One of the key factors in determining whether or not you will have enough to live off of in retirement is, not surprisingly, what you currently live off of. The more you need to live off of the more you need to save up in order to retire. There are a variety of things you can do to lower your personal cost of living such as paying off a home or simply spending less on restaurants and shopping, but another option is to move to a location that has a lower cost of living.
For those of our readers living in California, it probably isn’t surprising to learn that California has the 4th highest cost of the living in the U.S. based on an annual survey by the Missouri Economic Research and Information Center. The survey ranks all of the states by averaging spending indices in five areas: groceries, utilities, transportation, health, and housing. Put simply, for every dollar spent in Florida (the closest state to being average), one would spend $1.34 in California and a mere 83 cents in Mississippi.
A couple of weeks back we included the following chart on housing costs in our weekly newsletter:
When you consider the fact that housing is usually around a third of most personal budgets, the differences between living in places like California, New York, and Washington D.C., and places like Ohio, Michigan, and Indiana are significant. For many retirees, selling a home in a high-cost state and moving to a much lower-cost state to be closer to family or a favorite golf course can have a big impact on your ability to retire.
In addition to above average housing, grocery, utility, transportation, and healthcare costs, California also has some of the highest tax rates in the country. According to a recent article from Bloomberg, the average effective income tax rate in California is 10.4%, while Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax at all. For retirees with a heavy draw on their IRAs, having a low state income tax rate has the potential to save them thousands in taxes each year. Put simply, if your plans for retirement aren't working out and you aren't tied to your current location, moving elsewhere could lead to significant improvement in the success rate of your plan. If you’d like to learn more about your ability to retire you can request a complimentary plan here.
“Cost of Living Data Series 2015 Annual Average.” MERIC. 2015. https://www.missourieconomy.org/indicators/cost_of_living/.
McIntyre, Alex, Jennifer Prince, and Christopher Cannon. Bloomberg. April 13, 2016. http://www.bloomberg.com/graphics/2016-state-taxes/.