This is the worlds leading source of financial content on the web, ranging from market news to retirement strategies, investing education to insights from advisors.
Forex Forever!

The Most Expensive States To Retire In

Author: Michael Harris

More than half of all Americans – 58% – feel like they are not on track for retirement, according to a study from Ameriprise Financial. And a recent survey from Bankrate.com shows that 26% of Americans between the age of 50 and 64 have saved nothing at all for retirement. These and a host of studies and surveys support what many Americans already know: The majority of us are financially unprepared for retirement.

Many people who don't have the money to retire in place – that is, at home – may look for alternatives: either abroad, where it's possible to settle down with a lower cost of living and access to affordable healthcare in some exotic corner of the world (see What Does Retirement Abroad Cost?), or a different, more reasonable corner in the U.S. (see Finding A Retirement-Friendly State).

But where to go? We compared data from Bankrate.com's Best and Worst States to Retire list and Kiplinger's "10 Worst States For Retirement" to determine which states are the most expensive, taking into consideration each state's cost-of-living rank as well as its tax-rate rank. We looked at the 10 worst (i.e.., most expensive) states in each category, and found six that made top 10 appearances in both categories – making them the priciest places to retire in, overall. Here's the roster.

New York

Cost of Living Rank: 47 (4th highest)
Tax Rate Rank: 50 (highest)
State Income Tax: 4.0% to 8.82%
State Sales Tax: 4.0%
Estate/Inheritance Tax: Yes/No

New York has the 4th highest cost of living in the U.S., behind only Connecticut, Alaska and Hawaii (which holds the dubious rank of #1). The state's 12.6% tax burden for 2011 (the most recent data available from The Tax Foundation, a private tax policy research organization) is well above the national average of 9.8% and is the highest in the country. Taxpayers pay $6,622 per capita in state and local taxes each year, and the top rate for capital gains is 31.5%, the second-highest rate in the U.S. (after California).

Connecticut

Cost of Living Rank: 48 (3rd highest)
Tax Rate Rank: 48 (3rd highest)
State Income Tax: 3.0% to 6.7%
State Sales Tax: 6.35% (7.0% for certain luxury items)
Estate/Inheritance Tax: Yes/No

Connecticut is the third most expensive state in terms of cost of living. Its 2011 tax burden of 11.9% ranks 3rd highest out of the 50 states, and taxpayers pay $7,150 per capita in state and local taxes. Real estate taxes are the 10th highest in the nation, and there are no exemptions or tax credits for pensions or other retirement income – including Social Security benefits. The exception is military retirement pay: Half of that is excluded from taxes.

California

Cost of Living Rank: 46 (5th highest)
Tax Rate Rank: 47 (4th highest rate)
State Income Tax: 1.0% to 13.3%
State Sales Tax: 7.5%
Estate/Inheritance Tax: No/No

California has the 5th highest cost of living and ranks 4th in terms of tax rates. The individual income tax top rate of 13.3% is the highest among states that impose an individual income tax. Its 2011 tax burden of 11.4% ranks 4th highest in the nation, and taxpayers pay $5,136 per capita in state and local taxes. Although Social Security benefits are exempt from taxes in California, all other s of retirement income are fully taxed. The state sales tax is 7.5% (the highest among the states mentioned here), and the combined rate in special city/county taxing districts can be as high as 10%.

New Jersey

Cost of Living Rank: 45 (6th highest)
Tax Rate Rank: 49 (2nd highest)
State Income Tax: 1.4% to 8.97%
State Sales Tax: 7.0%
Estate/Inheritance Tax: Yes/Yes

New Jersey has the 6th highest cost of living and the 2nd highest tax rate in the country. The state's 2011 tax burden was 12.3%, and taxpayers pay $6,675 per capita in state and local taxes. New Jersey is one of only two states that levy both an inheritance tax and an estate tax. While close relatives are generally excluded from the inheritance tax, other beneficiaries face tax rates ranging from 11% to 16% on inheritances over $500.

Rhode Island

Cost of Living Rank: 42 (9th highest)
Tax Rate Rank: 43 (8th highest)
State Income Tax: 3.75% to 5.99%
State Sales Tax: 7.0%
Estate/Inheritance Tax: Yes/No

Rhode Island has the 9th highest cost of living in the country, and the 8th highest tax rate, even though it lowered its top income tax rate from 9.9% to 5.99% four years ago. The state had a 2011 tax burden of 10.5%, and taxpayers pay $4,676 per capita in state and local taxes. All s of retirement income are taxed, including Social Security benefits, which are taxed at the state level to the same extent as the federal level (up to 85%).

Vermont

Cost of Living Rank: 41 (10th highest)
Tax Rate Rank: 42 (9th highest)
State Income Tax: 3.55% to 8.95%
State Sales Tax: 6.0%
Estate/Inheritance Tax: Yes/No

Vermont has the 10th highest cost of living and 8th highest tax rate. Its 2011 tax burden was 10.5%, and taxpayers pay $4,351 per capita in state and local taxes. Vermont taxes most retirement income, including Social Security benefits, which are taxed up to 85% (in sync with the federal rate). The sales tax rate is 6%, and local municipalities may add 1%. Prepared foods, restaurant meals and lodging are taxed at 9%, and beer and wine is taxed at 10% in restaurants.

The Bottom Line

Several states recently have tried to make their tax systems more appealing to retirees. Maine, for example, boosted the amount of pension income that can be excluded from state taxes, and Nebraska increased its exemption for Social Security income. The federal exclusion for estate tax is currently $5.34 million, and both New York and Maryland are incrementally increasing their exemptions to match the federal amount.

Whether you are concerned with making your money last longer during retirement or leaving more assets to your children, the local cost of living and tax rate may be an important consideration during retirement. Not that non-financial factors – your interests, hobbies, comfort, health and proximity to friends and family – aren't important when choosing a retirement destination. Just bear in mind that wherever you retire (be it in place, in another state, or abroad) can have a considerable impact on your finances, as well.

last five articles

#1755 Alternatives To Balance Transfers

Author: Michael Williams

If you're trying to get rid of high-interest credit card debt, transferring your balance to a lower-interest credit card, or even a card with a promotional 0% APR, isn't your only option. Here are some alternatives that might be better for helping you pay off your credit cards quickly and spend l... see more

#1536 3 Big Medical Costs and How to Protect Against Them

Author: Andrew Williams

Whether you are just starting out or nearing retirement, a medical event can cause financial strain. In this age of consumer-directed healthcare, people are required to foot a larger portion of their medical costs, which means more out-of-pocket expenses. It's partly the reason medical bankruptci... see more

#547 AARP Expects Massive Caregiver Shortage by 2020

Author: Christopher Jackson

Americans are living longer than ever before. But that's not necessarily because they're healthier and taking better care of themselves. Americans are living longer, primarily because modern medicine has largely eradicated smallpox, mumps, polio, and a variety of other diseases that once claimed ... see more

#644 Best Savings Priority: Retirement vs. College Fund

Author: Matthew Davis

You're headed for retirement – and your kids are headed for college. Both are incredibly costly: The average American will need upwards of $1 million to retire and, these days, a college education can easily set you back $100,000 or more, depending on the choice of school. These estimates can o... see more

#250 Open Enrollment for Health Insurance Marketplace

Author: Jacob Harris

If the term open enrollment makes you a bit anxious, you're already ahead of the game. At least you're aware that health insurance plans have these periods. If you're insured by your employer, open enrollment probably happens once a year in October, November or December. For Medicare, the period ... see more