Social Security, Taxes, and COLA
Retirees don’t earn money in their retirement period, leading many of them to falsely believe that their benefits won’t be subject to taxation. In reality, almost 40% of social security recipients pay taxes on the benefits they receive, reports the Social Security Administration. “Retirees forget that even though they may not have earned income in retirement, they will have taxable income that includes Social Security benefits, interest income, pension income and the distributions they take from their IRAs,” comments Michelle Gessner, a certified financial planner and founder of Gessner Wealth Strategies. She goes further:
“When all of that adds up, they are often shocked to see that they are not in the lower tax bracket that they had expected—even without earned income.”
In order to avoid such misconceptions, retirees should be sufficiently educated on retirement, and avoid mistakes such as early claims on social security, notes Morgan Stanley (NYSE:MS).
Apart from social security taxation, another misconception that many people hold is that retirees live on a “fixed income.” In reality, these incomes aren’t fixed and are adjusted for inflation via “COLAs” or Cost of Living Adjustments. 2021 COLA was 5.9%, while COLA for 2022 was a whopping 8.7%.
While the COLAs may be good news for some retirees, they may push many others into a higher tax bracket. This is bad news if your state taxes social security income. The worst states to retire in that tax social security include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Retirees should avoid these states if they want to stretch their retirement savings further.
In particular, empty nesters can consider some of the best states to retire in on a fixed income. These include Alabama, Florida, New Hampshire, and South Dakota. These are among the best states for retirement because they don’t charge social security or pension incomes. However, taxes aren’t the only thing retirees need to be worried about. The cost of living is also important in determining where you should end up during your retirement years. California, New York, Massachusetts, and Hawaii are the worst states to retire in for taxes and cost of living both.
Instead of these states, retirees should consider moving to Alaska, Florida, Georgia, Mississippi, Nevada, South Dakota, or Wyoming. These are the best states to retire to for taxes. For those who wish to have the best of both worlds, the best states for taxes and cost of living are Georgia, Mississippi, South Dakota, and Wyoming.
According to Morgan Stanley, a financial advisor can help potential retirees make the right goals and decisions. At Morgan Stanley, financial advisors help retirees maximize their savings and minimize the impact of taxation once they tap into their funds. Therefore, retirees should consider employing the services of such organizations to reap the maximum benefits.
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Methodology
In order to compile the list of most popular states to retire to in the U.S., we have used U.S. Census Bureau’s report called “The Older Population:2020”. Popular states were ranked based on the percentage of seniors aged 65 or older in the state. After compiling the states based on the percentage of seniors, we ranked the states in ascending order from the lowest to the highest percentages.
Here are the most popular states to retire to in the U.S.:
15. Iowa
Percentage of retirees: 18%
Affordable costs of living, quality healthcare, and tax-friendliness are three reasons Iowa is a popular state for retirees. The state doesn’t tax social security income, and there are deductions on other types of retirement income as well. Starting the tax year 2023, Iowans aged 55 and above will also be exempt from paying state taxes on retirement income. The state enjoys all four seasons; and is characterized by rolling hills, scenic rivers, and vast outdoor spaces. The healthcare system is quite robust, with reputable hospitals, medical centers, and healthcare providers. Cost of living is 10.3% lower than the U.S. average, a major draw for retirees.
14. Rhode Island
Percentage of retirees: 18.3%
Rhode Island may be one of the worst states to retire in for taxes, yet 18.3% of seniors live in the state. Various retirement communities and active adult communities draw in retirees. A mild climate, access to oceans, and numerous cultural events add to other benefits of retiring to the state. Its location in the New England region provides access to major cities such as New York and Boston. Healthcare facilities are excellent as well, with many renowned medical centers and hospitals. The cost of living is 0.5% higher than in the U.S., with many areas cheaper to retire than others.
13. New Mexico
Percentage of retirees: 18.5%
New Mexico is an ideal destination for those looking for a peaceful retirement. The state has a rich and diverse cultural heritage stemming from Hispanic, Native American, and Western influences. The major draw of retiring to New Mexico is its cost of living, which is 5.8% lower than the U.S. average. The state is moderately tax-friendly for retirees, with states taxing all sorts of retirement income, including social security. However, seniors having household incomes below a certain level are not taxed. The state also boasts a stunning landscape; characterized by dramatic canyons, gigantic mountains, expansive mesas, and beautiful red rock formations in the desert.
12. Arizona
Percentage of retirees: 18.7%
Arizona, also known as the Grand Canyon State, is among the top popular states to retire in the US. The state’s year-round warm climate and ample sunshine are a major draw for retirees. Boasting over 300 days of sunshine annually, retirees can spend a lot of time outdoors and enjoy an active lifestyle. Moreover, there are a plethora of retirement communities and housing options tailored to retirees’ needs in the state.
The distinguished landmark called The Grand Canyon makes for the perfect day trip, while the rest of Arizona is home to stunning national parks, scenic mountain ranges, and beautiful desert landscapes. The state has a favorable tax environment, too. While it does have an income tax, it doesn’t tax social security. Moreover, the cost of living is 7% above the U.S. average, with some cities in the state cheaper to retire than others.
11. Oregon
Percentage of retirees:18.8%
Oregon is another one of the popular states to retire to in the U.S., comprising 18.8% of retirees. The state has a wide variety of stunning landscapes to boast, such as the majestic peaks of the Cascade Range, picturesque views of Crater Lake, and the rugged coastline of the Pacific. The state is moderately tax-friendly, and the mild climate explains why retirees live here. Social security benefits are exempt from state tax, but income from retirement accounts is fully taxed. There is no sales tax either, and property taxes are below average. The cost of living is 15% higher than the U.S. average.
10. South Carolina
Percentage of retirees:19%
Tax-friendly environment, affordable living costs, and excellent healthcare facilities lure retirees into choosing South Carolina. There are plenty of retirement communities in the state, with southern hospitality rooted in them. The beautiful coastline along the Atlantic Ocean is a major plus, providing retirees the chance to experience coastal living, water sports, and the sandy beach. There are no taxes on social security benefits, and property taxes are some of the lowest in the nation as well. The cost of living is also affordable, being 3.5% lower than the U.S. average.
9. Pennsylvania
Percentage of retirees:19.1%
Pennsylvania, one of the country’s largest states, offers retirees a chance to enjoy a lively retirement period filled with cultural and recreational opportunities. Retirees can move to the charming yet affordable places along the East Coast, pick the western side, such as Pittsburgh, or settle in the center, such as Hershey, famous for its chocolates. All income from social security is fully exempted, as well as income from retirement accounts. Property taxes are higher on average, while the average total sales tax rate is one of the lowest in the U.S. The cost of living is 1% lower than the U.S. average; another attraction for retirees to the state.
8. New Hampshire
Percentage of retirees:19.3%
Picturesque landscapes, excellent healthcare, and a peaceful environment make New Hampshire a popular state to retire to in the U.S. The White Mountains are certainly the highlight of the state, along with other pristine lakes and charming coastal areas. Residents get to experience the quintessential New England lifestyle in the state’s small towns and villages. Residents also enjoy many outdoor activities, such as hiking the Appalachian Trail, fishing in lakes, exploring state parks, and skiing in The White Mountains. New Hampshire has no state income tax, but a 5% tax is levied on dividends and interests. There is no sales tax either, but property taxes are high in the state. The cost of living is 15% above the U.S. average.
7. Hawaii
Percentage of retirees: 19.4%
Despite the high cost of living, retirees still love Hawaii for its unparalleled natural beauty and amazing climate. It is also among the top states with the most retirees. Majestic volcanoes, vivid cliffs, lush rainforests, and picturesque shorelines provide retirees with true gratification. A plethora of outdoor activities make the state more attractive, such as snorkeling, golfing, hiking, beach yoga, and endless others. Retirees love to embrace the aloha spirit and the rich cultural heritage found in the state. The state is also moderately tax-friendly, with no social security or public pension income tax. Private pensions and retirement savings are taxed, however. The cost of living is 79% over the U.S. average, with some places cheaper to retire than others.
6. Delaware
Percentage of retirees: 19.7%
Delaware is another state that has emerged as one of the most popular retirement destinations in the U.S. Most seniors are attracted to it because of its tax-friendliness. It is one of the four states with no sales tax and does not tax social security benefits either. Property taxes are some of the lowest in the United States, allowing retirees to stretch their savings better. Active adult neighborhoods and retirement communities are another draw towards the state. Delaware also boasts scenic coastal areas, charming small towns, and beautiful beaches for retirees. Numerous hospitals and medical centers are spread throughout the region as well. The cost of living is 2.6% above the U.S. average, with some places cheaper to retire than others.
5. Montana
Percentage of retirees: 19.9%
Retirees love Montana as a retirement destination due to its laid-back lifestyle, majestic natural landscapes, and reasonably affordable cost of living. The tax environment is moderately tax-friendly. There is no sales tax, while property taxes are fairly low. However, there are taxes on most forms of retirement income, as well as social security tax for people whose income is above a certain threshold. The state offers retirees a peaceful and laidback lifestyle, thanks to its low population density and sparsely populated areas. Abundant lakes, rivers, and mountains throughout the state offer vast recreation opportunities, and the state boasts some excellent healthcare facilities as well. The cost of living is 3.7% higher than the U.S. average, with some places in the state cheaper to retire to than others.
4. West Virginia
Percentage of retirees: 20.5%
West Virginia has 20.5% of seniors living in its state. The tax environment is quite friendly, with partial taxes on social security and other retirement income. Sales and property taxes are low, too. Stunning natural landscapes are a major draw for retirees, and the Appalachian Mountains serve as the perfect backdrop to the beautiful state. Retirees can stretch their retirement income living in the state, thanks to its cost of living, which is 9.7% lower than the U.S. average. The fall landscapes of West Virginia look beautiful on a long drive, and overall, retirees love it here in this state.
3. Vermont
Percentage of retirees: 20.6%
Retirees come to love the serene state of Vermont for plenty of reasons. The state has breathtaking natural landscapes, four distinct seasons, and plentiful recreational opportunities. Other factors that add to its charm include excellent healthcare, a low crime rate, good air quality, and a significant focus on environmental sustainability. The state is also revered for its farm-to-table dining, focusing on fresh, locally sourced, and organic ingredients. The cost of living in Vermont is 14.9% above the U.S. average, but many baby boomers who once came to ski fell in love and chose to retire in the state.
2. Florida
Percentage of retirees: 21.2%
No state income tax, warm temperatures, and stunning coastlines are a few reasons retirees are drawn to Florida. The state is very tax friendly, too. There is no state income tax, meaning all retirement incomes go untaxed to retirees. Property and sales taxes are close to national averages too. Beautiful beaches on the Atlantic Ocean and the Gulf of Mexico allow retirees to enjoy a beachfront living in the state. Retirees can go birdwatching, swimming, or engage in other scenic exploration. There are a vast number of retirement communities available with state-of-the-art amenities to enjoy. The cost of living is 2.3% above the national average, with some places cheaper to retire than others.
1. Maine
Percentage of retirees: 21.8%
Maine may not be entirely tax-friendly, but it is still a popular retirement destination, with 21.8% of seniors living here. The peaceful and laid-back atmosphere makes it an ideal retreat for retirees. There are charming coastal towns and villages, such as Bar Harbor, Camden, and Kennebunkport. Renowned seafood restaurants, quaint shops, and unique coastal culture can be found in the state. Plenty of outdoor opportunities, such as kayaking, bird watching, and mountain skiing, keep residents busy. The cost of living is 11% higher than the national average, and 9.2% of adults are living below the poverty level. The state also doesn’t tax social security, but other forms of retirement income can be taxed as high as 7.15%.
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