Property Tax vs. Income Tax vs. Sales Tax in Retirement

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Alf 101
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Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by Alf 101 »

There have been a number of retirement topics that circle around this, but I'm curious in thoughts from the board about the various taxes in retirement.

Though still a good way off, let's say that we have great flexibility in where we settle in retirement. Let's then project a factor that might heighten the concerns about preserving the nest egg -- e.g., early retirement, exceptionally long life, lengthy market underperformance. Since we can't go on autopilot, taxes might be an important consideration in where we choose to live.

I see three major taxes:

1. Property Tax
This seems like a potential problem. There are places with much higher property taxes than others -- certain cities, states, communities. While working, this could be acceptable. Perhaps these places have good schools, and are great to raise a family. Maybe I pay more to avoid a longer commute, or I get more land in a more populated area so I can garden.

However, upon retirement some of these factors are less important, and a high property tax is an anchor on fixed income. If a state relies on property tax to fund its budget, that hurts me more as a retiree.

2. Income Tax
Some states do not have an income tax. I would presumably still be paying federal income tax, living off IRA distributions and Social Security; assuming I take the minimum required distributions, I'm not sure I'd save that much.

3. Sales Tax
Some states do not have sales tax. For planning purposes, my estimate would be that we'd spend about as much in retirement as before we retired. That said, we live below our means, and save a fair bit. No sales tax may save us more over a year than having no state income tax -- particularly if we had to buy something like a refrigerator or car; overall I'm not sure these savings would move the needle much.

Overall I would choose where to retire based on family and friends, and what felt like home. I might want a warmer or different climate; I also might want not want to be too far out there -- nearer to medical care, grocery stores, culture, and social activities. It does seem to me, as long as I avoid HCOL areas, and high property taxes, that leaves many other options for a lengthy retirement.

Again though, I haven't retired. How much of this is true, and how much of how I'm thinking about this is bunk? Thanks.
jebmke
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by jebmke »

Taxes wouldn't even make my top 5 list of criteria for retirement location.
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Mike Scott
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by Mike Scott »

All states get their revenue from taxes so somebody is paying. The taxes may be distributed differently but the total is the total. You may be able to choose a combination that slants in your favor. High property taxes are less direct issue if you are renting but then I suppose they are built into the rent. Maybe you want to live in an RV? Sales taxes are not as important if you don't spend a lot of money or live near a border state without a sales tax. Income taxes are probably more important if you have higher taxable income. Tax policies can also change as we have seen long standing state tx policies changing in some states in response to changes in the federal tax policies.

Our state has an income tax but some exemptions for retiree income. Property taxes are modest compared to many and there are property tax exemptions if you qualify. Etc.

As you point out, there are many other reasons besides financial and tax considerations to choose a location to retire.

For us, it is fortunate that taxes as a whole are acceptable where we are because we don't plan to go anywhere else.
adamthesmythe
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by adamthesmythe »

A better approach is to pick a location (or locationS) and look at the numbers to see if you can comfortably afford to live there.

There will always be taxes, and some of them you may not know to look for.
smitcat
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by smitcat »

Alf 101 wrote: Thu May 16, 2019 9:26 am There have been a number of retirement topics that circle around this, but I'm curious in thoughts from the board about the various taxes in retirement.

Though still a good way off, let's say that we have great flexibility in where we settle in retirement. Let's then project a factor that might heighten the concerns about preserving the nest egg -- e.g., early retirement, exceptionally long life, lengthy market underperformance. Since we can't go on autopilot, taxes might be an important consideration in where we choose to live.

I see three major taxes:

1. Property Tax
This seems like a potential problem. There are places with much higher property taxes than others -- certain cities, states, communities. While working, this could be acceptable. Perhaps these places have good schools, and are great to raise a family. Maybe I pay more to avoid a longer commute, or I get more land in a more populated area so I can garden.

However, upon retirement some of these factors are less important, and a high property tax is an anchor on fixed income. If a state relies on property tax to fund its budget, that hurts me more as a retiree.

2. Income Tax
Some states do not have an income tax. I would presumably still be paying federal income tax, living off IRA distributions and Social Security; assuming I take the minimum required distributions, I'm not sure I'd save that much.

3. Sales Tax
Some states do not have sales tax. For planning purposes, my estimate would be that we'd spend about as much in retirement as before we retired. That said, we live below our means, and save a fair bit. No sales tax may save us more over a year than having no state income tax -- particularly if we had to buy something like a refrigerator or car; overall I'm not sure these savings would move the needle much.

Overall I would choose where to retire based on family and friends, and what felt like home. I might want a warmer or different climate; I also might want not want to be too far out there -- nearer to medical care, grocery stores, culture, and social activities. It does seem to me, as long as I avoid HCOL areas, and high property taxes, that leaves many other options for a lengthy retirement.

Again though, I haven't retired. How much of this is true, and how much of how I'm thinking about this is bunk? Thanks.
If you are going to concern yourself with taxes than perhaps add inheritance taxes to your list.
Jack FFR1846
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by Jack FFR1846 »

Don't forget state gas tax, meals tax and what is and is not taxed (some state food is, others not...same with clothing). Car registration and exise/personal property tax. There are all kinds of fun taxes out there.

When considering a move after giving notice at my job in one state where I was going to work in a neighboring state, my manager made a statement I'll never forget....."The state has to pay for the services they provide somehow". Very true. I guess you can game the system and pick a place where they don't tax what you have and maybe tax the heck out of things you don't have.
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dodecahedron
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by dodecahedron »

1) Some places with high overall property taxes (e.g., Arlington VA) have very generous senior citizen property tax breaks for those with modest incomes and assets.

2) Some places with high overall state/local income taxes (e.g., New York) have very generous tax breaks for retirement income. (E.g., NYS and NYC do not tax any SS benefits, any federal or military pensions, any pensions from NY state or local government employment. In addition, the first 20K per person of other pension/retirement plan distribution income is also exempt in NY for those over 59 1/2. And of course, if your taxable portfolio includes Treasury securities (including EE or I bonds), that is also exempt from state/local income tax.

3) Places with high sales tax rates often have exclusions that may represent a significant portion of household spending budgets for retirees (e.g., groceries, health care goods and services, charitable donations, contributions towards education of grandchildren, etc.)
lexie2000
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by lexie2000 »

For many reasons, taxes not being the main reason but one of the reasons, we relocated from the Bay Area in CA to a very rural community outside of Reno, NV for retirement. I must say that the tax savings for us have been HUGE. The state of Nevada gets most of its revenue from the gaming industry so there is no state income tax. This saves us a ton as we are now in the process of doing 401k to Roth conversions. We got a CA state income tax break during the accumulation phase, but pay no NV state income tax on the withdrawals/conversions. This saves us from paying an additional 9.3% in CA state income tax (minimum) on our 401K money. Sales tax in Reno is higher on average than a lot of other places (about 8.3%), but that is still lower than what we would be paying in the Bay Area (9%). Our property tax bill is A LOT lower too. In CA it was about $1K/mo. for a home that was only 200 sq. ft larger than the brand new home we live in now on an acre of land with a property tax bill of about $3K/yr.

Overall, since we moved here we have saved $15-20K/yr. in taxes alone with the added bonus of a better overall quality of life. We feel extremely fortunate that we found a retirement location that we really love with the added benefit of saving thousands a year in taxes.
thx1138
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by thx1138 »

As others said all states have to get their taxes from some place. Certainly some spend more than others and provide different services than others so a starting point has to been the false assumption that we'd be making apples to apples comparisons between total tax burden and how it is split between various tax schemes:

Income tax scales nicely, usually in a progressive way, with downturns. If you can't spend very much for some reason your income tax goes down. This is good.

Sales tax scales but is usually not very progressive. Buy less pay less but typically not totally excluded at low incomes the way income tax might. That said in many states staples such as groceries are excluded from sales tax which is relatively progressive.

Property tax does not scale much usually. If you hit a downturn your property tax usually doesn't go down. This can be a serious cash flow problem without good solutions unless you sell the property. Again though this really depends on locality as some have exclusions for low income retirement folks or other mechanisms to help keep fixed income folks in their homes.
StealthRabbit
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by StealthRabbit »

There are several 'retirement - relocation - spreadsheet' solutions. I use 'weighted' criteria.

1st... determine your MUST criteria (Climate / terrain / family / interests / medical...)
Then drill down..

taxes (not top priority) = many beneficial combinations for retirement.

I found;
1) An income tax free state (living / working / investing),
2) Next door to a sales tax free state, (<10 min)
3) but Property Taxes increased many fold since retirement (from $3/ day to now $43 / day). (minimal senior property tax deferrals)

Would be wise to sell, but we built it brick-by-brick and have a great view...& live in a Nationally Protected Scenic Area, (Impossible to recreate), So... we had to re-position our retirement investments to provide cash flows to meet Property Tax needs. - Not smart, but necessary for this current chapter of retirement.
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Alf 101
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by Alf 101 »

This is all very interesting and helpful. As has been said, many expenses are scalable, but not property tax. Actively working I can live with it for the trade-offs of my home and situation, but in retirement I see it not unlike a high ER for a fund.

While somewhat of a thought experiment, there is the potential for great realism here as well. I have known people who were laid off in their late 50s, unable to catch elsewhere, and retired early. Like many, the idea of retiring early -- on my own -- is appealing. Yet my wife and I have family members who've lived well into their 90s. So while not the greatest criteria in retirement planning, tax burden is not insignificant.

Let's say I have $1M. If I withdraw 4% each year, or $40K. A $8-10K annual property tax would loom large. Of course, the hope is to diversify such that I can come close to matching that 4% in growth, have more than $1M, and have a lot of things go right in terms of markets, inflation, expenses, etc.

Then again, hope is not a plan. While I feel very solid regarding my "very-Bogleheaded" retirement planning, there are uncertainties you can't eliminate, and I'm ambitious about living a long time.
lexie2000
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by lexie2000 »

Alf 101 wrote: Thu May 16, 2019 2:16 pm This is all very interesting and helpful. As has been said, many expenses are scalable, but not property tax. Actively working I can live with it for the trade-offs of my home and situation, but in retirement I see it not unlike a high ER for a fund.

While somewhat of a thought experiment, there is the potential for great realism here as well. I have known people who were laid off in their late 50s, unable to catch elsewhere, and retired early. Like many, the idea of retiring early -- on my own -- is appealing. Yet my wife and I have family members who've lived well into their 90s. So while not the greatest criteria in retirement planning, tax burden is not insignificant.

Let's say I have $1M. If I withdraw 4% each year, or $40K. A $8-10K annual property tax would loom large. Of course, the hope is to diversify such that I can come close to matching that 4% in growth, have more than $1M, and have a lot of things go right in terms of markets, inflation, expenses, etc.

Then again, hope is not a plan. While I feel very solid regarding my "very-Bogleheaded" retirement planning, there are uncertainties you can't eliminate, and I'm ambitious about living a long time.
If you really like where you live, then plan your retirement around staying put after you pull the plug. In the meantime, if your Plan A (staying put) isn't financially appealing, then come up with a Plan B or Plan C.
The Wizard
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by The Wizard »

I think it all kind of averages out.
Rich people just sort of deal with the taxation issue.
No point in moving to a low cost boondock zone unless it meets your particular needs...
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The Wizard
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by The Wizard »

Soliloquy from an extremely frugal retiree after relocating to an extremely low tax boondock zone:
"Okay, I've done it; I have now arrived!
"Let the party begin!
"Hello? Hello??"
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mrsbetsy
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by mrsbetsy »

Valid points all the way around.


Property Tax: Here in CA, we have Prop 13 which limits the amount property tax can go up each year. It's 2% only. As a result, my property tax here in the Bay Area on a ridiculously expensive home is extremely cheap (about 6K) especially considering other states. If Prop 13 is every repealed, I will be very sad, but for now the state seems to be healthy financially.

Sales Tax: 9% where I live, but we no longer make too many purchases. Food and medicine aren't taxed so that helps.

Income Tax: Sucks right now because we own two businesses and the state definitely gets their share of our money. Hopefully in a couple of years when we stop working, we are positioned well enough that we won't have much "income" anymore.

Our biggest expense is actually healthcare, not necessarily taxes. Currently, we pay about 25K a year for the two of us -- just for the cheapest insurance plan so a medical emergency doesn't wipe us out. That feels like we are flushing it down the toilet every month.
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Alf 101
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by Alf 101 »

I think another aspect of this is that not everyone is in love with where they currently live. You make certain compromises. Maybe you'd like more land and a space to garden, but want to avoid a long commute, and need to make sure the kids can attend good schools, or moved to be closer and take care of in-laws. The kids will grow up, the commute will shrink to zero, and if you don't outlive the in-laws you probably didn't make it to retirement.

On the flip side, maybe any number of other places look good. Recent posts about the best states to retire ran the gamut of what people liked. Off the top of my head there are 5-6 places I've visited or previously lived that I could easily see myself returning to. I know several people who retired and promptly moved -- due to a combination of downsizing, finding a move favorable climate, and simply shaking it up to stay mentally fresh. Many of them wanted out of an urban or suburban area, not to the sticks but somewhere more quiet. This does not sound all bad.
quantAndHold
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by quantAndHold »

I agree with the people who say pick a few potential places you’d like to live, then run the numbers for yourself. Tax, especially in retirement, is a very individual thing. Pay attention to tax breaks that are available to seniors in those locations. “High tax” states may not be high once you consider those tax breaks.

When I retired, we moved from WA to CA, not because of taxes specifically, but because we wanted to live in CA. When I was working and high income, the fact that WA has the most regressive tax system in the country was a huge benefit to us. In retirement, where we make and spend relatively little, California’s very progressive tax system, low property taxes, and the fact that they don’t tax Social Security, make CA a much better deal. In WA, we paid more just in property tax than our entire combined tax bill is now in CA.
Yes, I’m really that pedantic.
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

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Deleting my messages on this forum
Last edited by tampaite on Mon Jun 03, 2019 7:17 am, edited 1 time in total.
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dodecahedron
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by dodecahedron »

Quality of public services is also a concern.

For me, an excellent public library, great public parks, great free and low cost (grant-subsidized) cultural programs, great air/water quality, and excellent police/fire/rescue services are important quality of life features.

School budget comes up for a vote on Tuesday. Although my children are grown up, the quality of local schools remains important to me for many reasons. To take just one: we have lots of great physicians in this area. The availability of great public schools is an important part of attracting and retaining them here. I value education and like having neighbors who also value it. There are many positive externalities associated with investing in local public schools.

Property taxes are high here, and I quibble with some of the school district´s priorities, but the bottom line is I am grateful to be able to pay the taxes to keep living here.
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Alf 101
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by Alf 101 »

I find it interesting that some states do offer tax and other incentives appealing to retirees. Previous post in this thread have discussed how it was cheaper to retire in Nevada and California, and California than Washington.

Googling "State with Incentives for Retirees", I likely would have never found this out. There are plenty of websites discussing which states have the lowest tax burden, which don't tax SS or pensions, which tax dividends from investments, etc. You can also find lists looking up "Best States to Retire" that weigh relevant factors such as climate, health care, crime, etc.

Are there retiree incentives you've discovered as you examined the fine print?
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iceport
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by iceport »

jebmke wrote: Thu May 16, 2019 10:02 am Taxes wouldn't even make my top 5 list of criteria for retirement location.
Exactly the same here!

To me, that's a classic example of the tail wagging the dog. Proximity to family, friends, natural and cultural resources and other quality-of-life factors are way, way more important to me.

Sure, taxes must be accounted for when determining whether you can generate enough income to fund the retirement you desire. And yes, if you can't fund the lifestyle you desire in retirement, relocating to reduce taxes might be a necessary step to take at some point. But compromising on quality-of-life factors by moving to a less desirable location to save money would be one of the very last options I'd consider.
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Alf 101
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by Alf 101 »

Ah, but is the question between "more expensive" vs. "less desirable" locations a fair one?

For some people there are only 1-2 places they'd be happy; for others 10-12. Also I've visited places in this country that would be fantastic to live, still less than an hour from good medical care; the only reason we didn't move there was because there weren't any jobs. For obvious reasons I won't list these, as I'm still a long way from retirement...

All said, retirement is a very personal decision, with competing factors, but proximity to family, medical care, and quality of life seem most important. Acknowledging this, I'm curious about the contributing financial factors. It's very simple to look up which states have the highest property tax rates, a fixed cause -- so good-bye New Jersey, New Hampshire, and the rest of the Northeast. But, again financially speaking, is there more to the story than that?
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by MarkerFM »

I think the higher your taxes, the more they weigh on the decision. We moved from a state with a significant estate tax to one without. The difference was more than twice what we spent to buy a very nice condo. No income tax versus one that is going up rapidly. Property tax lower than previous residence on a cost per $ of value basis. Sales tax much lower.
lexie2000
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by lexie2000 »

Alf 101 wrote: Fri May 17, 2019 3:14 pm Ah, but is the question between "more expensive" vs. "less desirable" locations a fair one?

For some people there are only 1-2 places they'd be happy; for others 10-12. Also I've visited places in this country that would be fantastic to live, still less than an hour from good medical care; the only reason we didn't move there was because there weren't any jobs. For obvious reasons I won't list these, as I'm still a long way from retirement...
Exactly!! Just because something is more expensive does not necessarily make it more desirable for everyone. When we relocated to the Bay Area we purchased what we thought would be our retirement home, but it turned out that living in the Bay was not a great fit for us. We are so fortunate to have found somewhere to retire that greatly improved our quality of life and that also happened to come with huge tax benefits.

Oh, and someone mentioned low property taxes in CA due to Proposition 13. That works well if you've lived in the same house for decades, or somewhat well if you happened to buy in a huge downturn (i.e., during the recession), but not so well if your company transferred you and you bought in 2005.
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by JoeRetire »

Alf 101 wrote: Thu May 16, 2019 9:26 am Overall I would choose where to retire based on family and friends, and what felt like home. I might want a warmer or different climate; I also might want not want to be too far out there -- nearer to medical care, grocery stores, culture, and social activities. It does seem to me, as long as I avoid HCOL areas, and high property taxes, that leaves many other options for a lengthy retirement.

Again though, I haven't retired. How much of this is true, and how much of how I'm thinking about this is bunk? Thanks.
Don't let the tax tail wag the retirement dog.
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retire2022
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by retire2022 »

Op

Here are some costs of gas tax or price of fuel for transportation, cost of food or groceries, cost of eating out or not, some states tax on these basic items also where are your friends will you be able to live without your present social circle, will you be able to make new friends?
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by StealthRabbit »

Alf 101 wrote: Fri May 17, 2019 3:14 pm Ah, but is the question between "more expensive" vs. "less desirable" locations a fair one?

For some people there are only 1-2 places they'd be happy; for others 10-12. Also I've visited places in this country that would be fantastic to live, still less than an hour from good medical care; the only reason we didn't move there was because there weren't any jobs. For obvious reasons I won't list these, as I'm still a long way from retirement...
....But, again financially speaking, is there more to the story than that?
Hint... I have found the locations near US National Labs is often very nice scenery / climate, engaged retirees, lots to do, affordable, close to medical care / airports.

Yup, a LOT more to the story, and very personal situation dependent. (Interests, activities, spending habits, access to what you will need / want in retirement (all have financial impact))

On my Relo Retirement spreadsheet pointed very clearly I had been pursuing the WRONG choice of areas. (financially specific data)... or I could have just listened to my spouse... "You are going to be VERY lonely there, and that will NOT be CHEAP!"


1) Home value fluctuation / future equity risk. (really risky if you must move to FT care-center / another state, and your home is PAID OFF and you can't sell it for decades due to your 'desirable' region) I wanted to retire to a beautiful and wealthy and income tax free 'energy state'. but.... feast or famine on home re-sell potential (BTDT in my 20's) ouch!

2) Medical costs and availability...
a) Some states have TERRIBLE (no) ACA exchanges (if you need that pre-age 65)
b) some states have TERRIBLE options for seniors ...if you ever need state assistance (never say never... (a very financially successful parent went under FT care at age 49 for 30+ more yrs)) Lived VERY broke! died a pauper.... stuff happens. Similar with an uncle, and a few friends. went broke after age 60 due to HC event.
c) Driving 6-10 hrs from your beautiful spot to cancer treatments can cost you a bundle (housing and transportation)

3) as mentioned... Estate Taxes (know your state regs and thresh-holds) poof... 50% of your life's accumulated wealth - GONE

4) Other transportation... If you fly a lot... living CLOSE to an international hub with cheap fares can save you a bundle over 40 yrs of traveling. OTOH... driving through 6 hrs of snow covered roads to make your flight to South Pacific can add risk / stress / expense. If I needed an overnight airport hotel for every flight I take... it would be far more expensive than a mortgage / rent.

5) Food, energy, and staples... some really NICE areas are VERY expensive and few choices of food options. Driving once a month to a city for provisions takes time and money. (impact for retirees who are short on both)

6) Entertainment? Everything from internet to venues / special concerts are often more in desirable areas (like Jackson Hole...) Whereas I am currently <30 min to 28 colleges (free entertainment / lectures / concerts / some sports). Really spendy to rent recreation equipment and space in Aspen, CO.

7) Opportunity Costs.. as a retiree, consider what interests may present earning opportunities. Many locations make exclude the availability of such opportunities. (My mom did (8) executive 'flip homes' after she retired. The 'unexpected' retirement earnings paid for a lot of recreation / cruises / RTW trips.) Senior tax exemptions... (can be significant)

Most Important... are you happy there? can you age at peace? (I must say... I REALLY enjoy my view properties now that I am retired and have time to enjoy them). I am willing to pay a premium to stay here. (during this chapter of retirement).

You will hear war stories...my FIL moved from moderately, but fairly taxed Colorado to Oregon (adequately taxed for seniors) He is 94 and can't wait to get out and to a better 'financial state' for seniors.
JGoneRiding
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Re: Property Tax vs. Income Tax vs. Sales Tax in Retirement

Post by JGoneRiding »

Probably because I have lived almost my whole life in one of those income tax free states (at least for now) I would put that high on the list. While we have sales tax it isn't that much higher than a lot of states that have both. If you live in the lower populated areas of an income tax free state than property taxes also tend to be low! But Lowry population areas also have less services something to consider as you age.
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