings from relocation, one must keep in mind what will play the largest role in an individual’s cost-of-living composition.
It can be appealing to move to another state to save in taxes and expenses, which could allow for increased spending on travel and leisure activities. However, the benefit from residing where one has established residency and is part of a familiar community is one that cannot be measured quantitatively. Therefore, we urge you to use this data as a resource when having these conversations, with the awareness that the question of relocation is not one with a simple yes or no solution.