Study after study supports what many Americans already know: A lot of us are financially unprepared for retirement. One study from Bankrate.com, for example, shows that 26% of U.S. residents between the age of 50 and 64 don’t have anything saved for retirement. And, according to the Transamerica Center for Retirement Studies, 36% of baby boomers plan to rely solely on Social Security as their primary source of income – worrisome, considering that Social Security benefits are intended to replace only about 40% of the average worker’s salary.
Obviously, many Americans are seeking ways to make what money they have last longer. One option is to retire abroad, where it’s possible to find a lower cost of living and affordable healthcare – not to mention, often, a nicer climate (see Retirement Funds Too Little? Retire Abroad). But if international travel isn’t how you see your future, it may be possible to settle down in a less expensive corner of the United States, where lower costs of living and gentler local taxes mean you can retire on less.
To find these money-saving states, we analyzed data from Bankrate.com’s 2016 “Best and Worst States to Retire” list. We looked at the top 20 least expensive states in two categories – cost of living and taxes (both income and sales taxes) – and found five states that ranked towards the top in both categories, making them today’s least expensive states for retirement. Here they are, in alphabetical order.
Cost-of-Living Rank: 7
Tax Rate Rank: 12
State Income Tax: 2% to 5%
State Sales Tax: 4%
Alabama ranks 7th lowest in cost of living and 12th for taxes. Its 2012 tax burden (based on the most current data from The Tax Foundation, an independent tax policy research organization) was 8.7% – the 11th lowest in the country – and taxpayers spend $3,067 per capita in state and local taxes. State income taxes range from 2% to 5%, but most retirement income, including Social Security, military, civil-service, state/local government and qualified private pensions, is exempt. Out-of-state government pensions are exempt as long as they are defined-benefit plans. Homeowners aged 65+ don’t pay any state property taxes. Cities and counties can still apply levies, but homeowners age 65+ with a taxable income of $12,000 or less qualify for an exemption.
Cost-of-Living Rank: 1 (lowest)
Tax Rate Rank: 10
State Income Tax: 3% to 5%
State Sales Tax: 7%
Mississippi earns the top spot for the lowest cost of living in the nation. Its 2012 tax burden of 8.6% ranks 9th lowest, and taxpayers pay $2,742 per capita in state and local taxes. Property tax collections are $899 per capita – the 10th lowest in the nation – and homeowners aged 65+ are exempt from the first $75,000 of their property's value. Social Security benefits, Railroad Retirement benefits and qualified retirement plan income (including income from IRAs, 401(k)s, 403(b)s, Keoghs, and qualified public and private pension plans) are exempt.
Cost-of-Living Rank: 4
Tax Rate Rank: 11
State Income Tax: 0.5-5%
State Sales Tax: 4.5%
Oklahoma ranks 4th lowest in cost of living, behind Indiana, Idaho and Mississippi. The state’s 2012 tax burden of 8.6% ranks 10th lowest in the nation, and taxpayers spend $3,515 per capita in state and local taxes. Property tax collections amount to $595 per capita, the 2nd lowest nationwide. Social Security and Civil Service Retirement System benefits are not taxed, and residents can exclude up to $10,000 per person (or $20,000 per couple) of other types of retirement income. Seniors who meet income requirements are eligible for both tax refunds and valuation freezes that keep their property taxes the same, even if their home (or the neighborhood) appreciates in value.
Cost-of-Living Rank: 6
Tax Rate Rank: 4
State Income Tax: None (on earned income; dividends and interest are taxed at 6%)
State Sales Tax: 7%
Tennessee residents enjoy the 6th lowest cost of living in the U.S. The state’s 7.3% tax burden for 2012 ranks 4th lowest out of all 50 states and is well below the national average of 9.9%. Taxpayers pay $2,805 per capita in state and local taxes (compare that to $6,993 in New York, ranked dead worst for taxes in the "Best and Worst States" list), and property tax collections are $799 per capita, the 9th lowest nationally. There's no state income tax, but dividends and some interest are taxed at 6%, which drops to 5% beginning with tax year 2016 (the first $1,250 is exempt). Taxpayers 65 years old and up who have a total annual income of $37,000 or less ($68,000 for joint filers) are exempt from the tax on dividends and interest.
Cost-of-Living Rank: 17
Tax Rate Rank: 6
State Income Tax: None
State Sales Tax: 6.25%
Texas ranks 17th in the nation in cost of living, and 6th in taxes. There is no state income tax, so Social Security benefits and other retirement income avoid taxation, at least at the state level. The 2012 tax burden was 7.6%, which ranks 5th lowest in the country, and taxpayers pay $3,340 per capita in state and local taxes. State and local property taxes are relatively high, and collections are about $1,559 per capita (the 14th highest in the nation). Homeowners who are 65 or older, however, benefit from two homestead exemptions that keep up to $25,000 of the home’s assessed value from taxes.
The Bottom Line
Of course, retirement destination decisions shouldn't be totally dictated by finances: It’s important to consider factors such as your recreational interests, hobbies, comfort, healthcare needs and proximity to family and friends. Still, retiring in a state that has a low cost of living and favorable taxes can be a good move if you’re trying to stretch your retirement dollars.
It can also be a smart move if you have wealth that you are trying to safeguard for yourself or for future generations, and some states have pushed for tax changes intended to entice retirees. None of the states listed above impose estate or inheritance taxes, including Tennessee, which as of January 1, 2016, stopped imposing an inheritance tax. For more thoughts, see Finding a Retirement-Friendly State.