Client Question: Moving States

June 27, 2024

I recently worked on a financial planning project for clients who were quickly approaching their retirement years. The ultimate goal of the exercise was to determine the estimate of annual spending their portfolio can support in retirement.

As you can imagine, this calculation relies on many assumptions concerning items such as asset class returns, asset allocation, income levels, income taxes. In order to make these assumptions as accurate/realistic as possible, I ask many questions of clients during these projects.

One question I ask is “do you plan to move before/during retirement?”

Why would state of residency matter? The biggest reason is income taxes. In the United States, you pay taxes at both the federal level (rules and rates consistent across all states). However, you may also pay income taxes at the state (or even city) level depending on which state you live in. Each state sets their own income tax policy – which includes whether income is taxed, the applicable rate(s), what’s included as income (ie: wages, social security, etc), and what deductions and credits apply.

These particular clients were debating a move from Wisconsin (where there is a state income tax) to Texas (where there is not state income tax). That change would have an important impact on their financial plan given that virtually all of their retirement savings is tax deferred and will be subject to income taxes at a federal level and state level (to the extent their state of residency has a state income tax)

If you are interested in learning more about state income tax profiles by state, here’s a helpful article from TurboTax.

There are other items that will vary based on state of residency – such as cost of living, property tax levels, cost of real estate, sales tax levels, and other items. All of these items are important to consider when evaluating whether the calculated allowable spending level from a given portfolio is attainable based on the likely costs of living in a given geographical area.

Moving is an exciting adventure and clearly should not be ruled out simply because of an income tax change or a slightly higher required budget. However, it is important to carefully consider all the impacts of a relocation, especially as retirement nears!

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