Moving to Florida or Texas for Retirement? 3 Questions to Ask First
Relocating to a tax-free state like Florida or Texas seems like a good idea, but unexpected expenses add up fast. Here is how to ensure your retirement move doesn't break the bank.
The allure of living in a state with no income tax in retirement can be undeniable. You won't have to worry about withdrawals or required minimum distributions pushing you into a higher tax bracket. Nor do you have to think about the state taxing some of your Social Security or pension. Plus, every dollar you save on taxes is another dollar you can spend on travel, hobbies, spoiling the grandkids, or leaving money to your heirs.
It's one of the reasons Florida, Texas and Tennessee are popular destinations for retirees. But relocating for the tax break doesn't mean you'll automatically save in retirement. Other living expenses could make it a wash, or worse, more expensive.
"If a state doesn't have income tax, it still has to pay for things," says Chelse Stevens, a certified financial planner and VP, consultant at Fidelity Investments. "Tennessee has one of the highest sales taxes (in the country). You start to see it in other ways."
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And it's not just sales tax where costs may be higher in a tax-friendly state. Florida doesn't tax your income, but it has the highest HOA fees and ranks third for the most expensive homeowners insurance. Meanwhile, Texas has the seventh-highest property taxes in the country and ranks fifth for the highest average home insurance premiums. Then there are property values, the cost of living, and health care costs to be factored in. You may not have to pay income taxes, but is everything else more expensive?
It's why Stevens says don't let the "tax tail wag the dog" when choosing where to live in retirement. Instead, ask yourself these three questions first to ensure you're moving for the right reasons.
1. What is the state's total tax picture?
When clients tell JPMorgan's Chief Retirement Strategist Michael Conrath that they are considering moving to a tax-free state, the first question he asks is which taxes they are referring to.
"It can be a pitfall to focus solely on the state income tax piece," says Conrath. "A zero income-tax rate can look great on paper, but it’s not a complete retirement plan. For retirees, the all-in picture — income taxes, property taxes, sales taxes and local taxes — is what matters."
Don't forget to consider the state's estate and inheritance taxes, says Conrath, as they can change the legacy you leave behind. Before relocating, Conrath suggests working with a tax professional, financial adviser, or doing it yourself to determine what you’ll pay in total taxes where you are now versus where you’re going.
2. Do I understand the total cost of living, and can I afford it?
Taxes are only part of the decision. There are other living expenses, which is why the second question you have to ask yourself is: Do I know the total cost of living?
"A move that saves on taxes can be offset quickly by higher insurance, utility bills or health care costs, which can vary dramatically by ZIP code," says Conrath. If you move to a state to save on taxes, will you end up paying more for housing, insurance, food, travel, medical and entertainment? Even one of those expenses could cancel out the savings from not having to pay state income tax.
3. Will the move improve my quality of life?
Moving in retirement for the taxes alone is not a good reason, even if you think you'll save money. There has to be something more, says Stevens, which is why the third question you should ask yourself is: Will the move improve my life?
Even if moving to Florida in retirement saves you tens of thousands of dollars, is it worth leaving your support network behind? A successful retirement relocation means balancing the financial benefits with quality-of-life factors, including proximity to family, friends, healthcare and daily conveniences.
"Before you move, make sure you are considering all the factors, not just one," says Stevens.
Test drive before you commit
To really get a sense of what it will be like to live in a tax-free state, consider a test run, Conrath says. Try renting for a season to get a sense of the costs and other trade-offs that won't be obvious by running the numbers on a spreadsheet. A test run can also help you "pre-experience" what normal life will be like if you retire in your city of choice.
"Don't just chase the lowest tax rate," says Conrath. "The goal is to understand and improve the durability of your plan over the course of your entire retirement so that you have the confidence to enjoy the retirement you’ve earned."
Editor's note: This article is part of an ongoing series looking at three questions to ask yourself before making a major financial or lifestyle decision. The other stories in the series are: 3 Questions to Ask Before Deciding if a Roth Conversion Is Right for You, 3 Questions That Reveal If You're Actually Ready to Age in Place, 3 Questions That Determine If You're Actually Ready to Retire Early, 3 Questions to Ensure Your Retirement Nest Egg Is Inflation-Proof, 3 Questions to Ask Before Unretiring, 3 Questions That Help You Find Your Perfect Social Security Claiming Age, Go Ahead and Splurge, But Ask Yourself These 3 Questions First and Before You Give Money To Your Kids, Ask Yourself These 3 Questions.
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