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The Big Impact of Geography on Clients' Retirement Plans

By Murray Coleman December 8, 2017

Just like in real estate, living comfortably in retirement can often come down to one word: location. Even if clients remain disciplined and follow their long-term financial plans, differences in costs of living in different parts of the country can greatly influence how far $1 million goes in retirement.

At least that’s the conclusion of a U.S. demographics study by analysts at HowMuch.net. Using recent data compiled from the Bureau of Labor Statistics and the Council for Community and Economic Research, the independent research site finds that:

  • In Mississippi, Arkansas, Tennessee, Kansas and Oklahoma retirement nest eggs can be expected to hold up for 24 years or more.
  • Savings will be eroded in Hawaii, D.C., California, Oregon and New York much more quickly – between 13 and 17 years.

“It’s important to remind clients there is clearly a sunshine tax to live in states like Hawaii and California,” says Leon LaBrecque, managing partner of LJPR Financial Advisors in Troy, Mich. “But studies like these also provide good illustrations to let people know they’ve got options.”

The advisor, whose firm manages more than $750 million, notes Florida and Arizona are two warm climate states that land “dead in the middle” of higher-cost states in terms of living expenses. At the same time, LaBrecque finds many parts of the South and Midwest remain relatively less costly areas to retire.

“At our practice, we hear from a lot of couples debating whether to move from Michigan or New York to Florida,” he says. “But for those where family considerations aren’t an overriding factor in picking a location to retire, we like to at least raise their awareness that there are less dramatic moves possible.”

That means, according to LaBrecque, instead of relocating across the country in California, couples might want to consider “a more moderate state like North Carolina where they’ll get more bang for their buck.”

But most clients he’s talked to over the years make such decisions based on where their family and friends live. “We don’t see a lot of people moving from New York City to Arkansas, for example, because they want their savings to last longer,” LaBrecque says.

Rather, he adds, clients are looking for help in determining “a good balance” between living a “reasonable” lifestyle and downsizing to a home where they feel “comfortable and secure.”

But there’s one major caveat to such data that wealth managers should keep in mind, points out Raul Amoros, content director at HowMuch.net. While such statistics use cost-of-living indexes and government consumer expenditure surveys broken down by age, not included is a look at income growth. As a result, revenue generated from items like portfolio returns, Social Security benefits and pension payouts aren’t part of this study.

Leon LaBrecque

“Given the limited scope of our data, this is just intended to be a simple yet fun way to start a discussion on how cost of living varies so much depending on where you live,” Amoros says.

The main point Amoros hopes advisors take from such number crunching: If people decide to retire in a high-cost state, “$1 million in savings might not be enough.”

Of course, living costs are relative to managing household expenses, suggests Jonathan Mariner, a tax policy analyst and president of software developer TaxDay.

In that sense, he sees a need for advisors to consider studies that address the impact of different tax treatments in different areas. “You can’t ignore local sales tax rates or differing state income tax levels,” Mariner says. Seven states don’t even impose an income tax, he points out. Some states, like Tennessee, are either phasing out or have already abolished taxes on stock dividends and interest, he adds.

The political climate can also be worth considering. Earlier this year a study by MultiState Associates estimated that 31 states faced budget deficits in fiscal 2017. “A lot more states and local authorities are going to have to change their tax policies,” Mariner says. “As baby boomers retire, states like Florida and Texas with growing populations can be much more generous about how they treat retirement income.”