Retirees move for various reasons: to find a better climate, to spend more time pursuing activities they love, or to be closer to family. Sometimes, the decision is based on a desire to downsize and reduce their cost of living. There are many financial considerations regarding your choice of retirement location, but there are three key factors that I would use as a starting point when weighing your options.
1) Look at total costs and not just income taxes if moving out of state. Every year, I see articles about retiring to “tax-free” states like Florida or Texas. There are seven states which have no personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Additionally, New Hampshire and Tennessee do not tax personal wages, but do tax dividends and interest. While moving to a tax-free state sounds like a great idea, there may be other costs of living that could offset those state tax-savings. Be sure to calculate the cost of property taxes, property insurance, and sales taxes. For a retiree who has $50,000 in annual income, the savings in income tax may be relatively small and your total living expenses could actually increase if you move to another state. It’s better to look at your whole cost of living, especially if your income in retirement will be modest.
When you look at property taxes, make sure to research whether your state offers any property tax programs for seniors. Texas, for example, will freeze school taxes for residents over 65, placing a ceiling on the tax on your primary residence. Some states offer seniors an income-based reduction on property taxes; it’s worth going through that paperwork to confirm you are eligible, rather than assuming you’re eligible and finding out later that you will not receive the tax rebate.
2) Consider travel costs. It’s one thing to enjoy a vacation for a few weeks, but some retirees find themselves feeling disconnected and missing out on family activities if they move away permanently. They find themselves coming back “home” more frequently and for longer periods. Before long, they’re spending $5,000 a year or more on travel costs between two locations. That’s fine if that’s the lifestyle you want, but it is an expense that you must consider if you’re thinking that moving is going to be a cost-saving plan. How will you feel about not spending holidays with your family, or missing your grandchildren’s birthdays and soccer games? Is the cost and hassle of travel going to make it worth while to move?
3) Know your health care coverage. If you are part of a health care network, such as a Medicare Advantage Plan (part C), what is covered out of state? This is a common issue for snowbirds who divide their time between a northern home and their southern winter get-away. I’ve spoken with quite a few whose “plan” is to have all of their appointments and check-ups take place when they’re home. But what happens if you get sick while you’re away? Out-of-network care may be very expensive or not covered by your insurance. It’s a risk both to your health and your finances.
This concern also applies for US citizens who are looking to move abroad to a low-cost location. It’s relatively easy to receive your Social Security and Pension out of the country, but for Medicare, you will have very limited or no coverage. Be sure to read this Medicare brochure before deciding to move overseas: Medicare Coverage Outside the United States.
If you decide to live abroad, you may think you don’t need to enroll in Medicare Part B. But if you later move back to the US, there will be a penalty (permanently higher premiums) to enroll in Part B if you didn’t sign up at age 65. And you must have Part B in order to participate in Medicare Advantage or to enroll in Prescription Drug coverage (part D). So be very careful you understand the potential future costs if you are planning on turning down Part B at age 65.