The Worst States to Retire In 350One of my New Year goals this year is to make an official Will just in case something happens. Unfortunately, the 2020 coronavirus pandemic exploded and I put a lot of things on the back burner. However, I’m planning to fly to Thailand very soon and I really want to get this done before I go. That’s why we bit the bullet and scheduled an appointment with a local attorney. Estate planning is an expensive process but it’s worth it because we already learned something very valuable – Oregon is the worst state to retire in. (I was going to say die in, but that’s a bit too morbid.)

Today, I’ll share why Oregon is a terrible state to live in after FIRE. Also, this will be a crowdsourcing project because I need your input. I don’t have the resources to research every state. If your state is worse than Oregon, tell us why. I’ll add it to our “worst states” list at the end of the post. I doubt you can top Oregon, though. Prove me wrong! Oh, this post is pretty US-centric. If you live in a different country, I’d love to see how it compares. Tell us in the comment section if it’s more expensive to retire in your country.

Assumptions

For this post, I’ll mostly focus on the financial aspects of life after financial independence. Life is more expensive in some locations and some states cost much more than others to live in. If you’re still in the accumulation phase, this isn’t a huge concern. But it’s a different story when you’re drawing down your portfolio. It’s better to minimize taxes and conserve your portfolio.

Also, I’ll use FatFIRE for this article. This means about $100,000 of passive income annually. This is enough income to live very comfortably almost anywhere in the United States. You’d need about $3,000,000 net worth to generate this much. Of course, many of us in the FIRE community are not shooting for FatFIRE. I think it’s still relevant, though. Your net worth will keep growing and probably get there someday. Lastly, I’ll use the RB40 family as a template – 2 adults and one son. This is important for estate planning.

Death Tax

Most people in the FIRE community probably aren’t too worried about the estate tax. In 2020, the federal estate tax exemption is $11.58 million for singles and $22.8 for married couples. That’s way beyond the FatFIRE level. This is one of the reasons why I put off estate planning for so long. Why worry about it when our net worth is far below that point? However, I completely forgot about death taxes at the state level.

There are two kinds of death taxes in the US — inheritance tax and estate tax.

Inheritance Tax

Inheritance tax is paid by the person who inherits the assets. Generally, if you’re a close relative, you’re exempted. The definition of close relative varies from state to state. We’ll look at Pennsylvania for example. A spouse is exempted from inheritance tax. A direct descendant (e.g., a son, daughter, or grandchild), pays 4.5%. Siblings pay 12%. Other heirs lose 15%. Yikes! That’s a big bill. Fortunately, only six states have inheritance tax – Maryland, New Jersey, Iowa, Nebraska, Kentucky, and Pennsylvania. Also, Pennsylvania and Nebraska are the only two states where a direct descendant has to pay inheritance tax, 4.5% and 1% respectively. We’ll put Pennsylvania on our list because it’s the worst of this lot. If you live in one of these states and don’t have a close relative, then you need to research more.

Estate Tax

Estate tax is a bit different than inheritance tax. When someone dies and leaves assets behind, some states levy a tax on it. It doesn’t matter who inherits the estate. Twelve states have estate tax – Maryland, Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Washington D.C. also has an estate tax. Fortunately, each state has an exemption on the estate. For example, Hawaii will tax estates above $5.5 million. Anything below $5.5 million is exempted. There are a few states that have low exemptions.

  • Oregon! – Anything above $1 million is taxed at 10% to 16%.
  • Massachusetts – 0.8% to 16% above $1 million.
  • Rhode Island – 0.8% to 16% above $1.6 million.

The exemption is per person. For a married couple, the exemption is doubled.

*Maryland has both inheritance tax and estate tax. However, the estate tax exemption is $5 million and a direct descendant doesn’t have to pay inheritance tax. It’s not bad for the RB40 household, but it really depends on your situation.

Estate Planning

Jackpot! We live in Oregon and have over $1 million in the estate. This isn’t that uncommon if you take life insurance into account. I have a $250,000 term life insurance policy and Mrs. RB40 has $500,000. We also have a house, rental condo, dividend portfolio, retirement accounts, and our real estate crowdfunding investment. We’ll assume everything adds up to about a $3,000,000 estate. If we get into a car accident and pass away, Oregon would take about $100,000 right off the top.

For us, Oregon is the worst state to die in. Let’s see if other states are better. The exemption is per person so the estate tax would be levy on whatever is above that.

  • Massachusetts – about $40,000 in estate tax
  • Rhode Island – $0 estate tax. $3,000,000 is below the exemption.
  • Pennsylvania – $135,000 inheritance tax.

From this section, we’ll add OR, MA, and PA to the worst states list. Unexpectedly, Pennsylvania is worse than Oregon.

You can read more details on the 17 states with death taxes at the AARP.

State and local taxes

Next, we’ll look at state taxes. Each state has its own tax structure so this one is tough. I’ll share what our taxes look like in Oregon. If your state is worse, let me know in the comment section. There are three main ways a state levies taxes – income tax, property tax, and sales tax. Personally, I prefer sales tax over income tax because I’m frugal. We don’t buy a lot of stuff. Income tax sucks because the money is taxed right when it comes in. Anyway, here is what a FatFIRE family would pay in Oregon.

  • Oregon state income tax on $100,000 income (married) – about $7,500.
  • Property tax in Portland ($300,000 assessed value) – $8,000.
  • Sales tax – $0. We don’t have a sales tax in Oregon.

So, we pay about 15.5% to live in Portland, Oregon. It’s lower in other Oregon cities, but not by a huge amount. Post FIRE, this is a huge burden. Other states with high tax burdens are California, Hawaii, New Jersey, Minnesota, and New York.

Let’s crunch the numbers for Palm Springs, California. We may move there to be closer to our families someday.

  • CA state income tax on $100,000 income (married) – about $3,000. The tax brackets are pretty good for this income level.
  • Palm Springs property tax (assessed value $300,000, a small house) – $4,000.
  • CA sales tax (spend $50,000 on taxable goods) – $3,500.

Whoa, did I make a mistake here? It looks like a retiree in Palm Springs pays less tax than Portlanders, about 10.5%. Maybe we should accelerate our relocation plan.

From this section, I’ll add Oregon, California, and Hawaii to the list. Let me know if I need to add other states.

Cost of living

Lastly, we’ll look at the cost of living. This one is complicated because every location is so different. The cost of living in Portland is much higher than in other cities/towns in Oregon. This is mostly due to the cost of housing. In a normal year, we spend about $50,000 and live a pretty comfortable lifestyle. I think the cost of living is moderate here for FatFIRE.  Also, our cost of living would stay about the same if we move to Palm Springs, CA. That’s fortunate because it’s bad to increase your COL after retiring.

The states with the highest cost of living are Hawaii, California, New York, and Massachusetts. We’ll put these on our list too. Oh, the cost of living is also very high in Washington, D.C. Let me know if the cost of living is very high in your city/town. We can add it to the list.

Here is a nice site to compare the cost of living between two cities. I also used this site to figure out local taxes.

Worst States to live after FIRE

Alright, here are the winners! This is for a family with a net worth of between $2 million to $5 million. If you’re worth more than this, you definitely need to talk to an estate planner.

worst states to retire in

If you live in any of these states, you might want to consider relocating to take advantage of geoarbitrage.

We like living in Portland so it’ll be difficult to move. However, Oregon is not a good state to retire in and we can’t stay here. Here is our tentative plan.

  • Move to Palm Springs when our son goes off to college. Mrs. RB40 has family in that area so we need to live there for a while.
  • Once we’re not needed in CA anymore, we’ll establish residency in Florida or Nevada. These states do not have an income tax or estate tax. I plan to travel a lot more extensively at that point and live around the world.
  • When we got tired of traveling, we’ll settle down in a location with a low cost of living and a low tax burden. It needs to be a good fit for us too.

Alright, now I need your help. Please tell us if your location is a particularly bad place to retire. We need to build this list so we can avoid these places. Oregonians, what do you think? Will you retire in Oregon or move across the river to Washington? Our lawyer told us many well off Oregonians are doing this.

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Image credit: Zack Spear

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