Retirees: Lower-Tax States May Not Save as Much as You Think

Retirees often consider moving to lower-tax states to save money, but the overall financial benefits may not be as straightforward as they seem. While lower income taxes can be enticing, other factors such as property taxes, sales taxes, and the cost of living can significantly impact the overall financial picture. This article delves into the complexities of moving to a lower-tax state and provides actionable advice for retirees to make informed decisions.

The Allure of Lower Income Taxes

Moving to a state with lower income taxes can seem like a no-brainer for retirees looking to stretch their savings. States like Florida, Nevada, and Texas, which have no state income tax, are popular destinations for retirees. However, the financial benefits are not as clear-cut as they might appear. For instance, while Florida has no state income tax, its sales tax is 7.0%, one of the highest in the country. Additionally, property taxes in popular retirement destinations like Florida can be substantial, offsetting the savings from lower income taxes.

The Hidden Costs of Lower-Tax States

Retirees need to consider the overall tax picture, including property taxes, sales taxes, and other local taxes. For example, in Florida, while there is no state income tax, the state sales tax is 7.0%, which is one of the highest in the country. Additionally, property taxes in Florida can be substantial, especially in popular retirement destinations. This means that while retirees might save on income taxes, they could end up paying more in other areas. As Rick Miller, a financial planner, notes, "Lower tax states will usually try to offset the lack of a state income tax in several ways. Real estate taxes, sales taxes, personal property taxes (cars, boats, etc.) along with generally higher levels of licensing and other official fees are commonly higher."

Non-Financial Considerations

Beyond the financial implications, retirees should also consider the non-financial costs and benefits of moving to a lower-tax state. Social isolation, healthcare access, and adaptation to a new environment are all critical factors that can impact overall well-being and satisfaction with the new location.

Social Isolation: Moving to a new state can lead to feelings of loneliness and isolation. Retirees may find it challenging to build new social networks and maintain relationships with friends and family left behind. For example, a client of Felix Kwan moved from the San Francisco Bay Area to Florida to save money on taxes but ended up feeling isolated and unhappy with the new environment. He eventually moved back to California.

Healthcare Access: Access to quality healthcare is a critical consideration for retirees. Moving to a new state may mean finding new doctors, hospitals, and healthcare providers. This can be particularly challenging for those with specific medical needs or chronic conditions. For instance, homeowners insurance can be prohibitively expensive or not available in certain areas, such as parts of Florida, which could impact healthcare access and costs.

Adaptation to New Environment: Retirees may face difficulties adapting to a new climate, culture, and lifestyle. For example, a client of Felix Kwan moved to Texas from California to save on taxes but found the property taxes to be much higher, which offset the savings from lower state taxes. Additionally, he did not like the new environment and eventually moved back to California.

The Bottom Line

While moving to a lower-tax state can provide financial benefits, retirees need to consider the overall tax picture, including property taxes, sales taxes, and other local taxes, as well as the cost of living in the new state. As Katie Carlson, head of wealth strategy at Bank of America Private Bank, recommends, "You need to make sure moving away from family and friends is worth the new lifestyle and tax savings."

In summary, while moving to a lower-tax state can offer financial benefits, retirees should carefully consider the potential non-financial costs and benefits. Factors such as social isolation, healthcare access, and adaptation to a new environment can significantly impact their overall well-being and satisfaction with their new location.