Factors to Consider When Relocating in Retirement

By Juliette Fairley | Print This Article

The most popular states to which professionals choose to retire are Florida and Texas. During the past two decades, 9 percent of all Americans over age 60—some 4.4 million people total—relocated, according to an AARP Aging and Migration report.

“Each state has a different taxing system, so find out what tax benefits individual states offer by contacting the municipal office in the city of your dreams,” advises Steven Gershman, a certified public accountant with KatzAbosch in Timonium, Md. “Do your research before deciding on a state to relocate to.”

When relocating in retirement, consider not only taxes but also cost of living, housing exemptions and the fiscal health of the state overall.

“In the past two years, the economy has tended to be fiscally weak so states are undertaking a lot of tax increases to strengthen their bottom line, which contributes to instability in the tax code,” says Kail Padgitt, a staff economist at the Tax Foundation in Washington, D.C. “You want to live in a state that is fiscally sound.”

In January, the Illinois legislature approved a 66 percent income-tax increase in an effort to end the state’s budget crisis. Texas, with a tax liability of 8.4 percent, competes with Florida’s at 7.4 percent for the lowest tax jurisdiction in the nation, while Illinois’ state-tax liability is 9.9 percent, according to a Tax Foundation report. New Jersey, New York, Connecticut and Maryland have the highest tax burdens at 11.8, 11.7, 11.1 and 10.8 percent, respectively.

Recent retirees prefer Florida and Texas in part because neither has a state income tax, which means no additional levy (beyond what the feds take) on capital gains and dividends or on pensions and Social Security as primary income. With the federal rate on long-term capital gains at 20 percent and on dividends at 39.6 percent this year, having no state income tax makes a big difference in net cash flow for retirees living on a fixed budget. Other states that have no income tax include Nevada and Alaska.

“Each state has its own benefits and drawbacks. The most significant difference in cost of living is typically in housing,” said Dean Frutiger, project manager at the Council for Community and Economic Research (CCER) in Arlington, Va., which sells cost of living indices on its website.

Read as a percentage of the national average, the overall composite cost of living index for retirees is 132.1 percent in Washington, D.C., 204.7 percent in New York City, 134.5 percent in Los Angeles, 114.7 percent in Miami, while the lowest is in Cookville, Tenn., at 80.5 percent, according to the CCER, which computes the cost of housing, health care, prescription drugs, consumer goods and services, groceries, utilities and transportation into one composite score.

Although housing tends to be the biggest expense, most states have a homestead exemption for the elderly called the Senior Citizens Homestead Exemption, which is an annual exemption available for residential property that is occupied by a person who is 65 years of age or older during the assessment year. The amount of the exemption varies but in Illinois, for example, the reduction is $4,000.

In Florida, the homestead program called Save Our Homes exempts all resident homeowners from paying most property taxes on the first $50,000 of the home’s value. So, if the value of the home is $200,000, Floridians who have declared the state their primary residence will only pay property taxes on $150,000—except that taxes for public schools get a lower exemption of $25,000. On the other end of the scale, Oklahoma residents are given a homestead exemption of $1,000.

Juliette Fairley is a Discovery Channel TV host, author and freelance writer based in New York. Her work has appeared in The Wall Street Journal, The New York Times, TIME magazine and other publications. She also hosted Cha Ching Money Makers on the Discovery Channel. The latest of her three personal-finance books is Cash in the City.

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