Retiring in the South
The Southern United States has much to offer retirees. With warm weather, sandy beaches and some of the best golfing in the nation, it’s easy to see why retirees flock to the South, and more specifically, to Texas, Georgia and Alabama. But there’s more to the Southern states than just the promise of the outdoors: The South is also home to some of the most cost-effective retirement destinations around. Many Southern states offer lower costs of living and favorable tax advantages for retirees.
In other words, retiring in the South can be good for your spirit and your bank account.
With offices in and around Houston, Texas; Atlanta, Georgia; and two locations in Alabama, the financial advisors at Linscomb & Williams have put together this quick guide of what you need to know about retirement planning in the South.
One key consideration in retirement planning is your cost of living. When you’re working, your employer usually adjusts your salary for where you live – if you work in a state with a higher cost of living, your salary is typically higher. But there is no cost-of-living adjustment on your retirement savings, so retiring in a state with a lower cost of living can help you stretch your nest egg further.
Cost of living is one area where Southern states tend to shine. Alabama, for example, has one of the lowest average cost of living for retirees, according to USA Today. Georgia’s cost of living is 7 percent less than the national average, and Texas comes in at 3.2 percent under the national average. This can fluctuate depending on the city or county you choose to plant roots in, so talk to your financial advisor about what your average expenses will be in retirement. A generalized, online cost-of-living calculator may not be accurate if you’re planning to plant roots in a more or less expensive area of a state.
Another major component of retirement income is taxes, especially if you’ll be withdrawing pre-tax savings, such as funds from your Traditional 401(k) or IRA. All withdrawals from traditional retirement accounts are taxed at ordinary income rates for federal purposes, but states can have their own rules for how they tax retirement income. And some states are more retiree-friendly than others.
The South is home to many of the most tax-friendly states for retirees. For example, Texas and Georgia do not tax Social Security income. There is also no income tax in Texas, and many of the Southern states have no inheritance tax and provide real property tax breaks for seniors.
If planning to retire in the South, pay close attention to your state’s overall tax picture, including the income tax range, sales taxes, taxes on Social Security income and whether the state offers other tax breaks specifically for seniors.
Recent natural disasters across the South, from hurricanes in Georgia to the unexpected freeze in Texas, are a poignant reminder of the need for disaster planning when you retire. Just as you would have insurance to safeguard your home and physical assets from natural disasters, retirees should also have protections in place to protect their finances in the event of a disaster. Being forced to withdraw from a portfolio in an emergency can severely handicap your long-term plan.
Aim to maintain a cash emergency fund in the event something unforeseen, like a hurricane, occurs.
Texas has been increasingly making the Top Places to Retire lists. Houston, specifically, was ranked among the 25 best places to retire in 2020 to 2021 by U.S. News & World Report. The city’s affordability and mix of big-city excitement and suburban living is part of why. Texas also has no income tax and does not tax Social Security, both of which are a major benefit for retirees.
If you’re retiring in Texas, something to keep in mind, however, is that the state has the seventh-highest median property tax rate of all U.S. states. That said, retirees are eligible for some property tax breaks, such as being allowed to defer property taxes on a primary residence (over age 65), or use a valuation freeze program or homestead exemption of $10,000 of the property’s assessed value for homeowners age 65 and older. Also worth noting is Texas’s high state and local combined tax rate.
Get a clear picture of how taxes will affect your overall retirement plan ahead of time to avoid surprises later on.
The Peach State is another common sight on Best States to Retire lists thanks to its warm weather and relatively low cost of living. With cultural hotspots like Atlanta, gorgeous beaches and some of the most famous golf courses in America, it’s no surprise Georgia is a popular place to retire. The state also offers many financial benefits for retirees.
Georgia has among the lowest average healthcare costs for retirees. It also provides many retirement tax benefits, such as no taxes on Social Security and up to $65,000 of most sources of retirement income for seniors age 65 and over. If you’re aged 62 to 64, you are also able to shelter some retirement income from taxes but it’s capped at $35,000. Medium state and property taxes also keep Georgia among the more affordable states to retire in the South.
Alabama is often overshadowed by its neighbor, Florida, when thinking of retirement, but Alabama actually has just as much – if not more – to offer. The Heart of Dixie provides many of the same benefits as Florida, including warm weather, golf and beach access, but oftentimes, for a much lower price.
Healthcare costs are below average and income tax ranges cap at 5 percent. Social Security and pension income are both exempt from state income taxes, and the state has the second-lowest median property tax rate in the country, with the added benefit that homeowners age 65 and over are exempt from all state property taxes. If you’re planning to retire in your own home, it can be harder to find a more tax-friendly state than Alabama.
State sales taxes in Alabama are also low, helping keep overall costs of living down. That said, some local governments add up to 7.5 percent local taxes on top of the 4 percent state tax rate, so talk to a local financial advisor about the county you choose to retire in.
Retiring in the South has many benefits, but to get the most of these benefits, you need to know how each element will impact your personal retirement plan. While property tax savings may appeal to someone who wants to retire in his or her own home, if you prefer community living, that may not be an important factor.
Work with a financial advisor to evaluate the financial impact of retiring in the South based on your individual situation. A financial advisor who is familiar with the unique considerations of retiring in the South will be able to walk you through how your chosen locale will affect your retirement plan.
Linscomb & Williams is headquartered in Houston, Texas and has offices in The Woodlands and Austin, TX; Atlanta, GA; as well as Birmingham and Huntsville, AL. We are a fee-only, fiduciary financial planning and investment management firm serving families nationwide. If you live in or plan to “fly South” for retirement, let’s talk! Your retired self will thank you later.