Retirees have a veritable mountain of critical decisions that need to be made. They have to decide when to claim Social Security benefits in order to maximize their lifetime payout; figure out whether Medicare or Medicare Advantage works best for them; and decide where they'll call home. This last point can be of particular importance given how all 50 states tax retirees differently.
However, deciding which state to live in isn't just a concern of retirees. Pre-retirees, or those defined as being between the ages of 45 and 64, also have to take into account how their state of choice could affect various aspects of their life. The state you choose to call home can have a direct impact on your finances, as well as your health and overall well-being.
Which state should pre-retirees call home?
With this in mind, LPL Research in May published its annual Retirement Environment Index, which takes a holistic look at the pre-retiree landscape of all 50 states. LPL Research's rankings examine each state using six broad categories (with corresponding weighting expressed a percentage in parenthesis):
- Financial (35%): This factor examines the financial well-being of a state, as well as that of its pre-retirees.
- Healthcare (20%): This analyzes the access and affordability of healthcare in all 50 states.
- Housing (15%): This factor looks at the availability of affordable housing, as well as the presence of nursing and assisted-living facilities in all states.
- Community quality of life (10%): Social factors are also taken into account, such as crime rates, traffic patterns, and weather conditions.
- Employment and education (10%): According to LPL Research, since the 20 years before retirement offer the greatest chance to save and grow your nest egg, access to full-time employment is critical.
- Wellness (10%): Finally, this looks at the personal habits and tendencies of pre-retirees that can impact health within each state.
What stood out in LPL Research's rankings is that no state had great ratings across all six categories, and no state performed poorly across all six. There's an upside and downside everywhere. The secret is in picking the aspects that work best for you. You'll also note that financial aspects, healthcare, and housing account for more than two-thirds of the total ranking.
LPL attempted to break down its state rankings into a grading curve, whereby 10% of states (five) received an "A" grade, 20% a "B," 40% a "C," 20% a "D," and 10% receive a big fat "F." The final rankings didn't precisely match this breakdown, but it came awfully close.
Let's take a look, from first to worst, which of the 50 states could be the most attractive for pre-retirees.
States that received an "A"
Just five states received the top ranking from LPL Research:
- South Dakota
Probably not what you expected at the top of the list, am I right?
Nebraska took the top honors after ranking eighth in 2016. It scored an A in the Financial and Community quality of life categories, and had passing grades in the other four categories. Interestingly enough, though, the Cornhusker state can be far less friendly from a financial perspective once you retire. Nebraska is one of 13 states that may tax your Social Security benefits, and it has an average combined state tax rate of 6.87% atop of an income tax that ranges from a low of 2.46% to a high of 6.84%.
Wyoming maintained its spot in the top five for a third straight year, albeit its poor grade (D) in healthcare could wind up dragging it down in future years. Wyoming's sparse population encourages little in the way of insurance competition, making it among the most expensive states in America to purchase health insurance.
States that received a "B"
Overall, seven states wound up earning a "B" grade from the Retirement Environment Index:
- New Hampshire
Note the trend? Generally speaking, states that performed the best on LPL Research's Index tend to be low-key places to live. For instance, Utah did very well in a number of categories, scoring a "B" in Financial, Community quality of life, and Employment & education, while landing an "A" in Wellness. If not for healthcare, where Utah was graded a "D," it could have possibly made a run at the top five.
Tennessee, which ranked sixth, was one of the very few states to receive an "A" in the financial category. Unlike Nebraska, which seems to turn on its retirees once they actually hang up their work gloves for good, Tennessee is among the most tax-friendly for retirees. Though sales tax can be pretty high at 7% across the state and the potential for up to 2.75% more from localities, there's no income tax, Social Security benefits aren't taxed, and IRA and 401(k) income aren't taxed. The Volunteer State is probably sounding awfully good to some folks right about now.
States that received a "C"
Another 21 states (we're going to exclude the District of Columbia from the rankings) received a passing, but mediocre, "C."
- North Carolina
- North Dakota
- Rhode Island
- West Virginia
The jumbled middle offers a few sparks of intrigue, as well as a taste of failure.
For example, Vermont earned top grades in Community quality of life and Wellness, as well as "B's" in Healthcare and Employment & education. Unfortunately, its ranking was sunk by the big fat "F" it received in the heavily weighted Financial category, signifying how unfriendly the state is to taxpayers. Aside from a combined tax rate of 6.17%, Vermonters pay an income tax ranging from 3.55% to 8.95%, and the state mirrors the federal taxation of Social Security benefits.
Another state with a wild bifurcation is Connecticut, which received top honors for Healthcare, but an "F" for its Financial aspects. Connecticut has the highest average household income in the country, meaning it's not shocking that its residents have easy access to healthcare, and that they can afford their care. However, Connecticut, like Vermont, is not friendly on the wallet come tax time. Most retirement income is taxable, and residents will pay a reasonably high state and income tax.
States that received a "D"
Continuing along, 11 states wound up receiving a subpar "D" grade for pre-retirees.
- South Carolina
This is the point where it begins to get tougher to find redeeming qualities, at least based on LPL Research's report. Both Mississippi and Arkansas earned "A's" for the affordability of their housing markets, but "D's" in Healthcare and "F's" in both Wellness and Employment & education wrecked their overall grades.
This jumble of states also houses the greatest cluster of Healthcare "F's" with Nevada, Montana, and Arizona all receiving the lowest grade possible. If you recall, Arizona was hit the hardest this year by Obamacare premium increases, with unsubsidized plans for its benchmark premiums (the second-lowest cost silver plan) rising by a ridiculous 116% year-over-year to $422 per month.
States that received an "F"
And finally, we have the states that LPL Research's findings would suggest are the least friendly, as a whole, for pre-retirees.
- New Jersey
- New Mexico
- New York
You'll also note that while low-key states tended to perform well, states that are business hubs performed rather poorly. New York wound up racking up an "F" in three categories (Financial, Housing, and Community quality of life). Though it scored OK with Healthcare (B), New York's exceptionally high housing costs and nosebleed state tax rates make it very difficult for workers to save for their retirement.
By a similar token, California was also a dunce. Like New York, California's housing affordability is an issue, but not as big an issue as its taxes. State sales tax in California averages 8.48% when combined with localities, and income taxes can peak at 13.3% for high-income earners.
Ultimately, where you decide to live is a personal decision, and no matter where you choose it's not going to be perfect. However, you should take into account the research that goes into reports like this, and understand how your choice to live in a particular state, county, or city, could impact your ability to save for the future.