For your entire working life you are told to plan and save for retirement. But as you get closer to that golden age (66-to-67 years based on a retiree’s ability to be eligible for a full social security (FRA) benefit or 70 years based on a delayed social security start date to maximize payout), you need to actually picture your life once you cross that threshold—and money is one big consideration.
Retirement income is a patchwork of stream sources that looks different for everyone. Perhaps you have a 401K? Great! Or maybe you put away quite a bit in savings and are one of the lucky people out there who has a pension. Regardless of your particular retirement picture—most of us depend on social security to a great degree. According to AARP, 25% of retirees age 65 and older in New Mexico rely on social security payments for 90% of their retirement income, proving the importance of social security to older Americans. (Just so you know, most financial planners say that social security usually only accounts for about 40-50% of the money you will need to live on in retirement and the rest of the money needs to come from other sources.) And according to the Social Security Administration, the average monthly social security payment today is $1,404.
So given the importance of your retirement income it only makes sense to investigate where might be the best location to live from an economic viewpoint. Two of the most important variables are taxes and cost of living—so let’s take a look at those.
Taxes in Retirement
First, you may not know it but the federal government may tax your social security. Yup. It’s true. There is a formula that takes into account different variables but do your homework and understand it. In a nutshell, you will owe tax on your benefits if your adjusted gross income plus any nontaxable interest plus ½ of your social security benefits is more than a specific amount ($32,000 for married taxpayers filing jointly). And up to 85% of your benefits can be taxed if your modified adjusted gross income (MAGI) is more than $44,000 (for married couples filing jointly). Let’s do the math. For a married couple receiving two social security payments of $1,400 and $800—half of their total yearly social security income is $13,200. Let’s say they receive $5,000 in dividends, and $8,500 in other income. Their MAGI would be $26,700, which is less than the allowable amount of $32,000—no taxes would be levied on this couple’s social security payments.
Certain U.S. locations are more tax-friendly than others for retirees. When you are living on a fixed income, the less money that goes to taxes, the more in your own pocket, right? So let’s take a quick look at state taxes (income, property, and sales) to understand how this may affect your bottom line.
There are seven states that impose no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire only tax dividend and interest income. However, you also need to look at the sales and property taxes, because if these are steep it could negate the no income tax benefit. According to a recent report from USA Today, Louisiana comes in with the highest sales tax at 10% while Delaware, Montana, New Hampshire, and Oregon have a 0% sales tax rate. (New Mexico’s is ranked the 15th highest in the country). Another way to slice it is if you have a pension, you might want to check out the following nine states that exempt all federal, military, and in-state pensions from taxes: Alabama, Hawaii, Illinios, Louisiana, Massachusetts, Michigan, Mississippi, New York, and Pennsylvania. According to thebalance.com, Pennsylvania and Mississippi are unique in that they are the only states that exempt ALL retirement income, even IRA and 401(k) distributions. Some states are not a great choice for retirees due to high tax rates and fully taxing pensions. These include California, Rhode Island, Vermont, Connecticut, and Nebraska.
Smartasset.com has a nifty map of the U.S. and categories each state according to how well the state scores on retirement taxes (includes retirement income, income, sales, property, estate, and inheritance taxes). They rate New Mexico as “moderately tax friendly” for seniors. “New Mexico taxes all forms of retirement income, including Social Security, while offering a deduction to seniors with household income below a certain limit. New Mexico’s sales taxes are above average, but its property taxes are among the lowest in the U.S.” Try it out—you can plug in your estimated retirement income, pension, etc. and see for each state what your state taxes would be.
How Far Will $1 Million Go?
Although the $1 million figure is often cited as the amount of ideal savings to accrue, it’s often an unrealistic figure for most of us. In fact, a 2016 BlackRock survey found that Americans ages 55 to 65 only have put away $136,000 for retirement. However, knowledge is power and it’s worth understanding how far that pie-in-the-sky number would last in all U.S. states to consider where your money may go farthest.
GoBankingRates, a personal finance website, claimed that Mississippi tops the spots for 1 million in retirement funds, lasting a whopping 26 years and 4 months. The shortest? Scenic Hawaii where $1 million in retirement won’t get you too far—about 12 years. New Mexico had a very decent outcome of 23 year and 3 months. See the expected outcome in 50 major cities across the entire country (Albuquerque is cited at 22.48 years.) The calculation was based on the annual expenses for people 65 and older for housing, groceries, utilities, transportation, and healthcare which was multiplied by each state’s cost-of-living index.
Best Places to Retire
There are many “lists” out there of the best places to retire—including those from Money and Forbes. The thing to understand is that you have to first identify what is important to you before reviewing the lists for it to be meaningful. For instance, cost of living might be your No. 1 priority or it might not. Perhaps you want to be located in a place with rich culture, art, and museums. Conversely, you might want to be far from the crowd in a place that allows you to breathe. Will you want to work or volunteer—and in what capacity? Perhaps being located near family is your goal—regardless of all other financial criteria. It is critical to understand how your daily life will play out before you set up your base camp, so to speak, for a successful retirement.
Ways to Boost Your Retirement Income
- Delay receiving social security income. While your full retirement age (FRA) may be 66 or 67, it makes sense if you can to delay the start of your payments. Each year you delay you will see gains of approximately 8%.
- Downsize your home. Right now the housing market is especially strong. Crunch the numbers to see if downsizing into a smaller home or condo makes sense.
- Work part time—a steady flow of some money could help keep your accustomed lifestyle. According to the Bureau of Labor Statistics the labor force participation among 65- to 74-year-olds is predicted to hit 32% by 2022, up from 20% in 2002. (Just make sure the added income doesn’t get eaten up by taxes.)
- If you are young, max out your 401(k) contributions or start an IRA, and keep up the contributions, and you’ll have a tidy sum when you retire. Why not meet with State ECU representatives to learn more about retirement savings options for members?
The most important thing is to start creating a roadmap for retirement. It’s empowering and may help you envision this special time in your life. And start to explore issues like where do you want to live, what do you want to do, and will you have the financial footing in place to live the lifestyle you want. Everyone’s retirement story will be different, but you do need some pre-planning to ensure a happy ending. There are many retirement calculators online that can get you started—but remember they can’t account for unexpected or rising medical and housing costs.