Consider these 5 things before deciding.
Fidelity Wealth Management
Key takeaways
- Carefully assess if your anticipated retirement income can comfortably cover the cost of where you want to live.
- If family won’t be nearby, plan for the potential cost of hiring help as you age.
- Moving to a state with no (or lower) income tax may seem appealing, but be sure to look at the full picture, as other costs may be higher.
Greater flexibility is one of the chief benefits of retirement. After working hard and making smart financial decisions, you should be heading into a period where you can do what you want, when you want, where you want.
Most people nearing or in retirement say they want to stay put in their current home. A national survey conducted by the University of Michigan’s Institute for Healthcare Policy and Innovation reports that nearly 9 in 10 people between the age of 50 and 80 said it was “very important” or “somewhat” important to stay in their current home as long as possible.1 Yet for some of us approaching retirement, making a move—downsizing locally, moving closer to family in a different part of the country, or chasing a more appealing year-round climate—is on the radar. Nearly 1 in 5 people at least 50 years old surveyed recently by the Federal Reserve Board of New York say they are considering moving in the next 3 years.2
If your goal is to stay right where you are, Aimee Kwain, an advanced planner with Fidelity, suggests you still need to ask yourself, “Can I afford to stay where I am, given my expenses, the cost of living, and my expected retirement income?”
Here are 5 financial steps to help you decide where to live in retirement.
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1. Analyze your anticipated retirement income to determine if it will support your preferred living situation.
Kwain says an annual financial plan review—including a detailed cash-flow analysis—becomes even more important when you stop earning and rely on income from investments and retirement accounts.
“This isn’t about just assuming everything will be the same in retirement,” says Kwain. For example, if you are hoping to do a lot of traveling once you retire, be sure to incorporate that into your assumptions.
If you’re moving far from your current base or family, Kwain suggests you think through the cost of trips back to stay connected, and whether you expect to finance family visits. Another key consideration is whether it’s important to you that your new home has the space for family and friends to stay with you. “If that’s the case, then you need to think how that will affect your property tax and insurance costs,” says Kwain.
2. Think through your later-life support system.
As you get older, you may want (or need) some help with long-term care. If you intend to live close to adult children or other family that will help with all (or some) of those activities, your long-term care costs are likely to be lower than if you don’t have children or intend to live somewhere that will necessitate hiring help.
If you plan to live somewhere where you will need to hire help, Kwain says your financial plan should assume the cost of long-term care will rise at a faster pace than general inflation, as has lately been the case.
Another option is a continuing care retirement community (CCRC) that offers fully independent housing options—typically a townhouse or apartment—on a campus that also has assisted living and, in some instances, skilled nursing care that you can move to if the need arises. The typical CCRC financial arrangement is that you pay a substantial entry fee that covers future care costs, as well as a monthly fee. Consulting with a professional like your financial or tax advisor to sort through the costs associated with a retirement community, whether a seniors-only development, assisted living, or a CCRC, is a smart move.
3. Ensure your home will be safe and comfortable for an older you.
A home that was fantastic to raise a family in might not have a layout that will make staying put manageable for an older you. Multiple stairsteps between the driveway and the entry, for example, can become a hardship, not just for you, but for visitors as well. As can a flight of stairs between your living area and your bedroom. Age-in-place design experts recommend having a bedroom you can access without any stairs, and a nearby bathroom with a walk-in shower large enough to accommodate a bench/stool, and enough space to make it possible to maneuver a walker.
If you want to stay put, you might consider renovating. For bigger-ticket remodeling, Kwain says the best way to finance it depends on the timing. “When interest rates are low, a home equity loan or line of credit might make sense. When they aren’t, you might consider using money from your investment portfolio. In both cases, you should first review your overall financial plan to determine which option makes the most sense for you and your situation.”
Another option is to move to a place that will make it safe and easy to stay put later in life, such as an apartment in an elevator building, a ranch home, or some type of senior housing.
4. Plan ahead to help soften the impact of a capital gain on a home sale.
If you’re thinking of selling a home to make a move, you may owe capital gains tax. The government allows up to $250,000 of gain per person from the sale of a home that was your primary residence in at least 2 of the prior 5 years to be tax-free. A married couple with more than $500,000 in gains from a sale may owe tax. (The cost basis for calculating a potential gain is the initial price you paid for the house, plus what you paid for capital improvements, such as a new roof or HVAC replacement.)
Kwain suggests huddling with a financial professional like your tax advisor before a planned sale to consider ways to offset any potential gain—tax-loss harvesting in a taxable investment account, for example, or perhaps bunching multiple years of charitable donations into one calendar year.
5. Look beyond potential state-tax savings when considering a move.
If you live in a state with high income taxes, retirement might have you thinking of moving to a state where your income isn’t taxed at all.
Kwain suggests focusing on the bigger financial picture. What you don’t pay in income tax could be offset by a higher general cost-of-living and/or higher property taxes. Furthermore, 12 states and the District of Columbia have their own estate taxes, while 6 states levy an inheritance tax. Be sure you fully appreciate the potential overall tax exposure before making a decision.
If your goal is to keep your current home but move to a new home in a low-tax state that you intend to claim as your “domicile” for tax purposes, make sure you understand how much time you must live in your low-tax home to satisfy residency requirements. A general rule is that you must spend at least 6 months and 1 day in the state you intend to claim as your domicile for state-tax purposes, though each state has its own rules. That’s a lot more than 3 months of snowbirding. And if you intend to rent out the home in the high-tax state, Kwain says to be prepared that all income earned inside that state may be considered taxable there. The same goes for any deferred compensation you’re entitled to based on work you did in your “old” state, unless you elect to make withdrawals from your nonqualified, deferred compensation plan via periodic installments over a period of at least 10 years. In that case, your distributions would be subject to state income taxes in your state of residence when payments are made.
“It’s not just about what you can save on income tax in your new state. There are many hidden costs you will want to consider,” says Kwain. While the decision you ultimately make about where to live will probably be based as much on your dreams and personal goals as on the money matters, understanding the financial ramifications up front may let you enjoy your retirement all the more—no matter where it is.
