Most people as they plan for retirement focus primarily on growing their investments. However, another way to make your money go further as we start to live longer is to spend less. Where you retire can have a huge impact on how much you spend both in taxes and living expenses.
We begin with retiring abroad. According to Kiplinger, between 2010 and 2015, 17% more Americans retired abroad, a number it expects to increase substantially over time. The reasons are obvious: warmer climate, lower cost of living, as well as a growing trend toward cheaper healthcare.
There are drawbacks to retiring abroad: Language/culture clashes, travel/airfare expenses, political strife, distance from family and friends.
Many couples still plan on returning to the US to visit family and relatives several times a year. Even if the cost of living is half the living expenses in the US, the cost of three trips back home (six round trip flights) may defray much of those savings.
Other travel expenses that may arise are for frequent and unforeseen medical trips to a US hospital. However, an ever increasing amount of retirees are now traveling outside the US for medical purposes.
Medical tourism refers to US patients traveling for medical care to what were once referred to as "Third World Nations" but are now near or on par with US medicine. Patients take advantage of the strong dollar and much cheaper medical care in these countries, sometimes for procedures that were out of the realm of possibility economically if they tried to have it performed in the US. Almost 1 million people traveled overseas for treatment, according to Patients Beyond Borders, a provider of medical travel information. However, the majority of the procedures performed were either dentistry or cosmetic in nature.
Retirees looking to save a few bucks by having procedures done abroad, whether voluntary or necessary, should weigh the risks. The US arguably has the best care in the world. It also has the most litigious medical environment with most of the laws on the side of the patient. In some countries, litigation, if something goes wrong, could take well over a decade. Also Medicare only covers care done in the US.
In the end, if a retiree's budget is very strict, retiring abroad with certain limitations such as infrequent trips back home and using local medical care can save significant amounts of money each year.
Where Should We Go?
The most common locales for Americans retiring abroad are Central and South America for several reasons: close proximity to the US, low cost of living, and fabulous year-round climate. Europe is also a popular destination for its culture and relative safety.
Here is a list for the 2017 Annual Global Retirement Index by International Living:
Here is the same source but a few years earlier. You can see how the countries moved in four years.
As mentioned, the warm locales of the Caribbean and Central/South America are one of the obvious first choices for American retirees. This may be a great option for cost and proximity, but it's not for everyone in terms of culture/ease of living. Retirees who don't speak the language may find it difficult to adjust. The Latin lifestyle is very laid back. When a plumber says he will be there at 9am, it's not uncommon for them to show up at 2pm or even later. If you're someone who would not be able to tolerate this, those types of locations may not be for you. Another concern is safety, as many of these countries have a much higher rate of violence than the US.
Europe is also a popular destination. However, in terms of economics, it can be just as pricey as the US. Relatively speaking though, it's safer and more "First World" than Central or South America.
In the end, retiring abroad is not for everyone. But it could extend your retirement funds another decade or more and mean the difference between retiring at 60 and retiring at 70.
The Taxman Cometh
If you don't plan on retiring abroad and wish to stay within the good ol' USofA, the location where in the country can also be a big factor in your annual expense layout. One of the biggest expenses to be cognizant of are taxes. State taxes vary widely as opposed to federal taxes which are fixed no matter what state you live in.
The top federal rate is 39.6% (which rises to 43.4% when you add in the Affordable Care Act surtax). However, state income taxes and property taxes can vary widely. Thirty-three states use some form of graduated tax bracket system. The ten highest state tax rates for 2016 according to the Federation of Tax Administrators are:
New Jersey 8.97%
District of Columbia 8.95%
New York 8.82%
While there are seven states that have no income tax at all:
Add to that list Tennessee and New Hampshire that only tax interest and dividend income and you have the best nine states for income tax treatment.
Other taxes retirees have to be cognizant of are property taxes and sales taxes. A low or no state income tax can lure retirees in, but they may end up paying more in the end with other taxes and fees. The Retirement Living Information Center suggests calculating your total tax burden, which includes state, local, property and sales taxes to give a more accurate reading on just what someone would pay in each jurisdiction.
And while some states may seem like a good bet, they may sneak taxes into everyday goods that will significantly increase your cost of living expenses. For example, several states mentioned above in the nine best income tax states have other ways to get you; Texas has high property taxes, Tennessee has a high sales tax, and Washington sneaks theirs into the state gas tax.
For retirees, other taxes come into play like taxes on pension income, social security income, inheritance and IRA distributions. These may be more important than state income taxes for retirees as most retirees don't have much income to tax.
Most states do not tax Social Security at all. This can be significant for some retirees if they rely heavily on government payouts. The current ones that do tax them are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.
Meanwhile, only ten states do not tax government pension plans. And eight states have a broad exemption of a portion of private sector pensions and IRA distributions.
And lastly, while many states do not have inheritance or estate taxes, there are 19 that do: Connecticut, Delaware, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont and Washington. DC also has estate tax.
Kiplinger examined how states tax income, sales, social security, inheritance, and aggregated that info well here.
Below we show a map made by the Tax Foundation (although dated at 2014) that combines the state and local average taxes. Only Oregon, Montana, and New Hampshire came in with a zero.
Kiplinger ranks them here in 2016:
5. South Dakota
In the end, there are many factors that need to be considered when retiring. And although they are not the ultimate reason for choosing a location to retire, people should be aware of the tax policies of states so they can better prepare for retirement. But whatever location you choose, creating the portfolio that meets your retirement needs is crucial to living well. That is where Yield Hunting comes in!