Ready For Retirement
Ready For Retirement
3 Steps to Prepare for an Out-of-State Retirement
Have you thought about what moving to a new state might mean for your retirement budget and lifestyle? In this Ready for Retirement episode, the focus is on preparing for an out-of-state retirement. James outlines three essential considerations for retirees planning a move:
1. Housing Costs and Expenses: From property values and local property taxes to potential capital gains from selling a current home.
2. Overall Cost of Living: Everything from groceries to utilities varies widely between regions. It’s also wise to consider personal lifestyle goals—like travel or access to nature—as these can impact ongoing expenses
3. A Solid Tax Strategy: Particularly if moving to a state with different tax laws. Retirees can benefit by adjusting their tax strategy based on the state they’ll be in, potentially saving thousands over time.
These tips offer invaluable guidance for anyone considering a fresh start in a new state after retirement.
Questions answered:
How can moving to a different state impact my retirement expenses?
What tax strategies should I consider if I plan to retire out of state?
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Timestamps:
0:00 - An overview
1:27 - Compare housing costs
4:04 - Moving to higher property tax state
6:32 - Moving to lower property tax state
7:12 - Compare cost of living
10:48 - Dial in your tax strategy
13:44 - Consider state tax rates
14:51 - Summary
Create Your Custom Strategy ⬇️
It's common for people to want to retire out of the state that they currently live in. The challenge is, a lot of us have no idea what that's actually going to look like. That's why, in today's episode of Ready for Retirement, we're going to walk through the three things that you need to be taking into account before preparing for an out-of-state retirement. This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. The three things that we're going to cover on today's episode is number one compare the cost of housing. Number two compare the overall cost of living. And number three dial in the right tax strategy. These are the three most important things that you need to do if you're going to consider an out-of-state move in retirement. The common theme of all these, before we actually start going through each of them individually, is they all have to do with your expenses. This is incredibly important because I've run so many scenarios for clients in the past where we might run a retirement projection of what does it look like if you spend, let's say, $7,000 per month in retirement. The projection looks totally fine. We then increase that to say well, what if your expenses are actually 8,000 per month instead of seven and all of a sudden, that really amazing looking projection looks horrible. Things fall apart. You're not projected to make it anymore. Now, obviously that's not universal, but that happens quite frequently, and what it really highlights is the importance of getting your expenses dialed in, first and foremost, but the number two, keeping those down to the greatest extent possible without having to sacrifice quality of life. That's what all three of the topics we're going to talk about today have in common, as they all have to do with the expenses you're ultimately paying in retirement, and we're going to help you come up with a framework for how should you think about what those expenses will be and what are some strategies that you can employ to keep them as low as possible?
Speaker 1:So let's jump in. The first thing that you need to do is to compare the cost of housing. So if you are living in one state today and you're planning to retire in another state, chances are very good it's not going to be a perfectly lateral move in terms of both the cost of that new home and the expenses of that new home. There's a few different ways this can actually look different. One way in which that could look different is simply property taxes. Even if you do move to a home of the same exact value let's just use a million dollars, which is a good sized home in most places what if you have a million dollar home in Colorado and you know that you're going to retire to Texas? Well, colorado traditionally has low property tax rates. Texas has, on average, very high property tax rates, relatively speaking. So you might go that same million dollar home from paying about $5,000 per year in property taxes in Colorado. As an example, to move into Texas and say, well, the same home value, it's still a million dollar home. Well, those property taxes could very easily jump up to around $20,000 per year. So nothing changed about your home value, but the property tax rate jumped up significantly. That's an extra $15,000 per year that you're now paying. So make sure that if you're going to move out of state, you understand what's it look like in terms of the state's property taxes as a whole but, more importantly, the specific county that you might be moving to. What are property taxes there?
Speaker 1:The second thing, and probably the most obvious thing that you want to look at when it comes to comparing the cost of homeownership, is the actual cost of the property. It's very common for a lot of people who live in high cost living areas to be living there in their working years because there's maybe more opportunity there with jobs, maybe their career requires them to be there when they retire. Part of their retirement plan is to downsize, is to sell their home, is to move somewhere else where it's less expensive and they can get a less expensive home. That might mean that they can pay off their existing mortgage. Potentially, that might mean that they sell their home and end up with equity left over to purchase the next home. So, whatever that looks like, make sure that you're taking that into account, because if all you're doing is saying, well, what's the cost of groceries and gas and the overall cost of living that matters, and we're going to touch upon that next but your housing can have such an important impact on this that you need to take that into account and that probably should go without saying. That should be pretty obvious. But understanding the different ways in which this can happen whether it's property tax changes, whether it's actually differences in the actual cost of the home that you're going to acquire versus. It could just be a portfolio change which ultimately determines how much income you can create for yourself in retirement. What do I mean by that? Well, even if you do hypothetically move from an equal value home to another equal value home in retirement, that doesn't mean that you're going to get all the cash, all the equity, from your current home and be able to use that for the purchase of your retirement home.
Speaker 1:Let's go back to that million dollar home example. Let's assume that you bought a home in Colorado for $300,000 and now it's worth $1 million. You know that you're going to retire and you're going to buy a million dollar home in Texas. Well, on paper it looks like a million dollar home here compared to a million dollar home there. That shouldn't really cost you anything. That should be a pretty lateral move in terms of expenses. Well, it's not one, because the property tax issue that we talked about, but number two let's assume that you sell that million dollar property in Colorado.
Speaker 1:Well, you're going to have broker fees. Those broker fees, those commissions, could be $50,000 to $60,000. That's coming off the top. On top of that, let's assume that you purchased that home in Colorado several years ago for $300,000. Well, when you sell it, you are going to pay taxes on the gains. The gains are going to be that difference between the $300,000 of original cost basis and, let's say, $950,000, which is the proceeds after the commission you pay to your agent. So what that is is that's $650,000 of capital gains that you have to pay taxes on. Now, if you're single, you get to exclude $250,000 of those gains. If you're a married couple, you get to exclude $500,000 of those gains, assuming you've lived in that home for two of the previous five years.
Speaker 1:Let's assume you're single in this case. Well, in that case, you have $650,000 of gains, difference between $950,000 and $300,000. You get to write off or you get to exclude, I should say, $250,000 of those gains because of the exclusion we talked about. That still leaves, though, $400,000 of gains that you have to pay taxes on. Depending on your tax bracket, it's probably tens of thousands of dollars that you're going to ultimately owe in taxes on the sale of that, based on those proceeds.
Speaker 1:So when you say I sell my million dollar home in Colorado in this example, and I'm going to buy the million dollar home in Texas, well, one, your property taxes increase quite substantially in this scenario. And number two, you don't have a million dollars. After all is said and done, from your Colorado proceeds, you might have somewhere between $850,000 and $900,000 to use for that purchase. Now you can either finance the difference or you might have to pull money from your portfolio to pay the difference. What that ultimately gets back to is now there's less money in your portfolio, which means there's less income that can be created, and retirement's all about cash flow. What are the income sources you have, how much income can you create and what expenses do you have that income needs to cover? So you can start to see how this home purchase decision impacts both the expenses that you're going to have, as well as potentially impacting the amount of income you can or can't generate.
Speaker 1:And this can also operate in reverse. Let's assume that you have that million dollar home and you sell it and you move to somewhere where a cost of living, cost of homeownership is significantly less expensive, and maybe you walk away with $900,000 after taxes and commissions, but you only purchase a $500,000 home. Well, that's $400,000 of equity of cash that you have left over that you can invest to create even more income for yourself. So this can work out both ways, both in the negative and in the positive. But it's really important to understand how will that move impact you?
Speaker 1:Based upon the difference in not just home prices but property taxes, the cost of living and home ownership there, have a very clear understanding of what that will look like. First and foremost. The second thing that you need to consider if you're going to move out of state and this is probably the most obvious of them is just the overall difference in cost of living. If you are working in San Francisco and you retire to Cleveland or Detroit, that's gonna be a pretty dramatic difference in the overall cost of living. So if you were living on X amount of dollars in San Francisco, you're not gonna need that same amount of dollars to cover lifestyle in Cleveland or Detroit or another very low cost of living area. I'm just using those as an example because San Francisco is one of the highest cost of living areas in the country. The other two so Cleveland, detroit these are some of the lowest cost of living areas.
Speaker 1:Now, obviously there's a spectrum of everything in between there, but when you're going to move, it's very common when you run a projection for your retirement, to say how much is it going to cost for you to retire. Most people will simply take a look at what they're currently spending. Here's our current lifestyle and here's how much we need to maintain that lifestyle. That's a great place to start. But if you are going to move, if you're not going to stay exactly where you are in retirement, you need to make adjustments. Now those adjustments need to go downward if you're moving to a lower cost of living area, but they might need to go upward if you're moving to a higher cost of living area, but they might need to go upward if you're moving to a higher cost of living area.
Speaker 1:Now I'm talking about general cost of living, not just housing. Housing is going to be more specific. You can see exactly what your current home is worth and property taxes and all that. You can then compare that to the future home that you intend to purchase. That's very specific. But the overall cost of living is more general. What's the cost of fuel? What's the cost of groceries? What's the cost of utilities? What's the general cost of living in the two areas? And make sure that you're factoring that in.
Speaker 1:Now here's another thing that people oftentimes don't really think about is it's easy enough to research a place and say okay, this cost of living here in this city is that, this cost of living in my current city is this. You can compare the two. But you also have to take into account your lifestyle and your goals. And what I mean by that is let's assume that you want to travel all the time in retirement and you move to some remote place. That's very low cost of living. But they don't have a nearby airport and the airport that is nearby doesn't fly to all the destinations that you want to fly to. So you end up having to spend lots of money to travel to the airport and lots of money to get connecting flights to fly to a hub, to take that flight to where you ultimately want to go. That really adds up. So sure, your overall cost of living where you live is low, but when you factor in the things specific to you, you start to realize that's significantly more expensive than maybe it would have been if you lived closer to a hub, maybe in a bigger city.
Speaker 1:I'm just using that as an example. I'm not saying you should live in a big city, but if you're going to travel, if you have some specific things about your retirement, think about that. How is that going to tie into your overall plan? Or maybe you love hiking, you love being in the mountains. I'll use Colorado again as an example. If you see some mountain towns in Colorado that you just love and you say that's where I want to live in my retirement. But you looked at the cost of living there and you say, gosh, it's a little bit higher than I would like. So you move somewhere further away from the mountain, somewhere further away from where you want to be, because it's lower cost of living. But then you end up spending a lot of money driving to the mountains and when you are there you have to rent a cabin, you have to rent an Airbnb, you have to rent a hotel and you start to realize that your lifestyle on paper is lower where you chose to live, but because of the added cost of all the things that you want to do now, all of a sudden it's much higher. I'm just using a couple of arbitrary examples, but the key point is understand the general cost of living where you are and how that compares to where you might be, but then factor in the overall cost of how much is it going to cost and what's the difference in that when you factor in things like travel or healthcare or some of these other one-off things that are going to be a bit different depending upon where you ultimately end up. So that's the second thing, comparing the overall cost of living.
Speaker 1:And the third thing is to really dial in your tax strategy. This one is so, so important and I see people miss this all the time. A big question a lot of people have in their working years is should I contribute to pre-tax accounts, should I contribute to Roth accounts or should I contribute to brokerage accounts? Then in retirement, a big question is where should I pull money from? Should I do a Roth conversions? There's all kinds of questions. They all have to do with tax strategy. I cannot tell you how many people I've seen who are living and working in California and now obviously I've seen that a lot because that's where I live and they'll be in high tax brackets. They might be in the 24 to 32 to 35% federal tax brackets and then California tax brackets is another 9, 10, 11% or so if they're high earners and they love Roth accounts.
Speaker 1:They say we're preparing for retirement, we want to minimize taxes in retirement, so we're prioritizing saving to our Roth 401k, doing backdoor Roth contributions, whatever it might be, and we'll run the analysis and we'll say look, every dollar that you contribute to Roth, there's an opportunity cost for that. Every dollar that you put in there, you could have put into your pre-tax 401k, for example, and if you're in, for example, the 24% federal tax bracket plus the 9.3, I'll just run it to 9% California state tax bracket, that's a 33% tax bracket. You could be saving 33 cents on the dollar if you were to put that dollar into a traditional 401k as opposed to a Roth 401k. So that's where we are to start. Well then we'll compare that individual and this individual is going to move to Florida, or they're going to move to Texas, or they're going to move to Nevada when they retire. And when they retire they're going to live on Social Security and dividends and interest and a little bit of IRA withdrawals and then Social Security. And when we look at their blended tax rate we say you know what? You're probably not going to be any higher than 12% tax bracket when you retire.
Speaker 1:So why are we putting money into Roth accounts today and foregoing a 33 cent on the dollar tax savings that we could have received if we put money into pre-tax accounts instead, when we're just going to pay 12 cents on the dollar when we pull that money out in retirement. The smarter thing in this specific case would almost certainly be to say can we maximize pre-tax accounts today? Think about tax arbitrage. When you do this, you get a 33% deduction on every dollar that you put in and then when you pull that money out in retirement, you're only paying 12 cents on the dollar because you're in the 12% federal tax bracket and you're in a state that doesn't have any state income taxes. So this is just something that requires some awareness, some forward-looking planning, because I see it so often. I love Roth accounts too. I love Roth 401k and Roth IRA and all that stuff. But what I love more than that is having a tax strategy that's going to minimize the.
Speaker 1:So when you're moving out of state, this is a big one, because if you're in California and you're going to retire in California, well, you're going to be subject to the same state tax brackets. Or if you're already in Texas and you're going to stay in Texas, you're going to be subject to the same state tax brackets, which, at the income tax level, are zero. So in those instances, all you would focus on is the federal tax bracket, but when you're going to move states, what you need to do is be very mindful of how state tax brackets are different depending on where you're going to retire. For those of you who are listening and saying, yeah, I do intend to move out of state, just for your reference, there are nine states that don't have any income taxes at all. Those are Alaska, florida, nevada, new Hampshire New Hampshire does tax dividend and interest income South Dakota, tennessee, texas, washington, wyoming.
Speaker 1:So if any of those states are states you have thought about in terms of you're going to retire there, well, that might impact where you should choose to put money into your retirement savings today. Then, beyond that, there are other states that do have state income taxes, but they don't tax 401k withdrawals, they don't tax IRA withdrawals, they don't tax pensions. So states actually have a wide variety of different ways that they treat income and it really does matter when you look at things. If you intend to retire to one of these states, that should inform the way that you are saving, where you're saving, what account you're saving to in your working years, and then it's going to help inform how you should implement your tax strategy, meaning where you withdraw money from in retirement, whether you do Roth conversions, whether you implement other strategies. That can be very different state to state.
Speaker 1:So, as we wrap up for today, a lot of people, when they retire, they intend to retire out of state, whether it's because they have family there, whether it's because of it's a better place for people to retire in, whether it's because it's where they want to be. There's a number of reasons people do this. If that's you, if you're going to do that, make sure that you're focusing on these three big things what's the cost of homeownership and how does that change between where you are and where you're going to retire to? What's the difference in overall cost of living, including some different nuances, things like travel, as we mentioned, and then how should that impact your tax strategy, based upon the differences in tax rates between the state you're in and the state you might retire to? That is it for today's episode.
Speaker 1:Thank you, as always, for listening. If you're watching on YouTube, please make sure to like and subscribe. If you're watching or listening on Apple Podcasts, please leave a review if you're enjoying it. Thank you for listening and I'll see you all next time. And has not influenced the content of any testimonials and endorsements shown. Any testimonials and endorsements shown have been invited, have been shared with each individual's permission and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements.
Speaker 1:Hey everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.
