As retirement approaches, many Americans contemplate relocating to a new state.
A recent report by the 2022 U.S. Census reveals that between 2015 and 2019, over 622,200 individuals aged 65 and above migrated to different states for retirement. Seeking affordable healthcare, favorable tax incentives, or pleasant climates, retirees are willing to change their location for a more comfortable retirement. So, what are the real costs associated with retiring in the U.S.?
Leveraging data from the Council for Community and Economic Research (C2ER), the U.S. Census Bureau, and the U.S. Bureau of Economic Analysis, Investopedia has devised the Investopedia Retirement Index. This index assesses the cost of living, tax responsibilities, and the proportion of individuals aged 65 and older in each state.
Through this index, Investopedia has identified states with the lowest tax burdens and living expenses, as well as the highest concentration of seniors aged 65 and above, aiding individuals in making well-informed decisions about their ideal retirement destination in the U.S.
Most Cost-Effective U.S. States for Retirement
The following states, ranked by our finance-focused index, are considered the top retirement destinations in the U.S.:
- Tennessee
- Florida
- Wyoming
- South Dakota and Missouri (same score on the Retirement Index)
- Alabama
On the flip side, here are the states with the least favorable attributes in terms of the evaluated factors:
- Washington, D.C.
- Hawaii
- California
U.S. Retirement Costs
Retirement expenses in the U.S. are on the rise. Recent years have seen a surge in inflation, increased mortgage debt among older adults, escalating healthcare costs, and various other financial considerations. As a result, factors like the cost of living, tax obligations, and the age demographics of an area have become pivotal, particularly for those reevaluating their retirement location. Let’s delve deeper into these elements and their impact on individuals’ retirement living choices.
When analyzing this data, bear in mind that state-specific index scores range from 83.4 to 138.9, with lower scores being more financially advantageous. Scores below 100 indicate above-average cost-effectiveness, while scores above 100 denote below-average cost-effectiveness.
Cost of Living
The Investopedia Retirement Index’s cost-of-living calculations encompass various components:
- Food
- Housing
- Utilities
- Transportation
- Healthcare
- Other goods and services (e.g., grooming expenses)
While the index omits quality and quantity considerations of these components, these anticipated expenses aid in projecting necessary retirement budgets to safeguard against outliving savings.
Healthcare costs are a crucial aspect of the cost of living, especially for retirees. Individuals aged 65 and above account for over 35% of hospital admissions, despite comprising only 17% of the U.S. population. Additionally, in 2022, one in four adults aged 65 or older had to reduce spending on essentials like food and utilities to afford healthcare.
Mississippi boasts the lowest average cost of living, representing 82% of the national average, whereas Washington, D.C., and Hawaii’s living costs are 149% and 139% of the national average, respectively.
Tax Burden
Tax considerations play a significant role in retirement planning and location choices.
Income tax is particularly pertinent for retirees as it influences withdrawals from tax-deferred retirement accounts like 401(k)s and pensions.
Seven U.S. states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
In addition to income tax, property and sales taxes are integral components when evaluating the overall tax impact. Alaska ranks as the state with the lowest tax obligation, at 56% of the national average, while New York and Hawaii face the highest tax rates at 137% and 135% of the U.S. average, respectively.
Resident Age
The age distribution of residents is another crucial factor influencing retirement location choices, as it affects social connections and support systems in later life.
High rates of solitude and isolation among older adults in the U.S. underscore the importance of social structures. Location matters, as depression rates vary between general communities versus healthcare-dependent or hospitalized older individuals.
Maine, Florida, and West Virginia have the highest proportions of residents aged 65 and above, while Utah has the lowest percentage at 11.1%.
For more guidance on retirement planning, consider procuring a copy of the Investopedia Retirement Guide.
More About the Top States
Tennessee
Tennessee ranks as the top state for retirement based on the Investopedia Retirement Index score of 83.4. With taxes at 69% of the national average and living expenses at 86% of the national average, Tennessee boasts an above-average population of individuals aged 65 and above.
Florida
Following closely, Florida secures the runner-up spot with an index score of 83.6, primarily driven by its below-average tax burdens. The state features comparable living expenses to the national average and a 22% surplus of residents aged 65 and above compared to the national average.
Florida’s homestead exemption stands out as a notable retirement benefit, offering tax exemptions up to $50,000 for homeowners.
The state draws the highest number of retirees, gaining 53,150 residents aged 65 and above between 2015 and 2019, according to the U.S. Census Bureau.
Wyoming
Securing the third spot in the ranking, Wyoming boasts an index score of 87.7. Despite near-average living costs, the state stands out with zero income tax and a tax burden at 65% of the national average.
South Dakota and Missouri
South Dakota and Missouri both share an index score of 87.8, positioning them among the top states for retirement.
South Dakota offers a cost of living 7% below the national average, a tax burden 26% lower than the national average, and a higher-than-average population of residents aged 65 and above by 4%.
On the other hand, Missouri boasts a cost of living 16% beneath the national average, a tax burden 11% below the national average, and a 5% above-average population of seniors.
Alabama
Earning a score of 88 on the Investopedia Retirement Index, Alabama is a top retirement destination. The state’s cost of living is 13% below the national average, the tax burden is 14% lower than average, and it has a 5% higher population of individuals aged 65 and above compared to the national average.
Remarkably, Alabama boasts the lowest property tax among contiguous U.S. states at 0.40%, making it a sought-after retirement spot for those seeking favorable tax conditions.
Retiring in the U.S. vs. Retiring Abroad
While many opt to retire in the U.S., a growing number of retirees are choosing to live abroad. International living can offer affordable housing, convenient healthcare, and a change of lifestyle from U.S. standards.
When contemplating an overseas retirement, considerations such as visa regulations, tax implications, healthcare availability, and proximity to loved ones play pivotal roles. Whether you opt for an international or domestic retirement setting, evaluate your individual requirements, preferences, and financial circumstances to determine the most suitable location for your retirement.
What Factors Should I Consider When Choosing a Place to Retire?
When selecting a retirement locale, aspects like cost of living, tax requirements, and resident demographics are paramount as they can significantly impact your daily life, financial well-being, and social network. These factors are precisely what the Investopedia Retirement Index gauges, pointing to Tennessee, Florida, and Wyoming as prime retirement destinations in the U.S.
However, individual lifestyles, preferences, and values vary, so the weight you assign to different factors will be unique to your personal circumstances.
Where Is the Cheapest Place to Live During Retirement?
According to the Council for Community and Economic Research’s cost-of-living index, Mississippi boasts the lowest living expenses, representing only 82% of the U.S. average. On the tax front (covering sales, property, and income tax), Alaska stands out with the lowest tax rates in the country, at just 56% of the national average.
Considering both living costs and tax burdens, Tennessee emerges as the overall most budget-friendly state, tallying only 77.6% of the national average in combined living and tax expenses. Subsequently, Wyoming and Florida follow suit with combined expenses at 81.6% and 81.7% of the nationwide average, respectively.
What U.S. State Has the Lowest Income Tax?
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming have no state income tax, making it a crucial factor for retirees due to its impact on retirement account distributions from traditional plans like 401(k)s, IRAs, and pensions. However, it’s important to consider property and sales tax in addition to income tax when strategizing for retirement.
The Bottom Line
With an increasing number of Americans relocating for retirement, factors like cost of living, tax burdens, and resident age play vital roles in the decision-making process. These elements significantly influence financial security, social connections, and overall well-being.
While the Investopedia Retirement Index offers valuable insights, it’s essential to conduct your research when determining your retirement destination. Whether you choose to relocate, stay put, or contemplate international retirement, prioritize your individual needs, desires, and financial status to make an informed decision.
Methodology
Please note that our index incorporates statewide averages, and these figures may vary compared to specific regions within each state. Urban areas typically exhibit higher living costs and taxes than state averages, while rural regions often offer lower financial burdens.
In crafting the Investopedia Retirement Index, cost of living constitutes 50% of the index, tax burden accounts for 30%, and resident age contributes 20%. A score of 100 represents the national average across these criteria, and state index scores range from 83.4 to 138.9, with lower scores indicating higher cost-effectiveness.
Cost-of-living data is drawn from the 2022 Cost of Living Index by the Council for Community and Economic Research. Tax figures encompass property, sales, and income taxes expressed as proportions of each state’s personal income. These tax metrics are sourced from the U.S. Census Bureau and the U.S. Bureau of Economic Analysis. Resident age data is derived from the U.S. Census Bureau’s American Community Survey.