President Donald Trump has flirted with the idea of abolishing the IRS and creating a revenue stream from tariffs to offset major tax cuts. His latest pitch reportedly calls to end taxes for individuals earning less than $150,000 a year.

“I know what his goal is — no tax for anybody making under $150,000 a year,” Commerce Secretary Howard Lutnick told CBS News. “That’s his goal. That’s what I’m working for.”

Lutnick later walked his assertion back adding that Trump would consider such a massive tax cut if he were able to balance the budget (a feat that hasn't been accomplished since 2001 under the Clinton administration, when the U.S. last experienced a fiscal year-end budget surplus). The U.S. has only experienced a budget surplus four times in the last 50 years, according to the U.S. Treasury Department.

The Trump administration’s tax strategy also aims to eliminate taxes on Social Security benefits, tips, and overtime pay, and implement significant tax cuts that experts argue largely benefit the wealthy.

The likelihood that this proposal to end taxes for such a large portion of the population will move forward is dubious. Though Trump has previously made comments about his wishes to “abolish income taxes,” the Trump administration has not shared any further details.

However, here’s what we know so far.

Related: Check out Kiplinger's tax blog for the 2025 filing season. We're providing live updates, news, information, and commentary to help you navigate your taxes.

How many U.S. taxpayers earn less than $150K?

President Trump's pitch to eliminate taxes for individuals earning less than $150,000 could arguably benefit most of the U.S. population. According to the latest statistics from the U.S. Census Bureau, over 76% of individuals in the country earn less than that income limit. (Though some estimates put that number closer to 90%.)

In 2025, data show the average household income was $80,610. A breakdown of average earnings by age group wasn’t close to $150K. For instance, the median household income was:

• $85,780 for those between the ages of 25 to 34
• $101,300 for 35 to 44 year olds
• $110,700 for 45 to 54 year olds
• $90,640 for 55 to 64 year olds

Meanwhile, those 65 and older earned an average of $54,710. That figure may count in retirement earnings such as Social Security benefit checks. A deeper dive into the numbers shows that less than a quarter of individuals in the U.S. earn more than $150,000.

Source: U.S. Census Bureau, Table A-2 Households by Total Money Income, Race, and Hispanic Origin of Householder: 1967 to 2023.

Trump $150K tax proposal concerns

However, the proposal to end taxes for individuals making under $150K raises several serious practical and economic concerns:

1. How would ending taxes for certain income groups impact work incentives?
2. Could this plan result in a nationwide sales tax?
3. What about tax fairness? Would those earning just above $150K bear a disproportionate tax burden?
4. How will the U.S. build revenue if it abolishes income taxes for most of its population?

According to Lutnick, offsetting the lack of taxes for that segment of the population would be achieved by implementing tariffs on foreign nations. That suggests the U.S. wouldn't be paying existing deficits due to the tax cuts proposed by Trump.

“His [Donald Trump’s] goal is to have external revenue,” Lutnick said, referring to placing duties on imported goods to the U.S. “...The rest of the world leans on our economy, breathes off our economy. Let them pay a membership fee.”

Who pays for tariffs?

Mr. Lutnick’s statement on tariffs raises other concerns touted by economists. While abolishing taxes for certain income groups sounds like a good idea on paper, tariffs alone may not be enough to drive revenue to fulfill this promise.

For instance, tax policy experts at the Tax Policy Center already doubt that tariffs would be enough to afford Trump’s campaign promises such as addressing the childcare affordability crisis.

• As mentioned, the Trump administration added cutting taxes on overtime and tips, as well as potentially extending tax provisions from the expiring Tax Cuts and Jobs Act (TCJA) under ‘one, big beautiful bill’ to his list of pledges.
• To make those cuts work and balance U.S. deficits, GOP lawmakers have floated enacting budget cuts to popular tax breaks and programs like Medicare.

It’s worth noting that tariffs on imported goods from Canada, for example, are paid by United States businesses. That import tax is generally passed on to consumers like you. That means that tariffs aren’t external revenue, as the Trump administration is swaying people to believe.

The tax can also cause financial strain.

Tariffs are also known as “regressive taxes” because they disproportionately impact lower and moderate-income households. For instance, during the 2018 trade war with China, the Trump administration authorized $61 billion in emergency relief payments to farmers and ranchers impacted by retaliation.

Trump taxes: What’s next?

The Trump administration hasn't detailed plans to end taxes for those earning less than $150,000. Mr. Lutnick, however, later characterized the proposal as “aspirational” if Trump balances the national budget. As mentioned, a task that has not been achieved since 2001.

Instead, President Trump has been busy doubling down on tariffs.

• In his first 50 days in office, Trump's administration has been embroiled in tariff wars with Canada, Mexico, Colombia, China, India, and the European Union.
• As reported by Kiplinger, President Trump recently placed global blanket 25% tariffs on all aluminum and steel imports to the U.S. on March 12.
• The Trump administration plans to place global reciprocal tariffs on all foreign nations on April 2, and reinstate 25% tariffs on Canadian and Mexican imports.

Additionally, the Trump administration has said it plans to create an External Revenue Service to collect tariffs from foreign nations. The new government agency would seemingly be an effort to replace the IRS and, apparently, the U.S. Customs and Border Protection (CBP).

But stay tuned. The Republican-led Congress is currently working to extend or make permanent the Tax Cuts and Jobs Act (TCJA), which is the signature tax legislation from Trum's first term. Whether promised tax cuts for overtime pay, Social Security benefits, tips, and the newest pledge for those making less than $150K make their way into any final legislation remains to be seen.

This article has been updated to reflect the Commerce Secretary's subsequent statements about Trump's tax plans.

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When you’re retired and living on a fixed income, managing the cost of living is the single most critical factor in securing a happy, financially stable retirement.

If your daily expenses take up most of your income, there’s little left for the things that make life enjoyable, and even less for leaving an inheritance for your loved ones or creating a financial cushion that brings true peace of mind.

It’s little wonder that so many adults 50 and older would consider relocating for a lower cost of living. Housing affordability remains one of the biggest drivers of moves among older Americans, according to surveys conducted in 2025–2026.

A 2026 MoveBuddha survey found that 87% of respondents overall said lower cost of living and housing affordability would motivate a move, while a PODS Moving Mindset Study (April 2026) showed that 61% of recent movers said affordability was their main priority.

We identified 24 of the best places to retire in the U.S. that offer below-average living costs for retirees. On top of affordability, all these places rank well, taking into account a low crime rate and overall safety, median incomes and poverty rates for retirement-age residents, residents' sense of well-being and the availability of recreational and healthcare facilities.

These reasonably priced places to retire are scattered across the nation, offering diverse options from mountains and beaches to small towns and larger cities.

See "How We Picked the Best Places to Retire" at the end of the list for details on our data sources and methodology.

1. Fargo, North Dakota

• City population: 141,434
• Share of population 65-plus: 13.6%
• Cost of living for retirees: 9.4% below the national average
• Average income for population 65-plus: $60,243
• Wellness score: 66
• State's tax rating for retirees: Tax friendly

With its low costs and generous tax situation, North Dakota has consistently ranked highly among our best states for retirement. We believe spending your golden years in the Peace Garden State to be a financially savvy choice (albeit perhaps an unorthodox one).

Fargo fits the bill for affordability, with particularly low housing costs for retirees, with a median home cost of $318,584 according to Zillow.

North Dakota State University is based in Fargo and, along with several other area colleges, offers attractive amenities for retirees and students alike. That includes sporting events and cultural attractions, such as numerous musical and theater performances.

Be sure to bundle up if you venture out in the winter months. The average low temperature in January is 0 degrees, according to U.S. Climate Data, and goes to an average low of 6 degrees in the surrounding months. Besides the cold temperatures, Fargo also gets a yearly average of 47 inches of snow. Bring a shovel.

2. Rochester, New York

• City population: 205,477
• Share of population 65-plus: 12%
• Cost of living for retirees: 11.4% below the national average
• Average income for population 65-plus: $40,083
• Wellness score: 63.0
• State's tax rating for retirees: Not tax friendly

While much of New York comes with above-average living costs, Rochester proves more affordable, slightly below average for retirees. Housing costs are notably cheap at about 64% below average for retired residents. The median home value is $241,627 according to Zillow, compared with an average of $368,198 for the entire U.S. and $510,449 in New York state.

That can leave plenty of room in your budget for warm coats, snow shovels and other winter gear. The average snowfall is a heavy 97.5 inches per year.

Luckily, you have plenty of local wine options to help keep you warm. The surrounding Finger Lakes Region is home to more than 100 wineries, all within a 90-minute drive of Rochester, and Casa Larga Vineyards is 20 minutes from downtown.

3. Richland, Washington

• City population: 66,112
• Share of population 65-plus: 16.5%
• Cost of living for retirees: 0.5% above the national average
• Average income for population 65-plus: $83,066
• Community score: 59
• State's tax rating for retirees: Tax friendly

Richland's metro area includes Kennewick, and both qualify as great retirement destinations.

But Richland, the smaller of the two, has an older population with a higher average income of $83,066 (Kennewick's is $64,053) and a lower poverty rate (7.6% compared with 8.3% in Kennewick) — both lower than the national poverty rate of 9.3% for people age 65 and older.

Whether you're partial to exploring the great outdoors or focusing on wine country, you have plenty of options — you don't even have to choose one over the other. You can enjoy boating and fishing on the Columbia, Yakima and Snake Rivers, and hiking or biking on the 23-mile Sacagawea Trail.

There are also more than 200 wineries within a 50-mile radius, offering beautiful views and many wines to sample. Besides that, housing is relatively affordable in Washington State, with an average home value of $469,874 compared with $604,087 for the rest of the state.

4. Albuquerque, New Mexico

• City population: 558,046
• Share of population 65-plus: 12.9%
• Cost of living for retirees: 8% below the national average
• Average income for population 65-plus: $62,336
• Wellness score: 60
• State's tax rating for retirees: Least tax friendly

You can find a bright and sunny retirement in Albuquerque. The city tends to get 310 sunny days each year throughout all four seasons. That gives you plenty of opportunities to explore the many hiking and biking trails in and around the city, go hot air ballooning and play on a variety of golf courses in the area.

When the sun goes down, local casinos — complete with concert venues and restaurants, table games, slots and bingo — help energize the local nightlife.

All that comes with below-average costs, but also below-average incomes. Many people aren't able to strike a balance. The sales tax rate for Albuquerque is 7.63% (the U.S. average is 7.12%). The income tax rate for Albuquerque ranges from 1.7% to 5.9%.

The average income of an Albuquerque resident is $67,995 a year; the U.S. average is $80,610. On the downside, there's also a poverty rate of 17.3% in Albuquerque among residents age 65 and up, compared with 10.9% for the U.S.

For seniors seeing the city at night, the violent crime rate is almost double the national average, at 51 per 1,000 residents.

5. Kansas City, Missouri

• City population: 520,000
• Share of population 65-plus: 15.7%
• Cost of living for retirees: 11.6% below the national average
• Average income for population 65-plus: $60,042
• Wellness score: 61
• State's tax rating for retirees: Mixed

The Kansas City metro area straddles two states and offers a wide range of affordable attractions for people of all ages, including retirees.

The music and arts scene is particularly vibrant, and the hometown of the late legendary jazz musician Charlie Parker, as well as the American Jazz Museum, the Nelson-Atkins Museum of Art, and the Kauffman Center for the Performing Arts.

For foodies, authentic barbecue is big, and you can entertain visiting grandkids with Legoland, the Sea Life Aquarium and the Kansas City Zoo.

The University of Missouri's Kansas City campus brings more than 16,000 undergraduate and graduate students, as well as all the amenities of college life, to the area (the main campus is in Columbia). It also offers an all-volunteer education program called Communiversity, which features a wide variety of classes and seminars in the metro area.

6. Sioux Falls, South Dakota

• City population: 217,209
• Share of population 65-plus: 15.3%
• Cost of living for retirees: 3.7% below the national average
• Average income for population 65-plus: $66,761
• Wellness score: 63
• State's tax rating for retirees: Most tax friendly

Sioux Falls is a particularly great spot to settle, with such advantages as a strong economy, low unemployment and hospitals specializing in geriatric services.

For all these reasons, plus the city's recreational activities (including regularly scheduled morning walks and pinochle for the senior program, run by the city's Parks and Recreation department), the Milken Institute dubbed Sioux Falls among the best small metro areas for successful aging.

All that comes pretty cheap for retirees. Along with low living costs, the median home value is $333,043, compared with $319,255 for the state, according to Zillow.

The state's tax picture is one of the best for retirees, with no income, estate or inheritance taxes.

7. Mankato, Minnesota

• City population: 47,370
• Share of population 65-plus: 12.2%
• Cost of living for retirees: 13.3% below the national average
• Average income for population 65-plus: $56,274
• Wellness score: 57
• State's tax rating for retirees: Least tax friendly

If the cold winters and equally harsh tax situation don't put you off from considering the North Star State, consider retiring in Mankato, about 90 miles southwest of the Twin Cities of Minneapolis and St. Paul. It's still a small city, but development is on the rise, and the local economy is growing fast.

Revitalization projects have added a nice mix of restaurants, shops, entertainment venues and more to the downtown area in recent years, and the city's strategic plan aims to spread that level of development throughout the Minnesota River Valley.

Some goals of the ongoing plan include:

• Adding housing, specifically within walking distance of jobs and shops
• Expanding Riverfront Park and other recreational land
• Building a pedestrian bridge that crosses the Minnesota River to North Mankato.

So far, that growth has yet to push up living costs. While other metro areas in Minnesota come with above-average expenses, Mankato's cost of living for retirees remains 13.3% below the national average. By comparison, Minneapolis has living costs for retirees 7.6% above the national average.

Unfortunately, typical incomes in Mankato are also lower, with the overall annual income for residents at $56,274, on average, compared with $70,099 in Minneapolis, according to BestPlaces.

8. Peoria, Illinois

• City population: 111,073
• Share of population 65-plus: 16.8%
• Cost of living for retirees: 24.4% below the national average
• Average income for population 65-plus: $53,568
• Community score: 60
• State's tax rating for retirees: Mixed

A big draw for this relatively small city is its affordability. Housing costs for retirees are particularly low, or about 61.5% below the national average. The median home value is a rock-bottom $132,671, compared with the $368,198 median for the rest of the U.S.

Over the years, plenty of money has been pumped through the city to further develop the downtown area. The Downtown Development Corporation of Peoria assisted many projects over the years, including issuing more than 700 construction permits in downtown.

The Riverfront area offers a vibrant setting with many eateries, shops and attractions, including the Peoria Riverfront Museum, complete with its Giant Screen Theater and Dome Planetarium.

The museum hosts a senior program with a free bimonthly morning lecture series and free admission to the museum on the second Wednesday of every month for guests age 60 and older.

The Peoria Park District offers more than 60 parks with miles of hiking trails, golf courses, a nature center and more. But, the violent crime rate in Peoria is 36.6, which is significantly higher than the national average of 22.7.

9. Lincoln, Nebraska

• City population: 305,010
• Share of population 65-plus: 16.1%
• Cost of living for retirees: 7.4% below the national average
• Average income for population 65-plus: $62,566
• Wellness score: 63
• State's tax rating for retirees: Least tax friendly

Lincoln might not be home to financial guru Warren Buffett, who was born in Omaha, about an hour north, but it has plenty of other notable points.

The capital city offers an abundance of attractions, including more than 130 parks, fine restaurants, an active nightlife, and a number of museums and theaters. Highlights include the Sunken Gardens (for budding horticulturalists) and the Museum of American Speed (for car enthusiasts).

Being a college town, home to both the University of Nebraska's Lincoln campus and Union Adventist University, the population might skew young. But the city is also prepared to assist its aging residents with about 30 health care and social service facilities per 1,000 seniors, compared with about 19 per 1,000 seniors in the U.S.

10. Huntsville, Alabama

• City population: 237,413
• Share of population 65-plus: 18.5%
• Cost of living for retirees: 5.8% below the national average
• Average income for population 65-plus: $60,959
• Wellness score: 67
• State's tax rating for retirees: Tax friendly

The Heart of Dixie boasts many great spots for affordable living, and Huntsville, in northern Alabama, is one of the best. It offers all the same low-cost, low-tax advantages as the rest of the state, while featuring more generous incomes among retirement-age residents.

Home to NASA's Marshall Space Flight Center, the Redstone Arsenal and the Huntsville campus of the University of Alabama, the city offers a robust economy and a highly educated population.

There are plenty of cultural attractions, from a sculpture trail to a symphony orchestra, as well as opportunities for outdoor recreation (think bass fishing). Alabama offers many of Florida's popular retirement attractions — warm weather, nice beaches and plenty of golf — all at a typically lower price.

11. Lexington, Kentucky

• City population: 332,841
• Share of population 65-plus: 14.8%
• Cost of living for retirees: 9.2% below the national average
• Average income for population 65-plus: $61,526
• Community score: 67
• State's tax rating for retirees: Most tax friendly

The Bluegrass State, home to the Kentucky Derby, holds plenty of appeal for horse lovers and bourbon aficionados.

But retirees can pursue other interests, as well. Lexington has more than 100 parks, five public golf courses and a 734-acre nature preserve with more than 10 miles of hiking trails.

For indoor entertainment, check out the numerous galleries and theaters, including the Lexington Opera House and its schedule of ballets, Broadway musicals, comedy shows, operas (of course) and other performances. The University of Kentucky offers the Singletary Center for the Arts, too.

You can also satisfy your academic pursuits at the University of Kentucky Osher Lifelong Learning Institute, which offers various courses, forums, interest groups, trips and events to people age 50 or older; annual membership costs of around $60.

The Donovan Scholarship program also allows Kentucky residents age 65 and older to take university classes for free, space permitting.

12. Morgantown, West Virginia

• City population: 30,707
• Share of population 65-plus: 13%
• Cost of living for retirees: 10.2% below the national average
• Average income for population 65-plus: $36,911
• Community score: 65
• State's tax rating for retirees: Not tax friendly

West Virginia University offers several benefits to older Morgantown residents. If you're age 65 and older, you can take WVU courses, for credit or not, at a discount.

If you're 50 or older, you can join the local chapter of the Osher Lifelong Learning Institute. A $50 annual membership gets you access to interest groups, trips, social gatherings and program classes, including local and international history, music, computers and yoga.

The university also helps boost local health care services with its many medical facilities, including the Eye Institute, the Heart & Vascular Institute and Ruby Memorial Hospital.

The Milken Institute credits the area's abundance of medical services — including orthopedic surgeons, primary-care clinicians and home-health care professionals — for contributing to Morgantown's high ranking (18th) among small metro areas.

13. Columbus, Ohio

• City population: 946,661
• Share of population 65-plus: 15.2%
• Cost of living for retirees: 8.6% below the national average
• Average income for population 65-plus: $58,575
• Community score: 62
• State's tax rating for retirees: Mixed

The biggest city in the Buckeye State comes with some of the smallest costs. Housing is particularly affordable: The median home value in Columbus, the state capital, is $248,749, compared with the U.S. average of $368,198, according to Zillow.

But comparably low costs don't equate to a lack of activities. Home to Ohio State University, locals can enjoy the academic culture, including big sporting events, concerts and cultural diversions. It also offers Program 60, which invites Ohio residents age 60 and older to take university courses for free.

Off campus, the downtown area has a lively scene with an eclectic mix of shops, galleries and restaurants. The Short North and German Village neighborhoods, in particular, are worth exploring.

14. Lafayette, Louisiana

• City population: 130,692
• Share of population 65-plus: 17%
• Cost of living for retirees: 9.8% below the national average
• Average income for population 65-plus: $55,329
• Community score: 59
• State's tax rating for retirees: Tax friendly

Laissez les bons temps rouler. That's Cajun French for "let the good times roll" and a phrase you ought to learn — and live by — when retiring to Lafayette. Known as the "Cajun Capital City," it's rich in history, distinctive foods, two-stepping tunes and, of course, Cajun and Creole culture.

Nature lovers have plenty to appreciate in the area, too. Located on the Mississippi Flyway and the Atchafalaya Loop of America's Wetland Birding Trail, Lafayette offers an abundance of wildlife to observe, as well as plenty of rivers, swamps and bayous for paddling, fishing, and exploring.

It's more affordable than New Orleans, which is about 130 miles east of Lafayette. If you're hoping for a retirement that's like one long Mardi Gras celebration, and you want help your budget to stretch as long as the party keeps rolling, Lafayette is the place for you.

15. Manhattan, Kansas

• City population: 54,974
• Share of population 65-plus: 10%
• Cost of living for retirees: 16.6% below the national average
• Average income for population 65-plus: $52,747
• Community score: 40
• State's tax rating for retirees: Least tax friendly

The Little Apple might not have all the bright lights and major metropolitan allure of New York City, but it has plenty to recommend itself, as well as significantly lower costs. (The cost of living for retirees in New York's Manhattan is 104.1% above the national average, with housing an astounding 245.9% above average.)

Housing costs for retirees in this Manhattan are particularly affordable, with a median home cost of $291,280. Yet, the average income for all households with earnings is slightly more than $52,747 a year. For comparison, the median home cost in Manhattan, New York, is more than a million dollars — at $1,227,524— with an average income of $96,950, according to BestPlaces.

Manhattan, home to Kansas State University, offers residents attractive college-town amenities, including the privilege of calling the school's top-notch athletics program your home team.

One particularly senior-friendly offering: The university, in collaboration with the local UFM Community Learning Center and the University of Kansas Osher Institute, offers courses year-round for $25 to $50 each, along with special events, aimed at encouraging lifelong learning, especially for locals age 50 and older.

The city is also developing an expanded trail system — beyond the existing 40 miles of trails throughout the city — for walking and biking throughout the city.

16. Des Moines, Iowa

• City population: 212,759
• Share of population 65-plus: 12.5%
• Cost of living for retirees: 13.4% below the national average
• Average income for population 65-plus: $48,444
• Community score: 62
• State's tax rating for retirees: Not tax friendly

For retirees looking to live in a big city on a small budget, Des Moines is a good choice. Affordability is one reason the Milken Institute ranked the state capital among the 100 large U.S. metro areas for successful aging in 2025.

Des Moines also boasts a strong economy and plenty of health care facilities specializing in aging-related services.

Retirees won’t lack for things to do. There are numerous museums and arts venues, including an outdoor sculpture park, a zoo and botanical gardens. There’s also a casino and racetrack in nearby Altoona.

17. Augusta, Georgia

• City population: 201,590
• Share of population 65-plus: 14.8%
• Cost of living for retirees: 20% below the national average
• Average income for population 65-plus: $46,108
• Community score: 57
• State's tax rating for retirees: Most tax friendly

With its low living costs and generous tax breaks for seniors, Augusta is ripening into a particularly peachy city.

Revitalization efforts have been pushing especially hard in the past several years, looking to expand the area's appeal beyond the annual Masters golf tournament in April and its accompanying celebrations and tourism revenue.

In a walkable downtown, retirees can enjoy new restaurants, museums, galleries and nightlife venues.

In the meantime, you can enjoy running, walking and biking along the Augusta Canal and kayaking and cruising along the Savannah River. Augusta University, along with other area schools, adds some nice college-town amenities, including free classes for Georgia residents age 62 and older.

The university also supplies the region with a top-notch healthcare network, including three hospitals and numerous specialists focused on oncology, geriatrics and senior health.

18. Jackson, Mississippi

• City population: 135,671
• Share of population 65-plus: 14.6%
• Cost of living for retirees: 23.9% below the national average
• Average income for population 65-plus: $39,969
• Community score: 57
• State's tax rating for retirees: Most tax friendly

Low costs and friendly tax policies can make for a sweet retirement in the Magnolia State, and the capital is particularly alluring. Jackson is a surprisingly eclectic city that holds appeal for Civil War buffs, blues music aficionados, even ballet fans.

Every four years, dancers from around the world flock to Jackson for the two-week USA International Ballet Competition to compete for medals, scholarships and spots in ballet companies. Similar competitions are held in places such as Russia, Bulgaria and Finland.

Jackson ranks highly among the best large cities for successful aging due to its affordability and an abundance of nurses, nurse practitioners and orthopedic surgeons, as well as caregiving options and geriatric facilities.

Note, however, that the area's residents are often prone to unhealthy habits that you don’t want to pick up, including low levels of activity and high levels of fast-food dining.

19. Green Bay, Wisconsin

• City population: 105,817
• Share of population 65-plus: 11.8%
• Cost of living for retirees: 10.2% below the national average
• Average income for population 65-plus: $55,221
• Community score: 60
• State's tax rating for retirees: Least tax friendly

The University of Wisconsin brings the benefits of retiring in a college town to the industrial city of Green Bay. That includes a thriving cultural and arts scene, quality medical care, a walkable downtown with an array of dining and shopping options, and of course, sports. Think, Green Bay Packers.

While the state's tax situation leaves something to be desired, low living costs are attractive. Green Bay is particularly affordable, with below-average costs for retirees across all spending categories.

Housing expenses are notably low, with costs for retirees falling 20% below the national average. The median home value in Green Bay is just $282,595, compared with $333,909 for all of Wisconsin, according to Zillow.

20. Durham, North Carolina

• Metro population: 311,965
• Share of population 65-plus: 15.3%
• Cost of living for retirees: 1.2% below the national average
• Average income for population 65-plus: $66,623
• Community score: 70
• State's tax rating for retirees: Not tax friendly

Duke University and the University of North Carolina might be bitter sports rivals, but their hometowns of Durham and Chapel Hill, respectively, team up to form a powerhouse metro area and a great place to retire.

The universities play a big role in those two advantages and also boost the local cultural and recreational scenes, as in many college towns.

Though not a deal-breaker for every retiree, it’s worth noting that violent crime is more prevalent in Durham than in the nation as a whole. The rate is almost twice as much as the national median of 22.7 per 1,000 residents, at 40.6, according to BestPlaces.

21. Fort Wayne, Indiana

• City population: 277,607
• Share of population 65-plus: 15%
• Cost of living for retirees: 18% below the national average
• Average income for population 65-plus: $53,978
• Community score: 56
• State's tax rating for retirees: Least tax friendly

The Fort Wayne metro area's affordability won't cost you in amenities. Despite being home to a nice collection of quiet neighborhoods, it also houses a thriving arts scene and hosts several festivals and events throughout the year.

The three local rivers — the St. Marys, the St. Joseph and the Maumee — are a main feature of the area, providing ample opportunities for canoeing, kayaking and cruising. More outdoor attractions: Fort Wayne is home to more than 80 parks and 100 miles of hiking and biking trails.

Fort Wayne isn't a metropolis, but if you feel the need for a small-town escape, head two hours south to Richmond. Its claim to fame (other than being budget-friendly) is that some of the earliest jazz records were made there by such greats as Duke Ellington and Louis Armstrong.

22. Fayetteville, Arkansas

• City population: 107,309
• Share of population 65-plus: 8%
• Cost of living for retirees: 9.7% below the national average
• Average income for population 65-plus: $52,111
• Community score: 56
• State's tax rating for retirees: Not tax friendly

The metro area of Fayetteville, which includes Springdale, Rogers and Bentonville, offers low costs but plenty of attractions.

The surrounding Ozark Mountains afford residents outdoor recreation and natural wonders to enjoy, while the downtown area, home to the University of Arkansas, provides restaurants, shops and a lively music and arts scene, including the Walton Arts Center.

Locals seem happy with what they have at their fingertips, with residents reporting high levels of liking where they live, feeling safe and having pride in their community. However, the city's violent crime rate is 33.7 per 1,000 residents — the U.S. average is 22.7.

23. Oklahoma City, Oklahoma

• City population: 727,836
• Share of population 65-plus: 13.3%
• Cost of living for retirees: 14.5% below the national average
• Average income for population 65-plus: $59,679
• Community score: 60
• State's tax rating for retirees: Not tax friendly

The biggest city (and growing) in the Sooner State has relatively low living costs. Housing-related expenses are particularly affordable, with a median home value of $207,961 compared with a state average of $221,765, according to Zillow.

A private room in a nursing home costs a median $8,973 per month, compared with a median $10,798 per month for the U.S., according to Genworth.

Cowboys (and those who want to be cowboys) might feel particularly at home in Oklahoma City — it has one of the largest livestock markets in the world — but given the area's downtown revitalization efforts in the past several years, everyone can find something to enjoy.

The Bricktown Entertainment District has a variety of restaurants and nightlife options. In neighboring Norman, the University of Oklahoma plays host to big-time sporting and cultural events.

24. Knoxville, Tennessee

• City population: 202,469
• Share of population 65-plus: 14.1%
• Cost of living for retirees: 8.2% below the national average
• Average income for population 65-plus: $44,308
• Community score: 61
• State's tax rating for retirees: Tax friendly

The Volunteer State is a good choice for retiree nest eggs of all sizes. On top of its friendly tax policies, most parts of Tennessee have below-average living costs across the board for retired residents. However, with the current influx of new residents, that could change.

Knoxville is particularly affordable for retirees, compared with, say, Nashville, where living costs among retired people are about the same as the national average. Housing costs for retirees in Knoxville are the biggest factor bringing down costs, with the city's median home value being $371,202 vs $436,355 in Nashville.

Being the gateway to the Great Smoky Mountains and home to the University of Tennessee, the city is rich in activities and attractions to fill your retirement years.

How we picked the 24 best places to retire

To pinpoint one great retirement destination in each state, we weighed several factors:

Cost of living for retirees for major metropolitan and micropolitan statistical areas, with data provided by the Council for Community and Economic Research, includes overall costs, housing, food and groceries, transportation, utilities, health care and miscellaneous expenses.

The cost of housing is taken from the most recent data on Zillow.

Household incomes, poverty rates and the number of healthcare facilities are from the U.S. Census Bureau and Sperling's Best Places.

Community well-being and physical well-being scores are provided by digital health company Sharecare, in collaboration with Gallup. These are two of the five elements of well-being that make up the overall Gallup-Sharecare Well-Being Index. (The other three elements are purpose, social and financial well-being.) The index is calculated on a scale of 0 to 100 and is based on more than 2.5 million nationally representative surveys.

Community well-being is defined as "liking where you live, feeling safe and having pride in your community." Physical well-being is "having good health and enough energy to get things done daily." We display the community score for each place we chose.

Population data, including the percentage of the population that is age 65 and older, is also provided by the Census Bureau and World Population Review. The figures are highlighted in these rankings for the benefit of readers, but were not factors in our methodology for ranking the best places to retire.

Taxes on retirees, based on Kiplinger's Retiree Tax Map, which divides states into five categories: Most Tax Friendly, Tax Friendly, Mixed, Not Tax Friendly and Least Tax Friendly. This information is provided for the benefit of readers but was not factored into our selections within each state.

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Now that the Federal Reserve has cracked the interest rate ice, the next development will be to separate winners from losers. Most headlines and popular attention focus on the record-setting stock market indexes, on the premise that cheaper credit is rocket fuel and key rates are heading lower still.

Traders will sooner or later take profits, but do not mistake an ordinary correction born of overexuberance for real trouble until and unless heavy selling metastasizes and lasts longer than a couple of weeks. And that is unlikely as strong economic growth, capital investment, company earnings and steady consumer spending persist in negating any rational case for a switcheroo to a bear market.

Plus, as banks and money market funds pay less and less, high-dividend-yielding stocks, led by financials, utilities, and most sectors of real estate investment trusts (REITs), will see big inflows of cash.

Banks make wider profit margins on lending when they cut depositors' rates, and one result of that is higher dividends. Several banks have just announced nice dividend boosts, including JPMorgan Chase (JPM) and Fifth Third (FITB). And the busy season for all dividend raises (not only from banks) lies ahead in December and January; 8% and 10% increases are likely to be common.

But my view is mixed and murky with fixed-income (and floating-rate) debt and credit. Here is where you will see winners and losers. High-yield IOUs and tax-exempt bonds are fine, and so are shares of high-interest-rate nonbank lenders.

But I am extra wary of long-term Treasuries and mortgages, and I’m especially wary of passive, total-market-style bond index funds. I would rather accept 3% to 4% from T-bills than trust that government bonds will rally at the longer end of the yield curve.

A good-news-is-bad-news conundrum for bonds

The problem is that many bond traders and fund managers are hardwired to regret sweet economic growth and other positive business and financial news.

As the Fed lowers interest rates to goose the economy, more than a few fear sticky inflation or even another bout of higher readings, notwithstanding all the favorable monthly trends. That explains why the Fed cut sent long-term Treasury and mortgage yields higher, not lower– which sliced bond and bond-fund values. The Vanguard Long-Term Treasury ETF (VGLT) fell 1.3% in a week and a half, while the iShares 20+ Year Treasury ETF (TLT) coughed up 1.6%. This is the wrong place to be.

So why, then, would municipals and high-yield bonds be different? With tax-exempts, it is a net-yield calculation compared with cash – and 3% to 4% tax-free looks better and better as the Fed prepares to trim another 0.5 percentage point from cash returns. Plus, municipals' results lagged earlier in 2024 due to oversupply. But demand is heavy now, and so the returns for munis are improving.

As for high yield, the fortunes correlate closely with stock performance and economic vigor. Both short-term high-yield bonds, as supplied by the PGIM Short Duration High Yield ETF (PSH), and longer-term high-yield funds, such as the Fidelity Capital & Income (FAGIX), yield 5% to 6% with stable-to-rising net asset values.

Again, while Treasury and other taxable bonds had a rough 10 days after the initial Fed cut, Fidelity Capital & Income boosted its net asset value more than 1%, and the fund shows a 9.4% year-to-date return through September 30.

As I often say (and history is on my side), yield rocks. We are about to hear it rock even louder now.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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When the Tax Cuts and Jobs Act (TCJA) became law in January 2018, it represented the largest redo of the U.S. tax code in decades — with far-reaching implications for individuals and businesses alike.

Many of its provisions were only temporary and are slated to sunset after 2025. If that occurs as scheduled, the effects will again be extensive, headlined by a considerable boost in the portfolio advantages and appeal of municipal bonds for many investors. Here are five things to keep in mind:

1. A potential reversion to higher marginal tax rates would be positive for muni bond demand.

In a higher-tax environment — and with higher tax-equivalent yields — demand for munis is likely to spike, making now an opportune time to invest before a potential run-up in demand.

The TCJA reduced the top marginal tax rate on individuals to 37% from 39.6%. If the TCJA sunsets after 2025, the highest marginal tax rate is expected to return to 39.6%.

The tax-equivalent yield on a muni increases as tax rates rise — making the tax exemption on munis more valuable for individuals who pay higher taxes. For example, the tax-equivalent yield on a tax-exempt muni yielding 5% is 7.93% at a 37% tax rate — but increases to 8.27% at a 39.6% tax rate.

2. The number of taxpayers subject to the alternative minimum tax (AMT) would increase dramatically.

The TCJA enacted a higher AMT exemption and an increase in the income at which the exemption begins to phase out. If the TCJA expires after 2025, it is estimated that the number of taxpayers paying the AMT would increase to 7.6 million in 2026 from current levels of about 200,000.

Certain Private Activity Bonds (PABs) issued in the muni market are subject to the AMT, muting the tax benefits for investors who are subject to this tax. With the potential for a major expansion of the AMT on the horizon, investors must remain vigilant about security selection, as we anticipate spreads on PABs, such as some airport bonds, would widen relative to other munis that are not subject to the AMT.

3. A potential lifting of the state and local tax (SALT) cap could benefit demographics — and issuer credit quality — in high-tax states.

Prior to the TCJA’s enactment, there was no limit on the amount of state and local taxes that taxpayers could deduct from their federal taxes. However, under the TCJA, a SALT cap was imposed, limiting the federal deduction to $10,000 for all tax filers.

The SALT cap disproportionately affects taxpayers in high-tax states. The cap’s end would lower the tax burden of residents in those states and could reduce any tax-driven incentive for residents to move elsewhere. The positive impact on the states’ demographics would support the longer-term credit quality of the muni issuers within their borders.

4. If discussions around changes in tax law signal a threat to the muni tax exemption, we could see accelerated issuance ...

Past tax law deliberations often have hinted at the potential for a rollback of the federal tax exemption for muni interest.

Under the TCJA, muni issuers lost the ability to advance-refund — refinance at a lower rate — tax-exempt bonds with proceeds from another tax-exempt bond issuance prior to the original bonds’ call date. As the TCJA legislation came together, some speculated that the impact on muni issuers would be even greater, with not-for-profit borrowers, such as private colleges, hospitals and charter schools, losing the ability to issue tax-exempt bonds.

5. ... But elimination of the tax exemption is highly unlikely.

Heading into this year’s election, we could hear fresh talk of a potential change to the muni tax exemption to help subsidize other elements of tax law change.

But the exemption is critically important to state and local governments, schools, hospitals, electric utilities, water and sewer systems, airports and toll roads that fund the nation’s vital infrastructure. Additionally, the exemption’s cost to the U.S. Treasury is quite modest — about $40 billion annually or $400 billion over 10 years — compared with the $4.6 trillion estimated cost of extending the TCJA for 10 years.

Because the exemption is essential to financing U.S. infrastructure, we do not believe its elimination is likely. However, in that extreme scenario, current tax-exempt munis, if grandfathered into the exemption, would become significantly more valuable — with considerable benefit for current investors.

As the prospects for TCJA’s wind-down become clearer, we will likely see asset prices start to respond to changing views regarding munis’ appeal. Every good planning discussion anticipates the future in enough time to get ready for it. That means that now is the time to revisit a muni strategy — and plan the portfolio adjustments needed to take full advantage if tax law takes a turn.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

It would be nice if there was an investment that could offer retirees growth potential, principal protection and complete liquidity. However, it doesn’t exist. There’s no such thing as a perfect investment, product or strategy. Nothing does everything well.

Traditionally, many investors have allocated a portion of their portfolio to bond funds in an effort to lower their overall risk while maintaining liquidity. The problem is bonds and bond funds are different. Bonds are guaranteed by and only as good as the entity that backs them, while bond funds are actively traded funds focused on the bond market bonds and can lose principal.

When retirees and near-retirees realize that their diversified portfolio of various stocks, ETFs and mutual funds, blended between the equities market and the bond market, is technically at risk, many start to look elsewhere for more safety. This is especially true when you consider the markets’ historical patterns, which I covered in my article Four Historical Patterns in the Markets for Investors to Know.

This article is intended to highlight the benefits and detriments of five investments and products that offer principal protection with growth potential. Please note investments and products that offer growth potential and principal protection are likely to underperform your standard benchmark indexes during the good years. However, because they offer principal protection, they won’t lose money in the down years (assuming there are no fees associated with the investment or product). Also, make sure to consider the credit rating of the entity that offers these investments or products. The principal protection offered is only as good as the entity that is backing them.

Liquidity could be an issue

Lastly, these investments and products also lack liquidity. Remember, there’s no such thing as a perfect investment, product or strategy. If you want growth potential and principal protection, you’ll have to give up some or all liquidity for a period of time. Consider for a moment that you probably don’t need access to all of your money in any given year. However, making sure a portion of your portfolio cannot lose ground may help you sleep better at night.

Don’t fall into allocation ambiguity and blindly guess how much needs to be protected. Design your lifestyle and legacy plan first and then build your portfolio around those requirements. If you want help understanding how to do this, you can learn more about how to create a retirement plan that’s designed to last longer than you without locking up assets into lifetime income streams from insurance companies in my book, How to Retire on Time. Let’s dive in.

1. CDs

Certificates of deposit, or CDs, are cash-equivalent products that offer a fixed rate for a fixed period of time. Because they are heavily influenced by interest rates, many banks may be hesitant to offer too high of a rate for too long of a period of time.

CDs tend to help with short-term protection needs. If the Fed were to drop rates, the new CD rates may not be enough to maintain your lifestyle expectations.

If you want protection with reasonable growth potential longer than two years, you may want to consider another option on this list.

2. Bonds

Bonds (not bond funds), like U.S. Treasuries or corporate bonds, are debt instruments guaranteed by the entity that backs them. Technically, you can sell a bond before its maturity if needed. However, if you were to sell before it matures, it would be sold at market price. That means you could sell it for a gain or a loss. If you want the protection, you would need to hold it until maturity.

Bonds may be a good fit if you want protection with a slightly longer duration than a CD, even though the short-term CD may have a higher rate. You never know when the Fed will increase or decrease rates. It is important to note that if interest rates were to go down, your bond would become more valuable, in case you decide to or need to sell it early. Otherwise, you can buy a bond and hold it to maturity, knowing what the rate is expected to be.

Be careful when picking high-yield bonds. The higher the yield or rate offered, the riskier the bond. Remember, bonds are only as good as the entity that backs them.

3. Fixed annuities

Fixed annuities, on the surface, are similar to a CD but from an insurance company. Insurance companies and banks operate differently. You may be able to get a higher rate for a longer duration through a fixed annuity. Once the annuity matures, you can liquidate it and spend it or move it into another investment or insurance product (e.g., fixed annuity, fixed-indexed annuities, etc.). If you are working with non-qualified funds, you can defer the capital gains tax by moving the cash from one non-qualified annuity into another non-qualified annuity through what’s called a 1035 exchange.

If you are younger than 59½, proceed with caution. Distributions from annuities before the age of 59½ may be subject to a 10% penalty. It is a retirement product that has limitations.

4. Fixed-indexed annuities

Many people do not realize that fixed-indexed annuities can be used as bond or CD alternatives, offering growth potential and principal protection on your cash value. In other words, fixed-indexed annuities do not have to be used as an income strategy. Many investors use them as an asset-preservation strategy to help hedge against downside market risk.

In a nutshell, here’s how they work. When the fixed-indexed annuity’s benchmark index, such as the S&P 500, goes up, the annuity’s cash value increases as well. When the benchmark index goes down, the principal of the annuity is maintained.

Assuming you picked an annuity with an annual reset, each year, a new “floor” is established. That means, unless you were to take a withdrawal or your annuity has fees associated with the policy, you cannot lose ground. Each year is a new year when the fixed-indexed annuity can grow its cash value or maintain the cash value of the previous year.

That said, I can’t emphasize the following enough: Not all fixed-indexed annuities are built the same. Just like some CDs may offer a 5% rate while others may offer a 0.5% rate, some fixed-indexed annuities have more growth potential than others. Your research and due diligence are incredibly important.

Here are a few words of caution for those considering using fixed-indexed annuities as a bond or CD alternative. Don’t add features you don’t need. If you are looking for potential cash growth and principal protection, don’t add on lifetime benefit riders or try to make your policy into a makeshift long-term care policy. The additional fees may compromise its original purpose of growth potential on the cash value with principal protection.

Also, many times an insurance company will have an annuity with and without a cash bonus offer. Annuities that offer a bonus, known as bonus annuities, tend to have less growth potential throughout the life of the policy. Because the bonus option may offer less growth potential, you may end up with less cash overall at the end of the policy, even when you calculate the cash bonus in the beginning. If you want your cash to grow, compare the options and their long-term growth potential.

I have found that fixed-index annuities, when sufficient shopping and research have been conducted, may offer more growth potential over the longer-term time horizon than CDs, Treasuries and fixed annuities. However, you must shop around and vet the insurance companies’ reputations, renewal rates and credit ratings. Make sure you also spend time understanding the benchmark index associated with any annuity. There are many new indexes focused on back-tested hypothetical results. That doesn’t make them bad. This means you may want to proceed with caution.

5. Cash value life insurance

Cash value life insurance, or permanent life insurance, can be used as a source of principal protection to help you through turbulent times. Even though some life insurance policies may have a cash component, they should not be considered investments.

You should only consider life insurance, whether it be indexed universal life insurance or whole life insurance, if your primary focus is to have a death benefit. The cash value associated with the policy, the tax strategies that can be implemented alongside the policy and so on should all be secondary objectives when considering life insurance. When funded and structured correctly, these secondary strategies can act as a nice complement to a retirement plan.

If you want to consider cash value life insurance, I would recommend exploring your options with an independent insurance agent who is also a licensed investment adviser and tax professional. The additional licenses may be able to help you explore a more comprehensive strategy with your policy than through a professional who is limited to only an insurance license. In other words, if their disclosure states they do not offer tax advice, how can they recommend an IUL for tax planning purposes?

Conclusion

Having principal protection can be helpful during difficult market conditions. If your portfolio is causing you to lose sleep, then maybe you are taking too much risk. I believe every investor should operate within their emotional and economic limits. Overall growth is important, but at what cost? Consider the potential benefits of having some of your portfolio’s principal protected.

If you are wondering how much should be protected, consider putting together your lifestyle plan first, then explore the tax and other strategies you want to implement. Once you understand your plan and the strategies designed to help bring that plan to life, you can start designing your portfolio.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Fixed income is in fashion — for good reason. Current bond yields are historically high, and rate cuts are on the horizon, so locking in yields before they fall is a potentially attractive proposition.

True to their name, high-yield bonds offer an average yield of about 7.7% as of June 30, 2024. This alone is higher than the 7.4% annual long-term return on the S&P 500 since 2000 (based on Bloomberg data to the end of May 2024). So, a high-yield investment could mean locking in “equity-like” returns from the income alone.

But with credit spreads at about 3.1%, should investors wait for them to widen closer to their 5.2% average since 2000?

We think that might not work out — for three reasons:

1. 'Time in the market' might beat 'timing the market.'

Most investors try to “buy low and sell high.”

But, believe it or not, that might not be the best way to play high-yield bonds.

Why? Because income has been a larger driver of high-yield returns than price moves over the years. Since 2000, high-yield bonds earned +7.7% annually from income and -1.3% annually from price moves (according to ICE at the end of May 2024).

To earn income, you need to be invested.

We back-tested several hypothetical automated trading strategies. Each hypothetically traded between high-yield bonds and cash at certain credit spread triggers. To our surprise, almost all trading strategies underperformed a simple strategy of just holding the Bloomberg US Corporate High Yield Index, and none consistently outperformed it, even ignoring transaction costs.* Hypothetical results have inherent limitations and are overly simplistic, but it is an interesting exercise that you can try.

2. Lower credit spreads may be justified.

We think the high-yield market is less risky than it used to be.

Historically (alongside the loan market), high-yield was the primary venue for private equity firms to finance leveraged buyouts (LBOs). This meant a sizable proportion of highly leveraged issuers.

But private equity firms have increasingly turned to the private credit market instead. The private credit market’s share of LBO issuance (by number of deals) has soared from 60% in 2019 to 86% in 2023, according to Barclays Research. We believe this may help lead to structurally lower default rates in high-yield bonds.

Average credit quality in the high-yield market has also improved: About 46% of the Bloomberg US Corporate High Yield Index is BB-rated (the highest high-yield rating) today vs about 34% in 2000, according to Bloomberg at the end of May 2024.

Smaller issuers with less frequently traded bonds command an “illiquidity premium,” which is reflected in higher credit spreads. But managers with access to technologies such as credit portfolio trading can trade these issuers as easily as the big names, so they have less need to demand an additional premium.

3. Credit spreads may offer more than adequate compensation for default risk.

We often take polls of investors, asking what they think average high-yield default rates are. Usually, they respond with something between 3% and 5% per year.

It may surprise you that, by our calculations, the average annual default rate on the Bloomberg US Corporate High Yield Index (including distressed exchanges) has been 2.5% since 2005, and the average loss from default has been 1.4%.

As such, we think credit spreads of about 3% offer ample compensation for default risks. One caveat, though: Many high-yield strategies hold only 10% to 30% of the 2,000 U.S. high-yield bonds available, and concentrations like this may amplify the risk of default. For those considering a high-yield vehicle, check how many bonds they hold. Investors may need to turn to a systematic approach to access a fully diversified high-yield strategy.

Waiting might be the wrong call

All-in bond yields are made up of two components: government bond yields and credit spreads. Both have tended to move counter to each other, providing a mutual stability buffer.

When credit spreads widen (usually a result of economic concerns), government bond yields tend to fall, due to a “flight to quality” or market expectations that the central bank will need to cut rates to stabilize the economy. When credit spreads tighten, government bond yields sometimes rise, due to lower demand for low-risk havens.

As such, waiting for credit spreads to widen might not mean investing at significantly higher all-in yields. If you consider all-in yields attractive, now might be a good time to consider an allocation. We believe now is the time to consider locking in high-yield bond yields before rate cuts take effect.

* Where model or simulated results are presented, they have many inherent limitations. Model information does not represent actual trading and may not reflect the impact that material economic and market factors might have had on insight’s decision-making.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The fixed-income market has long been a cornerstone for conservative investors seeking stability and predictable returns. However, the landscape of bonds and fixed-income investments has faced significant shifts, particularly in response to monetary policies and economic conditions.

Higher interest rates have introduced challenges for bond investors in recent years, leading to a reevaluation of strategies to mitigate risks while capitalizing on the income-generating potential of bonds. Now, with the possibility of falling interest rates and the Federal Reserve's strategic monetary adjustments, investors need to have a nuanced understanding of how to navigate the complexities of the fixed-income market before rates rise and after.

Fixed-income market dynamics

Fixed-income markets are sensitive to changes in monetary policy, particularly those set by the Fed. These changes can profoundly impact bond yields, prices and overall investment returns. Understanding these dynamics is crucial for effectively navigating the fixed-income market.

The relationship between interest rates and bond prices is inversely proportional. When interest rates rise, bond prices fall, and vice versa. This inverse relationship is a fundamental principle of bond investing and plays a critical role in portfolio management strategies.

Between 2008 and 2023, the bond market in the United States saw an average yearly return of merely 2.81%, according to the Bloomberg US Aggregate Bond Index. U.S. Treasury bonds experienced even lower performance, with an average annual return of just 2.35% during this timeframe. This was exacerbated in 2022 when the Fed's hawkish rate hiking commenced, and bond market losses amounted to a staggering 13%.

The Fed plays a vital role in shaping the fixed-income landscape. It uses monetary policy tools, primarily the federal funds rate, to influence economic conditions. Changes in the Fed's policy stance can significantly impact bond yields and prices.

During the July Federal Open Market Committee meeting, the Fed again held rates steady, though it appears a rate cut could be coming at its next meeting, in September.

Historically, bonds have shown consistent positive performance after Fed pauses in rate hikes. This performance is often linked to the subsequent loosening of monetary policy, leading to falling interest rates.

From August 1984 to December 2021, the average U.S. bond market total returns following the end of a rate hike cycle was roughly 8% after six months and 13% after one year.

Current fixed-income environment

The current fixed-income environment is characterized by higher, but potentially falling, interest rates. The federal funds rate currently stands at 5.5%, up significantly since the sub-1% rates in 2021. This environment presents both challenges and opportunities for investors.

The Fed's stance since 2022 has been geared toward tightening monetary policy to combat inflation. Higher interest rates have led to declining bond prices, resulting in sharp losses for many bond investors. However, these higher rates have also increased bond yields, enhancing the income potential of those securities during that time.

However, based on the Fed's economic projections and policy commentary, the tightening cycle is likely complete unless high inflation reignites. Since October 2023, following a pause in rate increases, the bond market has performed exceptionally well.

There are indications that an interest rate cut could happen in September and continue into 2025 and 2026. Falling rates offer the potential for capital appreciation and increased diversification benefits for bond investors.

Strategies for navigating the current environment

There are several strategies that investors can adopt to navigate the current fixed-income market environment effectively. For instance, with the prospect of falling interest rates, it may be prudent for investors to decrease their cash and short-term bond positions.

Investing in longer-term fixed-income securities can help lock in higher yields before rates fall. Increasing the duration of a bond portfolio can be beneficial when interest rates peak, as long-term bonds have more significant potential for capital appreciation during periods of falling rates.

Investors should also note that floating rate securities, whose interest rates adjust with market rates, have historically underperformed during periods of loosening monetary policy. Reducing exposure to these securities can help mitigate potential losses.

The fixed-income market's landscape is constantly changing, shaped by shifts in the Fed's tone and monetary policy. By understanding these dynamics and adopting effective portfolio management strategies, investors can navigate the fixed-income market effectively.

Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As bonds have struggled, producing losses in client accounts over the past couple of years, we have had more clients ask the question: Should bonds still have a role in the portfolio?

Traditionally, the answer has been that bonds provide diversification and income. They zig when stocks zag, providing income for spending needs. In finance terms, bonds have “low correlation” levels to stocks, and adding them to a portfolio would help to reduce the overall portfolio risk. However, over the last two years, as the Fed has worked to aggressively raise rates, this correlation has increased. What we saw in 2022 was the bonds fell right along with (and nearly as much as) stocks.

Compound that with the current state of interest rates. One of the most basic investing truisms is you should pursue investments offering a higher interest rate over investments with lower interest rates for the same level of risk. It just makes sense — of course you would want to earn more interest. Another concept involves how soon you get your investment back (liquidity). All else equal, you would want to make shorter-term loans where you would get your principal back sooner rather than later. The only way that you would be willing to lend your money for longer is if you received more interest to do so.

However, in today’s interest rate environment, investors are earning more on short-term bonds than long-term bonds, as you can see in the chart below. And investors are earning even more on federally insured certificates of deposit (CDs). As the chart below shows, one-year CDs currently pay 5.8% compared to only 4.8% for a 10-year Treasury bond.

Given all this, it seems like a no-brainer to invest in the short-term options and receive the higher interest rates and better liquidity that come with them. If bonds aren’t fully dead, why not at least eliminate the default risk of lending to companies and invest only in short-term CDs and Treasury securities? At first glance, this strategy seems brilliant and, frankly, “too good to be true.” And, of course, that is the case. This is where having a long-term investment approach comes in.

What happens a year from now?

To illustrate the point, let’s think about the longer term. What happens 12 months from now when the one-year CD matures? At that point, investors must look to reinvest the proceeds they receive. Most market pundits expect that the previously mentioned aggressive increase in interest rates by the Fed will at minimum slow the economy dramatically, if not push the U.S. economy into a recession.

If that happens, overall interest rates will fall as the Fed looks to reduce interest rates to stimulate economic growth. That makes it highly likely that investors won’t earn the current 5.8% rate if they reinvest their CDs next year.

For those who invested in a two-year CD and accepted the lower 5.1% rate, they don’t have this concern, known as reinvestment risk, for an extra year. The longer term of the current investment, the further investors can push out the concern over reinvestment risk.

When long-term bond prices will rise

Additionally, just as longer-term bonds fell when interest rates went up, the prices of long-term bonds will rise when interest rates go down. That is because investors looking to reinvest the proceeds from their maturing CDs are willing to pay extra for long-term higher rates, which are no longer available in the marketplace.

The result is that bonds in general, and long-term bonds in particular, tend to do very well after the Fed stops raising rates (the Fed left rates unchanged at its latest meeting, in December). A study by Capital Group that looked at how bonds performed after past Fed rate-hiking cycles provides room for optimism — that maintaining a bond position in your portfolio may once again provide positive returns, income and diversification benefits.

According to that study, bonds have provided returns of over 10% in the 12 months following the end of the rate-hiking cycle and have compounded at 7.1% over the next five years, well above the long-term average of 4.8%.

Bonds still play a critical role in portfolios

We still believe that bonds play a critical role in client portfolios and that beginning to shift to longer-term bonds could benefit investors over the long-term, given today’s higher interest rates. It is easy to take a short one- to two-year timeframe and wonder if the world has changed, but successful investing requires a long-term focus of seven to 10 years, incorporating full market cycles.

When you’re working with a financial adviser, they will be there to help you keep that focus and to best position your portfolio to generate the long-term returns necessary to achieve your financial plan. Bonds continue to play an important role in that goal.

Related Content

• 10 Things You Should Know About Bonds
• Should You Buy Bonds Now? What to Consider
• Bond Basics: How to Buy and Sell
• What's the Deal With Bonds Right Now?
• Bond Basics: What the Ratings Mean

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Plenty of Americans are glum about their personal finances these days, with inflation the No. 1 reason for their pessimism and potentially not having enough money for retirement driving many of their worries, according to Gallup.

But not everything related to finances is gloomy. These days, there’s a glimmer of brightness that investors shouldn’t overlook — bonds.

Bonds have not always been the most enticing of investments, and for a long time, their yield was so small that they added little to the overall growth that many investors wanted to see. But bonds served a purpose even then: They could help reduce risk in your portfolio, balancing out the uncertainty that came with aggressive stock investments. On their own merits, though, bonds didn’t provide much of a return, so many people avoided them or just devoted a sliver of their portfolios to them.

That’s been changing, and if you haven’t given much thought lately to bonds, now is a good time to give them another look. Their yields are much more attractive and offer a good option for investors who would like to realize some return while still minimizing risk.

The Fed helps drive the shift

But why is this happening? What has driven the sudden shift in the outlook for and performance of bonds?

One significant reason for the change has been the Federal Reserve’s effort to fight inflation, that nemesis so many Americans say has them concerned about their personal finances.

The Fed, worried about the cost of everything going up too much too fast, sought to temper inflation’s sting by raising interest rates. High interest rates potentially can help hold down inflation because when it becomes more expensive to borrow money, consumers might opt to cut back on their spending. If they limit their spending, then businesses will be forced to lower their prices to entice those customers back into the market.

But that tactic for trying to check inflation had an additional effect: It created an improved performance for bonds, which may yield 5% or more across the spectrum. Suddenly, bonds, bond exchange-traded funds (ETFs) and bond mutual funds are a more attractive part of the portfolio instead of just an afterthought for diffusing risk.

Doing your bond homework

If you’re contemplating making bonds a larger portion of your portfolio — and you should be — I would add this bit of advice: Do a little homework before you plunge into the purchase of any particular bond, bond ETF or bond mutual fund, much the same way you would when buying a stock.

Think about that for a moment: Most people use discretion when choosing stocks. They don’t just invest money randomly in a company’s stock without at least some investigation into its past performance, what the market is like for the company’s business and whether anything is happening in the world that could impact the stock’s value. Once they do make the purchase, many of those investors will actively track how their stocks are doing, seeking to make informed decisions on when to sell or buy more.

Few people think about that sort of discretion when it comes to bonds. Instead, they often buy a bond ETF and let it sit there. If you want the best return on your bonds the same way you want the best return on your stocks, then you need to do more than that. In the current market, anyone choosing a bond should show similar discretion as they would when choosing a stock, making informed decisions on which bonds make for the more attractive investment. You should look at selecting individual bonds, bond ETFs or bond mutual funds from different sectors and maturities, then allocating appropriately within your overall portfolio.

Active management vs. being passive

Of course, the most attractive investment can change from week to week, which is another reason to take an active approach to your investments. If you are investing today, you want to know what’s happening with the market right now, not what was a good deal a year ago or even a month ago.

At our practice, we believe that active management is more viable than passive. With the market changing so fast these days, it’s more necessary than ever to be engaged and active with your investment strategy.

What’s working well for you can change quickly, so you need to monitor market conditions regularly to take advantage of new opportunities as they arise — or dodge trouble when it appears on the horizon.

Certainly, you can do that on your own, but it pays to find a good financial professional who has the experience and knowledge to assist you with those decisions. Together, you can discover what the right decisions are for you — and when to make them.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a Registered Investment Advisor. BCM and First Coast Financial Group Inc. are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.

Any comments regarding safe and secure products, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Brookstone Capital Management.

Related Content

• 10 Things You Should Know About Bonds
• Bond Basics: How to Buy and Sell
• What's the Deal With Bonds Right Now?
• The Benefits of I Bonds vs EE Bonds To Store Your Savings

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In today's volatile market, investors are facing unusual challenges, particularly when it comes to bond investments. While stock markets have experienced ups and downs, bond returns have been disappointing, leading many investors to question the role of bonds in their portfolios.

To understand the current state of bonds, it's essential to grasp the fundamentals. Bonds are debt instruments issued by governments and companies to raise capital for various purposes. Investors essentially lend money to the issuer in exchange for regular interest payments and the return of the principal amount upon maturity.

Bonds are considered more conservative investments than stocks, offering stability and income generation. However, they are not without risk, as bond issuers may default on their payments.

Due to the complexities of buying individual bonds, individual investors often access bond exposure through mutual funds or exchange-traded funds (ETFs). Fund managers conduct thorough research on bond issuers and diversify investments across multiple bonds to mitigate risk.

Adjusting to current market conditions

Including bond funds in portfolios serves several purposes, such as reducing volatility, generating income and diversifying investments. However, the recent steep rise in interest rates has led to a significant decline in bond prices. As interest rates increase, bond prices fall, making them less attractive to investors. This phenomenon has created a challenging environment for bond investments.

While the goals related to bond allocations remain the same, appropriate adjustments should be considered to adapt to the current market conditions. Here are some strategies that can be employed:

1. Reducing bond duration

Duration refers to the time between now and a bond's maturity date. Shorter-duration bonds tend to have lower price volatility compared to longer-duration bonds. Portfolio volatility can be reduced by shifting bond funds from medium to short duration. Money market funds have the shortest duration and are typically used for this purpose.

2. Buying individual bonds

While buying bond funds is common, individual bonds can provide more control and customization. However, individual bond ownership requires expertise in bond research and management. Financial advisers can offer access to individual bonds and fund managers who can handle the research and management aspects.

3. Considering dividend-paying stocks

For investors seeking income, one option is replacing a portion of the fixed income allocation with dividend-paying stocks. Dividend payments from stocks can provide a source of regular income, complementing the income generated by bonds.

4. Looking at alternative asset classes

Alternative asset classes, such as commodities or real estate, can diversify portfolios. These asset classes may offer unique opportunities for growth and income, contributing to a well-rounded investment strategy.

A long-term perspective is important

Despite the recent challenges faced by bond investors, it's important to maintain a long-term perspective. When bond prices are discounted, investors can benefit from higher returns when the bonds mature. Rebalancing portfolios during market downturns allows for purchasing bonds at lower prices.

Bond allocations are common in most client portfolios, and a financial adviser can help recommend and implement the above adjustments if prudent and appropriate for your particular situation. For individuals with losses in taxable accounts, tax-loss harvesting before the end of the year may also be considered a strategy.

Understanding the dynamics of bonds and their role in diversified portfolios is crucial for investors navigating today's market challenges. While bond returns have been disappointing recently, bonds still offer stability, income generation and diversification benefits.

By adjusting strategies and considering alternative approaches, investors can adapt to current market conditions and continue working toward their long-term financial goals. It is essential to consult with a trusted financial adviser to develop a personalized plan that aligns with individual circumstances and priorities.

This article is educational and not investment advice. Please contact your financial advisor to discuss your individual situation.

Sara Stanich, MBA, CFP®, CDFA™, CEPA is the founder of Cultivating Wealth, an independent, women-owned financial planning firm serving families and individuals nationwide. Residing at the intersection of life and finances, Cultivating Wealth offers fee-only financial planning services for people who want to take power over their wealth. To learn more, visit cultivatingwealth.com.

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• I-Bonds: Pros and Cons of Investing
• Best Bond ETFs to Buy Now
• How to Buy Treasury Bonds

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The credit markets are so vast that notwithstanding the bloody numbers for 2022, I figure someone, somehow, somewhere must be breaking even or in the plus column managing fixed-income funds. And I found such a guy. Fittingly, David Sherman shares the name of the legendary World War II tank, for he is in the vanguard of an onerous trench battle against relentless forces: inflation, recession, the Federal Reserve and everything else bent on destroying bond values. 

Sherman is commander-in-chief of a platoon of actively managed, short-term, high-yield bond funds with the RiverPark and CrossingBridge insignias. The flagship is RiverPark Short-Term High Yield (symbol RPHYX), unfortunately closed to new investors. The fund is 1.4% in the green this year through October 7, yields 2.5% and has never had a losing calendar year since its launch in 2010. Among other Sherman vehicles, three CrossingBridge funds—Ultra Short Duration (CBUDX), Low Duration High Yield (CBLDX) and Responsible Credit (CBRDX), with an environmental, social and governance focus—are newer and much smaller. Each is offered as “institutional,” which means you need $50,000 to invest. Their 2022 returns range from minus 0.4% to plus 0.8%. And for a minimum of $2,500, there is RiverPark Strategic Income (RSIVX). It is down 3.5% through October 7, but its monthly distributions give it a yield of 5.3%, and its overall record since 2013 is excellent. That 3.5% loss compares well to similar funds with losses on the order of 8%.

How active fund managers earn their keep

The best of these results still trail risk-free Treasury bills and money market funds. And some active fund managers who stand out during a bear market are just plain lucky. But a talk with Sherman and a look at these funds has me convinced he has found a way to generate high and rising monthly income distributions on the order of 6% with less danger to principal than most types of bond funds.

RiverPark Short-Term High Yield has a duration (a measure of interest-rate sensitivity) of 0.46 with a portfolio that yields 6.1% to maturity. I know of similar funds with roughly the same yields but durations of 3, which means that they stand to forfeit more than twice the capital that the RiverPark fund does should overall interest rates go on rising. Sherman is constantly buying and rolling over undervalued ultra-short junk and BBB-rated bonds and preferred shares. Many holdings are in energy, insurance, utilities and health care, which have minimal risk of defaulting. Typical investments have a 6% or higher coupon, are due to mature in a year or so, and cannot be called or refinanced.

Few of us have the knowledge to identify or buy this stuff on our own. But one drawback of these or any other boutique, research-driven portfolios is that the cost of analysts and traders falls across a small asset base; RiverPark Strategic Income has just $186 million in assets, so its expenses are 1.18%. That’s partly why the minimum to invest in several of these funds is $50,000.

But 2022 shows that managers like Sherman are worth considering when lower-cost index funds or those that hew, herd-style, to a benchmark are a recipe for 10% losses. 

Inflation is finally flattening out after setting post-pandemic records. But this lower inflationary environment may not last if incoming President Donald Trump follows through with his promise to impose tariffs on goods imported from Canada, China and Mexico.

Some economists predict tariffs could cause inflation to rise again, impacting the wallets and returns of many retirees. The prospects of tariffs are already having an impact. The Federal Reserve cited economic uncertainty under a new President for its more cautious stance on cutting interest rates in 2025.

If you’re a retiree (or near retiree) who is worried about inflation heading into 2025 you are not alone. Even for super savers, inflation is retirement kryptonite. To keep up with rising costs, you may be forced to take larger withdrawals from your portfolio, increasing the risk that you’ll outlive your nest egg. And if inflation is accompanied by a bear market, those withdrawals can leave a permanent hole in your portfolio.

Although you can’t control the inflation rate—or the stock market—you can take steps to protect your retirement security. Here's how.

The 4% rule for retirement withdrawals

One of the most perplexing questions facing retirees is this: How much can I withdraw from my savings each year without running out of money? For many, the answer has been to use the 4% rule, developed by William Bengen, an MIT graduate in aeronautics and astronautics who later became a certified financial planner.

Here’s how it works: In the first year of retirement, withdraw 4% from your IRAs, 401(k)s and other tax-deferred accounts (which is where most workers hold their retirement savings). For every year after that, increase the dollar amount of your annual withdrawal by the previous year’s inflation rate. For example, if you have a $1 million nest egg, you would withdraw $40,000 the first year of retirement. If inflation that year is 2%, in the second year of retirement you would boost your withdrawal to $40,800.

Although the 4% rule has held up well since it was introduced in 1994, Bengen acknowledges that a period of high inflation could threaten his formula. The past few years illustrates why: Using the above example, if you retired this year and withdrew $40,000 from your $1 million nest egg, you would increase your withdrawal to about $43,200 (assuming inflation increased 8% again). That’s a significant amount under any circumstance, but such a sizable withdrawal during a bear market exposes you to what’s known as sequence-of-returns risk. If your account balance shrinks significantly during the early years of your retirement, you have fewer assets to create returns during market recoveries, posing the threat that you’ll run out of money in a retirement that could last decades.

Investment firm Morningstar recommends in higher inflationary periods a 3.3% withdrawal rate for new retirees who have a portfolio mix of 50% stocks and 50% fixed-income investments and a 30-year time horizon.

Financial planners say retirees should view the 4% rule as a guideline, not something that’s engraved in stone. Cecil Staton, a certified financial planner in Athens, Ga., sets up guardrails for his clients that reflect their individual circumstances, with withdrawal rates ranging from 3% to as high as 6%. “Somebody in their early sixties is probably going to have a different guardrail than somebody in their seventies,” he says. “The longer money needs to last, the more conservative you should be with withdrawal rates.”

Reducing your withdrawals when prices are rising can be a challenge. But in the early years of retirement, trimming your withdrawals by even a small amount—say, from 4% to 3.8%—will reduce the risk that you’ll run out of money, says Wade Pfau, professor of retirement income at the American College of Financial Services. Over a 30-year period, he says, “even small changes can have a big impact.”

Monitor investment fees

High investment costs can put an additional drag on your portfolio at a time when you can least afford it. A recent report from Pew Charitable Trust found that workers who roll their 401(k) plans into an IRA often end up paying higher fees for mutual funds than they paid when their money was in a 401(k). Workplace retirement plans can use their purchasing power to offer institutional-class shares, which are usually less expensive than the retail-class shares sold by IRA providers.

Leaving your savings in your employer plan is one option, but there are drawbacks to this strategy. You may want to consolidate accounts left with several former employers into one IRA, and your former employer may limit the number of withdrawals you can take from the plan. If you decide to move your money, you can shop around for low-cost funds before rolling over your 401(k), or roll over funds that are already in an IRA into an account with a lower-cost provider. The Financial Industry Regulatory Authority (Finra) provides an online analyzer you can use to compare the costs of more than 30,000 mutual funds, exchange-traded funds and money market funds.

Using the bucket system? Take it easy on cash

Many retirees use a strategy known as the bucket system to protect themselves from market downturns. With this system, you divide your savings among three buckets. The first is designed to cover living expenses for the next one to three years, after you tap a pension or annuity (if you have one) and Social Security. Because you need to be able to access the funds at any time, money in this bucket is typically stashed in an ultra-safe investment, usually a bank savings account or money market fund.

The second bucket contains money you’ll need over the next 10 years and can be invested in short- and intermediate-term bond funds. The third bucket is filled with money you won’t need until much later, so you can invest it in assets that are riskier but offer potential for long-term growth — mainly stocks, and possibly real estate and commodities.

The amount you should keep in your cash bucket depends on your individual circumstances — other sources of income, for example, and your tolerance for risk. During unsettling times like these, it may be tempting to increase the amount of money stashed in this bucket, where it won’t be buffeted by market turmoil or global conflicts. But keeping too much of your savings in cash will amplify the risk that you’ll run out of money, says Jamie Hopkins, director of private wealth management at Bryn Mawr Trust, a wealth management firm.

“If you’ve got $10 million in savings, you can move it all into certificates of deposit and live like a king, but most people don’t have the luxury to move everything into a really conservative asset,” says Matthew Benson, a CFP in Chandler, Ariz. “The risk that everyone thinks of when they think of investing is volatility, but for a retiree, one of the bigger risks is their assets being eroded by inflation.”

A reverse mortgage can generate cash

Home values are still high, even with mortgage rates up, leaving senior homeowners with $14 trillion in home equity. If you’re planning to downsize, you can tap that equity right away and add the proceeds to your savings. But if you want to stay in your home, there’s another option: Take out a reverse mortgage line of credit as early as possible—homeowners are eligible at age 62.

The line of credit will create a buffer during market downturns, providing a source of funds to pay expenses until your portfolio recovers, says Pfau. You won’t have to pay the money back as long as you remain in your home. In 2025 the maximum amount you can borrow using the government insured Home Equity Conversion Mortgage, the most popular kind of reverse mortgage, is $1,209,750 up from $1,149,825 in 2024.

While some TV ads may lead you to believe that every senior needs a reverse mortgage, there are definite downsides. Up-front costs are high, so you shouldn’t take out a reverse mortgage unless you plan to stay in your home for at least five years. The loan will come due when the last surviving borrower sells, leaves for more than 12 months due to illness or dies. If your heirs want to keep the home after you die, they’ll need to pay off the loan.

A HECM reverse mortgage is a “nonrecourse” loan, which means the amount you or your heirs owe when the home is sold will never exceed the value of the home. As long as you remain in the home, you retain ownership, but you’re responsible for paying taxes and insurance and maintaining the property.

Max out social security benefits

If you’re anywhere near retirement, you probably know that you’re eligible to file for Social Security benefits at age 62. And you’re probably also aware that you can increase the size of your benefits by waiting until at least full retirement age (FRA) — 66 for beneficiaries born between 1943 and 1954, gradually increasing to 67 for beneficiaries born in 1960. If you wait until age 70, you’ll maximize your benefits. If you’re able to continue postponing benefits after you reach full retirement age, you’ll receive an 8% retirement credit for every year between FRA and age 70.

Not everyone can afford to postpone filing for Social Security benefits, but if you’re married, you may be able to have it both ways. The lower-earning spouse could file before full retirement age, even though that will mean a reduction in that spouse’s benefit (up to 30% if the spouse files at age 62). Use that income, along with income from other sources, to pay expenses while the higher earner’s benefit — which will get the biggest boost from delayed-retirement credits — continues to grow until age 70. This strategy also increases survivor benefits. A surviving spouse who is at least full retirement age can receive 100% of the deceased spouse’s benefit.

Consider taking a lump sum instead of a traditional pension

If your employer provides a traditional pension, you may be offered two options at retirement: monthly payments for life or a lump sum. In uncertain times, it’s tempting to choose the monthly check, because who doesn’t want guaranteed income for life? But the decision isn’t as straightforward as it seems.

First, most traditional pensions aren’t adjusted for inflation, so the buying power of your monthly checks will erode over time. A lump sum, however, can be invested, providing the potential for growth that will keep pace with rising costs. A market downturn, if it occurs, offers the opportunity to buy stocks and stock funds at lower prices than you would have paid, Staton says.

Another factor to take into account: interest rates. Lump-sum payouts are calculated based on the present value of guaranteed monthly payments, using mortality tables and interest rates published by the IRS and updated monthly. Basically, the lower the published rates, the higher the lump-sum payout, Benson says. Interest rates are coming down but not fast as many would like.

A final factor to take into consideration is the financial health of your employer. Are you confident that your company will be around for the next 30 years (or more)? Your employer is required by law to honor your pension contract, and the federal Pension Guaranty Benefit Corp. provides a backstop if your company is no longer able to fulfill that obligation. But if your employer files for bankruptcy and the PBGC takes over the plan, you may not receive 100% of the pension you were originally promised. In 2025, the maximum pension guaranteed by the PBGC for a 65-year-old retiree is $89,181 (or $80,263.68 for a joint annuity that will pay 50% of benefits to the surviving spouse).

There are still, of course, strong arguments in favor of taking guaranteed monthly payments, particularly if you’re confident your employer will be around to pay them. If you expect to live a long time, you won’t have to worry about running out of money in your later years. If you opt for the joint-and-survivor option, the surviving spouse will also receive lifetime income (although your payments will be lower). And if guaranteed income is important to you, you’ll likely receive a bigger monthly payment from your employer than you could purchase by investing in an immediate annuity.

Your tolerance for risk matters, too. Many retirees will sleep better at night if they know they’ll receive a monthly paycheck, even if it’s not adjusted for inflation. And as is the case with immediate annuities, which we discuss below, having a source of guaranteed income to cover your regular expenses could allow you to take more risks with funds you’ve saved in IRAs or other non-pension sources.

Consider annuities for a portion of your nest egg

By allowing you to convert a chunk of your savings into a guaranteed monthly check, immediate annuities are a DIY pension for retirees who may not receive one from their employer. But annuities also suffer from the same disadvantages as traditional pension payouts in an inflationary cycle. Unless you buy an inflation rider, which could reduce your initial payouts by up to 28%, your payments won’t keep pace with the rising cost of living.

Advocates of annuitizing a portion of your nest egg say that doesn’t mean you should dismiss this financial option. If you invest enough in a single-premium immediate annuity to cover most of your non-discretionary expenses, you can reduce withdrawals from the rest of your portfolio during market downturns, thus lowering sequence-of-returns risk, Pfau says. Plus, with your expenses covered, you can invest the rest of your portfolio more aggressively — which means those funds stand a better chance of staying ahead of inflation, he says.

Rising interest rates make immediate annuities more attractive. Payouts are typically tied to rates for 10-year Treasuries, which are currently around 4.6%.

If you need income now, consider an annuity ladder. With this strategy, you spread out the amount you want to invest over several years. For example, if you want to invest $200,000, you would buy an annuity for $50,000 this year and invest another $50,000 every two years until you have spent the entire amount. As you age, the size of your payouts will increase in any event.

Indexed annuities offer the potential to earn higher returns than you’ll get from most fixed-income investments and can be converted to a guaranteed stream of income later in retirement. Buffered annuities, also known as registered index-linked annuities, or RILAs, are tied to a stock market index, but they have a floor, or buffer, that limits how much you can lose. For example, if the annuity has a buffer of 10% and the index it’s linked to falls 4%, you’ll lose nothing. If the index falls 30%, though, you’ll lose 20%.

Another option is to invest in a deferred-income annuity, which provides guaranteed payments when you reach a certain age. For example, a 65-year-old man who invests $100,000 in a deferred annuity that starts payments when he turns 80 would receive about $2,322 a month, according to ImmediateAnnuities.com, compared with $612 a month if he were to start payments immediately. The downside is that you could die before payments begin, leaving you and your heirs with nothing to show for your investment. For that reason, it’s helpful to think of a deferred income annuity as an insurance policy: You may not recoup your investment, but even if you live to 101, you won’t run out of money.

Reduce discretionary expenses

When it comes to things you can control to protect your savings from inflation, reducing spending is at the top of the list. “That doesn’t mean you have to change your lifestyle — just be a little more strategic,” Hopkins says. You may want to postpone your trip to Paris for a few months. Likewise, you may want to delay the purchase of a big-ticket item.

Paying attention to discretionary expenses is particularly important during the early years of retirement, when studies show that many retirees spend more than they do in their seventies and eighties. While that’s understandable — you’re still in good health and ready to have some fun — that’s also the period the sequence-of-returns risk is greatest. If you’re willing to be flexible about withdrawals during the early years of retirement, Hopkins says, you can always boost them later.

Lower your taxes with Roth options

Financial professionals often say that it’s not how much you make (or save), it’s how much you keep. While reducing the amount of money you must hand over to the IRS is always important, it’s even more critical when inflation and a market downturn are shrinking the size of your portfolio.

If you’ve saved diligently over the years, there’s a good chance you’ve stashed a lot of money in tax-deferred accounts — primarily IRAs and 401(k) plans. Whether you need the money or not, on April 1 of the year after you turn 73, you generally must start taking required minimum distributions from those accounts. (Starting in 2033 RMDs begin at age 75). You’ll pay taxes on those withdrawals, and if they’re sufficiently large, the income could push you into a higher tax bracket.

That isn’t the case with Roth IRAs: Withdrawals are tax-free as long as you’re 59-1/2 or older and have owned the account for at least five years, and you’re not required to take RMDs.

When you convert a traditional IRA to a Roth, you must pay taxes on all deductible contributions at your ordinary income tax rate. The tax bill is based on the value of your IRA at the time you convert. Suppose, for example, that your IRA was valued at $300,000 in January and is now worth $250,000. If you convert before your portfolio rebounds, you’ll pay taxes on the lower amount.

You don’t have to convert your entire IRA (or IRAs) at once, and if your account is large, you probably shouldn’t. You’ll have to pay taxes on the conversion for the year you convert, which could push you into a higher tax bracket and trigger other unpleasant consequences, such as the high-income surcharge on Medicare Part B premiums. Consider converting a specific amount every year, ideally just enough to remain within your tax bracket. Make sure you have enough money in your cash bucket to pay the tax bill next year.

Depending on how much you’ve saved in IRAs, 401(k)s and other tax-deferred accounts, you may not be able to afford to convert the entire amount to a Roth. A tax-smart strategy to deal with the remaining funds in tax-deferred accounts is to take calculated annual withdrawals before RMDs kick in, even if you don’t need the money, says Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab. Otherwise, you could find yourself forced to take a very large, taxable withdrawal at age 72. “You can often smooth out your taxes by taking some money out of IRAs and 401(k)s before you’re required to take RMDs,” he says. As is the case with Roth conversions, ideally you’ll want to keep those withdrawals small enough that you’re not bumped into a higher tax bracket.

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If you are furious –or just frustrated –with the inflation readings, the price of fuel and the daily trading drama on Wall Street, remember that we have seen this trouble before, survived and recovered.

Surely you know the proverb that bad news can be good news for financial markets. If the next recession is not yet official, there are signs it is gathering. But some consequences of a standard economic downturn work to the benefit of fixed-income investors and are tolerable for stock and fund holders who diversify and pursue high dividends. There is no cause to freak out.

Let's start with bonds. It is generally too late to sell and quite likely worth selective buying. Since the 10-year Treasury yield topped at 3.48% on June 13, it has dropped to roughly 3%, a bond-price rally that is allaying the year-to-date losses in popular funds.

BNY Mellon Municipal bond Infrastructure Fund (DMB, $13), a closed-end fund and a longtime recommendation of Kiplinger's Investing for Income, bottomed on May 23, down 24% for the year. The fund is now off less than 10% for 2022 as its deep discount to net asset value has reverted to a premium. The 5% yield should be the equivalent of 7% or more if you are in a high tax bracket. The duration is moderate, and most of its bonds are investment grade. (Returns and other data are as of July 8; investments I like are in bold.)

A Fork in the Road for Bond Yields

Remember that everything you see and hear about the Federal Reserve's interest-rate-raising campaign is tethered to short-term rates. The goal is to fight inflation at the cost of an economic slowdown, which means long-term bond yields, including mortgage rates, are intended to level off or fall. Indeed, long Treasury and investment-grade corporate rates could fall harder once the bond world sees a two-month easing of the inflation readings, which would extend this bond rally.

"The antidote to all this pessimism is a change in the inflation outlook," says Ken Leech, chief investment officer for Western Asset Management. Leech loves that gasoline futures are plunging, as are the prices of fertilizer, lumber and more. The Bloomberg Commodity Index is down 15% from early June. That bolsters the dollar, which in turn is disinflationary. The Invesco Dollar-Bullish ETF (UUP, $29) is up 11.5% for 2022.

Turning to stocks, the Dow industrials and the S&P 500 will stay susceptible to news-driven 2% daily swings. But there is a convincing argument for dividend-payers. So far this year, for example, the surprise ace among all blue-chip mutual funds is Federated Hermes Strategic Value Dividend (SVAAX), with a 5% gain. (You can buy the fund with no sales charge at major online brokerage platforms.) Lest you confuse this with an oil fund, its 16.5% energy weighting trails stakes in healthcare and utilities. Returns lag sis-boom-bah bull markets, but the fund is rapidly closing its long-term total-return gap with the struggling Vanguard and Franklin dividend-growth funds. Plus, the Federated fund yields 3.9%.

I know the public is edgy that inflation will stay high. But what seems like bad economic news can be a balm for your portfolio. The rest of 2022 will be better than the first half for many investments, even if recession clouds close in sooner rather than later.

When it comes to bond investing, there's a lot more to know than the current interest rate on Treasuries.

Bonds have two primary roles: income – whether taxable or tax-free – and portfolio diversification. Much of the time, when stocks or other investments struggle, bonds hold their value.

Read on to learn some key concepts every bond investor should know.

The Federal Reserve has raised interest rates by more than 5 percentage points over the past two years. Why is this important to investors in bonds?

Bond prices certainly are linked to interest rates, but inversely. When interest rates overall are on the rise, older, lower-yielding bonds become devalued. Conversely, falling rates raise the value of older issues with higher coupon rates.

So remember this like it's your mantra:

• When interest rates rise, bond prices fall.
• When interest rates fall, bond prices rise.

Rinse, wash, repeat.

To dispel with some misconceptions, "duration" is not a rough estimate of how long it will take to reach your investing goal. Neither is it the number of years a bond issuer has gone without a negative credit event. And it doesn't refer to the number of years before the borrower has to return your principal.

Rather, it’s a measure of a bond’s interest rate sensitivity. As a general rule, for every 1% increase or decrease in interest rates, a bond's price will change approximately 1% in the opposite direction for every year of duration. 

Duration – roughly related to a bond’s maturity, or the average maturity of the bonds in a fund’s portfolio – tells you approximately how much the price of a bond, or a fund’s net asset value, would fall or rise depending on the direction of interest rates. A duration of 5.5, for example, implies that a fund’s share price would fall roughly 5.5% if market rates rise one percentage point over a 12-month period.

A rising stock market that attracts investment assets at the expense of bonds or a growing government budget deficit can hurt returns on bonds, but nothing cripples them like the "I" word.

Indeed, nothing is as pernicious to a lender than inflation, which represents a double-whammy for bondholders.

After all, inflation both devalues the real worth of future interest payments and usually results in higher interest rates that detract from a bond’s current market value.

Recession talk makes bond investors nervous for good reason. Corporate bonds are at increased risk of default when the economy is contracting. It turn, that keeps a lid on bond prices.

Nothing gets recession talk started like an inverted yield curve.

A wild and volatile bond market, also known as an upside-down bond market, isn't nearly as worrisome. It's also not good when Treasury securities pay higher interest rates than corporate bonds or mortgages with the same maturity.

But an inverted yield curve is worse. When short-term Treasury notes pay a higher interest rate than long-term government notes and bonds, there be monsters ahead.

Inverted yield curves are usually taken as a warning that the economy is slowing and might go into a recession. Longer-dated maturities typically yield more than shorter ones; when that relationship reverses, it could be because investors foresee lower interest rates as the economy slows along with borrowing demand.

However, there are exceptions, and an inverted yield curve doesn’t always spell disaster.

The two most important agencies that rate the creditworthiness of bond issues are Moody's and Standard & Poor's.

The highest credit score for borrowers – be they companies or countries – is AAA. Both agencies use the same designation when it comes to the very best, most reliable debtors.

AAA ratings are precious and hard to earn. The government of Canada gets one. Pharmaceutical giant Johnson & Johnson also has a AAA rating. Amazon, however, even with its massive war chest and firehouse of free cash flow, gets a rating of A1 from Moody's and S&P rates Amazon at AA-.

Famously, the U.S. lost its top-notch rating from Standard & Poor’s when the rating agency downgraded Uncle Sam to AA+ in August 2011, citing a high level of debt and weakened “effectiveness, stability and predictability of American policymaking” with regard to the debt load.

Don't mistake this for the interest rate on the bond when it is issued, or the interest rate the bond pays between now and the date it is scheduled to mature.

Yield to maturity is the total return, including a gain or loss in the bond’s price, that you can expect if you buy the bond today and keep it until it matures.

Rather, it's a total return calculation.

Although the word “yield” is in the phrase “yield to maturity,” the figure also includes the future gain or loss in the bond’s value to bring it back to par.

If a company goes out of business and liquidates, bondholders have the first claim on whatever cash becomes available in the bankruptcy.

Anyone who does not own securities but is owed money by the borrower becomes a general creditor. General creditors might include employees, contractors and suppliers. Stockholders are last in line.

Everyone else – including shareholders, bankers with delinquent loans to the business, and the company's suppliers – must get in line behind the bondholders.

It's a misconception that when you buy bonds from your broker, you must order in multiples of $1,000.

In fact, you can buy $25 “baby bond” units, and often those are better and more liquid than bonds with a face value of $1,000. The $25 units are simple to buy because they are listed just like stocks or ETF units.

High-yield bonds, also known as junk bonds, can have a legitimate place in a fixed income portfolio.

That's especially true when the economy is so strong that even weak companies are profitable and paying their debts.

Junk bonds are often seen as more related to stocks than to other bonds, and they tend to do better when the economy is growing swiftly and stocks are rising.

Municipal bonds are often known as tax-exempt bonds, but that doesn't mean you always escape income tax on the interest.

Some municipalities issue both tax-free and taxable bonds because some buyers, such as pension funds and foreign investors, would benefit from the higher yield but do not get anything from a tax exemption.

When the stock market took a beating this spring, nervous investors looked to bond mutual funds and exchange-traded funds (ETFs) for protection and sanity. After all, fixed income typically provides regular cash and lower volatility when markets hit turbulence.

And the markets absolutely hit turbulence. For instance, between Feb. 19 and March 10, not only did the S&P 500 experience a historically rapid loss of 14.8% – it experienced a dramatic rise in volatility, too, hitting its highest level on that front since 2011, says Jodie Gunzberg, chief investment strategist at New York-based Graystone Consulting, a Morgan Stanley business. The index's losses and volatility escalated even more through the March 23 lows.

However, bonds offer ballast – "not only downside protection but also moderate upside potential as investors tend to seek out the safety of U.S. government and investment-grade corporate bonds amid stock market uncertainty" – says Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, a New York-based investment research company.

Bond prices often are uncorrelated to equities. Stocks typically do well in periods of economic growth, whereas bonds typically do well in periods of declining economic activity, Gunzberg says. The Federal Reserve has also thrown in its support, buying up corporate bonds and even bond ETFs over the past couple months, in turn driving up private purchases of debt.

Indeed, bond funds have done extremely well in 2020. Of course, yields have thinned out and their room for upside has shrunk as a result. Nonetheless, investors still can find stability and some measure of income in these products.

Here are 12 bond mutual funds and bond ETFs to buy. These funds offer diversified portfolios of hundreds if not thousands of bonds, and most primarily rely on debt such as Treasuries and other investment-grade bonds. Just remember: This is an unprecedented environment, and even the bond market is acting unusually in some areas, so be especially mindful of your own risk tolerance.

Returns and data are as of July 21, unless otherwise noted. For mutual funds, returns and data are gathered for the share class with the lowest required minimum initial investment – typically the Investor share class or A share class. If you use an investment adviser or online brokerage, you may be able to buy lower-cost share classes of some of these funds. Yields are SEC yields, which reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.

• Assets under management: $71.0 billion
• SEC yield: 1.3%
• Expenses: 0.04%, or $4 annually for every $10,000 invested

Just like S&P 500 trackers such as the iShares Core S&P 500 ETF (IVV) are how you invest in "the market," the iShares Core U.S. Aggregate Bond ETF (AGG, $119.08) is effectively the way to invest in "the bond market."

AGG is an index fund that tracks the Bloomberg Barclays U.S. Aggregate Bond Index, or the "Agg," which is the standard benchmark for most bond funds. This portfolio of more than 8,150 bonds is heaviest in Treasuries, at a 38% weight, but also has significant exposure to corporate debt (28%) and mortgage-backed securities (MBSes, 25%), as well as sprinklings of agency, sovereign, local authority and other bonds.

This is an extremely high-credit-quality portfolio that has 69% of its assets in AAA debt, the highest rating possible. The rest is invested in other levels of investment-grade bonds. That makes AGG one of the best bond ETFs if you're looking for something simple, cheap and relatively stable compared to stocks.

Learn more about AGG at the iShares provider site.

• Assets under management: $58.0 billion
• SEC yield: 1.2%
• Expenses: 0.035%

The Vanguard Total Bond Market ETF (BND, $88.99) is another name in broad-exposure bond funds. It targets U.S. investment-grade bonds and is geared for investors with medium- or long-term goals.

"Total" bond ETFs like BND incorporate a wide spectrum of fixed-income investments in a passively managed vehicle, says Mike Loewengart, managing director of investment strategy at online brokerage firm E*Trade Financial.

"Fixed-income investments can add ballast to your portfolio, especially during wild market swings," he says. "Investors leverage bonds because they are more predictable than equity investments, albeit a bit more boring, which turns off some investors."

BND holds more than 9,650 bonds, with about 42% of those holdings in Treasury and other agency debt, 29% in investment-grade corporates, 24% in MBSes and the rest sprinkled across bonds such as sovereign debt and asset-backed securities (ABSes). It's also available as a mutual fund (VBTLX).

Learn more about BND at the Vanguard provider site.

• Assets under management: $5.2 billion
• SEC yield: 1.7%
• Expenses: 0.06%*

The iShares Core Total USD Bond Market ETF (IUSB, $54.78) is another strong core bond fund that provides a blend of primarily investment-grade debt, but it also has some exposure to higher-yield bonds that AGG doesn't.

IUSB's portfolio, which includes nearly 10,000 bonds, is most heavily weighted in investment-grade corporate debt from the likes of AT&T (T) and JPMorgan Chase (JPM), at a third of assets. Another 31% is invested in Treasuries, and 23% is allocated to mortgage-backed securities. The rest is sprinkled among agency issues, international sovereign debt and other types of bonds.

This indexed ETF does have a "slight exposure to high-yield bonds, which tend to do better in a risk-on environment," CFRA's Rosenbluth says. But otherwise, nearly 91% of this bond ETF's holdings are investment-grade, including a 58% slug in AAA-rated bonds.

The yield, at 1.7%, is about on par with the S&P 500 right now. But IUSB has been far, far less volatile than the blue-chip stock index. It also has outperformed, with a 6.6% return that beats the S&P by roughly 470 basis points. (A basis point is one one-hundredth of a percent.)

* Includes a 1-basis-point fee waiver.

Learn more about IUSB at the iShares provider site.

• Assets under management: $14.2 billion
• SEC yield: 0.4%
• Expenses: 0.15%

If you're looking to focus more on stability than potential for returns or high yield, one place to look is U.S. Treasuries, which are among the highest-rated bonds on the planet and have weathered the downturn beautifully so far.

Bond ETFs like the iShares U.S. Treasury Bond ETF (GOVT, $28.11) give investors direct exposure to U.S. Treasuries. GOVT's holdings range from less than one year to maturity to more than 20 years. Roughly half of the fund is invested in bonds with one to five years left to maturity, another 26% is in bonds with five to 10 years left, and most of the rest is in Treasuries with 20 or more years remaining.

GOVT has produced a total return of more than 9% in 2020 as investors have hunkered down into safety plays. Just note that an already low yield, as well as little room for yields to go further south, really limit the upside price potential in this bond ETF. But it still might be an ideal place for investors looking for stability and just a tiny bit of income.

Learn more about GOVT at the iShares provider site.

• Assets under management: $14.9 billion
• SEC yield: 0.0%
• Expenses: 0.1359%

This is a tricky time to be buying bonds since "yields are in a race toward zero," says Charles Sizemore, a portfolio manager for Interactive Advisors, an RIA based in Boston.

"Buying longer-term bonds at these prices exposes you to interest-rate risk. If yields bounce off of these historic lows, bond prices will fall," he says. "Given that yields are modest across the bond universe, it makes sense to focus on safety rather than reach for a slightly higher yield that won't really move the needle that much anyway."

In an environment like this, Sizemore believes it makes sense to stay in bonds with shorter-term maturity. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL, $91.54) is a liquid way to get access to the short end of the yield curve. It invests in an extremely tight portfolio of just 14 bond issues with thin maturities of between one and three months – good for the truly risk-averse.

BIL hardly moves in good markets and in bad. For instance, from the start of 2020 through the March 23 market low, the S&P 500 lost more than 30% on a total-return basis. BIL? It improved by 0.5%. Since then, the S&P 500 is up 46.5%, while BIL has lost just 4 basis points.

"The yield is a moving target and may approach zero soon due the Federal Reserve slashing rates," Sizemore said in March, and that has since come to pass – BIL yields nothing right now. "But you have essentially no interest-rate risk and you're parked in the safest corner of the bond market."

Learn more about BIL at the SPDR provider site.

• Assets under management: $13.9 billion
• SEC yield: 0.9%
• Expenses: 0.35%*

If you prefer to have a human overseeing your short-term bond investments, you can look to actively managed ETFs such as PIMCO Enhanced Short Maturity Active ETF (MINT, $101.75).

Like BIL, MINT is among the more conservative bond ETFs you can buy. The fund currently has more than 800 holdings, with a stated goal of "capital preservation, liquidity and stronger return potential relative to traditional cash investments."

The trade-off? A little bit more risk than, say, a savings account or money-market fund – but far less risk than most other bond funds. The ETF's holdings are 94% invested in bonds with less than a year to maturity, with the remaining 6% invested in debt with no more than three years left. Nearly 80% of MINT's bonds have investment-grade credit ratings – the majority of that is corporates, though it also includes Treasuries and other bonds.

MINT offers a "relatively attractive yield given its minimal interest-rate risk and can be a stronger alternative to sitting on the sidelines," CFRA's Rosenbluth says.

* Includes 1-basis-point fee waiver.

Learn more about MINT at the PIMCO provider site.

• Assets under management: $29.5 billion
• SEC yield: 1.1%
• Expenses: 0.05%

Another way to invest in short-term debt is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH, $82.89).

Given the financial damage happening to even good publicly traded companies, corporate bond funds – even ones that hold investment-grade debt – are hardly bulletproof. Thus, it's worth pointing out that 90% of the bonds in VCSH are in the A or BBB range, the lower of the four investment-grade tiers.

"But given that the holdings are investment-grade bonds with only five years or less to maturity, your risk is tolerably low," Sizemore says. Indeed, the average maturity of bonds in the fund is just under three years.

The yield of 1.1% is modest. However, relative stability and an uber-cheap expense ratio make VCSH a decent place to wait out the volatility. If you prefer mutual funds, Vanguard offers an Admiral-class version (VSCSX).

Learn more about VCSH at the Vanguard provider site.

• Assets under management: $13.6 billion
• SEC yield: 1.1%
• Expenses: 0.05%

The Vanguard Intermediate-Term Bond ETF (BIV, $93.82) is an "in the middle fund" that invests exclusively in intermediate-term, investment-grade debt.

It's another index fund, this time investing in bonds with maturities between five and 10 years. Roughly half the fund is invested in Treasuries and other U.S. government bonds, with another 46% in investment-grade corporates, and most of the rest in foreign sovereigns.

The idea here is to provide more yield than in similarly constructed funds, though at the moment, BIV's yield isn't too differentiated from shorter-term funds. Year-to-date, however, it's beating the "Agg" benchmark by 227 basis points.

Vanguard Intermediate-Term Bond ETF also has a mutual fund version (VBILX).

Learn more about BIV at the Vanguard provider site.

• Assets under management: $5.4 billion
• SEC yield: 2.3%
• Expenses: 0.05%

If you do want to roll the dice on longer-term investments for a little more yield, bond ETFs such as the Vanguard Long-Term Bond ETF (BLV, $115.43) can get the job done.

The roughly 2,500-bond portfolio is heaviest in investment-grade corporate debt (52%), followed by Treasury/agency bonds (41%). Almost all of the rest of BLV's assets are used to hold investment-grade international sovereign debt.

The added risk comes in the form of longer maturity. About 72% of the fund is invested in bonds maturing in 20 to 30 years, 23% is in the 10-to-20 range, 4% is in bonds with 30-plus years remaining, and the rest is in the five-to-10 range. Because there's more of a chance these bonds won't get paid off than bonds that expire, say, a year from now, that means this fund can rise and fall a lot more than funds like MINT that deal in short-term debt.

But the higher yield might be tempting to some investors.

"Unless you see interest rates rising in the near future, owning a long-term bond fund can provide substantially more income to your portfolio," says Daren Blonski, managing principal of Sonoma Wealth Advisors in California. "If interest rates do rise, a long-term bond fund would underperform."

Like many other Vanguard bond ETFs, BLV trades as a mutual fund (VBLAX), too.

Learn more about BLV at the Vanguard provider site.

• Assets under management: $2.2 billion
• SEC yield: 1.4%
• Expenses: 0.25%

Investors looking for an actively managed core bond mutual fund can look to Vanguard Core Bond Fund Investor (VCORX, $10.99).

VCORX invests across the spectrum of investment-grade debt, and it does so across bonds in a wide range of maturities. The portfolio includes nearly 1,300 bonds at the moment, with an average effective maturity of 7.3 years.

Government mortgage-backed securities are the largest chunk of holdings at almost 37%, followed by investment-grade corporates (35%) and Treasuries (16%). But it has several other sprinklings, including foreign sovereign bonds, asset-backed securities and short-term reserves.

VCORX a young fund that only got its start back in 2016, but so far it’s doing well, with a three-year total return of 18.4% that’s more than a percentage point better than the AGG ETF’s total return. And this actively managed fund is priced like an index fund at 0.25% in annual fees.

Learn more about VCORX at the Vanguard provider site.

• Assets under management: $50.4 billion
• SEC yield: 2.94%
• Expenses: 0.73%

Managed by well-known bond portfolio manager Jeffrey Gundlach, the DoubleLine Total Return Bond Fund Class N (DLTNX, $10.76) acts as a "nice diversifier to core fixed income while providing current income without overstretching in quality for higher yield and strong risk-adjusted returns in varying market and interest-rate environments," says Nicole Tanenbaum, partner and chief investment strategist at Chequers Financial Management, a San Francisco-based financial planning firm.

While DLTNX is a "total return" fund, its primary vehicle is mortgage-backed securities of varying types. Nearly 80% of the bond mutual fund's assets are invested in these right now, with the rest sprinkled among debt such as Treasuries and other asset-backed securities, as well as cash.

"In today's persistent low-yield environment, many investors had been drifting away from safer core bond holdings toward riskier, high-yield credit given the more attractive yields they offer," Tanenbaum says. "While it may be tempting to reach for these higher yields to generate more income, it is critical for investors to fully understand the underlying credit quality of the bonds they are choosing to receive that higher yield."

The Retail-class N shares we list here require a $2,000 minimum investment in normal accounts or $500 in an IRA. You can invest in the lower-expense Institutional-class shares (DBLTX, 0.48% annual fees) with a $100,000 minimum investment in normal accounts, or a $5,000 minimum investment in an IRA.

Learn more about DLTNX at the DoubleLine provider site.

• Assets under management: $31.4 billion
• SEC yield: 1.6%
• Expenses: 1.14%

The BlackRock Strategic Income Opportunities Investor A (BASIX, $10.00) is an actively managed bond mutual fund that should complement core bond exposure to increase your risk-adjusted returns. Managers Rick Reider, Bob Miller and David Rogal have been with the fund for varying amounts of time, with Reider boasting the longest tenure in BASIX at roughly a decade.

This isn't your garden-variety bond fund. More than 15% of BASIX's assets are invested in "interest-rate derivatives" – hedges that institutional investors use against movements in interest rates. Another 16% is invested in emerging-market bonds, and the rest is split among debt such as junk bonds, Treasuries, collateralized loan obligations (CLOs) and more.

Performance is a mixed bag against the "Agg" bond index, though it's far less volatile than both the market and even the Nontraditional Bond category. But one thing weighing down its performance is high costs – not just a 1.14% expense ratio, but also a 4% maximum sales charge. But you can get around this if you have access to the Institutional shares (BSIIX), which have no sales charge and a 0.62% annual fee.

While an individual using a regular account would need to scrape together a whopping $2 million minimum initial investment, investors whose assets are managed by independent financial advisors might be able to access this share class for a far more reasonable minimum investment. You also might be able to access BSIIX via your 401(k) or other employer-sponsored retirement plan.

Learn more about BASIX at the BlackRock provider site.

When you're trying to balance a fixed income with an enjoyable retirement, cost of living is a crucial factor to consider. After all, if your daily expenses eat up too much of your budget, you won't be left with much extra for anything fun, to leave an inheritance for your loved ones or even just as a cushion to give you peace of mind. No wonder that among retirees who move, 60% according to a Vanguard survey, do so to live somewhere less expensive.

To that end, we identified which of the 50 best places to retire in the U.S. offer below-average living costs for retirees. On top of affordability, all of these places rank well with us, taking into account safety, median incomes and poverty rates for retirement-age residents, as well as residents' sense of well-being and the availability of recreational and health care facilities. And these affordable places to retire are scattered across the nation, offering diverse options from mountains and beaches to small towns and college towns. Take a look at the list.

See "How We Picked the Best Places to Retire" at the end of the list for details on our data sources and methodology.

• City population: 133,188
• Share of population 65+: 13.6%
• Cost of living for retirees: 9.4% below the national average
• Average income for population 65+: $60,858
• Wellness score: 66
• State's tax rating for retirees: Tax Friendly

With its low costs and generous tax situation, North Dakota has consistently ranked highly among our best states for retirement. So we believe spending your golden years in the Peace Garden State to be a financially savvy choice for your retirement destination (albeit perhaps an unorthodox one). And Fargo fits the bill for affordability, with particularly low housing costs for retirees, 14.6% below the national average. 

North Dakota State University is based in Fargo and, along with a number of other area colleges, brings with it attractive amenities for retirees and co-eds alike. That includes sporting events and cultural attractions, such as numerous musical and theater performances. Just be sure to bundle up if you venture out in the winter months. The average low temperature in January is literally 0 degrees Fahrenheit, according to U.S. Climate Data, and only goes up to an average low 6 degrees Fahrenheit in the surrounding months.

• City population: 207,274
• Share of population 65+: 12.8%
• Cost of living for retirees: 11.4% below the national average
• Average income for population 65+: $36,552
• Wellness score: 63.0
• State's tax rating for retirees: Not Tax Friendly

While much of New York comes with above-average living costs, Rochester proves more affordable, slightly below average for retirees. Housing costs are notably cheap at about 64% below average for retired residents. Indeed, the median home value is $217,411, according to Zillow, compared with $357,469 for the entire U.S. and $764,868 in New York state.

That can leave plenty of room in your budget for warm coats, snow shovels and other winter gear. The average snowfall is a heavy 100 inches a year. Luckily, you have plenty of local wine options to help keep you warm year-round. The surrounding Finger Lakes Region is home to more than 100 wineries, all within a 90-minute drive of Rochester, and Casa Larga Vineyards is located just 20 minutes from downtown.

• City population: 63,757
• Share of population 65+: 16.7%
• Cost of living for retirees: 0.5% above the national average
• Average income for population 65+: $65,224
• Community score: 59
• State's tax rating for retirees: Tax Friendly

Richland's metro area includes Kennewick, both of which qualify as great retirement destinations. But the smaller of the two, Richland, has an older population with a higher average income (Kennewick's is $57,989) and lower poverty rate (7.6% compared with 8.3% in Kennwick—both lower than the national poverty rate of 9.3% for people age 65 and older).

Whether you're partial to exploring the great outdoors or focusing on wine country, you have plenty of options—you don't even have to choose one over the other. You can enjoy boating and fishing on the Columbia, Yakima and Snake Rivers, and hiking or biking on the 23-mile Sacagawea Trail. There are also more than 200 wineries within a 50-mile radius, offering beautiful views and many wines to sample.

• City population: 560,274
• Share of population 65+: 17.2%
• Cost of living for retirees: 8% below the national average
• Average income for population 65+: $51,858
• Wellness score: 60
• State's tax rating for retirees: Least Tax Friendly

You can find a bright retirement in Albuquerque. The city tends to get 310 sunny days each year through all four seasons. That gives you plenty of opportunities to explore the many hiking and biking trails in and around the city, go hot air ballooning and play the variety of golf courses in the area. And when the sun goes down, local casinos — complete with concert venues, restaurants and more, along with table games, slots and bingo — help energize the local nightlife.

All that comes with below-average costs, but also below-average incomes. And many people aren't able to strike a balance: The poverty rate in Albuquerque among residents age 65 and up is 14.4%, compared with 10.9% for the U.S. and 17.8% for the state.

• City population: 510,704
• Share of population 65+: 14.1%
• Cost of living for retirees: 11.6% below the national average
• Average income for population 65+: $47,789
• Wellness score: 61
• State's tax rating for retirees: Mixed

The Kansas City metro area straddles two states and offers a wide range of attractions for people of all ages including retirees. The music and arts scene is particularly vibrant, being home to legendary jazz musician Charlie Parker as well as the American Jazz Museum, the Nelson-Atkins Museum of Art, the Kauffman Center for the Performing Arts and the Kansas City Art Institute. For foodies, authentic barbecue is big, too. And you can entertain visiting grandkids with Legoland, the Sea Life aquarium and the Kansas City Zoo.

Also, while the University of Missouri's main campus is about 125 miles east in Columbia, the school brings more than 16,000 undergraduate and graduate students, as well as all the amenities of college life, to its Kansas City campus. It even offers an all-volunteer education program called Communiversity, offering a wide variety of classes and seminars to the entire metro area. Class fees range from just $10 to $18, plus a $3 registration fee, but students age 65 and older can skip the registration fee and get a discount of $1 off the first class and $2 off all subsequent classes.

• City population: 206,410
• Share of population 65+: 12.0%
• Cost of living for retirees: 13.7% below the national average
• Average income for population 65+: $54,268
• Wellness score: 63
• State's tax rating for retirees: Most Tax Friendly

If you've never considered moving to South Dakota in retirement, perhaps you should as Sioux Falls is a particularly great spot to settle. It is filled with advantages, including a strong economy, low unemployment and hospitals specializing in geriatric services. For all these reasons, plus the city's recreational activities (including regularly scheduled morning walks and pinochle for the senior program, run by the city's Parks and Recreation department), the Milken Institute dubbed Sioux Falls among the best small metro area for successful aging.

And all that comes pretty cheap for retirees. Along with low living costs in Sioux Falls, the median home value is $192,900, compared with $193,700 for the state and $229,000 for the U.S., according to Zillow. Plus, the state's tax picture is one of the best for retirees.

• City population: 45,742
• Share of population 65+: 12.6%
• Cost of living for retirees: 13.3% below the national average
• Average income for population 65+: $55,568
• Wellness score: 57
• State's tax rating for retirees: Least Tax Friendly

If the cold winters and equally harsh tax situation don't put you off of the North Star State, consider retiring in Mankato, about 90 miles southwest of the Twin Cities. It's still a small city, but development is on the rise, and the local economy is growing fast. Revitalization projects have added a nice mix of restaurants, shops, entertainment venues and more to the downtown area in recent years, and the city's strategic plan aims to spread that level of development throughout the Minnesota River Valley. Some goals of the plan include adding housing, specifically within walking distance of where jobs and shops are; expanding Riverfront Park and other recreational land; and build a pedestrian bridge that crosses the Minnesota River to North Mankato.

So far, all that growth has yet to push up living costs. While other metro areas in Minnesota come with above-average expenses, Mankato's cost of living for retirees (and others) remains below the national average. By comparison, Minneapolis has living costs for retirees 7.2% above the national average. Unfortunately, typical incomes in Mankato are also lower, with the overall annual income for residents with earnings at $64,826, on average, compared with $80,269 in Minneapolis. 

• City population: 110,460
• Share of population 65+: 16.6%
• Cost of living for retirees: 24.4% below the national average
• Average income for population 65+: $48,221
• Community score: 60
• State's tax rating for retirees: Mixed

A big draw for this relatively small city is its affordability. Housing costs for retirees are particularly low, 61.5% below the national average. Indeed, the median home value is a rock-bottom $124,243, compared with the $357,469 median for the U.S. 

Plus over the years plenty of money has been pumping through the city, in a bid to further develop the downtown area. The Downtown Development Corporation of Peoria assisted a number of projects over the years, including the issuance of 714 construction permits in downtown with an estimated value of $74 million. Already the Riverfront area offers a vibrant setting with a number of eateries, shops and attractions, including the Peoria Riverfront Museum complete with its Giant Screen Theater and Dome Planetarium. The museum hosts a senior program with a free bi-monthly morning lecture series and free admission to the museum every second Wednesday of the month to guests age 60 and up. Also, the Peoria Park District offers 64 park sites with miles of hiking trails, golf courses, nature center and more.

• City population: 294,757
• Share of population 65+: 14.4%
• Cost of living for retirees: 7.4% below the national average
• Average income for population 65+: $61,837
• Wellness score: 63
• State's tax rating for retirees: Least Tax Friendly

Lincoln may not be home to financial guru Warren Buffett like Omaha, which is about an hour north, but it has plenty of other notable points to recommend it. The capital city offers an abundance of attractions, including more than 130 parks, fine restaurants, an active nightlife and a number of museums and theaters. Highlights include the Sunken Gardens (for budding horticulturalists) and the Museum of American Speed (for car enthusiasts).

Being a college town, home to both the University of Nebraska's Lincoln campus and Union College, the population may skew young. But the city is also prepared to assist its aging residents with about 30 health-care and social service facilities per 1,000 seniors, compared with about 19 per 1,000 seniors in the U.S.

• City population: 225,564
• Share of population 65+: 16.5%
• Cost of living for retirees: 5.8% below the national average
• Average income for population 65+: $60,443
• Wellness score: 67
• State's tax rating for retirees: Tax Friendly

The Heart of Dixie boasts many great spots for affordable living. And Huntsville, in northern Alabama, is one of the best. It offers all the low-cost, low-tax advantages as the rest of the state, but adds more generous incomes among retirement-age residents. 

Home to NASA's Marshall Space Flight Center, the Redstone Arsenal and the Huntsville campus of the University of Alabama, the city offers a robust economy and a highly educated population. There are plenty of cultural attractions, from a sculpture trail to a symphony orchestra, as well as opportunities for outdoor recreation (think bass fishing). In fact, Alabama at-large offers many of Florida's popular retirement attractions—warm weather, nice beaches and plenty of golf—all at a typically lower price.

• City population: 320,154
• Share of population 65+: 14.4%
• Cost of living for retirees: 9.2% below the national average
• Average income for population 65+: $64,175
• Community score: 67
• State's tax rating for retirees: Most Tax Friendly

As you'd expect, the Bluegrass State holds plenty of appeal for horse lovers and bourbon aficionados. But retirees can pursue other interests here as well. Lexington has more than 100 parks, five public golf courses and a 734-acre nature preserve with more than 10 miles of hiking trails. For indoor entertainment, check out the numerous galleries and theaters, including the Lexington Opera House and its schedule of ballets, Broadway musicals, comedy shows, operas (of course) and other performances. The University of Kentucky offers the Singletary Center for the Arts, too.

You can also satisfy your academic pursuits at the University of Kentucky. The Osher Lifelong Learning Institute offers various courses, forums, interest groups, trips and events to people age 50 or older; annual membership costs $35. The Donovan Fellowship allows Kentucky residents age 65 and older to take university classes free, space permitting.

• City population: 30,429
• Share of population 65+: 10%
• Cost of living for retirees: 10.2% below the national average
• Average income for population 65+: $64,628
• Community score: 65
• State's tax rating for retirees: Not Tax Friendly

West Virginia University offers a number of benefits to older Morgantown residents. If you're age 65 and up, you can take WVU courses, for credit or not, at a discount. Or if you're 50 or older, you can join the local chapter of the Osher Lifelong Learning Institute. A $30 annual membership gets you access to interest groups, trips, social gatherings and program classes, including local and international history, music, computers and yoga.

The University also helps boost local health care services with its many medical facilities, including the Eye Institute, Heart Institute and Ruby Memorial Hospital. The Milken Institute actually credits the area's abundance medical services—including orthopedic surgeons, primary-care clinicians and home-health-care professionals—for contributing to Morgantown's high ranking (18th) among small metro areas.

• City population: 913,175
• Share of population 65+: 11%
• Cost of living for retirees: 8.6% below the national average
• Average income for population 65+: $47,469
• Community score: 62
• State's tax rating for retirees: Mixed

The biggest city in the Buckeye State comes with some of the smallest costs. Housing is particularly affordable: The median home value in Columbus, the state capital, is just $236,962, compared with the national median of $357,469, according to Zillow.

But low costs doesn't equate to a lack of activities. Home to Ohio State University, locals can enjoy the co-ed culture, including big sporting events, concerts and cultural diversions. It also offers Program 60, which invites Ohio residents age 60 and older to take university courses free. Off campus, the downtown area has a lively scene with an eclectic mix of shops, galleries and restaurants. The Short North and German Village neighborhoods, in particular, are worth exploring.

• City population: 121,467
• Share of population 65+: 17.3%
• Cost of living for retirees: 9.8% below the national average
• Average income for population 65+: $49,795
• Community score: 59
• State's tax rating for retirees: Tax Friendly

Laissez les bons temps rouler. That's Cajun French for "let the good times roll" and a phrase you ought to learn—and live by—when retiring to Lafayette. Known as the "Cajun Capital City," it's rich in history, distinctive foods, two-stepping tunes and, of course, Cajun and Creole culture. Nature lovers have plenty to appreciate in the area, too. Located on the Mississippi Flyway and the Atchafalaya Loop of America's Wetland Birding Trail, Lafayette offers an abundance of wildlife to observe, as well as plenty of rivers, swamps and bayous for paddling, fishing and exploring.

Plus, it's more affordable than the more (in)famous Louisiana city of New Orleans, which is about 130 miles east of Lafayette. If you're hoping for a retirement that's like one long Mardi Gras celebration, and you want help your budget to stretch as long as the party keeps rolling, Lafayette is the place for you.

• City population: 53,682
• Share of population 65+: 10%
• Cost of living for retirees: 16.6% below the national average
• Average income for population 65+: $70,608 
• Community score: 40
• State's tax rating for retirees: Least Tax Friendly

The Little Apple may not have all the bright lights and major metropolitan allure of New York City, but it has plenty to recommend itself, as well as significantly lower costs. (The cost of living for retirees in New York's Manhattan is 104.1% above the national average with housing a ridiculous 245.9% above average). Housing costs for retirees in this Manhattan are particularly affordable at 30.5% below the national average. And yet, the average income for all households with earnings is a comfortable $78,054 a year.

Home to Kansas State University, Manhattan affords residents attractive college-town amenities, including the privilege of calling the school's top-notch athletics program your home team. One particularly senior-friendly offering: The university, in collaboration with the local UFM Community Learning Center and the University of Kansas Osher Institute, offers courses year-round for $50 each, along with special events, aimed at encouraging lifelong learning, especially for locals age 50 and older. The city is also developing an expanded trail system — beyond the existing 40 miles of trails throughout the city — for walking and biking throughout the city.

• City population: 210,381
• Share of population 65+: 12.5%
• Cost of living for retirees: 13.4% below the national average
• Average income for population 65+: $45,563
• Community score: 62
• State's tax rating for retirees: Not Tax Friendly

For retirees looking to live in a big city on a small budget, Des Moines is a good choice. Affordability is just one reason the Milken Institute ranked the state capital among the 100 large U.S. metro areas for successful aging. Des Moines also boasts a strong economy and plenty of health care facilities specializing in aging-related services.

Retirees won’t lack for things to do, either. There are numerous museums and arts venues, including an outdoor sculpture park, a zoo and botanical gardens. There’s even a casino and racetrack in nearby Altoona that hosts annual camel, ostrich and zebra races (sorry, no wagering on these exhibition races allowed).

• City population: 200,884
• Share of population 65+: 14.8%
• Cost of living for retirees: 20% below the national average
• Average income for population 65+: $53,185
• Community score: 57
• State's tax rating for retirees: Most Tax Friendly

With its low living costs and generous tax breaks for seniors Augusta is ripening into a particularly peachy city. Revitalization efforts have been pushing especially hard over the past several years, looking to expand the area's appeal beyond the annual Masters golf tournament in April and its accompanying celebrations and tourism revenue. In a walkable downtown, retirees can enjoy new restaurants, museums, galleries and nightlife venues.

In the meantime, you can already enjoy running, walking and biking along the Augusta Canal and kayaking and cruising along the Savannah River. Augusta University, along with other area schools, adds some nice college-town amenities, including free classes for Georgia residents age 62 and up. The University also supplies the region with a top-notch health care network, including three hospitals and numerous specialists focused on oncology, geriatrics and senior health.

• City population: 143,709
• Share of population 65+: 14.8%
• Cost of living for retirees: 23.9% below the national average
• Average income for population 65+: $39,510
• Community score: 57
• State's tax rating for retirees: Most Tax Friendly

Low costs and friendly tax policies can make for a sweet retirement in the Magnolia State, and the capital is particularly alluring. Jackson is a surprisingly eclectic city that holds appeal for Civil War buffs, blues music aficionados and even ballet fans. Every four years, dancers from around the world flock to Jackson for the two-week USA International Ballet Competition to compete for medals, scholarships and spots in ballet companies. Similar competitions are held only in Russia, Bulgaria and Finland.

Jackson ranks high among the best large cities for successful aging due to its affordability and an abundance of nurses, nurse practitioners and orthopedic surgeons, as well as caregiving options and geriatric facilities. Note, however, that the area's residents are prone to unhealthy habits that you don’t want to pick up in retirement, including low levels of activity and high levels of fast-food dining.

• City population: 105,744
• Share of population 65+: 13.8%
• Cost of living for retirees: 10.2% below the national average
• Average income for population 65+: $45,067
• Community score: 60
• State's tax rating for retirees: Least Tax Friendly

The University of Wisconsin brings all the benefits of retiring in a college town to the industrial city of Green Bay. That includes a thriving cultural and arts scene, quality medical care, a walkable downtown with an array of dining and shopping options and of course sports.

And while the state's tax situation leaves something to be desired, low living costs are attractive. Green Bay is particularly affordable, with below-average costs for retirees across all spending categories. Housing expenses are notably low, with costs for retirees falling 20% below the national average. Indeed, the median home value in Green Bay is just $146,500, compared with $229,000 for the U.S., according to Zillow.

• Metro population: 336,892 
• Share of population 65+: 15.1%
• Cost of living for retirees: 1.2% below the national average
• Average income for population 65+: $56,789
• Community score: 70
• State's tax rating for retirees: Not Tax Friendly

Duke University and the University of North Carolina may be bitter sports rivals, but their hometowns of Durham and Chapel Hill, respectively, team up to form a powerhouse metro area, and a great place to retire. The universities play a big role in those two advantages and also boost up the local cultural and recreational scenes, like in many college towns.

Though not a deal-breaker for every retiree, it’s worth noting that violent crimes are more prevalent in Durham than they are for the nation as a whole. The rate of violent crime is 6.8 per 1,000 residents, according to the Neighborhood Scout, compared with a national median of 4 violent crimes per 1,000 residents.

• City population: 269,994
• Share of population 65+: 14.9%
• Cost of living for retirees: 18% below the national average
• Average income for population 65+: $46,040
• Community score: 56
• State's tax rating for retirees: Least Tax Friendly

The Fort Wayne metro area's affordability will not cost you in amenities. Despite being home to a nice collection of quiet neighborhoods, it also houses a thriving arts scene and hosts a number of festivals and events throughout the year, including the family-friendly Three Rivers Festival in the summers. Indeed, the three local rivers—the St. Marys, the St. Joseph and the Maumee—are a main feature of the area, providing ample opportunities for canoeing, kayaking and cruising. More outdoor attractions: Fort Wayne is more than 80 parks and 100 miles of hiking and biking trails.

Fort Wayne is by no means a metropolis, but if you ever feel the need for a small-town escape head two hours south to Richmond. Its claim to fame (other than being budget-friendly): Some of the earliest jazz records were recorded in Richmond by such greats as Duke Ellington and Louis Armstrong.

• City population: 101,680
• Share of population 65+: 9.1%
• Cost of living for retirees: 9.7% below the national average
• Average income for population 65+: $56,466
• Community score: 56
• State's tax rating for retirees: Not Tax Friendly

The metro area of Fayetteville, which includes Springdale, Rogers and Bentonville, offers low costs but plenty of attractions. The surrounding Ozark Mountains afford residents outdoor recreation and natural wonders to enjoy while the downtown area, home to the University of Arkansas, provides restaurants, shops and a lively music and arts scene, including the Walton Arts Center.

Locals seem happy with what they have at their fingertips with residents reporting high levels of liking where they live, feeling safe and having pride in their community.

• City population: 702,767
• Share of population 65+: 13.3%
• Cost of living for retirees: 14.5% below the national average
• Average income for population 65+: $54,263
• Community score: 60
• State's tax rating for retirees: Not Tax Friendly

The biggest city in the Sooner State charges residents little in living costs. Housing-related expenses are particularly affordable, a 45.4% below average for retirees. Indeed, the median home value across all ages is $197,047, well below the nation's median of $357,469, according to Zillow. And a private room in a nursing home costs a median $94,170 a year, compared with a median $116,800 a year for the U.S., according to Genworth.

Cowboys may feel particularly at home in Oklahoma City—it has one of the largest livestock markets in the world, after all—but given the area's downtown revitalization efforts over the past several years, everyone can find something to enjoy. The Bricktown Entertainment District has a variety of restaurants and nightlife options. And in neighboring Norman, the University of Oklahoma plays host to bigtime sporting and cultural events.

• City population: 198,162
• Share of population 65+: 14.5%
• Cost of living for retirees: 8.2% below the national average
• Average income for population 65+: $39,121
• Community score: 61
• State's tax rating for retirees: Tax Friendly

The Volunteer State is a good choice for retiree nest eggs of all sizes. On top of its friendly-tax status, most parts of Tennessee have below-average living costs across the board for retired residents.

Knoxville is particularly affordable for retirees, compared with, say, Nashville, where living costs among retired people are about the same as the national average. Housing costs for retirees in Knoxville are the biggest factor bringing down costs, at nearly 6.9% below the national average. The city's median home value is just $350,614 versus $262,900 in Nashville and $428,358 throughout the country. Being the gateway to the Great Smoky Mountains and home to the University of Tennessee, the city is rich in activities and attractions to fill your retirement years.

To pinpoint one great retirement destination in each state, we weighed a number of factors:

• Cost of living for retirees for major metropolitan and micropolitan statistical areas, with data provided by the Council for Community and Economic Research, includes overall costs, housing, food and groceries, transportation, utilities, health care and miscellaneous expenses.
• Household incomes, poverty rates and number of health care facilities are from the U.S. Census Bureau.
• Community well-being and physical well-being scores are provided by digital health company Sharecare, in collaboration with Gallup. These are two of the five elements of well-being that make up the overall Gallup-Sharecare Well-Being Index. (The other three elements are purpose, social and financial well-being.) The index is calculated on a scale of 0 to 100 and based on more than 2.5 million nationally representative surveys. Community well-being is defined as "liking where you live, feeling safe and having pride in your community." Physical well-being is "having good health and enough energy to get things done daily." We display the community score for each place we chose.
• Population data, including the percentage of the population that is age 65 and older, is also provided by the Census Bureau. The figures are highlighted in these rankings for the benefit of readers, but were not factors in our methodology for ranking the best places to retire.
• Taxes on retirees, based on Kiplinger's Retiree Tax Map, which divides states into five categories: Most Tax Friendly, Tax Friendly, Mixed, Not Tax Friendly and Least Tax Friendly. This information is provided for the benefit of readers but was not factored into our selections within each state.

Vanguard, with more than $5 trillion in global assets under management, is the world’s largest mutual fund provider – and for good reason.

Vanguard funds pioneered index investing and, since its founding in the 1970s by the late Jack Bogle, have emphasized low costs. Organized like a mutual insurance company, Vanguard’s funds are owned by fund shareholders and run “at-cost.” There’s no need to turn a profit to satisfy outside investors.

Any time I’m tasked with covering Vanguard funds, I’m a happy guy. Very few Vanguard funds haven’t done right by investors, but Vanguard is especially good for those in retirement. Retirees, after all, don’t want to take outsize risks in their investing, and Vanguard’s managers aren’t encouraged to take big gambles. Low costs remove a lot of the pressure on managers to take extra risk in the hopes of squeezing out a little more profit.

Here are my five best Vanguard funds for retirees. This list heavily emphasizes active management (but I do think highly of some Vanguard index funds). Several of my picks also are recommended by Dan Wiener, editor of the The Independent Adviser for Vanguard Investors newsletter.

Says Wiener: “Find a good manager at Vanguard, and you’ll find a fund that will outperform its benchmark and comparable Vanguard index funds.”

Data is as of April 17. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.

• Market value: $772.7 billion
• Yield: 1.9%
• Expenses: 0.04%
• Vanguard Total Stock Market Index Admiral (VTSAX, $72.06) is the only index fund on this list, and that’s because it’s both one of the best indexed Vanguard funds and a great fit for retirees. It even boasts a long-term performance edge against Vanguard 500 Index Fund Admiral (VFIAX). Over the past decade, VTSAX’s annual average performance has topped the Standard & Poor’s 500-stock index tracker by 10 basis points (a basis point is one one-hundredth of a percent).

The S&P 500 and VFIAX invest in a roughly 90%-10% mix of large caps and mid-caps. Total Stock Market covers much more of the stock market, with its 3,600-plus holdings invested across large caps (76.2%), mid-caps (17.4%) and smaller companies (6.4%). That said, larger companies still command the largest weights in both fund, so their top holdings are virtually identical, including the likes of Microsoft (MSFT), Apple (AAPL) and Amazon.com (AMZN).

VTSAX has an affordable minimum initial investment of $3,000. The expense ratio is a mere 0.04% annually, or just $4 for every $10,000 invested. Very little portfolio turnover helps keep costs low, too – Total Stock Market trades a tiny 3% of its assets, on average, every year.

Note: This fund also is available as an exchange-traded fund under the symbol VTI.

• Market value: $35.6 billion
• Yield: 1.5%
• Expenses: 0.32%

Take two of the world’s best money managers, then cut expenses to the bone, and you have a first-class foreign stock fund in Vanguard International Growth Admiral (VWILX).

Baillie Gifford runs 60% of the fund; Schroders manages the rest. The fund has had a remarkable three-year run through April 17. It returned an annualized 15.2% over that stretch – an amazing 6.6 percentage points better per year than the MSCI All-Country World Ex U.S. Index. The credit for that streak goes largely to three decisions made by the two firms:

• Overweighting emerging markets, which outpaced developed foreign developed-market stocks
• Buying growth stocks despite their lofty valuations
• Putting more than 10% of assets into U.S. stocks such as Amazon.com (AMZN).

Putting more than 10% of assets into U.S. stocks such as Amazon.com. Top holdings include Tencent (TCEHY), Alibaba (BABA) and Baidu (BIDU) – tech stocks known as part of the “BAITs,” which are like the Chinese equivalent of America’s “FANGs.” In all, 48% of assets are currently in consumer cyclical and technology stocks.

Be careful. VWILX is a superb fund, but don’t expect the recent outperformance to continue. Indeed, I’d be shocked if the fund didn’t go through some periods of below-market performance given how aggressively it’s positioned. The fund is 30% more volatile than the MSCI index, thanks in part to its high-priced tech stocks.

Buy this fund in relatively small doses, perhaps pairing it with a value-oriented foreign fund, such as Oakmark International (OAKIX). When VWILX does fall, hold on tight.

Note: VWILX requires a $50,000 minimum initial investment. VWIGX is the symbol for the investor class of this fund, which charges 0.45% in annual expenses but requires a mere $3,000 minimum investment.

• Market value: $46.5 billion
• Yield: 1.2%
• Expenses: 0.38%

Health-care stocks led the S&P 500’s 11 sectors in 2018 but have stumbled of late. It is the only sector in the index that has delivered a loss so far in 2019.

Threats of tighter regulation of health care, particularly of prescription drug prices, have weighed heavily on the sector. But it’s difficult to see any big changes coming from Washington given the opposition to most regulation by Republicans.

That makes this an ideal time to invest in Vanguard Health Care Investor (VGHCX, $183.01), one of the best Vanguard funds under the “sector and specialty” category. Demand for better medical treatments continues to grow as more Americans enter old age. In fact, analysts forecast that health-care stocks will report the second-highest earnings growth among the S&P sectors for the first quarter.

VGHCX is a large-cap fund with a preference for pharmaceuticals (47% of assets) over biotechnology (16%). Its size prevents it from venturing much into small caps. But the fund has always been run with a conservative, large-cap tilt; top holdings include Big Pharma outfits such as AstraZeneca (AZN) and Bristol-Myers Squibb (BMY). About 25% of the fund is in foreign stocks.

Lead manager Jean Hynes graduated from Wellesley College in 1991 and shortly thereafter went to work at Wellington Management, which runs the fund for Vanguard. She rose through the ranks, becoming co-manager in 2008 and manager in 2012. And she’s extremely patient. Turnover averages about 10% to 15% annually, and many stocks have been in the fund for a decade or more.

Long-term returns have been solid. Over the past 15 years, the fund has returned an annualized 10.6% – an average of two percentage points per year ahead of the S&P 500.

• Market value: $59.2 billion
• SEC Yield: 2.9%*
• Expenses: 0.10%

The bond market is paying very little extra, if anything, to investors who stretch for yield – either by investing in long-duration bond funds or low-credit-quality bonds. And with bond yields so puny across the board, Vanguard’s low expense ratios are a huge plus.

• Vanguard Short-Term Investment-Grade Admiral (VFSUX, $10.57) pays a yield of 2.9% on a high-quality portfolio dominated by corporate bonds. However, the fund also has a 25% weighting in asset-backed securities and commercial mortgages, as well as about 10% in super-safe Treasuries.

The Vanguard fund is a low-risk option that pays a meaningful higher return than the 10-year Treasury bond, which yields a smidgen over 2.5%. Only 19% of the fund is invested in BBB-rated bonds, which, during an economic downturn, could fall sharply.

Don’t let turnover at the top of this fund steer you away. Longtime lead manager Greg Nassour left the fund in April. But Vanguard’s fixed-income resources are broad and deep with some 60 managers, analysts and traders. No single departure should make much difference. The fund is managed relatively tightly around an internal Vanguard benchmark.

In a high-quality fund like this one, view the yield (2.9%) as the reward for owning the fund and the duration (2.5 years) as the risk. Duration tells you how much the fund will drop in price if interest rates rise by one percentage point. In recent years, it has been tough to find a fund where the yield is higher than the duration.

Note: VFSUX requires a hefty $50,000 minimum initial investment. VFSTX is the symbol for the investor class of this fund, and while it charges double the price for the same portfolio, it requires a mere $3,000 minimum investment. VCSH is the symbol for an exchange-traded index fund that invests almost exclusively in corporate bonds and has 46% of assets in BBBs, and charges just 0.07% in expenses. I’ve recommended VCSH previously, but VFSUX yields just seven one-hundredths of a percentage point less while offering substantially less risk. It’s worth it if you can afford the minimum investment.

* SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.

• Market value: $27.4 billion
• SEC Yield: 1.8%
• Expenses: 0.09%

The municipal bond market is just about as stingy as the taxable bond market. There’s little to be gained by investing in longer-term munis or low-quality tax-exempt bonds. The makes Vanguard Limited-Term Tax-Exempt Admiral (VMLUX, $10.95) a good choice.

VMLUX holds more than 5,200 municipal bonds, yields 1.8% and has a duration of 2.4 years. The fund’s average credit quality is double AA. It holds only about 10% of assets in bonds rated below single-A.

Don’t look for much risk-taking here, and don’t expect fat returns. Bonds, after all, are primarily a defensive investment, designed to cushion your portfolio when stocks crater. Anything you earn in yield or price appreciation is icing on the cake.

Note: VMLUX requires a $50,000 minimum initial investment. VMLTX is the symbol for the investor class of this fund, which charges 0.17% in annual expenses but requires a mere $3,000 minimum investment.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

With interest rates as low as they’ve been lately and stock markets as volatile as we’ve been seing, the stage appears to be set for a different kind of investment: fixed-indexed annuities (FIAs).

Created more than 20 years ago, FIAs salved the wounds of many investors who had their portfolios whipsawed by the great recession. Offering some upside potential with a guarantee against losses, these investments are principally a trade-off: You transfer some risk to the issuing insurance company in return for limited participation in the gains of an index. On the other hand, equities offer more growth, but … they can't guarantee anything.

Because of the low interest rate environment, finance experts like Dr. Wade Pfau and economist Roger Ibbotson have recommended that financial advisers and their clients think of FIAs as another asset class, framing them as an alternative to fixed-income investments like bond funds. Dr. Pfau believes that the guarantees afforded by FIAs may be especially beneficial for retirees during volatile conditions, saying that "This protection may make it easier to retire successfully in down market environments."

It's easy to see how they could appeal to investors. As markets grow more volatile, FIAs are enjoying a swell of popularity … but they are sometimes oversold and misunderstood. Before you buy a fixed-indexed annuity, you need to understand these three things:

• How you earn money with that investment.
• How the insurance company earns money.
• How access to your money may be limited for a period of time.

We will get to all of that. But first it makes sense to take a look at how we got to where we are now.

The Interest Rate/Stock Market Roller Coaster

Major artifacts of the great recession 10 years ago include the low (but rising) interest rates we see today. They were lowered as part of the Federal Reserve's loosening of monetary policy to promote borrowing and stimulate the economy. Policymakers chose this route, rather than the austerity policies favored by other central banks.

That's great, because it may have saved our bacon, and may be due credit for the 10-year-long bull market we've been riding. But some economists believe this expansion cannot continue.

If they are right, the low-interest piper may be coming to collect because as markets begin to grow volatile, or a correction seems imminent, the fixed income investments most folks would turn to for safe harbor are most sensitive to interest rate risk. Which is to say that interest rates and bond prices have an inverse relationship. With rates so low, bonds may not offer the ability to de-risk as they have in the past.

The bottom line: Long-term bonds purchased today will be worth less in the future if rates rise, and short-term bonds (with yields as low as they are right now) simply may not offer enough “oomph” to meet investing goals over the next few years.

Consider the average 5-year CD, as well. According to the FDIC, the average interest rate for jumbo deposits in early November 2018 was 1.2%. Investing $100,000 in a 5-year CD offering 1.2% would grow the account to only $106,145 at maturity. It's hardly worth locking that money away for such a long time.

3 Fixed-Indexed Annuity Lessons for Investors

Demand for safe harbor with higher potential returns has folks seeking alternatives like fixed-indexed annuities. Here’s what they need to know before they decide to buy.

No. 1: How You Are Paid

One of the primary confusions about fixed-indexed annuities is how they earn money for their owners. Folks selling them may sometimes say things like, "They offer equity exposure without any of the risk." It's important to understand that there are no underlying investment options in a fixed-indexed annuity, so there is no actual exposure to equities.

1. Instead of investing directly in underlying investment options, you are credited interest via a market index of your choosing. Some of these indices are common and widely known, like the S&P 500, EAFE or Russell 2000. Others may be proprietary, and not as well known. It's always a good idea to ask your adviser for help selecting an index.
2. Index return is usually credited to FIA accountholders less any dividends. When the actual S&P 500 index delivers a 14% return, that generally means with dividends reinvested. Dividends may comprise 1% to 2% of that return, so the actual credit may be more like 12% to 13%.
3. Commonly, interest is credited yearly on an anniversary (“annual point-to-point crediting” for instance). This means that there is usually no new daily value for these products. If you invest $10,000 in a FIA with an annual point-to-point crediting, the contract value will be $10,000 for 364 days until the contract anniversary. If the index returns 4%, excluding dividends, your account is then credited with $400, and your account balance grows to $10,400 on day 365. Then the cycle starts again.
4. If you were to withdraw all of the funds from the policy on any one of the 364 days until that day when earnings are credited to the account, you would not be credited for any earnings and you may be on the hook for surrender charges and MVA. (More to come on that in a bit.)
5. These products are not securities, so they're not regulated by the Securities and Exchange Commission. They are not sold with a prospectus.
6. Bonuses are not free. Some insurance companies incent the sale of FIAs by offering contract owners a “bonus” when the initial investment is made. Understand that these bonuses are priced into the product in a variety of ways. You will ultimately pay for that bonus one way or another.

No. 2: How the Insurance Company is Paid

There are no additional fees charged for investing in a FIA, but investors “pay” for FIAs in the form of limited participation in a given index's return via caps, participation rates or spreads.

A very small portion of the funds you contribute to purchase a FIA are invested in call options to provide the market-linked growth. The cost of those options then determines the caps, participation rates and spreads.

A large portion of the funds contributed to the purchase of a FIA are also invested by the insurance company in investment-grade bonds. The company pays itself the difference between the yield on this investment portfolio and the cost of the call options.

Remember that while performance on the upside may be limited, a floor protects you from any losses. This is what you are paying for: a guarantee against any losses.

1. Like a "ceiling," caps limit how much money you may earn via a particular index. When you choose an index, your account is subject to the rates offered at that particular time. If a cap of 8% is placed on the S&P 500 index of a given FIA, then 8% is the most you may be credited for that period. If the S&P 500 returns 12% that year, you get 8%. If it returns 7%, you are credited with 7%. If it returns 50%, you get 8%. However, if it suffers a negative year, say it falls 30%, your account value doesn't change for that year.
2. Participation Rates work much like caps but limit gains to a certain percentage of a given index's return, rather than a fixed limit. If you choose the S&P 500 index with a participation rate of 80% and the S&P returns 10% in a given year, you are credited 8% (which is 80% of the S&P’s return). If the S&P returns 50% in a year, you are credited 40%, etc.
3. Spreads work a little differently than caps or participation rates. They offer a baseline over which interest may be credited. If you chose the S&P 500 index again, with a 4% spread, you'll only be credited with interest if the index performs better than 4%. If the index returns 4%, you are credited with nothing. If it returns 6%, your account will be credited 2% and so on.

Once you select an index for a given period, you are locked in to the cap, spread or participation rate for that whole period. When the period ends, you may then select a different (or same) index with potentially different caps, spreads or participation rates, and begin again.

No. 3: How Access to your Money May be Limited

To understand how access may be limited to your investment, you must first understand how insurance companies cover their obligations in these products. Basically, they make long-term investments (like puts in the options market) for a specified period of time … call it five years or seven years. These investments insure the company against losses, making it possible for them to offer these benefits.

1. Typically, these products offer “free” withdrawals of up to 10% annually, but they aren’t exactly free because these withdrawals will, of course, impact the account value.
2. To further protect their investment, insurance companies impose “surrender periods” during which investors are charged CDSC (contingent deferred sales charges) or surrender penalties. These penalties reimburse insurance companies if clients cash out, and typically decrease annually until they are exhausted by the end of the surrender period.
3. This surrender period may correlate to the period of the long-term investments they make for risk-management purposes.
4. I've learned that the sweet spot for surrenders (where the products tend to offer the most value for the least amount of time) is right around seven years. Some products have extraordinarily long surrender periods of 14 years or more! We recommend zero-commission products with surrender periods of five or seven years.
5. MVAs, or market value adjustments, may also be applied if an amount over the free withdrawal threshold is taken out of the FIA during the surrender period. An MVA is computed to adjust your annuity's value based on the broader interest rate environment. It can increase or decrease your account's cash value. Insurance companies are then able to manage risk by aligning your account's cash value with the long-term investments they've made to back your account's guarantees. If interest rates are higher when you withdraw than when you made your initial investment, the MVA will have a negative impact on your cash value. If interest rates are lower, the opposite is true.

The Bottom Line for Investors

Built to offer better returns than CDs (certificates of deposit), fixed-indexed annuities are a fairly conservative investment. If you are nervous about upcoming market volatility, and want to take some risk off the table, then a fixed-indexed annuity may be a good option. Like investments in bonds and CDs, they may require locking your money away for a prescribed period of time. Make sure you consider liquidity needs over the next five to 10 years before making a decision.

No-load fixed-indexed annuities are likely your best bet. By removing commissions, insurers can afford to shorten surrender periods, raise caps, sweeten participation rates and minimize spreads. Improving upside potential can help you meet your retirement investing goals easier.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

People approaching or just starting retirement may have plenty of life experience under their belts, but many are enjoying at least one brand-new feeling: a sense of freedom. Starting at age 60, the majority of people shift from saying where they live is determined by their responsibilities, including family and work obligations, to saying they're free to live wherever they want, according to a survey by Merrill Lynch and Age Wave, a research firm focused on the aging population. And many retirees exercise that freedom to relocate, with 64% having moved or anticipating moving in retirement.

But how do you choose where to retire? Many factors come into play, from proximity to family to climate preferences—but we'll leave those personal preferences to you. What we can help you with is the financial angle: We ranked all 50 states for retirement based on quantitative factors, figuring that the best states for retirees will offer low living costs and light tax burdens, as well as quality health care options. We also sought out states that are healthy—both economically (with well-balanced state budgets) and physically (with a fit and active senior population). Finally, we favored states with relatively prosperous residents age 65 and over. Take a look at our list of the best states for retirement.

See "How We Ranked Every State for Retirement" at the end of the rankings for details on our data sources and methodology.

• Population: 6.1 million
• Share of population 65+: 15.4% (U.S.: 14.5%)
• Cost of living: 10% below U.S. average
• Average income for 65+ households: $43,540 (U.S.: $53,799)
• Average health care costs for a retired couple: Below average at $408,746 (U.S.: $423,523)
• Tax rating for retirees: Mixed

The Show Me State has little to tell in the way of retirement advantages. The low living costs go hand in hand with relatively low household incomes. And the tax situation is moderate: If your adjusted gross income is less than $85,000 for single filers ($100,000 for couples filing jointly), your Social Security benefits are not taxed and you can deduct a portion of your public retirement benefits. But distributions from individual retirement accounts, 401(k)s and other employer retirement plans are taxable at ordinary income tax levels, which hits the top rate of 6% on more than just $9,000 of taxable income.

And one notable downside: Missouri ranks low at 42nd in the nation for senior health with a high percentage of low-care nursing home residents and a high prevalence of smoking, according to the United Health Foundation.

• Population: 11.6 million
• Share of population 65+: 15.5%
• Cost of living: 12% below U.S. average
• Average income for 65+ households: $42,667
• Average health care costs for a retired couple: Below average at $417,912
• Tax rating for retirees: Mixed

Ohio's status as a destination for retirees matches its geographic location: in the middle. Its living costs are well below average, but so is its average household income. Even the tax situation is just fine: Social Security benefits are not taxed, and retirees living in the Buckeye State can claim a tax credit of up to $200 on other retirement income.

• Population: 5.4 million
• Share of population 65+: 12.7%
• Cost of living: 17% above U.S. average
• Average income for 65+ households: $54,108
• Average health care costs for a retired couple: Below average at $415,210
• Tax rating for retirees: Mixed

Retirees in the Centennial State may just reach 100 years themselves. Colorado ranks fourth in the United Health Foundation's senior health rankings, with particularly high marks in clinical care and positive behaviors. Among its health-related strengths, the state has low rates of obesity and physical inactivity in seniors. It also has a low poverty rate among the 65+ population at 7.4%, compared with 9.3% for the nation as a whole.

• Population: 583,029
• Share of population 65+: 13.8%
• Cost of living: Same as U.S. average
• Average income for 65+ households: $45,305
• Average health care costs for a retired couple: Above average at $430,916
• Tax rating for retirees: Most Tax Friendly

The Equality State knows how to keep an even budget. It ranks fifth in the nation for its fiscal health, holding more than enough cash to cover its obligations (thanks to plenty of revenues from oil and mineral rights), according to the Mercatus Center. That bodes well for its ability to maintain its generous tax benefits for retirees and all its residents. There's no state income tax at all, and the state sales tax is a modest 4.5%.

• Population: 7.1 million
• Share of population 65+: 14.0%
• Cost of living: 21% above the U.S. average
• Average income for 65+ households: $55,577
• Average health care costs for a retired couple: About average at $420,480
• Tax rating for retirees: Tax Friendly

The Evergreen State can be a great place to stay refreshed throughout retirement. Washington boasts more than 3,000 miles of coastline and two major mountain ranges: the Cascades and the Olympic Mountains. So active retirees have plenty of opportunities to boat, swim, climb, hike and more. No wonder the state ranks second in the nation (after California) for physically active seniors, according to the United Health Foundation's senior health rankings report.

• Population: 934,695
• Share of population 65+: 16.5%
• Cost of living: 11% above U.S. average
• Average income for 65+ households: $52,387
• Average health care costs for a retired couple: Below average at $414,416
• Tax rating for retirees: Tax Friendly

The First State offers retirees first-rate tax advantages. It does not tax Social Security benefits and exempts $12,500 of investment and qualified pension income for taxpayers age 60 and older. Above that, income tax rates are modest, ranging from 2.2% to 6.6%. Plus, there's no sales tax at all. Health care costs are also friendly to retiree budgets with a 65-year-old couple's expected to pay 2.2% less than the U.S. average. Living costs, otherwise, are relatively high—particularly considering the below-average household incomes for seniors.

• Population: 12.8 million
• Share of population 65+: 16.7%
• Cost of living: 3% below U.S. average
• Average income for 65+ households: $48,706
• Average health care costs for a retired couple: Below average at $411,414
• Tax rating for retirees: Most Tax Friendly

The Keystone State locks in an affordable standard of living for retirees. Health care costs for a 65-year-old retired couple come in 2.9% below the national average. And the tax situation, among the 10 friendliest in the U.S. for retirees, can boost your bottom line even more: Most retirement income, including Social Security benefits, is not taxed. Unfortunately, Pennsylvania's own budget is not so sturdy. With not enough cash to cover short- or long-term obligations, its fiscal health ranks a low 45th among all 50 states, according to rankings from the Mercatus Center at the George Mason University.

• Population: 3.1 million
• Share of population 65+: 15.8%
• Cost of living: 12% below U.S. average
• Average income for 65+ households: $41,194
• Average health care costs for a retired couple: Below average at $399,991
• Tax rating for retirees: Not Tax Friendly

Low living costs are the big advantage for retirees in the Hawkeye State. Health care costs are especially affordable, at 5.6% below the U.S. average, based on what a 65-year-old retired couple can expect to pay for the rest of their lives. That should help the below-average household income for seniors stretch further. But the tax situation may be burdensome: While Social Security benefits are untaxed, some retirement income may get hit by the high top rate of 8.98%. On the plus side, people age 55 or older can exclude up to $6,000 if single ($12,000 for joint filers) of taxable retirement income.

• Population: 4.8 million
• Share of population 65+: 15.8%
• Cost of living: 7% below the U.S. average
• Average income for 65+ households: $43,340
• Average health care costs for a retired couple: Below average at $408,343
• Tax rating for retirees: Tax Friendly

If the mild weather and southern charm of the Palmetto State aren't enough of a retirement draw, surely the affordability can tempt you. On top of below-average living costs, the tax situation goes easy on a fixed income, too. South Carolina doesn't tax Social Security benefits and offers generous exemptions on other types of retirement income. It also does not levy an inheritance or estate tax. Property taxes tend to be very low.

• Population: 1.6 million
• Share of population 65+: 14.3%
• Cost of living: 5% below the U.S. average
• Average income for 65+ households: $40,248
• Average health care costs for a retired couple: Below average at $407,942
• Tax rating for retirees: Mixed

Put your potato jokes away, people. Idaho has some serious advantages to offer your retirement. The state's affordability, for one thing, makes it easy to stretch your retirement savings. And while the tax picture for retirees is mixed—there's a statewide sales tax of 6% and a state income tax that can go as high as 7.4%—Social Security benefits are not subject to state taxes. Idaho also is one of the states that doesn't have an inheritance or estate tax.

• Population: 2.9 million
• Share of population 65+: 10.0%
• Cost of living: 4% above the U.S. average
• Average income for 65+ households: $53,211
• Average health care costs for a retired couple: Below average at $412,641
• Tax rating for retirees: Least Tax Friendly

The Beehive State is a sweet spot for active retirees. Utah ranks second in the U.S. for the overall health of its 65-plus population, according to the United Health Foundation, and offers plenty of outdoor recreation options that are sure to keep you buzzing through retirement. There are five national parks, seven national monuments, five national forests and 43 state parks to host all your hiking, climbing, boating and skiing desires.

Maybe the activity can distract you from the state's unfriendly tax laws—Utah is one of the few states that taxes Social Security benefits, for example. Still, the tax man isn't keeping Utah's seniors down: Even with income levels for older adults just about average for the U.S., the state has the third-lowest poverty rate in the country for people 65 and older.

• Population: 1.3 million
• Share of population 65+: 15.9%
• Cost of living: 18% above U.S. average
• Average income for 65+ households: $53,204
• Average health care costs for a retired couple: $424,052
• Tax rating for retirees: Most Tax Friendly

The Granite State's current tax situation gives retirees a solid advantage. Ranking among the 10 Most Tax-Friendly States for Retirees, it doesn't tax Social Security benefits or other retirement income or levy any sales tax. That savings helps balance out the above-average living costs and below-average household incomes. Another plus: New Hampshire ranks fifth in the U.S. for senior health, according to the United Health Foundation.

• Population: 19.9 million
• Share of population 65+: 19.1%
• Cost of living: 1% above U.S. average
• Average income for 65+ households: $51,187
• Average health care costs for a retired couple: About average at $425,025
• Tax rating for retirees: Most Tax Friendly

If you're looking to party with your peers through retirement, head to the Sunshine State. Nearly 3.8 million seniors call Florida home, giving its population the highest share of residents age 65 and older in the country. Indeed, it's famous for its retiree-haven status, what with its warm weather, beautiful beaches and seven-season-long "Golden Girls" endorsement. But the main attraction for retirees to the Sunshine State must surely be the tax situation. Florida has no state income tax, estate tax or inheritance tax, and it doesn't tax Social Security or other retirement income, either. Plus, those benefits are pretty secure: Florida scores top marks for fiscal soundness, according to a recent report from the Mercatus Center at George Mason University, in large part due to its abundance of cash versus short-term liabilities.

• Population: 8.3 million
• Share of population 65+: 13.8%
• Cost of living: 7% above U.S. average
• Average income for 65+ households: $59,869
• Average health care costs for a retired couple: Below average at $408,950
• Tax rating for retirees: Tax Friendly

Virginia is for retirees. Overall living costs are above average, but high household incomes among seniors—11.3% higher than the national average of $53,799, to be exact—should be able to cover the spread. Plus, health care costs, a particularly worrying budget item for retirees, actually tend to be relatively affordable, with a retired couple in the state expected to pay 3.4% less than the average couple in the U.S. Plus, the Old Dominion doesn't tax Social Security benefits and allows residents 65 and older to deduct income up to $12,000 per person, depending on their income levels.

• Population: 4.8 million
• Share of population 65+: 15.3% (U.S.: 14.5%)
• Cost of living: 13% below the U.S. average
• Average income for 65+ households: $44,934 (U.S.: $53,799)
• Average health care costs for a retired couple: Below average at $404,922 (U.S.: $423,523)
• Tax rating for retirees: Tax Friendly

Retirees are sure to love the Heart of Dixie. You can get many of Florida's retirement attractions—warm weather, nice beaches and plenty of golf—all at a lower price. The low living costs extend to health care, for which retirees can expect to spend 4.4% less than the average retired American couple. Taxes are easy on the budget, too, with income tax rates ranging from just 2% to 5%, and Social Security benefits being exempt.

• Population: 6.5 million
• Share of population 65+: 15.0%
• Cost of living: 12% below the U.S. average
• Average income for 65+ households: $47,891
• Average health care costs for a retired couple: Below average at $411,617
• Tax rating for retirees: Tax Friendly

The Volunteer State is a good choice for budget-conscious retirees. According to data from the Council for Community and Economic Research, every major metro area offers below-average living costs in almost every category of expenses, including health care—among the biggest financial concerns for aging Americans. Plus, Tennessee does not levy state income taxes, so your retirement income can stretch even further. And being economically healthy, Tennessee should have no issues maintaining its tax-friendliness; it ranks eighth of all states for fiscal soundness, according to a recent report from the Mercatus Center.

• Population: 736,162
• Share of population 65+: 14.2%
• Cost of living: 1% above U.S. average
• Average income for 65+ households: $46,763
• Average health care costs for a retired couple: Below average at $414,455
• Tax rating for retirees: Tax Friendly

Cross the border from South Dakota, our top state for retirement, and you'll find many of the same benefits: North Dakota offers retirees affordable living costs and overall low taxes. Unfortunately, retirement income, including Social Security benefits, gets no tax break in the Peace Garden State. But income taxes are so low—ranging from 1.1% to 2.9%—that it's still considered tax friendly. Plus, the state ranks second-highest for fiscal soundness, indicating that the economic health is stable enough to sustain a friendly tax environment.

• Population: 10.1 million
• Share of population 65+: 12.3%
• Cost of living: 7% below the U.S. average
• Average income for 65+ households: $50,607
• Average health care costs for a retired couple: Below average at $404,460
• Tax rating for retirees: Most Tax Friendly

Warm weather and low living costs make Georgia just peachy for a happy retirement destination. Health care expenses are particularly affordable for retirees, with the sixth lowest average costs for a retired couple in the country. Plus, Georgia's favorable tax situation makes it one of the 10 Best States for Taxes on Retirees.

• Population: 1.4 million
• Share of population 65+: 16.1%
• Cost of living: 87% above the U.S. average
• Average income for 65+ households: $71,997
• Average health care costs for a retired couple: Below average at $375,273
• Tax rating for retirees: Tax Friendly

As you'd expect on an island paradise, living ain't cheap. In fact, Hawaii sports the highest living costs in the country. And yet, the landscape turns out to be idyllic for retirees' finances. For one thing, the seniors who have settled there can afford it. The average household income for people age 65 and older are the highest in the U.S. at 33.8% above the national level. Plus, health care costs are surprisingly affordable at 11.4% below the national average. Credit that to the Aloha State's highly efficient health care system—ranked tops by Bloomberg—and its healthy population, snagging the third highest spot in the United Health Foundation's Senior Health Report rankings, which are based on people's behaviors, such as physical activity, as well as community support and clinical care available.

• Population: 851,058
• Share of population 65+: 15.2%
• Cost of living: 4% below the U.S. average
• Average income for 65+ households: $43,712
• Average health care costs for a retired couple: Below average at $415,297
• Tax rating for retirees: Most Tax Friendly

The Mount Rushmore State might not be the first place that comes to mind when you dream of where to retire, but it's first place on our list. Affordability is the main factor pushing it to the top spot. In addition to low living expenses, including for health care, South Dakota is one the 10 Best States for Taxes on Retirees. And you can be confident it'll stay that way. The state ranks third in the country for fiscal soundness, according to a recent report from George Mason University's Mercatus Center, which indicates high confidence that it can keep up with short-term expenses and long-term financial obligations.

To rank all 50 states for retirement, we weighed a number of factors:

• Taxes on retirees, based on Kiplinger's Retiree Tax Map, which divides states into five categories: Most Tax Friendly, Tax Friendly, Mixed, Not Tax Friendly and Least Tax Friendly.
• Cost-of-living for each state, with data provided by Sperling's Best Places, includes overall costs—across all age groups—for housing, food and groceries, transportation, utilities, health care and miscellaneous expenses.
• Average health care costs in retirement are from HealthView Services and include Medicare, supplemental insurance, dental insurance and out-of-pocket costs for a 65-year-old couple who are both retired and are expected to live to 87 (husband) and 89 (wife).
• Rankings of each state's economic health are provided by the Mercatus Center at George Mason University and are based on various factors including state governments' revenue sources, debts, budgets and abilities to fund pensions, health-care benefits and other services.
• Rankings of the health of each state's population of residents 65 and over are from the United Health Foundation and are based on 34 factors ranging from residents' bad habits (smoking and excessive drinking) to the quality of hospital and nursing home care available in the state.
• Household incomes and poverty rates are from the U.S. Census Bureau.
• Population data, including the percentage of the population that is age 65 and older, is also provided by the Census Bureau. They are highlighted in these rankings for the benefit of readers, but were not factors in our methodology for ranking the states.

In contemplating retirement, the big question tends to be when to retire? Or, perhaps, how much money do you need to retire? But where to retire can be an equally pressing matter. In fact, according to a survey by Merrill Lynch and Age Wave (a research firm focused on the aging population), 37% of retirees have already moved in retirement and another 27% intend to. Even if you're among the rest who plan to stay put in retirement, you might find that entering a new stage of life changes the world around you, requiring a reassessment of how your home state treats your nest egg.

To help you weigh the pros and cons of each state when it comes to retirement, we ranked all 50 states based on financial factors critical to retirees, including living expenses, tax burdens, health care costs, household incomes, poverty rates and the economic wellness of the state itself. Of course, plenty of other factors figure into this major life decision, from proximity to family to climate preferences. But we'll leave assessing those personal considerations to you.

Whether you're figuring out where to head next or just how you need to adjust your budget when moving into retirement, see how every state in the union treats its retirees financially.

States are listed in alphabetical order. See "How We Ranked Every State for Retirement" at the end of the rankings for details on our data sources and methodology.

• Ranking: #6
• Population: 4.8 million
• Share of population 65+: 15.3% (U.S.: 14.5%)
• Cost of living: 13% below the U.S. average
• Average income for 65+ households: $44,934 (U.S.: $53,799)
• Average health care costs for a retired couple: Below average at $404,922 (U.S.: $423,523)
• Tax rating for retirees: Tax Friendly

Retirees are sure to love the Heart of Dixie. You can get many of Florida's retirement attractions—warm weather, nice beaches and plenty of golf—all at a lower price. The low living costs extend to health care, for which retirees can expect to spend 4.4% less than the average retired American couple. Taxes are easy on the budget, too, with income tax rates ranging from just 2% to 5%, and Social Security benefits being exempt.

• Ranking: #31
• Population: 736,855
• Share of population 65+: 9.4%
• Cost of living: 32% above U.S. average
• Average income for 65+ households: $59,230
• Average health care costs for a retired couple: Above average at $467,743
• Tax rating for retirees: Most Tax Friendly

The Last Frontier is the last place most people would choose as a retirement destination. In fact, only 69,305 people in the whole state are age 65 and older—making it the smallest population of seniors in the country. The folks who do brave retiring in Alaska do well, though. They pay no state income or sales tax, and eligible residents get paid an annual dividend check from the state's oil wealth savings account just for living there. In 2017, the payment was $1,100 per person. And despite the state's high living costs, the poverty rate among seniors is the lowest in the U.S. at just 4.5%.

• Ranking: #27
• Population: 6.7 million
• Share of population 65+: 15.9%
• Cost of living: 3% above the U.S. average
• Average income for 65+ households: $47,973
• Average health care costs for a retired couple: Below average at $408,721
• Tax rating for retirees: Mixed

The Grand Canyon State, with its ample sunshine, dry heat and beautiful desert landscape, is a popular retirement destination. But the financial setting is not quite as picturesque. Despite slightly above-average living costs, the average household income for seniors falls 10.8% below the national average. The 5.6% state sales tax doesn't help, and it can be pushed as high as 10.9% in some localities—though the average is 8.25%, according to the Tax Foundation.

On the bright side, you can find pockets of affordability throughout the state. The living costs in Phoenix, for example, are 5% below average, according to the Council for Community and Economic Research. And the capital city does not charge sales tax on groceries.

• Ranking: #23
• Population: 3.0 million
• Share of population 65+: 15.7%
• Cost of living: 17% below average
• Average income for 65+ households: $42,482
• Average health care costs for a retired couple: Below average at $398,395
• Tax rating for retirees: Not Tax Friendly

The Natural State offers extraordinarily low costs. Indeed, it's tied with West Virginia for lowest overall living costs in the country, and its average health care costs for a retired couple are the third cheapest in the U.S. State taxes aren't quite as generous: Social Security benefits and up to $6,000 of other retirement income are exempt, but above that, your top income rate could hit 6.9%, if your income exceeds $75,000. Glass half full (not really): Most retired residents are unlikely to reach that high bracket. In fact, the average household income for people age 65 and older in Arkansas is 21% below the U.S. average. The poverty rate for seniors is 10.5%, the eighth highest in the country.

• Ranking: #45
• Population: 38.7 million
• Share of population 65+: 12.9%
• Cost of living: 52% above the U.S. average
• Average income for 65+ households: $65,904
• Average health care costs for a retired couple: Above average at $430,867
• Tax rating for retirees: Mixed

The Golden State sports the second-highest living costs in the country, behind only Hawaii. And though the average household income for seniors is well-above average, plenty of older residents are unable to bear the heavy burden: 1 in 10 Californians age 65 and over are living in poverty. The tax situation adds to the gravity: Except for Social Security benefits, retirement income is fully taxed, and California imposes the highest state income tax rates in the nation (the top rate is 13.3% for single filers with $1 million incomes and joint filers with incomes above $1,074,996).

One bright spot: If you're over age 65, you can claim an extra $110 exemption off your tax bill. But with a low score for fiscal soundness—the eighth worst in the country—California may not be able to afford such a generous offering in the future.

• Ranking: #18
• Population: 5.4 million
• Share of population 65+: 12.7%
• Cost of living: 17% above U.S. average
• Average income for 65+ households: $54,108
• Average health care costs for a retired couple: Below average at $415,210
• Tax rating for retirees: Mixed

Retirees in the Centennial State may just reach 100 years themselves. Colorado ranks fourth in the United Health Foundation's senior health rankings, with particularly high marks in clinical care and positive behaviors. Among its health-related strengths, the state has low rates of obesity and physical inactivity in seniors. It also has a low poverty rate among the 65+ population at 7.4%, compared with 9.3% for the nation as a whole.

• Ranking: #46
• Population: 3.6 million
• Share of population 65+: 15.5%
• Cost of living: 24% above the U.S. average
• Average income for 65+ households: $68,845
• Average health care costs for a retired couple: Above average at $439,191
• Tax rating for retirees: Least Tax Friendly

The Constitution State does little to promote the general welfare of its resident retirees. In fact, Connecticut ranks among the 10 tax-unfriendliest states for retirees. Real estate taxes are the second-highest in the country. Some residents face taxes on Social Security benefits, and most other retirement income is fully taxed, with no exemptions or tax credits to ease the burden.

All those taxes come on top of high living costs. But Connecticut residents may be able to afford it: The state's average household income for seniors is the fourth-highest in the U.S., and its poverty rate for residents age 65 and older is a low 7.1% vs. 9.3% for the U.S.

• Ranking: #15
• Population: 934,695
• Share of population 65+: 16.5%
• Cost of living: 11% above U.S. average
• Average income for 65+ households: $52,387
• Average health care costs for a retired couple: Below average at $414,416
• Tax rating for retirees: Tax Friendly

The First State offers retirees first-rate tax advantages. It does not tax Social Security benefits and exempts $12,500 of investment and qualified pension income for taxpayers age 60 and older. Above that, income tax rates are modest, ranging from 2.2% to 6.6%. Plus, there's no sales tax at all. Health care costs are also friendly to retiree budgets with a 65-year-old couple's expected to pay 2.2% less than the U.S. average. Living costs, otherwise, are relatively high—particularly considering the below-average household incomes for seniors.

• Ranking: #8
• Population: 19.9 million
• Share of population 65+: 19.1%
• Cost of living: 1% above U.S. average
• Average income for 65+ households: $51,187
• Average health care costs for a retired couple: About average at $425,025
• Tax rating for retirees: Most Tax Friendly

If you're looking to party with your peers through retirement, head to the Sunshine State. Nearly 3.8 million seniors call Florida home, giving its population the highest share of residents age 65 and older in the country. Indeed, it's famous for its retiree-haven status, what with its warm weather, beautiful beaches and seven-season-long "Golden Girls" endorsement. But the main attraction for retirees to the Sunshine State must surely be the tax situation. Florida has no state income tax, estate tax or inheritance tax, and it doesn't tax Social Security or other retirement income, either. Plus, those benefits are pretty secure: Florida scores top marks for fiscal soundness, according to a recent report from the Mercatus Center at George Mason University, in large part due to its abundance of cash versus short-term liabilities.

• Ranking: #3
• Population: 10.1 million
• Share of population 65+: 12.3%
• Cost of living: 7% below the U.S. average
• Average income for 65+ households: $50,607
• Average health care costs for a retired couple: Below average at $404,460
• Tax rating for retirees: Most Tax Friendly



Warm weather and low living costs make Georgia just peachy for a happy retirement destination. Health care expenses are particularly affordable for retirees, with the sixth lowest average costs for a retired couple in the country. Plus, Georgia's favorable tax situation makes it one of the 10 Best States for Taxes on Retirees.

• Ranking: #2
• Population: 1.4 million
• Share of population 65+: 16.1%
• Cost of living: 87% above the U.S. average
• Average income for 65+ households: $71,997
• Average health care costs for a retired couple: Below average at $375,273
• Tax rating for retirees: Tax Friendly

As you'd expect on an island paradise, living ain't cheap. In fact, Hawaii sports the highest living costs in the country. And yet, the landscape turns out to be idyllic for retirees' finances. For one thing, the seniors who have settled there can afford it. The average household income for people age 65 and older are the highest in the U.S. at 33.8% above the national level. Plus, health care costs are surprisingly affordable at 11.4% below the national average. Credit that to the Aloha State's highly efficient health care system—ranked tops by Bloomberg—and its healthy population, snagging the third highest spot in the United Health Foundation's Senior Health Report rankings, which are based on people's behaviors, such as physical activity, as well as community support and clinical care available.

• Ranking: #11
• Population: 1.6 million
• Share of population 65+: 14.3%
• Cost of living: 5% below the U.S. average
• Average income for 65+ households: $40,248
• Average health care costs for a retired couple: Below average at $407,942
• Tax rating for retirees: Mixed



Put your potato jokes away, people. Idaho has some serious advantages to offer your retirement. The state's affordability, for one thing, makes it easy to stretch your retirement savings. And while the tax picture for retirees is mixed—there's a statewide sales tax of 6% and a state income tax that can go as high as 7.4%—Social Security benefits are not subject to state taxes. Idaho also is one of the states that doesn't have an inheritance or estate tax.

• Ranking: #43
• Population: 12.9 million
• Share of population 65+: 13.9%
• Cost of living: 4% below U.S. average
• Average income for 65+ households: $54,051
• Average health care costs for a retired couple: Above average at $435,889
• Tax rating for retirees: Mixed

The Prairie State's fiscal standing has been sliding downward for years. Illinois has weighty long-term debts, large unfunded pension liabilities and big budget imbalances. All this puts it in the second-lowest spot on the state rankings for fiscal soundness, behind only New Jersey, according to George Mason University's Mercatus Center. In October 2015, ratings agency Fitch downgraded the state's credit rating to near-junk status. That means the tax breaks on a variety of retirement income sources, including 401(k) plans and individual retirement accounts, are hardly assured, and higher taxes are on the table. Already, state and local sales taxes are as high as 11% in some areas.

• Ranking: #38
• Population: 6.6 million
• Share of population 65+: 14.3%
• Cost of living: 15% below the U.S. average
• Average income for 65+ households: $42,303
• Average health care costs for a retired couple: About average at $425,365
• Tax rating for retirees: Least Tax Friendly

With its below-average living expenses, Indiana might seem like a winner for retirees. But when you consider the well-below-average household income—at 21.4% below average, to be exact—the older residents of the Hoosier State start looking more like underdogs. And the tax situation doesn't help: Most retirement income other than Social Security benefits is taxable at ordinary rates.

• Ranking: #13
• Population: 3.1 million
• Share of population 65+: 15.8%
• Cost of living: 12% below U.S. average
• Average income for 65+ households: $41,194
• Average health care costs for a retired couple: Below average at $399,991
• Tax rating for retirees: Not Tax Friendly

Low living costs are the big advantage for retirees in the Hawkeye State. Health care costs are especially affordable, at 5.6% below the U.S. average, based on what a 65-year-old retired couple can expect to pay for the rest of their lives. That should help the below-average household income for seniors stretch further. But the tax situation may be burdensome: While Social Security benefits are untaxed, some retirement income may get hit by the high top rate of 8.98%. On the plus side, people age 55 or older can exclude up to $6,000 if single ($12,000 for joint filers) of taxable retirement income.

• Ranking: #30
• Population: 2.9 million
• Share of population 65+: 14.3%
• Cost of living: 14% below average
• Average income for 65+ households: $49,392
• Average health care costs for a retired couple: Below average at $412,773
• Tax rating for retirees: Least Tax Friendly

Retirees might rather be in Oz. Among Kiplinger's least-tax-friendly states for retirees, Kansas is raising tax rates to try and tackle its increasing budget deficit. Its fiscal health earns it a 32nd ranking, according to a recent report from the Mercatus Center at the George Mason University. For 2018, income tax rates range from 3.1% to 5.7%—and that applies to most retirement income, including Social Security benefits (unless your adjusted gross income is $75,000 or less). Still, the affordable living costs might be enough to convince you that there's no place like home in Kansas.

• Ranking: #34
• Population: 4.4 million
• Share of population 65+: 14.8%
• Cost of living: 14% below the U.S. average
• Average income for 65+ households: $42,666
• Average health care costs for a retired couple: About average at $420,375
• Tax rating for retirees: Most Tax Friendly

Kentucky ranks as the second-worst state in the country in terms of senior health, according to the United Health Foundation. Among its challenges are a high rate of smoking, physical inactivity and poverty, as well as a low number of quality nursing homes.

On the plus side, the Bluegrass State offers low living costs, as well as a number of tax breaks for retirees. Social Security benefits, as well as up to $41,110 of other retirement income, are exempt from state taxes. However, with a low ranking of 47th in the country for fiscal soundness, those tax benefits may not be very secure.

• Ranking: #42
• Population: 4.6 million
• Share of population 65+: 13.6%
• Cost of living: 10% below U.S. average
• Average income for 65+ households: $50,744
• Average health care costs for a retired couple: Above average at $432,292
• Tax rating for retirees: Tax Friendly

The living costs are low in Louisiana, but so are the incomes. And health care costs still prove to be pricey with a 65-year-old couple in the state expected to pay 2.1% more than the average American couple of the same age. One driver of those high costs may be the local population's poor health. Indeed, Louisiana had the fourth lowest senior health score, according to the United Health Foundation, in part due to high rates of obesity, smoking and mental distress, as well as low availability of geriatricians and quality nursing homes. The poverty rate for people age 65 and older is also remarkably high at 12.9%, behind only Mississippi for the highest in the U.S.

• Ranking: #22
• Population: 1.3 million
• Share of population 65+: 18.2%
• Cost of living: 2% below U.S. average
• Average income for 65+ households: $40,256
• Average health care costs for a retired couple: Below average at $401,781
• Tax rating for retirees: Mixed

The Pine Tree State can be a little prickly when it comes to its retirees. While living costs are a bit below average—with health care costs for a retired couple particularly affordable at 5.1% below average—incomes for senior households are even lower, averaging 25.2% below the typical U.S. level. And tax breaks do little to boost retirement budgets: While Social Security benefits are not subject to state taxes, most other retirement income is taxable. There's even an estate tax, though it only applies to estates worth more than $11.18 million in 2018.

• Ranking: #48
• Population: 6.0 million
• Share of population 65+: 13.8%
• Cost of living: 17% above U.S. average
• Average income for 65+ households: $70,874
• Average health care costs for a retired couple: Above average at $436,074
• Tax rating for retirees: Least Tax Friendly

Retirees in Maryland are bound to be crabby. The average household income for people age 65 and older is the second-highest in the country—but it gets pinched plenty by high taxes and living costs. The Free State doesn't tax Social Security benefits, but distributions from individual retirement accounts are fully taxable. And the taxes keep coming even after you pass: Maryland is the only state that has an estate and an inheritance tax, albeit only at lofty thresholds with the former only applying to estates exceeding $4 million in value in 2018.

• Ranking: #49
• Population: 6.7 million
• Share of population 65+: 15.1%
• Cost of living: 38% above the U.S. average
• Average income for 65+ households: $65,312
• Average health care costs for a retired couple: Above average at $450,383
• Tax rating for retirees: Not Tax Friendly

The Bay State harbors some heavy costs for retirees. On top of the third-highest overall living costs in the country, it also holds the second-highest health-care costs for a 65-year-old couple, trailing only Alaska. And though the average household income for seniors is high, taxes can take a big bite out of those earnings. Social Security benefits are exempt, but most other retirement income is taxed at the state's flat rate of 5.15%. Plus, given its low fiscal wellness—the third-worst in the U.S., according to Mercatus Center at George Mason University—the tax situation is likely to get harsher before it gets friendlier to retirees.

• Ranking: #35
• Population: 9.9 million
• Share of population 65+: 15.4%
• Cost of living: 12% below U.S. average
• Average income for 65+ households: $44,397
• Average health care costs for a retired couple: About average at $423,608
• Tax rating for retirees: Not Tax Friendly

The Great Lakes State can make for a decent retirement destination. It offers some of the lowest living costs in the country and maintains a low poverty rate among seniors at 8.1%, compared with 9.3% for the U.S. The tax situation, though, is not so great—and a bit complicated. Social Security benefits are not currently taxed, but starting in 2020, taxpayers turning 67 will have to choose between deducting Social Security income or $20,000 of all income sources for single filers ($40,000 for couples).

• Ranking: #33
• Population: 5.5 million
• Share of population 65+: 14.3%
• Cost of living: 4% above the U.S. average
• Average income for 65+ households: $47,838
• Average health care costs for a retired couple: About average at $422,815
• Tax rating for retirees: Least Tax Friendly

The Land of 10,000 Lakes is a hard place for retirees to stay afloat. Above-average living expenses and below-average incomes can equate to imbalanced budgets in retirement. Plus, the tax situation adds an extra burden. One of the 10 Worst States for Taxes on Retirees, Minnesota taxes Social Security benefits to the same extent as the federal government. Most other retirement income, including military, government and private pensions, is also taxable. And the state's sales and income taxes are high.

On the other hand, Minnesota is a great place for health-focused retirees. The state is the healthiest in the country for seniors, according to the United Health Foundation rankings.

• Ranking: #29
• Population: 3.0 million
• Share of population 65+: 14.3%
• Cost of living: 15% below U.S. average
• Average income for 65+ households: $44,100
• Average health care costs for a retired couple: About average at $423,267
• Tax rating for retirees: Most Tax Friendly

Low costs and generous tax breaks make the Magnolia State a sweet deal for retirees. Social Security and other qualified retirement income—including distributions from IRAs, 401(k)s and other plans—are not taxed, and property taxes are among the lowest in the country. But on the sour side, Mississippi ranks dead last when it comes to senior health, according to the United Health Foundation. It also suffers the worst poverty rate in the country among people age 65 and older at a whopping 13.4%; the U.S., 9.3%.

• Ranking: #20
• Population: 6.1 million
• Share of population 65+: 15.4%
• Cost of living: 10% below U.S. average
• Average income for 65+ households: $43,540
• Average health care costs for a retired couple: Below average at $408,746
• Tax rating for retirees: Mixed

The Show Me State has little to tell in the way of retirement advantages. The low living costs go hand in hand with relatively low household incomes. And the tax situation is moderate: If your adjusted gross income is less than $85,000 for single filers ($100,000 for couples filing jointly), your Social Security benefits are not taxed and you can deduct a portion of your public retirement benefits. But distributions from individual retirement accounts, 401(k)s and other employer retirement plans are taxable at ordinary income tax levels, which hits the top rate of 6% on more than just $9,000 of taxable income.

And one notable downside: Missouri ranks low at 42nd in the nation for senior health with a high percentage of low-care nursing home residents and a high prevalence of smoking, according to the United Health Foundation.

• Ranking: #36
• Population: 1.0 million
• Share of population 65+: 16.7%
• Cost of living: 3% above the U.S. average
• Average income for 65+ households: $42,367
• Average health care costs for a retired couple: Below average at $413,031
• Tax rating for retirees: Not Tax Friendly

You may have a hard time holding onto your fortune in the Treasure State. Living costs are above average, but incomes are 21.2% below average. The tax situation certainly doesn't help: Montana taxes most forms of retirement income, including Social Security, and the top rate of 6.9% kicks in once taxable income tops just $17,400.

Still, Big Sky Country seems to retain a large number of retirement-age folks: The state's 65-and-older population share is the fifth highest in the U.S. The great (albeit cold) outdoors, including Yellowstone and Glacier national parks, may be what trumps the state's drawbacks for adventurous retirees.

• Ranking: #21
• Population: 1.9 million
• Share of population 65+: 14.4%
• Cost of living: 12% below U.S. average
• Average income for 65+ households: $45,215
• Average health care costs for a retired couple: Below average at $418,079
• Tax rating for retirees: Least Tax Friendly

The Cornhusker State collects its fair share of taxes from resident retirees—perhaps more than its fair share. Most forms of retirement income are taxable at ordinary income rates, though Social Security benefits are exempt for joint filers with an adjusted gross income of $58,000 or less or $43,000 for single filers. It seems like the state could afford to be more generous: Its fiscal health ranks sixth in the U.S., according to the Mercatus Center at the George Mason University.

• Ranking: #25
• Population: 2.8 million
• Share of population 65+: 14.1%
• Cost of living: 4% above U.S. average
• Average income for 65+ households: $52,239
• Average health care costs for a retired couple: Above average at $429,243
• Tax rating for retirees: Most Tax Friendly

Retiring to Nevada can be a gamble. Pro: No state income tax means you get to keep more of your cash. Con: You'll need it to cover higher than average expenses. Plenty of people make it work. Seniors in the Silver State have a relatively low poverty rate of 8.4%, compared with the national average of 9.3%.

• Ranking: #9
• Population: 1.3 million
• Share of population 65+: 15.9%
• Cost of living: 18% above U.S. average
• Average income for 65+ households: $53,204
• Average health care costs for a retired couple: $424,052
• Tax rating for retirees: Most Tax Friendly

The Granite State's current tax situation gives retirees a solid advantage. Ranking among the 10 Most Tax-Friendly States for Retirees, it doesn't tax Social Security benefits or other retirement income or levy any sales tax. That savings helps balance out the above-average living costs and below-average household incomes. Another plus: New Hampshire ranks fifth in the U.S. for senior health, according to the United Health Foundation.

• Ranking: #47
• Population: 8.9 million
• Share of population 65+: 14.7%
• Cost of living: 27% above the U.S. average
• Average income for 65+ households: $69,710
• Average health care costs for a retired couple: Above average at $440,299
• Tax rating for retirees: Mixed

Retirees planning to plant themselves in the Garden State might want to think twice. Living costs are the fifth-highest in the country, with retiree health care costs ranking third-highest. Plus, property taxes rank highest in the nation—a negative made even worse with the new tax law limiting how much of such tax payments is deductible. To top it off, with the worst ranking for fiscal soundness in the U.S., New Jersey's tax picture is unlikely to improve soon.

Still, residents seem to bear the burden well. The average income for 65-and-up residents is the third-highest in the U.S., and the poverty rate for the age group is a low 8.1% (9.3% nationwide).

• Ranking: #39
• Population: 2.1 million
• Share of population 65+: 15.3%
• Cost of living: 5% below U.S. average
• Average income for 65+ households: $46,836
• Average health care costs for a retired couple: Below average at $380,164
• Tax rating for retirees: Least Tax Friendly

The Land of Enchantment is not such a magical place for retirees. The tax breaks, for one thing, leave something to be desired: Social Security benefits are subject to tax by the state, as are retirement account distributions and pension payouts, though low-income seniors may qualify for a retirement-income exemption of up to $8,000. Unfortunately, plenty of people may be able to take advantage of that break, after all. The poverty rate for people 65 and older is 11.9%, the third highest in the country.

• Ranking: #50
• Population: 19.7 million
• Share of population 65+: 14.7%
• Cost of living: 22% above the U.S. average
• Average income for 65+ households: $67,140
• Average health care costs for a retired couple: Above average at $433,347
• Tax rating for retirees: Not Tax Friendly

One (pricey) Big Apple spoils the entire Empire State. Manhattan reigns as the most expensive place to live in the U.S., with costs soaring 138.6% above the national average, according to the Council for Community and Economic Research. However, New York state's relatively lower average cost of living means you can find more affordable spots outside the city: Brooklyn, for example, is “just” 82% more expensive than the average U.S. metro area, and Rochester and Utica actually offer below-average living costs.

Despite boasting an average income for residents age 65 and older that's among the top five in the country, the same age group suffers a poverty rate of 11.4%, worse than the national 9.3% rate and tied with Kentucky for the fourth-highest rate in the country.

• Ranking: #28
• Population: 9.9 million
• Share of population 65+: 14.7%
• Cost of living: 5% below average
• Average income for 65+ households: $43,616
• Average health care costs for a retired couple: Below average at $406,849
• Tax rating for retirees: Not Tax Friendly

Its weather is mild, as is its financial attractiveness as a retirement destination. The Tar Heel State offers below-average costs across most metro areas, with the Kill Devil Hills micro area (part of the Outer Banks) being one pricey exception, according to the Council for Community and Economic Research. But income levels are typically lower, too. And though Social Security benefits are still not taxable, other breaks for retirees have been eliminated, leaving most other retirement income taxable at the current flat rate of 5.49%.

• Ranking: #4
• Population: 736,162
• Share of population 65+: 14.2%
• Cost of living: 1% above U.S. average
• Average income for 65+ households: $46,763
• Average health care costs for a retired couple: Below average at $414,455
• Tax rating for retirees: Tax Friendly

Cross the border from South Dakota, our top state for retirement, and you'll find many of the same benefits: North Dakota offers retirees affordable living costs and overall low taxes. Unfortunately, retirement income, including Social Security benefits, gets no tax break in the Peace Garden State. But income taxes are so low—ranging from 1.1% to 2.9%—that it's still considered tax friendly. Plus, the state ranks second-highest for fiscal soundness, indicating that the economic health is stable enough to sustain a friendly tax environment.

• Ranking: #19
• Population: 11.6 million
• Share of population 65+: 15.5%
• Cost of living: 12% below U.S. average
• Average income for 65+ households: $42,667
• Average health care costs for a retired couple: Below average at $417,912
• Tax rating for retirees: Mixed

Ohio's status as a destination for retirees matches its geographic location: in the middle. Its living costs are well below average, but so is its average household income. Even the tax situation is just fine: Social Security benefits are not taxed, and retirees living in the Buckeye State can claim a tax credit of up to $200 on other retirement income.

• Ranking: #26
• Population: 3.9 million
• Share of population 65+: 14.5%
• Cost of living: 16% below U.S. average
• Average income for 65+ households: $46,848
• Average health care costs for a retired couple: About average at $420,195
• Tax rating for retirees: Not Tax Friendly

The Sooner State is a middle-of-the-road retirement destination. Household incomes are relatively low, but so are overall living costs. The tax situation helps somewhat: Social Security benefits are not taxed, and you can exclude up to $10,000 per person of other retirement income. On the downside, Oklahoma is the third-worst state in terms of senior health, according to the United Health Foundation's rankings, which took into account quality of health care facilities, physical behaviors of resident seniors and a host of other health-related criteria. Problem areas for Oklahoma include: high levels of physical inactivity and smoking among seniors, as well as low availability of geriatricians and quality nursing homes.

• Ranking: #32
• Population: 4.0 million
• Share of population 65+: 15.9%
• Cost of living: 18% above U.S. average
• Average income for 65+ households: $45,255
• Average health care costs for a retired couple: Below average at $412,398
• Tax rating for retirees: Not Tax Friendly

Taxes in the Beaver State gnaw away at fixed incomes. It charges no sales tax, but Oregon levies one of the highest top state income tax rates in the U.S., at 9.9%. And although Social Security benefits are exempt, most other retirement income is taxable. Not that there's much to tax. Oregon seniors bring in below-average household incomes—15.9% less than the national average of $53,799. And despite those low incomes, overall living costs are high. One bright, cheap spot: Health care costs for a retired couple in Oregon are typically 2.6% lower than the U.S. average.

• Ranking: #14
• Population: 12.8 million
• Share of population 65+: 16.7%
• Cost of living: 3% below U.S. average
• Average income for 65+ households: $48,706
• Average health care costs for a retired couple: Below average at $411,414
• Tax rating for retirees: Most Tax Friendly

The Keystone State locks in an affordable standard of living for retirees. Health care costs for a 65-year-old retired couple come in 2.9% below the national average. And the tax situation, among the 10 friendliest in the U.S. for retirees, can boost your bottom line even more: Most retirement income, including Social Security benefits, is not taxed. Unfortunately, Pennsylvania's own budget is not so sturdy. With not enough cash to cover short- or long-term obligations, its fiscal health ranks a low 45th among all 50 states, according to rankings from the Mercatus Center at the George Mason University.

• Ranking: #44
• Population: 1.1 million
• Share of population 65+: 15.8%
• Cost of living: 22% above the U.S. average
• Average income for 65+ households: $55,674
• Average health care costs for a retired couple: Above average at $428,144
• Tax rating for retirees: Not Tax Friendly

Tiny Rhode Island packs in big costs. Living expenses across the board are well above average with health care costs for a 65-year-old couple 1.1% higher than average. At least above-average incomes for older residents can make those burdensome costs a bit more bearable. Also, the tax situation has been improving—the Ocean State no longer taxes Social Security benefits for single filers with up to $80,000 in adjusted gross income and joint filers with up to $100,000 in AGI. And up to the first $15,000 of retirement income may be exempt for retirees, depending on income levels. Still, the updated tax situation is not enough to move it out of not-friendly territory for retirees.

• Ranking: #12
• Population: 4.8 million
• Share of population 65+: 15.8%
• Cost of living: 7% below the U.S. average
• Average income for 65+ households: $43,340
• Average health care costs for a retired couple: Below average at $408,343
• Tax rating for retirees: Tax Friendly

If the mild weather and southern charm of the Palmetto State aren't enough of a retirement draw, surely the affordability can tempt you. On top of below-average living costs, the tax situation goes easy on a fixed income, too. South Carolina doesn't tax Social Security benefits and offers generous exemptions on other types of retirement income. It also does not levy an inheritance or estate tax. Property taxes tend to be very low.

• Ranking: #1
• Population: 851,058
• Share of population 65+: 15.2%
• Cost of living: 4% below the U.S. average
• Average income for 65+ households: $43,712
• Average health care costs for a retired couple: Below average at $415,297
• Tax rating for retirees: Most Tax Friendly

The Mount Rushmore State might not be the first place that comes to mind when you dream of where to retire, but it's first place on our list. Affordability is the main factor pushing it to the top spot. In addition to low living expenses, including for health care, South Dakota is one the 10 Best States for Taxes on Retirees. And you can be confident it'll stay that way. The state ranks third in the country for fiscal soundness, according to a recent report from George Mason University's Mercatus Center, which indicates high confidence that it can keep up with short-term expenses and long-term financial obligations.

• Ranking: #5
• Population: 6.5 million
• Share of population 65+: 15.0%
• Cost of living: 12% below the U.S. average
• Average income for 65+ households: $47,891
• Average health care costs for a retired couple: Below average at $411,617
• Tax rating for retirees: Tax Friendly

The Volunteer State is a good choice for budget-conscious retirees. According to data from the Council for Community and Economic Research, every major metro area offers below-average living costs in almost every category of expenses, including health care—among the biggest financial concerns for aging Americans. Plus, Tennessee does not levy state income taxes, so your retirement income can stretch even further. And being economically healthy, Tennessee should have no issues maintaining its tax-friendliness; it ranks eighth of all states for fiscal soundness, according to a recent report from the Mercatus Center.

• Ranking: #24
• Population: 27.0 million
• Share of population 65+: 11.5%
• Cost of living: 10% below U.S. average
• Average income for 65+ households: $55,383
• Average health care costs for a retired couple: Above average at $430,561
• Tax rating for retirees: Tax Friendly

Living expenses in the Lone Star state are typically low, but health care costs are an exception. In fact, the amount a 65-year-old retired couple can expect to pay for these costs is 1.7% more than the U.S. average. On the bright side, incomes are also relatively high and go untaxed by the state. Still, not everyone can afford Texas: The state has a poverty rate of 10.8% for seniors, the sixth highest in the U.S.

• Ranking: #10
• Population: 2.9 million
• Share of population 65+: 10.0%
• Cost of living: 4% above the U.S. average
• Average income for 65+ households: $53,211
• Average health care costs for a retired couple: Below average at $412,641
• Tax rating for retirees: Least Tax Friendly

The Beehive State is a sweet spot for active retirees. Utah ranks second in the U.S. for the overall health of its 65-plus population, according to the United Health Foundation, and offers plenty of outdoor recreation options that are sure to keep you buzzing through retirement. There are five national parks, seven national monuments, five national forests and 43 state parks to host all your hiking, climbing, boating and skiing desires.

Maybe the activity can distract you from the state's unfriendly tax laws—Utah is one of the few states that taxes Social Security benefits, for example. Still, the tax man isn't keeping Utah's seniors down: Even with income levels for older adults just about average for the U.S., the state has the third-lowest poverty rate in the country for people 65 and older.

• Ranking: #40
• Population: 626,249
• Share of population 65+: 17.0%
• Cost of living: 12% above the U.S. average
• Average income for 65+ households: $45,755
• Average health care costs for a retired couple: Below average at $408,038
• Tax rating for retirees: Least Tax Friendly

Steep living costs and taxes weigh heavily on below-average incomes in the Green Mountain State. Social Security benefits, as well as most other forms of retirement income, are subject to state taxes, and the top income tax rate is a high 8.95% (which kicks in at $416,500 for single filers and $421,900 for joint filers).

On a positive note, Vermont ranks eighth in the country in terms of senior health, according to the United Health Foundation's rankings.

• Ranking: #7
• Population: 8.3 million
• Share of population 65+: 13.8%
• Cost of living: 7% above U.S. average
• Average income for 65+ households: $59,869
• Average health care costs for a retired couple: Below average at $408,950
• Tax rating for retirees: Tax Friendly

Virginia is for retirees. Overall living costs are above average, but high household incomes among seniors—11.3% higher than the national average of $53,799, to be exact—should be able to cover the spread. Plus, health care costs, a particularly worrying budget item for retirees, actually tend to be relatively affordable, with a retired couple in the state expected to pay 3.4% less than the average couple in the U.S. Plus, the Old Dominion doesn't tax Social Security benefits and allows residents 65 and older to deduct income up to $12,000 per person, depending on their income levels.

• Ranking: #16
• Population: 7.1 million
• Share of population 65+: 14.0%
• Cost of living: 21% above the U.S. average
• Average income for 65+ households: $55,577
• Average health care costs for a retired couple: About average at $420,480
• Tax rating for retirees: Tax Friendly

The Evergreen State can be a great place to stay refreshed throughout retirement. Washington boasts more than 3,000 miles of coastline and two major mountain ranges: the Cascades and the Olympic Mountains. So active retirees have plenty of opportunities to boat, swim, climb, hike and more. No wonder the state ranks second in the nation (after California) for physically active seniors, according to the United Health Foundation's senior health rankings report.

• Ranking: #37
• Population: 1.8 million
• Share of population 65+: 17.8%
• Cost of living: 17% below the U.S. average
• Average income for 65+ households: $40,109
• Average health care costs for a retired couple: Below average at $404,606
• Tax rating for retirees: Not Tax Friendly

Despite its below-average living costs, the Mountain State offers some rocky terrain for retirees. Retirement income, including Social Security, is taxed to the same extent as it is on your federal form—though the first $8,000 is exempt. And given the state's fiscal health, its tax situation is unlikely to get friendlier: According to a recent report from the Mercatus Center at George Mason University, West Virginia ranks as the ninth-worst state in terms of fiscal soundness.

The state also scores poorly for the health of its 65-and-over population, ranking 45th in the country, according to the United Health Foundation. While 64.6% of older adults nationwide are considered able-bodied, only 56.6% of those in West Virginia can say the same—the worst in the U.S.

• Ranking: #41
• Population: 5.8 million
• Share of population 65+: 15.2%
• Cost of living: 4% below U.S. average
• Average income for 65+ households: $40,011
• Average health care costs for a retired couple: About average at $423,978
• Tax rating for retirees: Least Tax Friendly

Wisconsin seniors suffer the lowest average household income in the nation. And yet, the living costs are only a bit below average, and a 65-year-old couple actually faces slightly higher-than-average health care costs in retirement. And taxes only make the situation worse: Social Security benefits are exempt from state taxes, but most other retirement income is subject to taxation (though there are some breaks for low-income residents).

• Ranking: #17
• Population: 583,029
• Share of population 65+: 13.8%
• Cost of living: Same as U.S. average
• Average income for 65+ households: $45,305
• Average health care costs for a retired couple: Above average at $430,916
• Tax rating for retirees: Most Tax Friendly

The Equality State knows how to keep an even budget. It ranks fifth in the nation for its fiscal health, holding more than enough cash to cover its obligations (thanks to plenty of revenues from oil and mineral rights), according to the Mercatus Center. That bodes well for its ability to maintain its generous tax benefits for retirees and all its residents. There's no state income tax at all, and the state sales tax is a modest 4.5%.

To rank all 50 states for retirement, we weighed a number of factors:

• Taxes on retirees, based on Kiplinger's Retiree Tax Map, which divides states into five categories: Most Tax Friendly, Tax Friendly, Mixed, Not Tax Friendly and Least Tax Friendly.
• Cost-of-living for each state, with data provided by Sperling's Best Places, includes overall costs—across all age groups—for housing, food and groceries, transportation, utilities, health care and miscellaneous expenses.
• Average health care costs in retirement are from HealthView Services and include Medicare, supplemental insurance, dental insurance and out-of-pocket costs for a 65-year-old couple who are both retired and are expected to live to 87 (husband) and 89 (wife).
• Rankings of each state's economic health are provided by the Mercatus Center at George Mason University and are based on various factors including state governments' revenue sources, debts, budgets and abilities to fund pensions, health-care benefits and other services.
• Rankings of the health of each state's population of residents 65 and over are from the United Health Foundation and are based on 34 factors ranging from residents' bad habits (smoking and excessive drinking) to the quality of hospital and nursing home care available in the state.
• Household incomes and poverty rates are from the U.S. Census Bureau.
• Population data, including the percentage of the population that is age 65 and older, is also provided by the Census Bureau. They are highlighted in these rankings for the benefit of readers, but were not factors in our methodology for ranking the states.

The big drop in world markets after the United Kingdom’s shocking vote to leave the European Union is only the latest reminder that investors need a variety of eggs in their portfolio baskets. Large caps, small caps, Asian stocks, European stocks, high-yield bonds, oil, copper—practically everything took a dive. The same happened in 2008. Not only did large-capitalization U.S. stocks lose 37% of their value, but real estate, commodities and foreign stocks tanked as well. Real diversification demands assets that don’t move up and down in tandem.

You need a strategy for softening the impact of market setbacks. Using hedging strategies will usually produce slightly lower returns over the long run, but, in my view, the smoother ride you get in return is worth the cost. I would be happier with a 6% return year after year than a 25% gain one year and a 10% loss the next.

The traditional wisdom for hedging a portfolio is to buy bonds to temper the ups and downs of stocks as well as provide consistent income. Medium- and long-term Treasury securities, with maturities ranging from, say, seven to 15 years, have thrown off interest of about 5% annually over the past century, with no risk of default. So a portfolio with half of its assets in Treasuries and half in a diversified bundle of U.S. stocks has produced long-term returns averaging about 7.5% annually. Even better, in no 10-year period over the past 90 years has such a portfolio ever lost money, according to Morningstar.

Investors, however, face two big hurdles: Bonds today are not paying 5% interest, and U.S. stocks seem unlikely to match their long-term average return of 10% per year. The 10-year Treasury is yielding 1.49%. If you believe stocks will return a few percentage points per year less than they have in the past, a 50-50 portfolio will, on average, return less than 6% a year.

There is, however, another solution. You can substitute alternative investments for some of your bond holdings. An alternative is an asset class that moves out of sync with the stock market. One popular example is gold. On June 24, the day the outcome of the U.K. vote to leave the EU became known, SPDR Gold Shares (GLD, $126), an exchange-traded product that tracks the price of the commodity, rose 4.9%, while SPDR S&P 500 ETF (SPY, $209), which tracks Standard & Poor’s 500-stock index, fell 3.6%. In 2008, when the S&P 500 ETF plunged 36.8%, the Gold fund gained 5.0%. In 2013, when the stock market ETF soared 32.2%, the Gold fund sank 28.1%. (Prices are as of June 30.)

Gold and stocks sometimes move together—as in 2009, 2010 and 2012—but, generally, they orbit different planets. Although I’m not a fan of gold, it is clear its meanderings aren’t determined by the same forces that move stock prices.

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Shift to neutral

Another example of an alternative investment is the market-neutral fund, whose manager tries to take market risk out of the picture by constructing a portfolio that balances long and short positions. Longs are simply traditional stock purchases, made in the hope that prices will rise. When you go short, you borrow a stock from someone else, sell it immediately, and then hope it declines in value so you can buy it back and return it when it’s worth less—and pocket the difference.

In a market-neutral fund, a manager may go long with one stock and short with another one in the same sector, making a profit if the long does better than the short. For example, a manager might decide that Coca-Cola (KO) is superior to Pepsico (PEP). She buys $1 million worth of Coke stock and shorts $1 million worth of Pepsi stock. Over a year, let’s say that the overall market is up, and Coke rises by 20%, but Pepsi increases by just 5%. The fund makes a $200,000 profit on Coke stock and suffers a $50,000 loss on Pepsi stock, for a net gain of $150,000, not including dividends. What if the overall market falls? The fund can still make money as long as Coke outpaces Pepsi. Say that Coke declines by 10% but Pepsi drops by 25%; then the fund will lose $100,000 on Coke but make $250,000 on Pepsi, for a net gain of $150,000.

Market-neutral strategies are typically the province of highly paid hedge-fund managers. Some of the best public mutual funds in this sector require lofty minimum investments and charge high fees. Vanguard charges just 0.25% a year for its Market Neutral Fund (VMNFX), the lowest fee of any mutual fund in the category, but it requires an initial minimum investment of $250,000. (The 0.25% figure excludes extra costs involved in selling short.)

Otherwise, the pickings in this category are slim. Among no-load funds with reasonable minimums, the best by far is TFS Market Neutral (TFSMX), which requires a minimum investment of $5,000 and has an expense ratio of 1.9% (excluding short-selling-related fees). Over the past 10 years, the fund, which focuses on small-cap stocks, has returned 3.9% annualized. Since 2008, the fund’s calendar-year returns have ranged from –7% to 17%, suggesting relatively low volatility, the hallmark of a good market-neutral fund. By contrast, the range for SPDR S&P 500 ETF was –37% to 32%.

Also consider the approach of the Merger (MERFX) and Arbitrage (ARBFX) funds to alternative investing. Each buys shares of already-announced takeover and merger targets, with the goal of capturing the last few percentage points of appreciation between the post-announcement share price and the price at which the deal is consummated. The result is modest, bond-like performance that is utterly divorced from the overall stock market and that exhibits little volatility. In 2008, the annus horribilis for stocks, Merger was down 2.3%; Arbitrage fell 0.6%.

Finally, you can invest in companies whose business is relatively isolated from the economy as a whole. One prime example is reinsurance. Property-and-casualty insurers don’t want to bear the entire risk of shelling out payments after a catastrophic event, such as a huge hurricane, so they buy their own insurance from reinsurers. The performance of such companies depends, in large part, on the frequency of major natural disasters—events unrelated to the stock market.

Warren Buffett is a longtime fan of the business. His company, Berkshire Hathaway (BRK.B, $145), owns Gen Re, one of the largest reinsurers. Berkshire is broadly diversified, with holdings that range from jewelry retailing to banking to consumer goods. But, with the exception of 2008, Berkshire’s annual returns have diverged nicely from those of the S&P 500 over the past decade.

For a purer play on the reinsurance business, consider Renaissance Re Holdings (RNR, $117). Its stock’s returns have diverged widely from those of the S&P 500 practically every year—by more than 15 percentage points in five out of the past 10 calendar years. Its volatility is much higher than that of a merger or market-neutral fund, but so are its returns, which have averaged 10.2% per year over the past decade. Others worth a look are Third Point Reinsurance (TPRE, $12), a smaller firm that was launched only five years ago but benefits from experienced management, and Validus Holdings (VR, $49), which has a superb record and sports a 2.9% dividend yield.

Got it? Buy insurance companies for your own insurance.

Five years ago, Kiplinger’s turned to longtime investment writer and in-house income guru Jeff Kosnett to launch a newsletter designed to steer income-starved readers to the best investments for dependable, spendable income. Today, Kiplinger’s Investing for Income continues to attract a growing army of satisfied readers.

How does Jeff uncover opportunities for his subscribers month after month? Of course, he spends a lot of time interviewing money managers and mutual fund masterminds, as well as the men and women who actually run real estate investment trusts (REITs) and master limited partnerships (MLPs). And he mines the Internet, searching for great ideas and studying the raw data to identify broad trends and profitable prospects. We asked Jeff to share with Kiplinger.com readers his favorite free sources for reasoned discussion and hard-to-find financial data. Bookmarking these sites will be a valuable step toward making you a more successful investor.

• Web address: www.cefa.comKey data: Discounts and premiums to net asset valueBest for: Sorting and screening 629 closed-end funds
• Kosnett Comment: CEFA’s tables show each fund’s distribution yield next to its income yield. The two won’t match, but they should be fairly close. If the income figure is low but the distribution is high, the fund is selling assets or issuing new shares to maintain the illusion of a fat yield. It could be headed for a distribution cut.
• SEE ALSO: Great Tech Stocks Paying Big Dividends

The keys to understanding any closed-end fund are data about current and historic discounts and premiums to net asset value, distribution rates, whether and how much the fund borrows (leverage), and total return on net asset value. This site offers all of that and more, plus the tools to sort and screen more than 30 varieties of funds in too many ways to count.

• Web address: www.eatonvance.comKey data: The numbers on all aspects of income investmentsBest for: Total returns and average duration of bonds
• Kosnett Comment: The page called “fixed income spread analysis” uses simple bar charts to show the current and past yield advantage of various categories, such as junk bonds or preferred stocks, over Treasuries. When the spread is unusually narrow, there’s more risk. When it’s wide, it’s usually a good time to invest.

This fund company’s site is loaded with free stuff. The best is the monthly monitor (accessible in the site’s Institutional Investors section): 40-plus pages of charts and tables about all aspects of stocks, bonds, bank-loan funds, commodities, industry sectors and more. All this — including total returns and average duration of more than 20 kinds of bonds — is nicely laid out on single pages.

• Web address: www.stlouisfed.orgKey data: 382,000 statistical series from 82 sourcesBest for: Financial data, graphs and charts from the government and everywhere else
• Kosnett Comment: You may go weeks or months without using this, and then you’ll refer to it several times in one sitting. It’s comforting to know that someone has gone to the effort of assembling all this info in one place.
• SEE ALSO: 7 Promising Dividend Stocks Yielding 5% or More

If you want to see a trend in, say, inflation, growth, interest rates or stock-market returns for just about any period, you’ll find it here. This takes the place of any almanac, encyclopedia or reference book — and it’s updated daily. FRED is the acronym for Federal Reserve Economic Data and is the brainchild of the Federal Reserve Bank of St. Louis.

• Web address: www.investinginbonds.comKey data: Real-time market data on bond trading action and pricesBest for: Owners (or potential owners) of individual corporate and municipal bonds and anyone else who wants to see how bonds are priced and what they are yielding at any given time
• Kosnett Comment:The Securities Industry and Financial Markets Association (SIFMA), the bond dealers’ trade association, runs the site and has a news feed as well. Some of the commentaries, though, are dated.

• Web address: www.rwbaird.comKey data: Relative yields of municipals and TreasuriesBest for: Analysis of taxable and tax-free bond markets
• Kosnett Comment: Baird’s municipal bond letter illustrates such basics as the ratio of tax-free bond yields to Treasury yields and the equivalent yield you need to earn on a taxable investment to net the same after-tax income.
• SEE ALSO: Best Nasdaq Stocks for Dividends

The managers of Baird Core Plus Bond fund and other excellent no-load income funds publish a combination of basics with just enough financial-market-speak to keep the pros happy with their Capital Markets Perspective. The insights live at Baird’s corporate site (address above) not the Baird Funds' consumer site. Offerings include both tax-free bond and taxable-bond commentaries. A recent subject is the tight supply of new bonds, which keeps prices high and yields low. There is also a colorful market commentary called, ahem, The Bull and Baird Blog.

• Web address: www.pimco.comKey data: Outlooks and forecasts from the fixed-income behemoth (with $1.43 trillion under management) formerly known as the Pacific Investment Management CompanyBest for: Investors who like to see commentaries and explanatory articles that put the market’s gyrations in perspective. For example, an article called “Emerging Markets Trying to Turn the Corner” makes the case for some, but not all, investments in those countries. The Pimco blog about the issues of the day is well-presented and with graphics.
• Kosnett Comment: The departure of Bill Gross from Pimco changed this site from his soapbox to more of a team effort.
• REGISTER FOR MARCH 10 WEBINAR: Jeff Kosnett Shares Tips to Double, Triple Your Cash Yield

• Web address: www.emma.msrb.orgKey data: Muni bond trading detailsBest for: Screening the tax-free bond universe for top yieldsElectronic Municipal Market Access, from the Municipal Securities Rulemaking Board, shows every municipal bond trade, plus key background information about thousands of issuers. If you own tax-exempts, you can see a price graph for each bond based on months of trades, just as you can chart a stock or a fund. You can also screen the tax-free bond universe in detail. For example, when you search for all AA-rated Arizona water and sewer bonds due between 2024 and 2029, up pop the yields and other particulars.
• Kosnett Comment: EMMA is easier to navigate if you know your bond’s CUSIP number.
• SEE ALSO: Stocks Paying Dividends for 100 Years or More

• Web address: www.reit.comKey data: Historical returns and other performance information for real estate trusts going back to their invention in the 1960s.Best for: Avid real estate investment trust fans and anyone who wants to see new offerings and news tidbits about the industry and its members. The site is run by the National Association of Real Estate Investment Trusts (NAREIT).
• Kosnett Comment: It would be good if NAREIT would link to a resource that provides up to the minute data on the individual REITs’ net asset values and prices to book value. You need a brokerage link to that kind of research.

• Web address: www.tcw.comKey data: Monthly updates by sector, such as the High Yield and Mortgage Market updates. Find it all under Insights from TCW, a global asset management firm.Best for: Bond fund investors, especially if you dabble in risky or unusual areas like junk bonds, mortgages and bank loans. There are also excellent forecasts and commentaries from the portfolio managers and analysts.
• Kosnett Comment: This is some of the best perspective on individual bond-market segments and what’s driving them up or down.
• REGISTER FOR MARCH 10 WEBINAR: Jeff Kosnett Shares Tips to Double, Triple Your Cash Yield

These are confusing times for income investors. Not so long ago, they loved bonds, which presented them with three decades of falling yields and rising prices. Last year, they hated ’em, as the Federal Reserve’s talk about slowing the pace of its bond purchases led to generally lower prices. Then early in 2014, as the Fed’s taper talk turned into action, prices of high-quality bonds did the unexpected and rose as yields fell, rekindling investors’ affection for fixed-income investments. In the end, though, the problem that has bedeviled investors hasn’t disappeared: Interest rates remain at historically low levels, and to get extra yield, investors must take extra risks.

Recent results underscore the turmoil in the bond market. Barclays Aggregate Bond index, a broad measure of U.S. investment-grade issues, lost 2.0% in 2013 (its first calendar-year drop in 14 years) then rose 1.5% in January. Other sectors swung even more: Long-term government bonds, after losing 13.3% in 2013, gained 6.2% in January. But developing-markets debt sank 7.3% in 2013 and declined 2.5% in January (for more, see Buy Emerging-Markets Bonds).

Through it all, though, some sectors have sparkled. Convertibles—stock-bond hybrids—returned 22.3% over the past year through January 31. And high-yield, or junk, bonds earned 6.7%. “In bonds, somewhere, something is almost always working,” says Jeff Moore, manager of Fidelity Investment Grade Bond. “And if nothing is working, it’s just a short pause.”

And that’s the lesson: It’s not that bonds don’t work anymore. It’s that what has worked for many investors in recent years—holding a mix of debt similar to the Aggregate index, which is heavy in Treasuries and doesn’t hold junk bonds—may not be the best combination for these times. As such, buying an index fund that captures the entire U.S. bond market could be a misstep. “You need to be more targeted in this environment,” says Brian Hahn, an adviser with money manager Neuberger Berman.

Putting aside the January drop in yields (much of it due to investors buying high-grade bonds to escape turmoil in emerging markets), chances are good that interest rates will resume their climb before long. So what’s a bond investor to do? To help you weather this uncertain market, we’ve assembled seven bond-fund portfolios designed to pay more than you can get from the bank while keeping duration (a measure of interest-rate risk) in check. Our portfolios yield from 2.1% to 3.6%.

We chose funds over individual bonds because we believe their benefits—particularly professional management and diversi­fication—outweigh their shortcomings. What’s more, building a well-diversified portfolio of individual bonds takes at least $100,000, according to Fidelity, to achieve an optimal mix of issuers, sectors and maturities. Most bond funds, by contrast, let you through the door for $2,500 or less. (Three of our portfolios hold only exchange-traded funds; the minimum for an ETF is the price of one share, plus commission.)

Before investing in our models, decide how much of your portfolio you want in bonds. Then match your objectives as best you can with those suggested in our model portfolios. If necessary, tweak the allocations to meet your tolerance for risk. “Walk before you run,” says bond strategist Mary Ellen Stanek, of Robert W. Baird, a Milwaukee investment firm. “Start with a conservative allocation, and as you get comfortable, take on more risk by readjusting the portfolio.” The trick is to build an allocation you can stick with even when the market turns against you. Selling in a panic is a “lose-lose situation,” says Stanek.

Keep in mind that where you hold your bonds matters, too. Because interest payments on most fixed-income securities are taxed as ordinary income, money managers advise holding taxable bonds in a tax-deferred account, such as an IRA or a 401(k). If you’re investing in a taxable account and have a high income, you’ll probably be better off investing in municipal bonds. Interest from debt issued by states and cities is generally exempt from federal income taxes and may be exempt from state and local income taxes, too.

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Low-Risk Portfolios: Trading Yield for Safety

These are for investors who may not be able to tolerate big losses in their bond portfolios. Or they may hold bonds to hedge against falling stock prices. To do that effectively, says Jeff Moore, a bond-fund manager at Fidelity, you need to buy what generally goes up when stocks go down. That means a combination of intermediate-term U.S. government bonds or government-guaranteed mortgage debt (such as Ginnie Maes), and investment-grade corporate bonds (debt that is rated between triple-A and triple-B, which indicates a relatively low risk of default).

Moderate-Risk Portfolios: A Mix for More Income

When you’re retired, you’re interested in income, not growth. But that doesn’t mean your bond allocations need to be more con­servative. What you need is the right kind of diversification. These portfolios offer exposure to a mix of different types of bonds: foreign debt, convertibles and high-yield IOUs, as well as Treasuries, investment-grade corporate bonds and floating-rate bonds.

Higher-Risk Portfolios: Shifting with the Market

These are opportunistic portfolios: The managers of the first three funds in the mutual fund portfolio have the latitude to buy different kinds of bonds as the market shifts. Each fund took a different tack last year (for instance, Osterweis focused on short-term high-yield debt, and Loomis Sayles loaded up on medium-maturity investment-grade and junk bonds). But all weathered 2013 without a loss. The rest of the portfolio focuses on sectors that are poised to do well in the current environment: floating-rate debt, mortgage bonds that aren’t backed by government agencies, and dollar-denominated emerging-markets bonds. The ETF portfolio consists of funds that invest in junk bonds, mortgage securities, floating-rate bank loans and emerging-markets debt.

Muni portfolio: When taxes matter

New tax laws make municipal bonds a no-brainer for top income earners. For starters, the maximum federal income-tax bracket now peaks at 39.6%, and there’s a 3.8% surtax on net investment income for single filers with adjusted gross income of more than $200,000 ($250,000 for married couples).

But lower-income taxpayers should consider munis, too, says Tim McGregor, a muni-bond strategist at Northern Trust, a Chicago-based money manager. That’s because the difference in yield between a high-quality muni and a Treasury is slim these days: Ten-year, triple-A munis recently yielded 2.5%, on average, compared with 2.7% for ten-year Treasuries. But for an investor in the top federal bracket, a tax-free yield of 2.5% is equivalent to a taxable payment of 4.4%.

For simplicity’s sake, we have crafted a portfolio consisting exclusively of national muni bond funds, three focusing on short-term or medium-term bonds and one owning longer-term debt. Residents of states with high income tax rates—for example, New York (where the top rate is 8.8%) and California (13.3%)—may get a higher after-tax yield by investing in state-specific muni funds. But almost all of those funds hold bonds with long maturities, making them extra-sensitive to swings in interest rates. We didn’t create an ETF portfolio because many tax-free bonds are thinly traded, and “if the market goes into panic mode and liquidity dries up, relying heavily on an index-based fund could lend itself to some bad surprises,” says Warren Pierson, a muni strategist at Robert W. Baird. The 2.1% yield in our portfolio is equivalent to a taxable 3.7% for an investor in the top tax bracket.