Where you retire matters. Consider this: Successful retirement requires a comfortable standard of living, which hinges on your expenses. The cost of living and retiring in states like California is significantly higher than in other areas, draining resources faster.
At the same time, money isn’t everything. Achieving your retirement goals, staying close to family, and participating in local communities can make your golden years the best time of your life. Sometimes, where you retire is non-negotiable.
But how much do you need to retire in California? After all, it’s essential to plan ahead. In today’s article, we’ll cover how much you may need to retire in California and what factors to consider when drafting your retirement plan.
Key Takeaways
- Retiring in California requires more savings than other states due to higher living costs, including housing, transportation, and healthcare. Properly estimating these expenses is crucial for determining how much you'll need to retire comfortably. It's important to account for inflation and rising healthcare costs, which can significantly impact your budget over time.
- Implementing effective retirement strategies, such as tax-efficient savings and high-contribution plans like 401(k)s and Roth IRAs, can help stretch your retirement savings. Delaying Social Security benefits can also increase your payouts, providing more financial stability during retirement. Planning ahead with a financial advisor ensures your strategies align with your long-term goals.
- Downsizing or relocating to more affordable areas in California can significantly lower your expenses, allowing your savings to last longer. While big cities like San Francisco and Los Angeles have higher costs, smaller towns or suburban areas can offer a lower-cost alternative without sacrificing quality of life.
How Much Do You Need to Retire in California
The first step of any retirement plan is an assessment of needs. In order to determine how much money you will need to retire, you’ll want to explore your expected retirement lifestyle—including expenses like travel, dining out, and pursuing new hobbies. In other words, you want to account for more than necessities.
Estimate Annual Expenses
Another essential component of retirement plans is estimating annual expenses. California is one the most expensive states to live in, with the overall cost of living being 38% higher than the national average. Transportation costs alone are the second-highest in the nation. Main cities in the state, such as Los Angeles and San Francisco, dominate lists of high retirement costs. But that doesn’t mean retiring in a sunny state is impossible.
Understanding long-term expenses will be crucial to determining whether it’s possible on your budget to retire there. It’s common to use the 4% rule to determine whether you’ll have enough. This method states that you can only take out 4% of your retirement funds per year, every year, to make your savings last.
Be Wary of Inflation
You’ll also want to factor inflation into your estimation. Rising healthcare costs, including mental health planning, should also be included in your ideal estimate. While these may be unpleasant or difficult to pin down, doing so can help you build a realistic retirement plan. And that can help you determine how to deal with inflation in retirement.
Another way to assess your retirement needs is to backtrack your required income once you have calculated comfortable annual retirement expenses. A common guideline is to replace 70% of your annual income before retirement.
By focusing on both the expense and revenue side, you can better understand exactly what you will probably need in retirement to live a comfortable lifestyle. Keep in mind that if your estimate of retirement living expenses is substantially different than the “70% of annual income” number, you might want to dig deeper to see why there is such a large difference.
Retirement calculators, whether that’s an online calculator or a downloaded Excel spreadsheet, can help. Still, the best way to do this is to engage with an experienced fiduciary financial advisor who will make sure this critical component is correctly determined.
Consider Your Retirement Age
California has no specific retirement age, meaning you can begin taking Social Security benefits at age 62. Full retirement age is 67, and for every year you delay past this date, 8% is added to your benefit. Other benefits, such as Medicare, open up at age 65, whether you are retired or not.
However, you don’t necessarily want to retire and start receiving benefits too early. Planning your retirement age is critical to preventing outliving your funds and ensuring a comfortable lifestyle. It’s often better to delay these benefits. For example, waiting until 67 or 70 to begin taking your Social Security benefits is often more advantageous.
Should You Downsize Your Lifestyle?
Downsizing may be a sound option for some retirees, but it’s not for everyone. It can significantly strain lifestyle and comfort, but it can also lower expenses and make retirement income last longer.
It’s important to consider what aspects of your lifestyle are supported by your current home and personal spaces to determine whether downsizing will make sense for you. You’ll want to plan ahead and think about the long-term viability of your house. It should be able to accommodate your hobbies and interests as well as potential accessibility aids.
You may also want to consider if family or friends will stay with you for long periods in retirement, especially if any of them will take on a caretaking role.
Once you determine whether or not a smaller and more affordable space will accommodate you, you can plan for when to move.
Account for California Retirement Taxes
Tax efficiency is key when it comes to state-specific retirement plans. California does not tax Social Security retirement benefits, while states like Colorado and Vermont do. That said, the state does tax other forms of income.
When it comes to taxes, California has a progressive tax system. A progressive tax system means that the tax rate increases as income increases. Therefore, it’s common to find strategies to reduce income during retirement. That’s not the same as reducing your cash flow during retirement. Income and cash flow often differ; we have a detailed guide to help you understand this critical difference.
There are other benefits to this system compared to other states. For instance, California has stable property taxes, no taxes on social security benefits, and no taxes on capital gains after a spouse passes away.
However, planning your tax efficiency can be challenging. It’s helpful to have a financial advisor who understands local tax law.
Tax Implications of Leaving California
At some point, you may leave California while in retirement. Whether your reason relates to the cost of living, being closer to family, or something else, it’s important to be aware of your potential tax obligations.
As of this writing date, California does not have an exit tax, sometimes referred to as a wealth tax, but it has been proposed several times. The last incarnation of this would impose a 0.4% tax for ten years after leaving the state if your annual income is greater than $30 million. Nonetheless, California can extract income taxes if your ties to the state are still “close” after moving out.
This is a complicated subject, but generally speaking, if you still maintain a residence or a presence beyond certain time limits or earn income in the state, you may still be subject to California income taxes even though you live in a different state. You need to check this out thoroughly.
Maximize Your Social Security Benefits
Many clients’ biggest question is when they should start taking social security. And that question isn’t complicated. With the average life expectancy being 76 years, retirees must take extra care to avoid outliving their savings.
To maximize their social security, many choose to delay taking these benefits. The longer you delay, the larger these payments will be. Given the higher cost of living in California, it can be beneficial to wait longer to receive social security.
Waiting can be especially helpful if you plan to have higher income from other sources. Delaying social security will not only boost your payment size later on, but it will also allow you to burn money from regular investment accounts early on to manage tax efficiency.
Effective Retirement Savings Strategies
With California’s higher cost of living, retirees require a higher percentage of income. It’s critical to consider high-savings strategies to maximize your retirement income.
For instance, you may want to contribute to a 401(k), especially if your employer matches contributions. You’ll also want to take advantage of the “mega backdoor Roth strategy.” This approach requires you to roll post-tax dollars from your 401(k) into your Roth IRA or Roth 401(k). The mega backdoor Roth strategy enables investors to save up to $69,000, or $76,500 if you’re over 50.
When selecting your savings strategies, a few elements can significantly impact your returns.
The first is time. The earlier you begin investing, the better. Returns on your investments will compound, enabling you to improve your retirement income without extra work.
Next is having a dedicated retirement account. The right account can help you save more efficiently and reduce your overall tax bill—or improve tax efficiency in retirement.
Finally, having an advisor can also help. Financial advisors can help you navigate complex savings strategies and discover new ways to maximize your savings.
6 Alternative Retirement Locations in CA
The high cost of living in California can help people find more affordable retirement locales. There are several places outside of California’s bigger cities that provide a high standard of living at a more affordable cost.
Some examples of key retirement locations in California include:
- Palm Springs: a popular retirement destination with a warm climate and outdoor activities.
- San Diego: a coastal city with a mild climate and outdoor recreational activities.
- Santa Barbara: a coastal city with a range of senior-friendly amenities and services.
- Napa Valley: a serene and relaxing retirement destination with wineries and senior-friendly amenities.
- Monterey: a coastal city with recreational activities and historic sites.
- Sacramento: a city with a mix of urban amenities and natural beauty.
Of course, there are many more neighborhoods that suit a retirement community. These are just the top six. With a state as big as California, there is a place for everyone.
Retiring in California Requires a Sustainable Retirement Plan
It’s often more beneficial to view retirement as a series of phases rather than a single chunk of time. Doing so allows you to see the big picture.
When first retiring in your late 60s, you may choose to explore new hobbies, travel, and be more adventurous. The 70s may be a time to rely on adult children or caregivers, creating a local community. Finally, the 80s may be a time for limiting travel for health reasons and/or being physically close to family and spending time with grandchildren (or great-grandchildren).
You’ll need to plan for each retirement phase to ensure you don’t outlive your savings. A retirement calculator can get you started. But it helps to have a second opinion from a seasoned fiduciary advisor.
Greg Welborn is a Principal at First Financial Consulting. He works with high-net-worth individuals and privately-owned businesses on financial planning issues including investment, retirement, and tax planning, among others.
Greg Welborn is a Principal at First Financial Consulting. He works with high-net-worth individuals and privately-owned businesses on financial planning issues including investment, retirement, and tax planning, among others.
