12 of the Cheapest States to Retire

Are you ready to retire from your career but worry that you may not be financially prepared? This is a common concern.

The majority of baby boomers have no retirement savings, and 40% plan to rely solely on Social Security for their income after retirement. What’s worse, most Americans have no idea how much they’ll realistically need for retirement. As such, retiring for less is more than important than ever.

How can you put your mind at ease? Well, you could start saving for retirement now, as well as plan for developing multiple retirement income sources. Both of which will help you live a more comfortable life. But, you can also stretch your budget by moving to the following twelve states.

Why? Because they are some of the cheapest states in the country when you look at factors like median home cost, medicare advantage cost, and the cost of living index. What’s more, they’re all fairly tax-friendly

1. Mississippi

• Median Home Cost: $140,818
• Medicare Advantage Monthly Cost: $48.87
• Average cost of living index: 85.1

The Magnolia State may be a viable choice as you plan your retirement and look for a place to settle down. It has mild winters and costs less than the national average to live here. In addition, it has one of the most tax-friendly retirement systems in the country.

How does Mississippi’s tax system benefit retirees? Firstly, the income tax is treated differently for retirees. In Mississippi, all income from pensions, Social Security, 401(k)s, IRAs, 403(b)s, SEP-IRAs, and 457(b)s are tax-exempt. However, seniors have to pay state income tax on their work income.

Additionally, the state has a moderate sales tax and low property tax. And, what’s more, there are no estate or inheritance taxes in Mississippi.

2. Alabama

• Median Home Cost: $170,184
• Medicare Advantage Monthly Cost: $64.27
• Average cost of living index: 88.6

Many retirees assume Florida is the place to retire, but more should consider its neighbor Alabama. After all, you could save a lot of money if you switched the Atlantic Ocean for Alabama’s Gulf of Mexico.

How so? Well, the Yellowhammer State is fairly tax-friendly as it’s home to some of the lowest property taxes in the country. Moreover, Alabama is one of 38 states to completely exempt Social Security from income taxes. Also, income from pensions is also is not taxed.

It is worth noting that some forms of retirement income may be taxed in Alabama. Retirement income earned from IRAs and 401(k)s will be taxed as regular income at Alabama’s state tax rate which ranges anywhere between 2% to 5%.

3. Oklahoma

• Median Home Cost: $150,754
• Medicare Advantage Monthly Cost: $47.49
• Average cost of living index: 88.2

Despite its lack of warm beaches, the Sooner State does offer affordable homes and low homeowner costs. In addition, the state’s tax system is particularly friendly to retirees on a tight budget.

The state of Oklahoma exempts Social Security retirement benefits in full. A $10,000 deduction is also allowed for other retirement income. This includes 401(k)s, 403(b)s, 457(b)s, IRAs and public and company pensions.

Even though Oklahoma has high sales taxes, property taxes are reasonably priced at around $1,300 per month.

4. Arkansas

• Median Home Cost: $149,120
• Medicare Advantage Monthly Cost: $44.34
• Average cost of living index: 92.1

Retirees planning an active retirement will find plenty of outdoor activities and mild weather in the Natural State. Despite Arkansas home prices being a bit higher than neighbors like Mississippi, they are still very affordable. And, property taxes are under a grand a month to balance out the high sales taxes.

Generally, retirees find Arkansas to be a tax-friendly state. The state does not tax Social Security benefits. For seniors with other retirement income, such as pensions or IRAs, Arkansas offers a deduction of $6,000 as well for persons age 59 ½ or older.

There’s also a homestead exemption called the homestead tax credit in Arkansas. Up to $375 may be claimed each year for the principal place of residence of a homeowner. Homeowners, including seniors, may claim the credit if they reside in their principal residence. It’s possible to claim the credit even if you live in a nursing home or retirement home as long as you’re a homeowner.

5. Georgia

• Median Home Cost: $245,778
• Medicare Advantage Monthly Cost: $48.91
• Average cost of living index: 89.8

According to realtor Dorrie Love Georgia is rivaling Florida as a retirement destination; “Four seasons, the mountains, the beach, an airport to go see children or grandchildren.”

But, that’s not the only reason why people are flocking to the Peach State. There is no Social Security tax in Georgia, and seniors 65 and older can deduct $65,000 per person from all retirement income. This deduction drops to $35,000 for persons aged 62 to 64. Furthermore, the state’s sales tax and property tax rates are both relatively low, and inheritance and estate taxes are not in effect.

Also, in Georgia, every homeowner whose home is occupied as a primary, permanent residence can claim the homestead exemption. Here the first $2,000 of the 40% assessed value is exempt from property taxes. For seniors 65 and older, however, a double homestead exemption may be available. The applicant’s total household income, excluding Social Security and pension benefits, must not exceed $10,000 per year.

6. Tennessee

• Median Home Cost: $231,682
• Medicare Advantage Monthly Cost: $58.17
• Average cost of living index: 90.0

“Tennessee is the home of history, nature, a mild climate, and many types of music,” writes Robin O’Neal Smith for Travel Awaits. Besides being a great vacation spot, The Volunteer State has so much more to offer. Tennessee natural beauty, amenities, and rural peace, combined with its mild temperatures, make it an ideal place for retirees, she adds.

“Tennessee is a state with zero state income or property taxes, and that is a big draw,” says O’Neal Smith. “It has the second-lowest per capita state and local tax burden behind Alaska, and Tennessee is 10.3 percent beneath the cost of living index.” Moving to Tennessee often means a significant financial advantage when moving from a high-tax state.

7. West Virginia

• Median Home Cost: $117,768
• Medicare Advantage Monthly Cost: $59.74
• Average cost of living index: 90.1

There’s a reason why West Virginia is called The Mountain State. Forests and mountains cover much of the state making it an ideal retirement destination for retirees who enjoy outdoor activities like kayaking, birdwatching, fishing, and hiking. But, West Virginia is also an affordable location with a favorable tax system.

Generally speaking, the state is tax-friendly, although the level of tax-friendliness depends on your income. West Virginia, for example, has low property and sales taxes. Most Social Security retirement benefits are taxed by the federal government and by West Virginia, with rates ranging between 3% to 6.5%.

Retirement income from other sources is also taxable, but it can be deducted up to $8,000. As such, if you have substantial retirement income from a retirement vehicle like an IRA, you may face very high taxes. On the flip side, if you primarily rely on Social Security income with a pension or retirement account as supplemental income, you’ll have a lower tax bill.

Also in West Virginia, homestead exemptions reduce property tax burdens for seniors. If you are age 65 or older and have owned and occupied your home for two years prior to applying for the exemption, you qualify for it. For homeowners who qualify, an exemption of $20,000 is applied to their property assessments.

8. Indiana

• Median Home Cost: $185,805
• Medicare Advantage Monthly Cost: $43.65
• Average cost of living index: 91.1

In addition to small towns and metropolitan areas, Indiana offers a low cost of living for retirees. Moreover, the Hoosier Hospitality makes Indiana a wonderful place to retire — as long as you don’t mind cold winters and warm, wet summers.

As with the majority of states, Indiana does not tax Social Security income. In addition, Indiana’s property taxes are relatively low. Despite this, Indiana taxes retirement income from pension plans and retirement savings accounts like 401(k)s and IRAs. Usually, this is around 3.23%.

There is another reason why you should consider Indiana; the “Over 65 Deduction.”

Senior citizens with an assessed property value of less than $182,430 who have owned and occupied their principal residence for at least a year may qualify. When calculating taxes, it is equal to $12,480 or half of the assessed value, whichever is lower.

9. Kansas

• Median Home Cost: $176,898
• Medicare Advantage Monthly Cost: $38.56
• Average cost of living index: 86.9

Located in the heart of the country, Kansas may be considered a flyover state. However, the Sunflower State offers urban, suburban, or rural lifestyles. But, above all else, it’s one of the more affordable places to spend your golden years.

The tax climate for retirees in Kansas is moderate. All Social Security benefits of seniors with an Adjusted Gross Income (AGI) of less than $75,000 are exempt from taxation. Also exempt are public pensions. If you have a 401(k) or pension plan, or an IRA, however, your retirement income is fully taxable at the 3.1% to 5.7% income tax rate.

Compared to other states, Kansas has high property taxes and one of the highest sales taxes. On the other hand, there is no estate tax in Kansas. And, for homeowners over the age of 55, you may be eligible for a $700 homestead refund.

10. Iowa

• Median Home Cost: $165,955
• Medicare Advantage Monthly Cost: $49.07
• Average cost of living index: 90.3

In Field of Dreams John Kinsella asks his son, Ray, “Is this heaven?” Ray’s response? “No, It’s Iowa.” For retirees, they might agree.

The Hawkeye State, despite its lack of beaches and warm weather year-round, still has enough for seniors to enjoy from city’s like Des Moines to national parks like Effigy Mounds. In fact, Iowa ranks as the ninth best state for a physically and socially active retirement.

Tax-wise, Iowa is rather tax-friendly. For example, Iowa does not charge state income taxes on Social Security benefits. But, the income from other retirement sources is taxed. Nevertheless, seniors, if they file jointly, can deduct up to $6,000 from that income.

One drawback is that Iowa’s property taxes are higher than average. Also, Iowa has its own tax on inheritances, with rates ranging between 5% to 15%. The homestead credit, however, is a property tax relief available to all Iowa homeowners whose primary residence is their principal residence. As such, you can subtract $4,850 from the assessed value.

11. South Carolina

• Median Home Cost: $225,406
• Medicare Advantage Monthly Cost: $38.38
• Average cost of living index: 94.8

Do you enjoy mountains? You can venture into the Blue Ridge mountains. If you’re more of a beach person, there is no shortage of picturesque beach towns. And, there’s also the chance that you could spot Bill Murray while on the golf course.

In short, the Palmetto State has it all. And, it’s not all that expensive.

“Kiplinger ranks South Carolina as one of the most friendly states for taxes on retirees,” writes Bob Niedt. To begin with, Social Security benefits are not taxed in South Carolina. “The state also offers other generous exemptions on other types of retirement income.”

Property taxes are low, and there are no inheritance taxes or estate taxes. Homestead exemptions allow the first $50,000 of an estate’s fair market value to be exempt from local property taxes for homeowners 65 and older, adds Niedt.

“There is a dark side concerning taxes in South Carolina,” he warns. “Sales taxes. Statewide, the rate is 6%. However, localities can add as much as 3%, potentially topping out at a 9% hit to your wallet, though the average combined rate is 7.46%, according to the Tax Foundation.”

12. New Mexico

• Median Home Cost: $248,670
• Medicare Advantage Monthly Cost: $39.61
• Average cost of living index: 90.6

If you’ve ever been to the Land of Enchantment, you would understand why retirees are flocking to New Mexico.

“New Mexico has a lot of real benefits for people moving here,” says Charles Lehman, project coordinator for Retire New Mexico, a one-stop resource for those considering moving to the state. “You’ve got a great cost of living. The housing costs are reasonable. Good weather—probably better weather than anyplace else. We’ve got the culture, the food, the scenery, the landscapes, and the outdoor recreation. We’ve really got a lot of advantages here in the state.”

GoBanking Rates estimates that grocery prices and healthcare costs are barely below the U.S. mean in New Mexico, but housing and utilities are more affordable, with savings of 19.6% and 11.1%. And, while all retirement income is taxable if you’re over 65, you may be eligible to deduct $8,000.

Retirement Living FAQs

1. When should I retire?

The choice to retire is yours whenever you have the financial means to do so, but it’s not always possible. A whopping 40% of people reported having to retire earlier than planned, primarily due to healthcare issues (taking care of themselves or a loved one) or changes at their work — according to the Employee Benefit Research Institute (EBRI).

FYI, the ERBI reports that the median retirement age is 62.

2. How much should I save for retirement?

Choosing a place to live in retirement shouldn’t be put off till the end of your career. Its something you should think about while planning and saving for retirement.

You can use a retirement calculator to calculate how much money you’ll need to retire. But how can you determine how much that retirement lifestyle will cost you?

If you plan on changing your lifestyle in retirement, common retirement planning guidelines may not be adequate. You can calculate how much retirement savings you will need by thinking ahead to what kind of future lifestyle you want, as well as, where you plan to live.

Envisioning where you would like to live in retirement doesn’t just make your retirement planning more accurate, it also helps you have a happier retirement. You should motivate yourself to save year after year to support your future lifestyle by thinking about where you hope to spend your retirement years.

3. When should I claim Social Security?

When it comes to retirement planning, age matters. The best time to take your Social Security retirement benefit is when you are at full retirement age (or later). It is possible to claim benefits as early as age 62, but you get a reduced benefit when you do. A reduction like that can end up costing you in the long run, and if your surviving spouse decides to take over your payment after you pass away, that reduced amount will remain.

If you wait until age 70 to file, the amount you receive will increase by roughly 8% annually. However, it’s not usually worthwhile to wait after 70.

4. How much will healthcare cost in retirement?

Healthcare is a constantly changing aspect of retirement as this increases by age and varies by location. A typical couple could spend $295,000 out-of-pocket on healthcare during retirement, according to Fidelity. The figure includes premiums, copays, vision and dental care, as well as other items but ignores possible long-term care expenses.

5. Where should I retire?

There are many factors to consider when deciding where to retire. Often, family and friends are the leading considerations, as well as factors such as access to sports, cultural activities, etc. But, you should also consider costs like housing and healthcare, as well as the tax-friendliest of the location.

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