Moving to a Different State May Significantly Improve Your Retirement Goals

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In Monday's Lifetime Income podcast, we showed how a "retirement tax inversion" strategy—moving to a state with lower taxes and costs of living—can make a huge impact in meeting retirement goals.

As many are aware, one of the greatest problems retirees face today is the extremely low yield offered on fixed income investments.

To put the matter in perspective, let's say you wanted to earn $3000 a month from interest income using a very safe and widely held fixed income security: 2-year Treasury notes.

In the year 2000, it would've taken $540,000 invested in 2-year Treasuries to earn $3000/month in interest income. Today, with interest rates now dramatically lower, you now need almost $8,000,000 to produce the same amount!

Given this sad state of affairs, many have chosen to accept more risk in their later years by taking on a higher exposure to stocks or by investing in high yield (junk) bonds, which may not be an appropriate strategy.

That said, when it comes to retirement planning, there are two sides of the equation: income AND expenses. We have spent a lot of time focusing on the income side of the equation in past Lifetime Income broadcasts but let's now focus on the expense side and see just how much of a difference relocating to a state with lower taxes and costs of living can make.

First thing to realize is that there is a fairly high correlation between tax rates and costs of living throughout the US. So, if you live in California, for example, where taxes and costs of living run high, making a move to another state can help make your dollars stretch much further.

Case Study: California to Arizona

To give you an example, consider Bob and Nancy Richards.

Bob and Nancy were in a high income tax bracket in California. By moving to Arizona, this moved them into a much lower bracket, which lowered their tax expenses per year.

Property taxes as well were reduced by 50%.

Using a cost of living calculator, moving to Arizona also led to a meaningful reduction in monthly expenses for common items:

  • Groceries: 5-10% less
  • Housing: ~50% less
  • Utilities: ~5% less
  • Transportation: 10-15% less
  • Health Care: ~10% less

Here's what they did:

Sold larger California home, paid cash for smaller house in Arizona. Assuming they had $600,000 in equity and paid $200,000 in cash for AZ home, this freed up an additional $400,000 of capital, which was added to their investable assets.

Using the above, they put 60% into fixed income and 40% into stocks, for monthly income needs.

Before, Bob and Nancy had a large shortfall between their retirement income and expenses. By taking advantage from the equity in their home, downsizing, and reducing both their taxes and costs of living, they were able to see a meaningful improvement in their retirement outlook.

Making a significant move and relocating to another state may not make financial sense for everyone. Many, for example, may already live in a state where taxes and costs of living are lower. Other key considerations include differing tax treatments state-by-state.

Housing prices have recovered from the prior downturn giving more homeowners a chance to take advantage of their equity. Furthermore, rates are at all-time lows, which makes it difficult for investors near or in retirement relying on fixed income investments. Rather than taking on higher amounts of risk, doing what many corporations have done—moving to an area with lower taxes and costs—may make a significant difference for individuals as well.

If you would like to learn more about our financial planning services and how we can help you in meeting your retirement goals, please feel free to call us (858) 487-3939.

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