Taxes vs. Retirement: Extend Your Nest Egg by Escaping High Taxes

My home town would be an expensive place to retire.  With a 5% state income tax, a 3% county income tax, a 6% sales tax, exorbitant property tax rates and costly real estate, a nest egg of $500,000 would last far less time here than it would in, say, Alaska or Ecuador. 

The tax question isn’t academic, or some political abstraction; by one calculation I made, I could live for only 15 years on my target retirement savings in my high-tax city, compared to virtually unlimited time in Ecuador.

How does that work?  Put simply, if your retirement investments earn an average of say 6% return every year, and you can live on draws equalling 5% of your investments, then your nest egg will continue to grow and you can live indefinitely on it.  But if you must spend 10% of your investments to live each year, then you draw down your nest egg and it will run out at a certain point.

This is why taxes (and cost of living) matter for retirement planning.  With only a limited amount of money, and an unknown amount of time that it must last, an extra 15-50% in effective spending each year is a huge burden and risk for retirees.  Retirees need to keep their annual costs low; if their costs are below the average return they can expect from their investments, then statistically they should never run out of money.

Here are a handful of states to consider for anyone looking to retire in the United States, and a list of places that offer an even better deal for retirees.

The following states have no income tax: Alaska, Florida, Texas, Nevada, South Dakota, Wyoming, Washington, New Hampshire and Tennessee (the latter two still tax some dividend and capital gains income, however).  That said, states may tax more heavily in other areas, for example sales tax or property tax.  There are five states with no sales tax: Alaska, Delaware, New Hampshire, Montana and Oregon. 

Before moving your residence to another state, double check local property taxes and cost of living as well.

States don’t just tax based on earning, spending or living, either.  Some states tax you for dying, by helping themselves to a hefty portion of your estate: Rhode Island, Massachusetts, New York, Connecticut, New Jersey, Maine, Nebraska, Iowa, Illinois, Minnesota, Vermont, Maryland, Oregon, Washington and Delaware all have death/inheritance taxes.

While there are some states with efficiently low taxes, Uncle Sam still collects federal income taxes, which can be a crippling 39.6% in the higher brackets.  Further, health care is notoriously expensive in the US, and real estate prices (or rents) can be unaffordably high.

Most Americans instantly dismiss the idea of retiring overseas, mistakenly believing that other countries are more “dangerous” or have inherently poor health care.  Both notions are of course false, and there are some excellent financial reasons to consider retiring abroad.  If you spend at least 330 days overseas, your first $100,800 of income is tax-free.  For almost all retirees, that means paying no income tax at all.

Then there is the lower cost of living. 

Consider Panama: it is an easy flight from the US, and Social Security income can be direct-deposited into Panama bank accounts tax-free.  It has affordable yet excellent health care, it’s warm and sunny year-round and gaining legal residency there is easy.  The same is true of Ecuador, and in both countries there are thriving expat communities.

Prefer Europe?  Move to Andorra, a tiny nation in between France and Spain.  It is not a member of the European Union, which means the residency rules are far more relaxed, but you’re in the middle of Western Europe for easy travel and a relaxed, cultured vibe. 

The list goes on, from the Philippines, certain islands in the Caribbean, parts of Central Europe and dozens of other affordable, beautiful and fully modern places to retire.

Increasing numbers of aspiring retirees may not have a choice, if they want to retire completely: Americans are worryingly underinvested for retirement, and many will likely run out of money before they die.  With Americans living longer every year, the risk of us outliving our money is growing.

As your retirement draws nearer, consider rethinking where you'll retire, to take advantage of lower taxes elsewhere.  It might just mean the difference between living comfortably for the rest of your days and running out of money in your twilight years.

Found the perfect low-tax place to retire, with low cost of living and excellent amenities?  Tell us about it!