Where Should You Retire? The Best and Worst States for Retirees

From Taxes to Health Care, Find the Best State to Retire to in 2021 or Beyond

The best advice for retirement is simple: plan early. You may have enrolled in a 401(k) and saved money, but knowing how to retire is more than that. Whether you want to retire to the mountains or the beach, there are many factors to consider when determining the best state for retirement.

We outline the top contenders and what you can start doing now to get there.

Planning for Retirement: A Checklist

As you or your partner approach your golden years, there are several steps to take to get your financial and living situation in order. Knowing how much money you will have in retirement, and how much more you can save, will give you a better idea of what state or specific neighborhood you can move to.

Merrill Edge advises individuals and couples to follow a pre-retirement checklist:

• Modify your investment portfolio to match your projected risk tolerance during retirement.
• If you are in your 50s, consider catch-up contributions to your 401(k) or IRA account and consolidate accounts if possible.
• Think about downsizing and minimizing loans and credit card debts.
• Take stock of your savings and assets to calculate your retirement income (roughly 4% of your total savings and assets).
• Ask yourself realistically how much money you expect to spend each year in retirement (e.g., travel expenditures, housing, etc.)
• Research health care options, such as Medicare or long-term care insurance.
• Figure out which states have appropriate living costs to your goals.
• If you do not know how much you still need to save, you can use a retirement calculator to take into account inflation, taxable retirement income and how much you’ve already saved.

Factors to Consider in a Retirement Location

Location, location, location. It’s a major research requirement if you want to learn how to retire well. Where you live during retirement will affect your happiness and quality of life. Here are a few questions to consider before making a decision:

• Where will your friends and family be?
• How close is it to a major city, if you want to be near one?
• What is the cost of housing?
• What is the cost of everyday living?
• What is and isn’t taxed?
• How good is health care?
• Is it diverse and inclusive?
• Is it safe?
• What is the weather like throughout the year? Is climate change a major issue (e.g., water levels in coastal states)?

When researching retirement-friendly states, you should look at the state from every angle. Kentucky is particularly attractive from a tax perspective, since social security and railroad retirement benefits are exempt from state income tax. However, studies also rank Kentucky as one of the worst states for retirees due to poor health care opportunities and senior populations living below the poverty line. While some aspects may seem appealing, others can become quick deal breakers.

Best States for Retirement

It’s no surprise that Florida is a fan-favorite for retirees. AARP often lists Florida in its list of top states for retirees, especially veterans. It cites affordability, veteran health care facilities and tax-friendliness. But, you may be surprised at the other states that top the list of the best states for retirement.

A recent study by WalletHub ranked all 50 states from best to worst states for retirement. The study used 45 metrics, including the following:

• Adjusted cost of living
• Tax-friendliness on pensions and social security income
• Annual cost and quality of health care and in-home services
• Senior levels of activity, obesity and disability
• Share of senior population
• Access to public transportation and entertainment
• Crime rate
• Weather

Based on the study’s criteria, the best (and worst) states for retirement in 2021 are as follows:

Best States	Reasons for Ranking	Worst States	Reasons for Ranking
1. Florida	Affordability, Quality of Life	1. New Jersey	Affordability, Quality of Life
2. Colorado	Affordability, Health Care	2. New York	Affordability, Health Care
3. Delaware	Affordability, Health Care	3. Mississippi	Health Care, Quality of Life
4. Virginia	Affordability, Quality of Life	4. New Mexico	Health Care, Quality of Life
5. North Dakota	Health Care, Quality of Life	5. Rhode Island	Affordability, Quality of Life
6. Montana	Affordability, Health Care	6. Kentucky	Health Care, Quality of Life
7. Idaho	Affordability, Quality of Life	7. West Virginia	Health Care, Quality of Life
8. Utah	Affordability, Quality of Life	8. Connecticut	Affordability, Quality of Life
9. Minnesota	Health Care, Quality of Life	9. Texas	Health Care, Quality of Life
10. New Hampshire	Health Care, Quality of Life	10. Illinois	Affordability, Quality of Life

 

It’s important to remember that this is not a definitive list, but rather a starting point for determining the best location for your needs. While some states may top the list in affordability, you may be prioritizing weather or medical services.

Tax-Friendly States

One of the most important factors in deciding where to retire is taxation. After all, it’s not just about how much you’ll have saved for retirement, but also how much you can save during retirement.

Which states are the most tax-friendly?

Income Taxation

Whether it’s Social Security, pensions, retirement distributions or investment income, which state you choose could be determined by its tax exemptions. However, where you find state income tax exemptions, you may find higher forms of other tax, such as sales tax.

Currently, the following states have zero income tax:

• Alaska
• Washington
• Nevada
• Wyoming
• South Dakota
• Texas
• Tennessee
• Florida

Note: Though New Hampshire has no wage tax, the state currently taxes interest and dividends. 

The following states do not tax 401(k), IRA or pension distributions:

• Illinois
• Mississippi
• Pennsylvania

Note: Alabama and Hawaii do not tax pensions, but they will tax other retirement distributions. 

In addition to these states, it is important to research other taxes, including estate tax and sales tax, to make the most well-rounded judgment.

Military Retirement Pay Taxation

Military retired pay (MRP) and Survivor Benefit Plan (SBP) payments are another important area of financial concern for veterans and their families. While these programs are fully exempt from taxation in states like Texas, Illinois, Florida, New York and others, you should check for updates from the Military Officers Association of America (MOAA), as proposed changes to state legislature have been frequent.

Prepare for Your Retirement Today

Perhaps you haven’t yet weighed the merits of Minnesota or New Hampshire, but one thing is for certain: the best time to start planning your retirement is now.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds and The Legal & Tax Aspect of Investing: Asset Protection; Estate Planning, and Tax Efficiency. This is an updated version of an article originally published on April 17, 2019.]

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