Approaching retirement, a significant number of U.S. residents contemplate relocating to new destinations. According to a 2022 U.S. Census report, between 2015 and 2019, 622,200 individuals aged 65 and older opted for interstate moves. Driven by the pursuit of more affordable healthcare, enhanced tax benefits, or milder climates, retirees in the U.S. are willing to undergo geographical shifts to enhance their comfort during retirement.
However, a fundamental question remains: What is the actual cost of retirement in the U.S.? In a comprehensive analysis utilizing data from the Council for Community and Economic Research (C2ER), U.S. Census Bureau, and U.S. Bureau of Economic Analysis, Investopedia devised the Investopedia Retirement Index. This index evaluates the cost of living, tax burdens, and the demographic proportions of individuals aged 65 and older in each state. Through this thorough examination, Investopedia identified states with the most favorable tax structures and living costs, as well as the highest concentration of residents aged 65 and older. This information aims to assist individuals in making well-informed decisions about their retirement destinations within the U.S.
The following states, listed in descending order, emerge as the most cost-effective options for retirement within the U.S., based on our financially-oriented index:
- Tennessee
- Florida
- Wyoming
- South Dakota & Missouri (with identical scores on the Retirement Index)
- Alabama
Conversely, the states ranking lowest in the featured factors, signaling potentially higher costs or less favorable conditions, are:
- Washington D.C.
- Hawaii
- California
US Retirement Expenditures
In the United States, the financial demands associated with retirement are on the rise. Recent years have witnessed a rapid increase in inflation, a growing number of older adults carrying mortgage debt into retirement, and escalating healthcare costs, among other contributing factors. Consequently, considerations such as the cost of living, tax burden, and the demographic distribution of age have gained significant prominence, particularly for those contemplating relocation during their retirement years. This analysis delves into these influential factors and their impact on the choices individuals make regarding their retirement residences.
It is crucial to note that the state-specific index scores in this study range from 83.4 to 138.9, with lower scores indicating better cost-effectiveness. States scoring below 100 are considered more cost-effective than the national average, while those scoring above 100 are regarded as less cost-effective.
Retirement Expenditures Across the US
Cost of Living
The Investopedia Retirement Index evaluates the cost of living based on the following components:
- Food
- Housing
- Utilities
- Transportation
- Healthcare
- Miscellaneous goods and services (such as the cost of a haircut in the area)
While the index doesn’t delve into the qualitative or quantitative aspects of each component, these anticipated costs aid in projecting the budget needed during retirement, ensuring financial security throughout this life stage.
Healthcare costs are particularly significant within the cost of living, given the demographic composition of retirees. Individuals aged 65 or older, according to the National Institutes of Health, contribute to over 25% of doctor visits and more than 35% of hospital stays, despite comprising only 17% of the total U.S. population. In 2022, one in four adults aged 65 and above had to curtail spending on basic necessities such as food, clothing, and utilities to accommodate rising healthcare expenses.
Mississippi stands out with the lowest average cost of living, representing 82% of the national average. In contrast, Washington, D.C. exhibits a cost of living 149% of the national average, while Hawaii’s stands at 139%.
Taxation Impact
In the realm of retirement planning and residential choices, taxes stand as a crucial variable that can significantly impact one’s retirement savings. Income tax, in particular, holds substantial relevance, influencing withdrawals and distributions from tax-deferred retirement plans like traditional 401(k)s, 403(b)s, traditional IRAs, and pension plans.
In tandem with income tax considerations, the Investopedia Retirement Index encompasses property tax and sales tax, providing a comprehensive evaluation of the overall tax impact within the retirement landscape.
Alaska emerges as the state with the lowest tax burden in the United States, representing a mere 56% of the national average. Following closely, New Hampshire claims the second-lowest score, with its tax burden amounting to only 64% of the national average. On the contrary, New York and Hawaii bear the highest tax burdens, standing at 137% and 135% of the U.S. average, respectively.
Demographic Composition
Resident age constitutes another pivotal factor in the decision-making process regarding retirement residences, as personal preferences for social interactions in retirement can vary significantly. In the U.S., a notable proportion of older adults faces an increased risk of loneliness and social isolation due to factors such as solo-living, the loss of friends and family, and chronic illness.
Geographical location can play a role in addressing these challenges, as depression rates vary. Research indicates that depression affects approximately 1% to 5% of older adults in general communities, whereas the rates rise to 13.5% for those requiring home health care and 11.5% for those hospitalized.
Maine, Florida, and West Virginia boast the highest proportions of residents aged 65 and above, with 20.7%, 20.4%, and 19.9%, respectively. In contrast, Utah exhibits the lowest proportion, with only 11.1% of residents aged 65 and above.
Exploring Top Retirement States
Tennessee, securing the highest position on the Investopedia Retirement Index with a score of 83.4, emerges as the prime state for retirement. This ranking considers factors such as tax burden, resident age, and cost of living. Tennessee boasts taxes that are 69% of the national average, a cost of living at 86% of the national average, and a population of individuals aged 65 and older surpassing the national average.
Florida follows closely as the second-best state for retirement, garnering an index score of 83.6. Florida’s appeal lies in its below-average tax burdens, with the cost of living aligning with the national average. Notably, the state hosts 22% more residents aged 65 and above compared to the national average. A significant advantage for retirees in Florida is the homestead exemption, allowing up to $50,000 of a home’s value to be tax-exempt. Furthermore, Florida attracted the highest number of retirees, witnessing a net increase of 53,150 residents aged 65 and above between 2015 and 2019, as per the latest U.S. Census Bureau data.
Wyoming secures the third spot in the rankings, boasting an index score of 87.7. While Wyoming’s cost of living is merely 2% below the national average, and its population of residents aged 65 and above is only 4% higher than the national average, it excels in the realm of taxes. Wyoming imposes no income tax and bears only 65% of the national average tax burden.
South Dakota and Missouri share the fourth position on the Investopedia Retirement Index with identical scores of 87.8. South Dakota, famed for Mount Rushmore, exhibits a cost of living that is 7% below the national average, a tax burden 26% lower than the national average, and a resident age proportion 4% above the national average. In the case of Missouri, the cost of living is 16% lower than the national average, the tax burden is 11% lower than the national average, and the proportion of residents aged 65 and older is 5% higher than the national average.
Alabama – A Top Retirement Destination
Alabama secures its place among the best retirement destinations in the U.S., boasting an impressive Investopedia Retirement Index score of 88. The state’s appeal lies in its cost of living, which is 13% below the national average, a tax burden that is 14% less than the national average, and a proportion of individuals aged 65 and over that exceeds the national average by 5%.
A notable feature contributing to Alabama’s attractiveness for retirees is its remarkably low property tax, standing at 0.40%—the lowest among all contiguous U.S. states. This makes Alabama a sought-after retirement location for those seeking a favorable financial environment.
Retiring in the U.S. vs. Retiring Abroad
While many retirees find convenience in living within the U.S. during retirement, an increasing number have chosen to reside abroad. Living abroad offers potential advantages such as more affordable housing, convenient healthcare options, and a change in lifestyle pace compared to U.S. living.
When contemplating the decision to live abroad, retirees often consider factors like visa requirements, residency establishment, taxes, Social Security implications, personal healthcare needs, and proximity to family and friends. Whether opting for an international retirement, relocating within the U.S., or staying in the current location, a thorough evaluation of personal needs and preferences is crucial for making an informed decision.
Frequently Asked Questions (FAQs)
What factors should I consider when choosing a place to retire?
A: Common considerations for choosing a retirement location include the cost of living, tax implications, and the age composition of residents, as these factors significantly impact daily comforts, retirement income, and community engagement. The Investopedia Retirement Index integrates these key factors, identifying Tennessee, Florida, and Wyoming as some of the top states for retirement in the U.S. However, individual lifestyles, community preferences, and values vary, making it essential for retirees to assess their unique needs and priorities in making this decision.
Where Is the Most Economical Place for Retirement?
In the quest for the most cost-effective location for retirement, Mississippi stands out, boasting a cost of living index of only 82% of the average cost in the U.S., according to the Council for Community and Economic Research’s (C2ER) assessment. Alternatively, Alaska emerges as the state with the lowest major taxes—sales tax, property tax, and income tax—amounting to only 56% of the national average tax burden.
However, when balancing cost of living and tax burden equally, Tennessee claims the title of the most affordable state overall, registering at only 77.6% of the national average for the combined cost of living and tax burden. Wyoming and Florida follow closely behind, with their combined cost of living and tax burden being 81.6% and 81.7% of the national average, respectively.
Which U.S. State Imposes the Lowest Income Tax?
Seven U.S. states stand out for not levying income tax: Texas, Montana, South Dakota, Florida, Wyoming, Alaska, and Washington. The absence of income tax in these states is a crucial consideration in retirement planning, impacting withdrawals and distributions from tax-deferred retirement plans, such as traditional 401(k)s, 403(b)s, traditional IRAs, and pension plans. Nevertheless, it’s vital to recognize that income tax is just one facet of the broader tax landscape in retirement planning, where factors like property tax and sales tax also play pivotal roles.