Planning for retirement isn’t just about saving enough money – it’s about making smart choices to stretch those savings and enjoy your golden years. One of the most impactful decisions you can make is choosing where to retire. Finding the best place to retire in the US can significantly affect your retirement plan, with taxes playing a major role in your cost of living.
Many retirees overlook how much taxes can chip away at their nest egg. In fact, only 30% of Americans included tax mitigation on their retirement plan. State income taxes, property taxes, sales taxes, and even taxes on Social Security or retirement accounts can vary widely, making some states much more retirement-friendly than others. The good news? With a bit of planning and research, you can find states offering lower taxes and an affordable, high-quality lifestyle.
This guide explores the key steps to finding the best states for retirement. From evaluating your finances to reviewing the most tax-friendly states in the US, you’ll gain insights to help you make an informed decision and maximize your retirement savings.
Key Takeaways
- Taxes vary significantly by state, impacting your retirement income. Selecting a tax-friendly state can reduce your tax burden and help your savings last longer while maintaining a high quality of life.
- While low taxes are important, consider other key factors like cost of living, climate, access to healthcare, and community amenities to find a location that meets both your financial and personal needs.
- Working with a financial advisor ensures you factor in tax implications, housing affordability, and lifestyle goals, helping you make an informed decision and enjoy your golden years to the fullest.
Evaluating Your Finances
One of the first steps toward assessing your retirement savings and income streams is determining your financial readiness for retirement. Ideally, you’ll work with an objective financial advisor to personalize your retirement plan and find ways to optimize your savings. But you can start by evaluating your fixed income and expenses to ensure a sustainable financial future and researching tax implications for your retirement location and account.
How Taxes Impact Retirement Planning
Taxes significantly affect your retirement income. State taxes, property taxes, sales tax, and inheritance or estate taxes can all reduce your overall savings amount. All these tax types are highly localized, meaning your retirement location matters.
Finding the best place to retire in the US isn’t easy, but it’s certainly possible.
Key Considerations for a Tax-Friendly Retirement State
There are different types of taxes. You can’t just look at each state’s “income” tax. You will also want to consider whether your state has:
- Low sales tax rates
- State income tax rates
- Tax treatment of Social Security and retirement accounts
- Property taxes
- Retirement income taxes
- Capital gains taxes
- Inheritance/estate taxes
It can also be helpful to look at the tax burden as % of income.
But it’s not just states. Some cities also have their own tax regulations. The best cities to retire in the US will have fewer or more favorable tax laws.
8 of the Most Tax-Friendly States for Retirees
Finding the most tax-friendly state for retirees takes some legwork. We can quantify taxes and the general cost of living, but quality of life can differ from city to city.
In the following list, we looked at low taxes, cost of living, and quality of life to determine the best place to retire. We left off some common past picks, such as Florida, due to increasing hurricanes and flooding that generate extreme but unpredictable costs.
#1. Wyoming
- State income tax rates: None
- Taxes on Social Security and retirement accounts: None
- Property taxes: 0.61% average
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Sales taxes: Up to 6%
- Tax burden as % of income: 6.2%
- Cost of living index: 98 (below the national average)
#2. New Hampshire
- State income tax rates: 3% on interest and dividends only (to be eliminated in 2025)
- Taxes on Social Security and retirement accounts: None
- Property taxes: 2.1%
- Capital gains taxes: 5%
- Inheritance/estate taxes: No estate tax, but an inheritance tax may apply to certain heirs with exemptions
- Sales taxes: None
- Tax burden as % of income: 6.4%
- Cost of living index: 120, higher than the national average
#3. North Dakota
- State income tax rates: up to 2.90%
- Taxes on Social Security and retirement accounts: Social Security, pensions outside of military retirement pay, and retirement accounts are all subject to tax.
- Property taxes: 1.02% average
- Capital gains taxes: 1.1% to 2.9%
- Inheritance/estate taxes: None
- Sales taxes: up to 7.5%
- Tax burden as % of income: 6.9%
- Cost of living index: 90, lower than the national average
#4. Tennessee
- State income tax rates: None
- Taxes on Social Security and retirement accounts: None
- Property taxes: 0.68% average
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Sales taxes: up to 9.75%
- Tax burden as % of income: 7.0%
- Cost of living index: 88 (lower than the national average)
#5. Arizona
- State income tax rates: 2.50%
- Taxes on Social Security and retirement accounts: Social Security is not taxable, but your retirement accounts and pensions are.
- Property taxes: 0.72%
- Capital gains taxes: 4.59%
- Inheritance/estate taxes: None
- Sales taxes: up to 11.2%
- Tax burden as % of income: 8.0%
- Cost of living index: 104
#6. Alaska
- State income tax rates: None
- Taxes on Social Security and retirement accounts: None
- Property taxes: 1.18%
- Capital gains taxes: None
- Inheritance/estate taxes None
- Sales taxes: up to 7.5%
- Tax burden as % of income: 6.5%
- Cost of living index: 130 (higher than the national average)
#7. Mississippi
- State income tax rates:4.70%
- Taxes on Social Security and retirement accounts: None
- Property taxes: 0.80%
- Capital gains taxes: up to 5%
- Inheritance/estate taxes: None
- Sales taxes: up to 8%
- Tax burden as % of income: 8.7%
- Cost of living index: 87
#8. Texas
- State income tax rates. None
- Taxes on Social Security and retirement accounts: None
- Property taxes: 1.80%
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Sales taxes: up to 8.25%
- Tax burden as % of income: 8.0%
- Cost of living index: 93
Balancing Taxes, Climate, and Lifestyle to Find the Best Place to Retire
No single variable makes any place “the best” to retire in. There will always be trade-offs. That is why it’s important to consider more than taxes when selecting a place to live. Seemingly small personal preferences, such as weather or proximity to activities, can greatly impact your life. Failing to consider these things may save you money, but you may sacrifice your happiness in retirement.
Retirement Lifestyle and Community
Around 33% of seniors experience loneliness, highlighting the importance of community and social engagement in retirement planning. Lack of socialization has been shown to contribute to deteriorating physical health among retirees, including causing anxiety, heart attacks, and dementia.
It can be helpful to research locations with a strong sense of community and opportunities for intergenerational connections. At the same time, you’ll want to see if your chosen location matches your preferred climate or what kind of cultural experiences are available.
Access to Healthcare
Healthcare is one of the most important considerations for retirees. According to a study by HealthView Services, an average 65-year-old couple that retired in 2023 will spend 70% of their Social Security benefits on healthcare alone.
Therefore, it’s important to prioritize healthcare and wellness in your retirement planning. This factor goes beyond your budget. You’ll want to know if you will have nearby access to quality medical care. This includes both physical and mental health options as well.
Affordability of Housing
Buying a house is a life milestone for many Americans and is one of the most expensive investments you will make. However, there is still an “implied” cost if you tie up too much real estate equity. Even if you’ve paid off your mortgage, there are still long-term maintenance costs and property taxes.
To maximize your retirement income, consider downsizing – both in terms of value and size. Many states would provide significant savings in purchase price, allowing you to buy the same size house at a lower price. But maintenance costs won’t decrease unless you’ve decreased the square footage or lot size.
This tactic requires some forethought to be effective. Too often, the temptation is to downsize to a state with lower property values and then pay all cash for the new home. This can make your real estate rich and cash-poor. After all, you cannot just pull off a shingle of your new home, walk into the store, and trade the shingle for a gallon of milk.
You can also tailor this strategy to your preferences. For example, what if you split retirement – “live” in one state for tax benefits but maintain a small place in another where you enjoy life? This strategy can work, but there are many considerations to factor in, which are beyond the scope of this article.
Making the Most of Your Retirement
Retiring in a tax-friendly state is a common strategy that enables you to optimize your retirement savings. Selecting the right retirement location makes it easier to balance the cost of living, long-term retirement costs, and quality of life. While it appears less complex than other tax mitigation strategies, it does require some planning.
Working together with an objective financial advisor can help you balance taxes and lifestyle. A fee-only, fiduciary advisor, such as First Financial Consulting, will help you achieve your personal goals daily while reducing taxes and preserving your wealth. We can’t tell you whether warm sunshine, winter wonderlands or majestic vistas are the right physical environment for you, but we can help you expand your choices by making sure that your retirement income is stable, your investments are performing well, and your tax burden is reduced.
We’ve been helping retirees assess where to spend their golden years for more than 45+ years, and we’d love to help you.
Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.
Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.
