March 11, 2014 — Finding the best place to retire in is a little bit like looking for a mate. There are lots of attractive ones out there. But for you – which state has the most appealing features and a minimum of not so desirable attributes. To help weed out the more unattractive ones, we present our 3rd annual (we skipped 2013) list of the worst states for retirement. There is one main point we want to emphasize – everyone’s retirement situation is different, so a one size fits all approach won’t work. If your grandchildren live in one of these states and you want to be near them – that makes it a great retirement state for you. Our goal for this article is to give you the tools to help you figure out what states aren’t a good fit for your retirement. See this article’s counterpoint: “Best States for Retirement – 2014“.
Factors we considered
In this year’s list we have tried to simplify the selection process for what makes a state not so great for retirement. We started by listing, in our opinion, the key attributes that make a state unattractive for retirement. Most of these negatives have to do with money and taxes. But as we always caution, retirement is about your happiness, which is way more important than money.
High Property Taxes. If you own property, you can’t avoid these taxes. No matter how high or how low your income, you will pay taxes based on the value of your home. Since retirees generally don’t have a lot of income, this is our number 1 negative consideration.
Taxation of Social Security & Pension/Retirement Income
Just about everybody in America will receive Social Security in retirement. It’s generally not that much (in 2014 the average couple on SS receives $2,111 a month), so the taxes on that income is usually not a critical factor. However for the fortunate, but shrinking, number of people receiving defined benefit pensions, taxes on those pensions could be a deciding factor on where you decide to retire. The type of pension, and where it comes from, has a big effect on state taxation. For example, is it from in or out of state, or is it a military or other government pension? Even more people are likely to be affected by the taxation of retirement benefits such as the Recommended Mandatory Distributions (RMDs) that you must start taking the year you reach age 70.5. State taxation of pensions and distributions from 401ks, IRAs, etc. is all over the map and difficult to research. On these matters you should use a tax professional to help make sure you get the most accurate information.
Cost of living
The majority of baby boomers won’t have the resources to sustain the lifestyle we had in our working days once we retire. So it makes a great deal of sense to look for a place to live where our scarce dollars go further.
Low Estate and Inheritance Taxes
Millions of boomers have accumulated substantial estates, thanks to hard work and/or good fortune. Assuming we want to pass much of that on to our heirs, the presence and severity of any estate and inheritance factors should be considered. For example in 2014 the federal estate tax is 40% on anything over $5.340 million (indexed for inflation). But several states are much harsher; 2 of them start taxing estates under $1 million (NJ and RI).
– Warm winter climate
– Good medical care
– Where your children, family, and friends live
– Where you have always wanted to live
– Recreational and cultural opportunities
– Natural beauty
– Natural disasters
Our rankings explained
In the spirit of recognizing that what makes a state good or bad for retirement is highly personal, we have refrained from ranking the states on this list. We have simply presented them in the order of property taxes paid as a % of home value. That is our #1 consideration here, but not our only one. Look at the facts and the pluses and minuses we have provided for each – and rank them based on your own situation. For example if you are going to receive a large pension and are very concerned about how it will be taxed, stay away from states that will tax it. See the end of article for links to the sources we used in this study. Here is our list of the worst states for retirement for 2014:
Negatives: Highest property taxes in nation. Taxes pensions. Highest estate taxes in the nation with an exclusion beginning at $675,000. One of the highest marginal tax rates at 8.97% on incomes over $500,000. One of the highest cost of living (46 out of 51).
Pluses: The Garden State has a high exclusion for pension income. Social security benefits are not taxed. Lowest gas tax in the nation (and by law you are not allowed to pump it yourself!). Not to mention some of the world’s great beaches. NJ has a senior tax freeze program but it is hard to determine if that results in meaningful savings.
World famous beaches in New Jersey (photo courtesy of Wikipedia)
Negatives: Second highest property taxes. Has an estate tax and the 5th highest gas tax.
Pluses: Pensions and social security income are exempt from taxation. Cost of living is about average.
Negatives: The 4th highest property taxes in the US. Retirement income is taxable. Relatively high marginal income tax rate of 7.75 in the highest bracket (over $225,000).
Pluses: No tax on social security benefits. No estate estate tax.
Negatives: The 6th highest property tax as a % of home value. Social security and pension income are taxed. The marginal tax rate is 6.84%, which starts at a very low $29,000. There is an inheritance tax.
Pluses: The 2nd lowest cost of living in the country.
Negatives: High property taxes as a percent of home value (#7). The current exemptions for pension and retirement income will be eliminated for people born after 1952.
Positives: Social security will remain exempt. No estate or inheritance tax. Below average cost of living (#18).
Negatives: High property taxes. Social security and pension income is taxed.There is a high marginal tax rate of 8.95% (on incomes over $405,100). High cost of living (#41)
Pluses: It is a beautiful state with nice people! Its mountains and forests provide outstanding recreation.
Negatives: Some pension/retirement income is taxed. Marginal tax rate is 5.95%.
Pluses: Ohio’s estate state tax has been repealed. SS benefits are not taxed by the state. Cost of living is below average (#15).
Negatives: The 10th highest property taxes (since homes are generally expensive here, that means people pay a lot of tax). The #4 gas tax. The 4th highest estate taxes (16% on anything over a $2 million estate. Top marginal tax rate is 6.7%. Social security and retirement income is taxable for higher income residents. Cost of living is high (48th of 51).
Positives: CT has the highest personal exemptions in the country ($24,000 for a couple), and there are some social security benefit exemptions.
Negatives: High property taxes (#11). Social security and retirement benefits are taxed. The 2nd highest estate tax (which starts on estates of $965,000). Marginal income tax rate of 5.99% on incomes over $135,500. High cost of living (#44). The state’s finances are under duress from deficits and pension funding.
Positives: So many bays, harbors, and oceanfront property that living near the water is easy.
Negatives: The 13th highest property tax as a % of home value. Some pension income is taxable. New York just improved its estate tax situation with a new law that takes place in April, 2014. In that year the tax exemption for estates is $2.062,500 and increases by just over $1 million each year until 2017 when it will match the federal exemption. Very high cost of living (49 out of 51).
Pluses: No tax on social security income. The governor is trying to reduce some of these taxes, especially the estate tax.
States with high property taxes – but not on our 10 worst list
Notice that we did not include all of the states with the highest property taxes on our “10 worst” list. That is because some of them have some positive factors that trump their high property taxes. They are:
Pennsylvania. Doesn’t tax pensions or social security. Has an inheritance tax. Relatively low income tax rate of 3.07%, although there are no personal exemptions.
Iowa. Social security is not taxable as of 2014. Some pensions are exempt. There is a 15% inheritance tax. Cost of living is well below average.
Kansas. Taxes SS on higher income residents. Pension income is normally taxable. But there is no estate tax, and the cost of living is low.
New Hampshire. The 3rd highest property tax in the nation. Although the cost of living is among the highest of any state, there is no sales tax, and the only income that is taxed is interest and dividends.
Texas. Although it has the 5th highest property tax rates, there is no income or estate tax.
California. Surprisingly enough, the Golden State has below average property taxes as a % of home value (#33). Part of that stems from the very high value of homes there, plus Homestead protections. But the state has other problems for retirees: High cost of living, the highest marginal rate in the country (13.3%), traffic, pollution, fiscal woes, and it does tax pensions. Social security is exempt, and the weather is usually great.
Most of the reasons why states made our 10 worst list have to do with money and taxes. There are more important considerations to think about, however. Use this list as a guide, but pick a place to retire based on the whole picture.