Study after study supports what many Americans already know: Many of us are financially unprepared for retirement. One study from Bankrate.com shows that 26% of U.S. residents between the age of 50 and 64 had nothing saved for retirement.
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. That's worrisome, considering that Social Security benefits are intended to replace only about 40% of the average worker’s salary.
Obviously, many Americans of retirement age or close to it are looking for ways to make their dollars stretch farther. One option is to retire abroad, where it’s possible to find a lower cost of living and affordable health care, often in a nicer climate.
But if that isn’t how you see your future, you might consider settling 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.
- Five states combine lower costs of living and a lower tax burden: Alabama, Mississippi, Oklahoma, Tennessee, and Texas.
- Some even have special tax breaks for older residents.
- None have inheritance or estate taxes.
To find these money-saving states, we analyzed 2019 data from Bankrate.com’s Best and Worst States to Retire data. We looked at the least expensive states in two categories – affordability and taxes (both income and sales taxes) – and found five states that ranked among the cheapest in both categories. The combination makes them good candidates for today’s least expensive states for retirement.
Affordability Rank: 10
Tax Rate Rank: 39
Alabama ranked 10th lowest in cost of living and 39th for taxes. Its 2019 property tax burden, based on data from the Tax Foundation, an independent tax policy research organization, was 15th lowest in the country.
Out-of-state government pensions are tax 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 to their residents, but homeowners age 65+ with a taxable income of $12,000 or less qualify for an exemption.
Tax Rate Rank: 31
Mississippi earned one of the top spots for the lowest cost of living in the nation, and homeowners aged 65+ are tax-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 tax exempt.
Cost-of-Living Rank: 41
Tax Rate Rank: 26
Oklahoma ranked 41st lowest in cost of living, and property tax rates ranked 19th. 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: 12
Tax Rate Rank: 16
Tennessee residents enjoyed the 12th lowest cost of living in the United States. The state’s tax burden ranks 16th lowest out of all 50 states, and property tax rates ranked 29th lowest.
There's no state income tax, but dividends and some interest are taxed at 5%. 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: 24
Tax Rate Rank: 15
Texas ranked 24th in the nation in cost of living and 15th in taxes. There is no state income tax, so Social Security benefits and other retirement income are not taxed at the state level.
Individual tax rates ranked 6th in the nation. However, homeowners who are 65 or older benefit from two homestead exemptions that keep up to $25,000 of the home’s assessed value from taxes.
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, health care 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 future generations. Some states have pushed for tax changes intended to entice retirees willing to relocate.
None of the states listed above impose estate or inheritance taxes. Only a handful of states impose estate taxes, and some of them have exemptions up to a certain amount.