Most pre-retirement planning meetings we have with Federal Employees primarily focus on deciding at what age to retire or what the approximate expected income will be. These are critical questions to discuss prior to approaching your retirement. Yet, there is another question that should be part of the planning process: Where to retire?
There are many Federal Employees who have already decided to retire in their current home or at least in the nearby vicinity. Others are open to living their retirement years somewhere else. The planning process should go beyond choosing between the beach and mountains, or rural vs. city.
A number of states have special tax breaks for retirees while several other states grant Federal Employee retirement benefits special tax status. We’ve put together a report for all fifty states. Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee limit their income taxes on individuals. They only tax dividend and interest income. Some of these also impose a tax on tangible property.
There are twenty eight states that do not tax or only impose a minimal tax on social security. Eleven states either do not tax or have a minimal tax on Federal pension payments. There are some exceptions to this in situations where you retire to one of these eleven states but earned your pension in a different state. Nine states have no capital gains taxes during retirement, though be aware that some of these states make up for this shortfall via higher property taxes or gasoline and other usage taxes. Finally, it’s important to note some states have taxation policies that appear to be hostile to retirees and tax virtually all income sources.
Planning your retirement especially after a long career as a Federal Employee can be bittersweet. It’s likely the end of your professional career and the start of a new chapter in your life. It can be fun to dream about the cottage near the beach or cabin in the woods. Just as important is to work with someone who can blueprint your finances prior to separation. Part of that retirement blueprint is a review of all of your sources of income and then determine the impact of various Federal and State taxes to that income. Coming up short in retirement is the number one reason retirees are forced to take a part time job.