In this article, we will take a look at the 20 worst states to retire in for taxes and cost of living.
Worst States to Retire
Retirement; the final chapter of the American dream may seem far-fetched for the retiree today. Goldman Sachs Asset Management backs backs this and reports that 75% of retirees today are falling short of their retirement goals. A surprising 25% of retirees are able to save 70% of their incomes throughout their career. The remaining end up as empty nesters; dooming themselves to a downgraded lifestyle in their so-called golden periods.
Even though a financial vortex is largely to blame for the lack of retirement savings; stumping retirees between life goals and urgent financial priorities, rising inflation and recession-scares are also culprits behind a broke retirement. Moreover, with social security and Medicare funds forecasted to be depleted in the near future, empty nesters may have a hard time in getting through their retirement years.
According to the Bank of America Corporation (NYSE:BAC), number of hardship withdrawals, as of 2022, increased by 36% compared to the previous year. Inflation is largely to blame for the shaken consumer confidence. In order to regain this confidence, employers and plan sponsors such as Bank of America Corporation (NYSE:BAC), The Charles Schwab Corporation (NYSE:SCHW), Citigroup Inc. (NYSE:C), and ConocoPhillips (NYSE:COP) should regularly educate employees on sound retirement planning.
In light of this, CNBC notes that the worst states to retire for taxes are New Jersey, Illinois, and New York. Provided that corporations such as Bank of America Corporation (NYSE:BAC), The Charles Schwab Corporation (NYSE:SCHW), and even ConocoPhillips (NYSE:COP) proactively educate employees nearing retirement on taxes and financial planning, their likelihood of retiring to the right state increases tenfold.
Well-informed retirees already realize that the best states to retire tax wise are Alaska, Florida, Georgia, Mississippi, Nevada, South Dakota, and Wyoming. They also know that the most tax friendly states may not offer the most affordable costs of living. In such cases, their best bet is to look for states that offer them the best of both worlds. Georgia, Mississippi, South Dakota, and Wyoming are the best states to retire in for taxes and cost of living both.
Empty nesters should be looking to retire in these states that are both tax friendly and offer low costs of living. Mississippi, Alabama, Iowa, and Tennessee do not impose state income taxes on retiree incomes, making them some of the best states to retire on social security. On the other hand, the 10 worst states to retire in are Vermont, New Hampshire, Oregon, Washington, Maryland, New Jersey, New York, California, Massachusetts, and Hawaii. Retirees should avoid retiring to these states if they wish for a comfortable retirement.
Saving for Retirement
The US News & World Report notes that almost 50% of people stopped contributing to their retirement funds in order to meet cost of living expenses. In this regard, the new legislation inculcating retirement-related provisions can help retirees manage emergency savings better. An allocated emergency savings account can help retirees save more by avoiding to tap into their retirement funds. The Charles Schwab Corporation (NYSE:SCHW) is already offering emergency saving options, and other corporations must follow suit for the sake of their employees.
Another way corporations can help employees maximize their retirement savings is through matching contributions. These are the contributions that an employer makes to your retirement plan account, provided you contribute to the plan from your salary, grow tax-free, and become taxable when withdrawn from the plan. ConocoPhillips (NYSE:COP) has an incredible matching program where 1% of contribution allows receiving company’s match of 6%.
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Methodology
In order to compile the list of the worst states to retire in for taxes and cost of living, we picked out all the states that are not tax-friendly or only moderately tax friendly from Smart Asset. Next, we ranked them on the basis of cost of living index by state and sourced the data from Missouri Economic Research & Information Center.
Few of the moderately tax friendly states had low cost of living indices; which is why they were not selected for our list. Instead, tax friendly states with high costs of living; such as Virginia, Colorado, and Idaho were used instead.
District of Columbia is also chosen for our list, even though it is not a state, due to the high taxes and costs of living in the region. States are ranked in an ascending order from lowest to highest costs of living.
20. Rhode Island
Cost of Living: 100.5
One of the worst states for retirement due to taxes and cost of living, Rhode Island has a high overall tax burden. For starters, the median property tax rate in the state is the 15th highest all over the US. Seniors may also have to pay tax on their social security benefits, provided that their federal adjusted gross income is more than $119,750. The sales tax bite isn’t that severe, but Rhode Island is one of the few states that collect their own estate tax too. Excluding IRAs, seniors having attained the full retirement age may exclude up to $15,000 of income from their military, government, or private retirement plans. Cost of living is 0.5% above the national average in Rhode Island.
19. Utah
Cost of Living: 101.5
One of the few states that tax social security, Utah may not be the ideal place to retire. Pension and other types of retirement incomes are also subject to a 4.85% flat income tax rate levied by the state. However, seniors may claim a small credit against these taxes. Utah also has an above average combined state and local sales tax rate at 7.19%. Meanwhile, property tax rates are the 8th lowest in the state. Cost of living is 1.5% above national average.
18. Virginia
Cost of Living: 103.1
Virginia isn’t exactly unfriendly for taxes, but combined with cost of living, retirees can certainly go for better options. Living costs in the state are 3.1% above the national average. Sales and property taxes are low. Income taxes in the state are generally a bit higher. Moreover, social security isn’t taxed, but other types of retirement incomes are deductible up to $12,000.
17. Montana
Cost of Living: 103.7
In Montana, most types of retirement incomes are taxed. Social security retirement benefits are also taxed, even though the taxable amount may differ from the federal taxable amount. Meanwhile, the state does not have a sales tax but some areas charge for a resort tax instead. Property tax rate is low, and costs of living is 3.7% higher than the national average.
16. Colorado
Cost of Living: 105.5
In Colorado, cost of living is 5.5% higher than the state average. Meanwhile, the income tax system allows for a large tax deduction on retirement incomes. Taxpayers who fall under the age of 55 are allowed to exclude up to $15,000 from their military retirement plan. Railroad retirement benefits in Colorado are exempt from the state tax too. While property tax rates are low, sales tax is relatively high (excluding medicine and groceries); exceeding 11% in some parts of the state.
15. Idaho
Cost of Living: 106.1
While social security benefits aren’t taxable in Idaho, other types of retirement incomes are. Public and private pension incomes are partially taxed as well. Property and sales taxes are low. However, it is one of the few states that taxes groceries. There are no estate or inheritances taxes. Cost of living is 6.1% higher than the national average.
14. Arizona
Cost of Living: 107.2
Arizona makes it to our list of the worst states to retire in for taxes and cost of living due to its moderate tax burden on retirees and high living costs. The state doesn’t tax social security benefits. However, distributions from 401(k) and other retirement accounts are taxed. Property taxes in the state maybe low, but combined sales taxes are high over 8%. Cost of living is 7.2% above the national average too.
13. Maine
Cost of Living: 111.5
One of the worst states to retire in for taxes and cost of living is Maine. While social security income isn’t taxed in the state, other forms of retirement income are taxed with rates as high as 7.15%. The property tax rate is above average at 1.09%, and the state also levies an estate tax. The sales tax rate is 5.5% including groceries except staples. Cost of living is 11.5% above the national average.
12. Connecticut
Cost of Living: 113.1
All types of retirement incomes are taxed under Connecticut’s income tax system. Some social security benefits may be tax-exempt, such as joint and head of household filers having an Adjusted Gross Income less than $100,000. The statewide sales tax rate is 6.5% which excludes groceries, prescription drugs, diapers, certain feminine products, and clothing under 50$. The average effective property tax rate is high at 2.15%. Meanwhile, costs of living is 13.1% above the national average.
11. New Jersey
Cost of Living: 114.1
One of the least friendly states to retire to, New Jersey has a high cost of living at 14% above the national average. Social security incomes are not taxed, while state income tax for retirement incomes are also low. The low tax is applicable for pensions below $75,000 for single filers and $100,000 for joint filers. However, the deal breaker is the property tax rate; one of the highest in the US.
10. Vermont
Cost of Living: 114.9
In Vermont, most of the retirement income is taxed. The rates may vary anywhere between 3.35% to 8.75%. Joint filers having federal adjusted gross income of $65,000 or less and other tax payers with an AGI of $50,000 or less are exempt from taxation of social security benefits. The median property tax rate is also the 5th highest in the state compared to other states. Sales tax, on the other hand, are below national average. However, cost of living is 14.9% higher than the national average.
9. New Hampshire
Cost of Living: 115
New Hampshire has a cost of living which is 15% higher than the national average. While there are no taxes on salaries and wages, dividends and interests are taxed at 4%. Retirees with investment incomes, therefore, will have their incomes taxed. By 2027, this tax will have been phased out. By 2024, the tax rate will be 3%, 2% in 2025, and 1% in 2026.
8. Oregon
Cost of Living: 115.1
Oregon is also one of the worst states to retire in for taxes and cost of living, with the latter being high at 15.1% over the national average. The lowest income tax rate in the state is 4.75% while the highest is 9.9%. While social security isn’t taxed, income tax from retirement accounts such as IRAs or 401(k) are taxed at the full state income tax rate. There are no sales taxes, and property tax rate is a little below the national average.
7. Washington
Cost of Living: 115.5
In Washington, cost of living expenses are 15.5% above the national average. The state has no income tax, implying that all social security incomes, retirement accounts, and pensions are tax-free. Property tax rates are average around 0.94%. However, sales tax rates are high at an average combined rate of 8.86%.
6. Maryland
Cost of Living: 119.5
Socials security benefits and 401(k) distributions are not taxed in Maryland, but other types of retirement incomes are fully taxed at the state income tax rate. These income tax rates can be as low as 2% and as high as 5.75%. The sales tax is around 6% with no additional local sales taxes. Property taxes are around the national average as well. Cost of living is also very high at 19.5% above the national average.
5. New York
Cost of Living: 125.1
One of the worst states to retire in for taxes and cost of living is New York. Living expenses are 25% above the national average, and New Yorkers have a significant tax burden as well. The income tax rate is very high, and New York City’s is an additional 3.078% to 3.876% higher. Social security benefits, military retirement plans, and retirement income from New York state and local government as well as federal government is tax-exempt. Private pensions and income from retirement accounts, on the other hand, are deductible up to $20,000. The state has an average state and local sales tax rate at 8.52%. Property tax rates are steep as well with reductions for qualifying seniors.
4. California
Cost of Living: 134.5
While social security benefits aren’t taxed in California, it is still one of the worst states a retiree can move to in terms of taxes and cost of living. Living expenses in the state are 34.5% above the national average, and the state also boasts some of the highest sales taxes in the United States. The average combined sales tax rate, according to Tax Foundation, is 8.82%. Pensions and income from retirement accounts are fully taxed at one of the highest state income tax rates.
3. Massachusetts
Cost of Living: 148.4
In Massachusetts, social security retirement benefits are fully exempt from taxation. However, most of the other forms of retirement incomes are taxed. The state has a flat personal income tax rate of 5%. There is a 6.25% state-level sales tax as well. Average property taxes are 1.14% of assessed home value, and qualifying seniors can claim a property tax break as well but cost of living is extremely high at 48.4% above the national average.
2. District of Columbia
Cost of Living: 148.7
Even though District of Columbia isn’t a state, it is included in our list as it is one of the worst places one can retire in for taxes and cost of living. Except for social security, most other income from retirement accounts are taxed. The sales tax rate is around 6%, same as the surrounding states of Virginia and Maryland. Cost of living is 48.7% above the national average.
1. Hawaii
Cost of Living: 179
The worst state to retire in for taxes and cost of living is Hawaii. With a cost of living that is 79% above the national average, the state is one of the most expensive ones that retirees can choose for themselves. The highest income tax bracket in the state is 11%. Retirement savings accounts and private pensions are fully taxed. However, social security benefits, private pensions, military and government pensions, and Tier 1 railroad retirement benefits are tax exempt. The average combined sales tax rate is 4.44%, and groceries are taxed at the full rate. The average effective property tax rate is 0.29%, one of the lowest in the US.
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Disclosure: none. 20 Worst States to Retire in for Taxes and Cost of Living is originally published on Insider Monkey.
