Commentary: Taxes, weather take glitter off golden years
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Plenty of folks are aware of the best states for retirees. But what are the 10 worst states in which to spend your golden years?
People of Illinois, California, New York, Rhode Island, New Jersey, Ohio, Wisconsin, Massachusetts, Connecticut and Nevada — you probably already know the answer.
The list, with Illinois leading the pack, comes from website TopRetirements.com. According to John Brady, president of TopRetirements.com, the 10 states earn this dubious distinction largely because of three factors: fiscal health, taxation, climate.
As for fiscal health, six of the 10 worst states for retirees on TopRetirements.com's list were among those just identified by a Pew Center for States report as being in "fiscal peril."
The report, "Beyond California: States in Fiscal Peril," showed that "some of the same pressures that have pushed California toward economic disaster are wreaking havoc in a number of other states, with potentially damaging consequences for the entire country."
Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin joined California as the 10 most troubled states, according to Pew's analysis.
Of note, TopRetirements.com's Brady suggested that retirees and would-be retirees might want to avoid states in fiscal peril because these locales might be expected to face decreasing services and increasing taxation.
States of Disunion
Topping his website's list, Illinois's fiscal health could be the worst of any state, observed Brady. "It even borrowed money to fund its pension obligations," he said. As for California, he said the Golden State — though it does have a warm climate — is expensive and its finances are in disarray. What's more, he added, it has paid some bills with vouchers.
New York wasn't mentioned as being in fiscal trouble by the Pew Center, but it does have "very high taxes, including property taxes." In fact, Brady said New York has the second-highest tax burden and fifth-highest per capita property taxes. Plus, he said, the Empire State has a "dysfunctional state legislature." As if that wasn't bad enough, it's terrifically expensive to live in New York. The only benefit to living in New York, he said, is that pensions are exempt from income tax.
As for Rhode Island, Brady said it's probably the worst-off state in the Northeast from a financial viewpoint. It also has high taxes, though he noted that the state does boast some great places to live.
New Jersey, according to Brady's analysis, has the highest property taxes in the U.S., as well as the highest total tax burden of any state, as reported in a 2008 Tax Foundation report. Plus, New Jersey has serious pension-funding issues, Brady noted. States with the greatest tax burdens after New Jersey were New York, Connecticut, Maryland, Hawaii, California, Ohio, Vermont, Wisconsin and Rhode Island, joined by the District of Columbia.
According to Brady, Ohio has high taxes and high unemployment (9.9% in October). Plus, it has cold winters.
Of the 40 largest cities in the United States, Milwaukee has the coldest winter weather, based on normal daily temperatures, according to Current Results, a website that tracks weather trends. The lakeside Wisconsin city's daily winter mean temperature is 24.1 degrees Fahrenheit. But fellow Great Lakes metropolis Cleveland is the fourth-coldest U.S. city, with a daily winter mean temperature that's not much higher at 28.4 degrees Fahrenheit.
Wisconsin, as noted, is doubly cursed in these rankings as a high-tax state with cold weather. Plus, it has high property taxes. The only good news, at least for those to whom it applies, is that the Badger State doesn't tax military pensions.
In a related survey, USAA and Military.com announced this week that Waco, Texas, tops the first-ever "Best Places for Military Retirement" list. In its report, USAA and Military.com focused on U.S. communities that offer "a high quality of life and help maximize military retiree benefits as service members manage their 'first retirement' from the armed forces and begin planning their 'second retirement' from civilian life." Other places on that list included, in order, Oklahoma City; Austin, Texas; College Station, Texas; Harrisburg, Pa.; San Angelo, Texas; Madison, Wis.; Pittsburgh; New Orleans; and Syracuse, N.Y.
New England had two other states on Brady's list of worst places for retirees: Massachusetts, which has high taxes including high property taxes and a very high cost of living, and Connecticut, which has the third-highest tax burden of any state as well as high property taxes.
"It has some terrific places to live, but the cost of living is very high," he said of Connecticut. What's worse, the Nutmeg State taxes Social Security.
States with the highest cost of living in the third quarter of 2010 were, in order, Hawaii, Alaska, California, New Jersey, New York, Connecticut, Rhode Island, Maryland, Vermont and New Hampshire, according to a Missouri Economic Research and Information Center analysis. The District of Columbia also makes the list.
Ironically, the 10th-worst place to retire is the one state where it's easy to find a cheap place to live: Nevada. As many know, Nevada is presently the home-foreclosure capital of the world. In fact, the Silver State continues to lead the nation in terms of foreclosure filings per household, with one filing for every 79 homes, according to RealtyTrac. Yes, the state is having financial problems, but the good news for retirees living there or contemplating a move there is that it doesn't have an income tax — at least not yet.
Of course, not everyone is smitten with Nevada as a place to retire. Money-Rates.com published in September its list of the 10 worst states for retirees. That site, which examined such factors as crime rates, climate, longevity and economic conditions, including taxes, job opportunities and cost of living, found the worst states for retirees were, in order, Nevada, Michigan, Alaska, South Carolina, Maryland, Tennessee, Ohio, North Carolina, Missouri and Arkansas.
States of Mind
Does any of this mean you shouldn't retire to these poorly ranked states? According to Brady, the answer is no. "Every individual has to consider his or her own criteria for selecting a list of the worst or best states to retire," he said. "The best way to start your individual list of best or worst states is to rank, or at least think about, your most important criteria."
In his study, Brady focused mostly on fiscal health, taxation and climate. But according to Brady, the full list of factors to consider when searching for a state in which to retire includes: taxes; climate and topography; crime; fiscal health of the state; recreation; transportation; health care; cost of living, including housing; education, including college; cultural resources; susceptibility to natural disasters; proximity to friends and family; and fitting in socially, politically and religiously.
And of those, taxes might be the most important. Retirees are affected in different ways by taxes, he said. For instance, the taxation of pensions and Social Security might be better or worse in different states. Ditto, sales taxes.
Property taxes can vary widely, as well. For instance, Brady said, property tax can be one of the biggest bills for retirees and it's a category of taxation that's not progressive. You might not have any income, but you will still get taxed on the full value of your house, he said. Of note, some states do have programs to help seniors control their property taxes. Inheritance and estate taxes are also to be considered, though he said such taxes might be viewed as the tax tail wagging the state-of-residence dog.
Choosing the best state in which to retire depends on many individual factors, and in truth, said Brady, "For any two people, the 10-worst-states-for-retirees list might be a good list for one person, but not for [the other]."
Robert Powell is editor of Retirement Weekly, published by MarketWatch.
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