Factors to consider when relocating to another state in retirement
When people retire, many choose to stay in their same geographic area, particularly in their initial state of retirement. In fact, according to a study published by Center for Investment Research in early 2020, 53% choose to “age in place” in the home they lived in since they were in their fifties. According to the same study, 16% wait to move when they are in their early 80s, presumably to a retirement community that offers assisted living for their later years.
Reasons to move
Retirees may choose to move from their current residence for a myriad of reasons. These may include living in a better climate, being closer to friends and family, access to quality healthcare and lower cost of living (including taxes).
Rather than making an outright move, some retirees start by buying or renting a second residence so they can try out living in another location for at least part of the year. Before making a permanent move, we strongly recommend spending extended periods of time in the new location since what appealed to you for a month may not for a longer stay.
Lower taxes are a major motivator
The idea of no longer paying state income tax is a major draw for many retirees. Obviously, this will reduce your annual expenses. In addition, some states that don’t charge income tax also are located in warm climates, such as Florida and Texas. And some states don’t tax all or part of your retirement income.
However, it is important to look at all taxes. This would include sales tax (7% in Florida), real estate taxes and even inheritance taxes. For instance, in Florida, the closer you are to the water, the higher the real estate taxes are. If purchasing a home, be sure to inquire what the taxes might be. They may increase from prior levels due to price appreciation of the home.
A good source for checking out taxes online is Kiplinger’s State by State Guide to Taxes for Retirees.
Proving you are a resident of the state
If you are moving from a high tax state to a lower tax state, your former state doesn’t want to lose your revenue, so the authorities may be watching you closely. It isn’t enough to get a new drivers license, library card, and car registration.
Each state has its own rules. For example, in order to prove residency in Florida, you need to prove that you spent more time in that state than in any other state. This means all 24 hours of the day. Therefore, you could spend five months in Washington DC, five months and one week in Florida, and then the balance of the year in another location to qualify as a Florida resident.
In my experience, we kept a loose-leaf book where we kept a calendar of which days we spent in each location, as well as receipts of items for expenses such as restaurants, markets, and drugstores as well as airline receipts. It may seem overkill, but if you are audited you will be glad you took the extra effort. States such as New Jersey and New York don’t want to lose your tax revenue. Make sure to keep those records for at least seven years.
You should have your legal documents reviewed by a local estate planning lawyer to make sure that they are compliant with that state’s laws. It is advisable to change to a local accountant who is familiar with the state income tax situation. While you might be reluctant to change doctors, the sooner you do that, the easier it is to substantiate that you are indeed a resident.
Other factors to consider when moving your residency
Prices for food, utilities, healthcare and other necessities can vary significantly in different areas of the country. Another factor—which is unknown at present—is the cost of home insurance. Hurricane Ian caused significant damage to Florida residences. As a result, home insurance costs are expected to increase substantially and will not be available at all in some areas.
Moving to be closer to family members
We have had several examples of our clients moving to be near their children and grandchildren. In some cases, this hasn’t worked out too well because although they are close to family, they left friends who are important to them behind. Also, adult children don’t always stay where they moved and may relocate again. In addition, the grandchildren may be busy with their own activities and not have time for their grandparents. Here again, we recommend extended visits before making a permanent move.
The bottom line is to stay flexible. Try to keep your options open so that if you make a move and it doesn’t work out you can retrace your steps. In addition, what may work for you in your early years of retirement may change in later years.
Presented by Alexandra Armstrong, CFP®, CRPC®