5 Keys to a Smart Retirement Move
by Kerry Hannon
Friday, June 6, 2008
provided by U.S. News


Relocating isn’t just about money, but factors like taxes and healthcare may be tiebreakers

It's not always about the money when it comes to deciding where to live in retirement. Four years ago, after more than three decades of living and working in New York City and environs, Jerrold Footlick, a magazine editor, and his wife, Ceil Cleveland, an author and New York University English professor, retired to Durham, N.C. It had nothing to do with lower taxes or a cheaper cost of living. "That was happy happenstance," Cleveland says.

That's not so unusual. About half of boomers expect to move to another state at retirement, according to a survey by Del Webb, a retirement housing corporation. And while a smart relocation decision will bolster a financial plan, the reality is that money matters often take a back seat to lifestyle issues in retirement.

Not that money doesn't matter (more on that later), but what's really key is living in a place that makes you feel comfortable. "Sure, the cost of living is very important," says Tom Wetzel, president of Retirement Living Information Center, a website. "But family, social networks, and other things often come first." Several criteria can trump financial concerns: climate, access to healthcare, crime rates, recreation, and culture—even shopping.

For Cleveland, 69, and Footlick, 72, moving to the Tar Heel State had everything to do with culture and the temperate climate. The couple was pulled in by the lively arts, sports, and intellectual scene around Durham's Duke University and the nearby University of North Carolina-Chapel Hill. But something else also struck a chord. "The area was Southern enough for me," says Cleveland, who grew up in West Texas, "and Midwestern enough for Jerry, who was raised in Ohio, and offered other things we loved about living in the Northeast—like changing seasons."

Plus, the couple knew the area and people living there. Footlick's daughter, Robbyn, is a Duke grad. Footlick had been on one of the university's editorial boards for well over a decade. So it was easy to fall in with a group of short-story writers, novelists, and journalists who had already migrated to the Research Triangle. "We don't consider ourselves retired," Footlick says. "We just write full time now, like practically everyone else we know here."

Living near their children and grandchildren wasn't a prerequisite for the couple, as it is for many relocating retirees. "We have five kids in five different states," Cleveland says. "We figured they chose where they want to live. Let's choose where we want to live."

Retirees Ina and Charles Logue followed the same thinking when they moved to Longboat Key, Fla., from Pittsburgh in 2002. "We had been visiting relatives here for more than 40 years while living through the gray, snowy Pittsburgh winters," Ina Logue says. So when she retired as assistant superintendent of schools in a district near Pittsburgh and Charles signed off as an outplacement counselor, they sold their four-bedroom home and headed south. They rented for three months before buying a two-bedroom bayside condo. One selling point: "Our four grown kids assured us they would rather visit us here than in Pittsburgh," she says.

There is plenty to be said for that. But where you live will be the key to a big chunk of your retirement budget. And if basic living costs like gas prices, utility bills, and groceries keep rising, moving to a more affordable area will pay off.

"Happy happenstance" is nice if it happens for you, as it did for Footlick and Cleveland. But if you have a few locations to choose among, making a strategic money decision can bulletproof your retirement budget.

Here are five financial factors to consider when planning to relocate.

1. Cashing in: One big reward of relocating is cashing in the equity you've built up in your home and moving to a more affordable area where you can buy a nice place for less. You might even be able to go further upscale. That's what Footlick and Cleveland did. They snagged a home half again as large as the one they sold on Long Island's North Shore.

And if your timing is right, you might have cash left over. That's great news for those looking to pay down or eliminate credit card and other consumer debts. You might also choose to pay cash for your new digs and wipe out your monthly mortgage payment.

If you do opt for a home loan, a clean credit record and cash in hand for a fat down payment will get you a better interest rate. That will let you take advantage of today's relatively low fixed rates on most mortgages, which economists expect to hold steady for the next year or so.

If your expected income from Social Security, pensions, and other sources isn't going to be enough, you may need the cash generated from selling your house for living expenses.

2. Tax-free gain: Married couples can exclude up to $500,000 in capital gains from the sale of a primary residence (single homeowners can exclude $250,000). This rule can be a windfall for retirees who own highly appreciated residential property, as long as they have owned and used the house as a primary residence for two of the past five years. Home flippers, if there are any left, need not apply.

3. Tax consequences: Moving from a high-tax state to a low-tax state is key. Look at income, sales, property, estate, and inheritance taxes. Seven states have no personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. However, 26 states (and the District of Columbia) that have broad-based personal income taxes do not tax Social Security benefits. Others don't tax private or public pensions.

Many people pick a retirement destination purely because there is no income tax. "This is a serious mistake, since higher sales and state and local property taxes can more than offset any lack of a state income tax," says Bill Stromsem, director of taxation for the American Institute of Certified Public Accountants. Florida, for example, imposes no income tax but makes up for that with sales and property taxes. State sales taxes vary greatly, with some at 7 percent or more. Only five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—have no sales tax.

Property taxes are generally the heaviest tax burden for homeowning retirees. States with low median real estate taxes include Alabama, Delaware, Hawaii, and Louisiana, the Tax Foundation says, while those with high real estate taxes include New Hampshire, New Jersey, and Texas.

Most states give breaks to residents over a certain age, and there may be property tax credits or homestead exemptions that limit the value of assessed property subject to tax. But it's usually not up to the state to judge the total taxable value. That's in the hands of a local assessor.

Best advice: Check out the total tax picture of your possible destinations and compare them side by side, advises Stromsen. "There's no free ride from any state. You may win on some taxes and lose on others. And you certainly don't want the tax tail to wag the dog. Go where you want to go," he says.

4. The Medicare mix: Medicare premiums vary by market. Each place has its own blend of medical facilities and insurers. For the prices and terms of carriers that serve your future community, check Medicare.gov and the website of the state's department of insurance.

5. Utilitarian thinking: Daily living costs fluctuate from place to place. Moving to a smaller residence will immediately save you money on utilities and maintenance costs. Depending on the climate where you settle, you might not even have to shrink your living space to slash utility bills. That was Footlick and Cleveland's surprise. Even in a larger home, their energy bills are down considerably from what they paid up north.

With Raleigh-Durham International Airport just 15 minutes down the road from their lakeside home, those savings make trips back to Manhattan for a splash of bright lights easy to work into their retirement budget.

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