For most of our clients their ideal retirement location or “Retirement Paradise” is in the Bay Area (or other high cost areas), near family and friends and a stimulating environment, but high taxes and the cost of living cause many to re-evaluate.
For those choosing to remain in the Bay Area, the purchase of a smaller home (downsizing) is often used as a way to reduce expenses or to make their home better suited for independent at-home aging. To remain in the Bay Area (or other high cost areas) retirement saving goals must be very aggressive and fully funded to support the same lifestyle during retirement.
Some consider moving to lower cost US states and even overseas. The idea of downsizing away from California (or your home state), as a way to reduce expenses and bolster available retirement funds may not be as easy as selecting the lowest tax or lowest cost location. Keeping in mind that retirement is not one uniform event, but a series of phases, let’s cover a few of the financial implications.
Relocating may indeed reduce some costs, but there are ramifications that are often overlooked. For example, moving away from higher cost areas can reduce income taxes, but this may not offset the increased cost of travel, other taxes (such as real estate), services, and costs associated with changes to lifestyle.
We suggest that you give the town, state or country that you intend to relocate to a try for extended periods of time and at various seasons of the year with an eye toward evaluating how you will spend your retirement and what costs will be incurred. How does it feel to revisit the same place over several years? Can you see yourself developing the supporting network you’ll need as you grow older? How will your budget be changed?
Don’t underestimate the value of a community that can provide stimulating events that you would be interested in attending (the opera, symphony, music, college courses). What about your family and friends? Will you want to be close to them while you age? What healthcare do you need and how does your future community support it? Some areas have low taxes, but do they provide the services that you’ll need as you age?
If you enjoy particular hobbies, you’ll probably want to check out the ease of access to your interests, but don’t neglect other priorities such as transportation and communication. As you age, travel becomes more difficult, especially if you develop special needs. Give thought to public transit and convenience to major airports or rail lines. In our experience, clients will deliberately choose a populated community to move to (later in retirement) with well developed public transit. Access to quality internet is also your lifeline to friends and family and to future independence.
Some states do not tax retiree income and some states provide extensive retiree services. Look to see which location provides benefits that you will need. Often states that do not tax an individual’s income have higher sales and property taxes, so you must do the numbers. Be mindful of Medigap policy costs and Medicare Part D (drug coverage) in your potential retirement paradise. Premiums can be lower in areas that have a lower cost of living or more retirees. The prohibitively high cost for healthcare and lack of services in some counties will likely surprise you.
It may seem a little pre-mature, but you should give some thought and consideration during the process of making your first retirement move to the possibility of a later move in life to be near loved ones or to an assisted-living facility. As we age, the process of moving becomes more challenging – though early in retirement it can be very exciting. You’ll find this stress can be reduced or avoided with some early planning and coordination.
A few words now about moving to a foreign country for some or all of your retirement years. It is likely that you can find countries with a lower cost of living than the US and where you can maintain or enlarge your lifestyle, but you’d be well advised to examine this option over several extended trips. If you are planning to remain abroad through only part of your retirement, you will need to determine how to fund your eventual return, or else how you will handle all retirement phases if you intend to remain permanently out-of-country.
All US “persons” (that’s the legal term for anyone deemed subject to US taxation authority) must file taxes annually. Typically the US has a treaty with other countries so that your earnings will not be double taxed, but most retirees do not work so double taxation is not a large concern. There are rules on what is or is not taxable to you as a resident of the foreign country and what is payable to the IRS. Consider that you will have to pay taxes on all pre-tax accounts, social security, pensions even while living overseas but you will likely avoid state tax. As a US person, you will have annual administrative financial filings (known as FBAR) while not residing in the US. Healthcare is often an issue later in retirement (Medicare does NOT cover foreign health care costs) unless you verify that the services and specialties needed as you age are easily available in your new home. Finally, currency differences will provide you with more purchasing power while the dollar is high. However, when the dollar drops, there may be a need to return to the US or find some other way to make up the shortfall. These contingencies need to be planned for early so that you’ll have a framework regarding your choices later in retirement.
When planning for your retirement paradise, bear in mind the most important principle—to think beyond today and prepare as best you can for contingencies throughout all phases in retirement. As always, we’re here to listen and to help outline the implications of your choices for the various stages of retirement. Working together, we can examine financially realistic options so that you can make the best choices today while preparing for the realities of your “Retirement Paradise”.
Edi Alvarez, CFP®
BS, BEd, MS