FLORIDA, ALBUQUERQUE, BRAYS ISLAND PLANTATION — lists of top retirement states, cities and even adult communities abound. But choosing the place where you'll spend the next chapter of your life is a very personal decision, especially at a time when many Americans are living healthier and more active retirement lives. Making the best choice also depends on many financial factors specific to your life and your family's goals. You may want to live closer to your children or grandchildren. You may prefer a particular climate or geographic region. Or you may simply want to live in a place that gives you more options, like access to cultural events or the ability to find interesting post-career work.
Regardless of the location, your decision will have an understandable impact on your financial strategy. As always, however, preparation is imperative. "The 'where' conversation needs to start now with a discussion around aspirations," explains Bill Hunter, director, Personal Retirement Solutions at Bank of America Merrill Lynch. "Once that's on the table, you can look deeper at the pros and cons of various geographic locations, and plan financially for your move."
Second acts, income and taxes
For many, plans to work in retirement often factor heavily in the location equation. "Three out of four people we talk to about retirement believe they will work in some fashion," Hunter says.
But work means different things for different people. Prospective retirees looking to spend less time on a current career, for example, may want to consider retirement commuting — spending part of their time where they currently work, and part in a retirement-oriented locale. Those seeking part-time work might scope out communities that offer work options for seniors, such as the hometown of a major charity. College towns can make sense for those interested in teaching in their field of expertise.
When people try to compare the cost of living with income needs, the question of taxes often arises. Hunter notes that one common pitfall is focusing too closely on state income tax. Retirement locales heralded for having no state income tax generally impose higher sales and property taxes, and there may be municipal taxes to consider as well.
"If your local taxes are high but you want to stay in the same area, you might move to the next town over to take advantage of a lower tax rate." — Bill Hunter, Director, Personal Retirement Solutions, Bank of America Merrill Lynch
That said, Hunter does suggest minimizing the tax bite. "You have to look at the whole picture," he points out. "For example, if your local taxes are high but you want to stay in the same area, you might move to the next town over or relocate just across the state border to take advantage of a lower tax rate." It's also important to check in with your tax advisor as you weigh your choices.
Beyond that, downsizing from a family home to a retirement home can often create capital gains. A hefty tax bill on the sale of your current property could change the amount you can afford to spend on your retirement home.
Communities, care and assistance
While not pleasant to contemplate, the eventual need for more medical care or assistance is a reality that should also be a part of your retirement strategy. "A more isolated location will mean higher out-of-pocket costs for things like medical procedures and home care, and you need to be prepared for that," Hunter says. Many retirees prefer to live closer to family partly for this reason, but it's also important to have this discussion with your children early on, to set expectations and plan financially for the days when you may need their help. This is critically important as you plan for your longer-term health care costs, which could have a huge impact on the income you will rely on down the road.
Do you have to move in retirement—or is your current home just right?
Read Empty Nesters: Move or Stay Put? next.
Age-restricted communities are another option for prospective retirees, who have a wide array of facility types from which to choose. These range from active adult developments, which typically offer activities and amenities and sometimes on-site medical care, to co-housing options, where retirees can live independently in a community, sharing communal facilities and divvying up both responsibilities and costs.
While these can be appealing, it's vital to understand the rules and financial terms of a community before committing. "You need a full appreciation of what you're agreeing to — what the fees cover and what they don't — as well as what that location may offer in terms of graduated assistance," Hunter explains. "Some have built-in transitions into assisted living, which can be important when spouses want to stay in the same facility as their needs change."
With so many variables to consider, choosing a retirement destination can feel overwhelming. But when you consider each alternative in light of your personal and family goals, you can make the kind of informed financial decisions that will have a bigger impact down the road.
"Start by setting your retirement goals and sharing them with your Financial Advisor," Hunter urges. "Painting the picture of how you want to live sets the framework. If the conversation starts with that, you're more likely to create a sustainable financial strategy."
3 Questions to Ask Your Advisor
- Given my priorities, financial situation and current location, would relocating make sense?
- Do my current retirement plans take into account the possible costs of my planned retirement location?
- Is now a good time to consider buying my retirement home?
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Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions