The location of your retirement can have an impact on your financial health during your golden years.
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Often times, retirees underestimate the cost of living, housing expenses and taxes. Analysts say choosing the right state for retirement can save retirees money and make a difference when it comes to monthly budgets especially for those living on a fixed income.
One main consideration should be taxes. “Taxes are a big item. States with no income tax or sales tax can offer a pretty big savings. It’s probably around a 10 percent savings straight up,” says Lloyd Korman, a New Jersey-based tax consultant. On the flipside, he says choosing a state with higher taxes could cost retirees as much as 20 percent more compared to living in a lower-tax state.
Based on taxes, housing costs and the cost of living, retirees may want to avoid these states if they are looking to keep more of their retirement dollars.
California is known for its sunny weather and beaches but it comes at a price. The state has the highest income tax rates in the country as high as 13.3 percent. California also has the highest state sales tax rate at 7.5 percent. Retirement income including IRAs, 401(k)s and most pensions are taxed as ordinary income. There is also a state penalty for early distributions from IRAs and 401(k)s. Bottom line: expect to get taxed on most forms of retirement income. Social security benefits, however, are not taxed.
Outstide of taxes, cost of living is high. California has the highest gas prices in the country, averaging more than $2.62 a gallon for regular unleaded. Home values also rank among the highest in the country. As for a trip to the beauty salon, it will cost you around $60 on average in Los Angeles, nearly double what it would cost in cities such as Phoenix or Denver.
Don’t let Hawaii’s beaches and palm trees fool you into thinking the state is a bargain paradise. Cost of living in Hawaii is high with Honolulu ranking second among the most expensive cities in the U.S. according to The Council for Community and Economic Research. Housing is a big expense. For example, the average listing price for a four bedroom, two bath home in the state tops $650,000, the highest in the country according to Coldwell Banker. Household items may cost more too. The price of orange juice is around $5.50 or about 50 percent more than what you would pay in Los Angeles. Gas prices also rank among the highest in the U.S.
On the tax front, Hawaii has one of the highest income tax rates with the top rateabove 8 percent. But social security benefits are not taxed. IRA payouts are taxed if the account was funded by an individual and not through anemployer. 401(k) distributions are also taxed but matching contributions from an employer may be exempt.
Vermont is known for its ski resorts, maple syrup and Ben & Jerry’s ice cream but it may not be a sweet spot for retirees. Blame it on taxes. Most retirement income is taxed at ordinary income tax rates including IRAs, 401(k)s, most pensions and social security benefits. Vermont also has one of the highest income tax rates with the top rate at 8.95 percent. Property taxes in the state also rank among the nation’s top ten according to the Tax Foundation.
4. New York
New York is home to the most expensive city in the country according to The Council for Community and Economic Research. So living anywhere near Manhattan can get expensive. For example, a home appliance repair could easily top $100, about double the cost in Los Angeles. Housing and food costs also rank high.
Income tax rates are among the highest in the country with the top rate at 8.82 percent. The combined state and local sales tax rate ranks in the top ten nationwide at 8.49 percent according to the Tax Foundation. Retirees do get some tax relief. Public pensions and social security benefits are not taxed. Some IRA and 401(k) income may be taxed if exemptions don’t apply.
Taxes are the main reason Connecticut may not be a favorite among retirees. Most retirement income including IRAs, 401(k)s and pensions (excluding military pensions) are taxed as ordinary income. Social security benefits are taxed for taxpayers who exceed certain income levels. Property tax in Connecticut is the fourth highest in the country at 1.98 percent according to the Tax Foundation. Cost of living in cities such as Stamford also rank among the highest in the country.
There are some states where seniors can easily stretch their retirement dollars. Nevada, Florida, Wyoming and South Dakota have no income tax, no taxes on retirement income and no taxes on social security benefits. Sales tax and cost of living are also relatively low.