Ask any retiree, and they'll tell you that creating and sticking to a retirement plan is no easy business. It takes decades of dedication for the average person to amass enough retirement savings to retire comfortably and on their own terms.
In some instances, however, deciding where you want to retire can be just as important as deciding when you want you to retire. The reason is that all 50 U.S. states have differences in the way your income and retirement benefits may be taxed. States can also differ greatly in terms of state, local, and even property taxes.
So which are the best states to retire in? Thankfully, Kiplinger has done some of the legwork for us and ranked the best states for retirement from top to bottom in June. Today, we'll focus on the top seven states listed and dig deeper to look at what qualities, both financial and non-financial, might make these states desirable locations to spend your golden years.
The seven best states to retire in
Coming in seventh is the ultimate getaway state, Hawaii.
Now, let's get the one downside of Hawaii out of the way: It's considerably more expensive to live in Hawaii than most anywhere else in the United States. Its cost of living is on par with that of New York City and San Francisco. But if you've diligently been saving for retirement and can afford its higher cost of living, there are unparalleled advantages to living in Hawaii, such as being on an island, dealing with 70-degree winters, and being able to enjoy what the outdoors has to offer year-round.
On top of its favorable weather and scenery, Hawaii doesn't tax Social Security benefits or most pension benefits. Further, according to the Bureau of Labor Statistics, Hawaii boasts an unemployment rate of just 4.1% as of May 2015, meaning people who want jobs can find them in Hawaii. The implication here is simple: Hawaii offers a stable economy, which could be of serious interest to retirees.
Sixth on Kiplinger's best states to retire in is another (somewhat) popular vacation state: Arizona.
Like Hawaii, Arizona offers a warmer climate than most U.S. states, and it gives retirees plenty of options when it comes to getting out and seeing the country. From golf courses to the Grand Canyon, Arizona has scenery that will pique just about any retirees' interests. Best of all, homes in Arizona are relatively affordable, with notably low property taxes, which means your retirement dollars can stretch a bit further in this state.
Arizona is also a hot spot for retirees because it's among roughly three dozen states that don't tax Social Security benefits, and its top-tier state income tax rate (4.54%) doesn't kick in until you reach $150,000 in income (or $300,000 for a married couple). Its generally favorable tax situation could be important for baby boomers and retirees relying on fixed-income investment tools such as bonds and CDs who need their money to last as long as possible.
5. South Dakota
For the fifth best state to retire to, let's track north and east of Arizona to the oil-rich state of South Dakota.
Arguably one of the greatest benefits of South Dakota is the open scenery. Between the small community feel, the great places to fish, and the Black Hills mountain range, South Dakota has the look and feel of being a truly unique place to retire. On the flip side, it also has a particularly harsh winter, with temperatures regularly plunging well below freezing. Although frigid temperatures probably mean a lower crime rate, retirees will have to weigh South Dakota's wild seasonal temperature swings when deciding if they want to retire here.
Should you choose to retire in South Dakota, you'll be pleasantly surprised by its favorable cost of living and tax situation. South Dakota retirees will avoid being taxed on Social Security benefits and will also enjoy the lack of a state income tax. South Dakota's vast energy assets (oil and natural gas) generate enough revenue to the point where a state income tax, as well as estate and inheritance taxes aren't needed. These energy assets are also responsible for pushing South Dakota's unemployment rate to a microscopic 3.8% as of May 2015.
If you're looking to retire on the East Coast without an East Coast cost of living, then fourth among the best states to retire, Pennsylvania, may be right up your alley.
Kiplinger notes that one of the primary allures of Pennsylvania are its many cultural attractions and the allure of its big city, Philadelphia, for seniors. As the study points out, AARP named Philadelphia one of the best big cities for retirees in the U.S. thanks to its free or reduced transit fares for those aged 65 and up.
But truth be told, the financial aspects of Pennsylvania are what make it a hot spot for retirees. Social Security benefits are free from taxation, as are tax-advantage retirement account payouts such as 401(k)s and IRAs. Median home prices are also particularly attractive. As recently as the third quarter of 2013, home prices in the Erie area of Pennsylvania sold for 41% below the national average. Cheaper home prices and tax-free status for tax-advantaged retirement accounts means you get to keep more of your money in retirement.
You must be aware of two things, though, when retiring in Pennsylvania. It is one of a select few states that collect an inheritance tax, and property taxes in the state are higher than the national average. There's always going to be some give-and-take, and this is the "take" of retiring in Pennsylvania.
3. West Virginia
Among the best states to retire, West Virginia cracks the top three with its beautiful scenery and very low cost of living.
One of its greatest allures is its location right in the heart of the Appalachian Mountains, which entice those looking to take advantage of West Virginia's abundant state parks and forests during retirement. Given the state's lack of large cities, retirees will get that community feel in West Virginia.
However, the scenery only tells half the story as West Virginia also offers the most affordable housing and rental options for senior citizens. Kiplinger notes a median home value of just $91,400, which is tied for the lowest in the country with Mississippi. Other perks include a very low property tax and absolutely no inheritance or estate taxes.
The downside is that the weather can vary wildly based on where you're located within the state (meaning snowstorms are possible during the winter); there is a tax on Social Security benefits (although the first $8,000 of retirement income for individuals or $16,000 for married couples is exempt); and West Virginia has the second-highest unemployment rate in the country at 7.2% as of May 2015, behind only the District of Columbia.
The runner-up of the best states to retire is Florida, the sunshine state. Of the seven states listed here, this should be the least surprising of them all. Florida's current demographics show a median age of nearly 41, which is well above the national average. In other words, Florida has been and will likely remain a retirement hot spot for a long time to come.
Florida's obvious appeal are its easy access to beaches and the ocean and its tropical weather, which means a temperate to warm climate pretty much year-round. The one downside/concern here will be homeowners' insurance costs due to Florida's risk of being hit by a hurricane or tropical storm. But housing costs are relatively cheap for seniors in Florida, with the housing bubble from 2008-2009 cutting homes prices in half in some instances.
From a financial perspective Florida is a big win for retirees. It is among a handful of states that has no income tax (it receives plenty of revenue from tourism), but is also doesn't tax Social Security benefits or other retirement income. In other words, retirees in Florida will have a good opportunity to keep the money they've saved and invested throughout their lives rather than give it up to local and state government taxation.
Of the best states to retire, Delaware, which is already nicknamed "The First State," takes the top honor, according to Kiplinger.
Like many of the states we've discussed, it has both financial and non-financial draws. Delaware's proximity to water and temperate climate (at least for those living near the water) make it an appealing retirement destination. And as a smaller state, Delaware lacks big cities, giving the state that small community feel.
In addition to having the ocean, mountains, and forest all within driving distance, Delaware also offers an abundance of financial perks for seniors. These include no taxes on Social Security benefits and exemption on the first $12,500 of pension income per year for retirees. Additionally, property taxes in Delaware are a staggeringly low 0.43%, and there's no sales tax to speak of. Yes, the cost of living is a bit higher in Delaware in terms of buying a home, but a lack of other taxes makes retiring there well worth it for many seniors.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.