No one ever said the path to retirement was easy, but what many senior citizens may not realize are that the surprises don't stop once they finally hang up their work gloves for good.
Arguably one of the biggest, but under-the-radar, choices a senior will make is deciding where to retire. Every state is unique in the way it taxes its citizens and/or retirees. Additionally, there are other differentiating factors, such as weather, crime rate, access to medical care, and so on, that can directly affect a retirees' well-being. How do we know which states encompass the best of all of these differentiating factors? Thankfully, we can turn to Bankrate and its list of the best states to retire in for the answer.
The best states to retire in
Bankrate's study, which is conducted annually, examines various aspects of all 50 states to come to a decisive conclusion on which are the best for retirees. Today, we'll take a closer look at which states made the top five, and more importantly take a deeper dive into what factors might make them financially attractive for retirees.
According to Bankrate, Virginia took the fifth spot for the second year in a row due to its lower-than-average cost of living, as well as declining crime rates. For what it's worth, every state in the top 10 on Bankrate's list of the best states to retire in had a cost of living that was below the national average. Healthcare quality and weather were also positive marks for the Old Dominion State.
Financially, there are a number of reasons for seniors to call Virginia home in their golden years. Virginia is one of 37 states that doesn't tax Social Security benefits, and in terms of combined state and local taxes, based on data from the Tax Foundation, Virginia has the 10th-lowest combined rate. This means seniors will be able to keep more of their money when buying the goods they need in retirement.
Additionally, Virginia residents may qualify for the Virginia Age Deduction, with income, filing status, and birthdate determining eligibility. Filers born prior to Jan. 2, 1939 may qualify for a $12,000 deduction on IRAs, 401(k)s, or public and private pensions. For seniors born after this date, but who are over the age of 65, a $1 reduction may be taken for every $1 in federally adjusted gross income that exceeds $50,000 for an individual filer or $75,000 for a married couple.
All in in all, some pretty nice perks for seniors.
The Beehive State chimes in as the fourth-best state to retire in according to Bankrate. A lower cost of living is one reason Utah ranks so highly, but outdoor activities, great weather, and higher than average financial well-being are additional factors that helped its 2016 ranking.
Financially, Utah retirees may not have it as easy as retirees in Virginia, but there are still some nice benefits. For example, residents ages 65 and up can qualify for a retirement-income tax credit of up to $450 per person, or $900 for a married couple, which is subject to certain income limits. This credit gets phased out at $0.025 per every $1 at an adjusted gross income over $16,000 for married individuals filing separately, $32,000 for married couples, and $25,000 for single filers. The retirement-income tax credit doesn't work with 401(k)s, but IRAs and pensions are fair game.
Utah retirees will also enjoy a proportionately low property tax compared to the national average, and won't have their wealth subject to an estate or inheritance tax (at least within the state) upon their passing. Combined local and state sales taxes are also right around the national average.
The one downside? Social Security benefits can be taxed, but there are some aforementioned exemptions based on income.
Ranking third is the Centennial State, Colorado, which gained bonus points from Bankrate for its nice weather (Denver has roughly 300 sunny days each year), ample activities for seniors, and particularly high scores for personal well-being.
But, there's more to like about Colorado than just its NFL champion Denver Broncos. Retirees in Colorado aged 65 and up may qualify for an exemption of up to $24,000 in income from an IRA, 401(k), and both public and private pensions. As an added bonus, residents between the ages of 55 and 64 are also able to exclude up to $20,000 in income from the aforementioned retirement plans. Best of all, this exemption works with Social Security income. Colorado, like Utah, does tax Social Security benefits, but many citizens will see their liability reduced or removed completely due to this exemption.
Property taxes in Colorado are also exceptionally low compared to the national average, and seniors are exempted on 50% of the first $200,000 of the actual value of the residence. Seniors may also qualify to defer their property taxes in Colorado.
As icing on the cake, there's no inheritance or estate taxes.
2. South Dakota
Based on Bankrate's findings, The Mount Rushmore State, South Dakota, ranked second in terms of best states to retire in. Bankrate admitted that the winters in South Dakota can be a bit harsh, but pointed to the states' ample sunshine over the entire year, high personal well-being scores, and substantially lower tax burden than the remainder of the nation.
Retirees in South Dakota are in for a number of financial treats. Social Security benefits aren't taxable, there's no state income tax, and retirement income isn't taxed within the state, period.
Property taxes in South Dakota might be a bit higher on a percentage basis compared to Colorado or Utah, but with a lower cost of living (which is a function of the states' abundant oil and gas assets) a higher property tax rate isn't all bad news. Additionally, seniors could qualify for a property tax assessment freeze if their income and home value falls below certain limits. Also, seniors who own a home and earn less than $10,500 annually may even qualify for a property tax-based refund.
Finally, taking home the top honor according to Bankrate is Wyoming, the Cowboy State. Bankrate highlighted Wyoming's very low tax burden, its exceptionally low crime rate, and high personal well-being scores as all the reasons why it took the top spot. Bankrate notes that the weather is also generally mild, which should please most retirees.
Based on the combination of state and local taxes rates, Wyoming has the eighth-lowest tax burden in the country (or third-lowest among states with a sales tax) according to the Tax Foundation. Furthermore, seniors won't pay tax on any retirement income, including Social Security, if they retire in Wyoming. Residents aren't on the line for estate or inheritance taxes, either.
Like many of the states before it, Wyoming also offers a property tax rebate to the elderly. The Tax Rebate to Elderly and Disabled program allows senior aged 65 and older who fall under certain income requirements to receive a refund of up to $800 for single filers and $900 for married filers on property tax, utilities and sales/use tax from the Wyoming Department of Health.
With so many choices (and ways to save money), where will you decide to retire? Share your thoughts in the comments below.
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.
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