WHERE TO LIVE IN RETIREMENT

Once you are approaching your retirement years, you start to think of how you are going to implement your retirement and spend your money. Choosing a place to live can have a profound impact on how far your money goes. This is the second half of an article taken from a past Retirement Advisor Newsletter, we discuss some of the tax issues associated with where you decide to live your retirement years.

WHERE TO LIVE IN RETIREMENT

(Part II)

Sales Taxes

Even if your income is not subject to state income tax, or your state has a low income tax rate, it doesn’t matter too much if what you purchase with your money is subject to high sales taxes. After all, in retirement you are now spending the money you previously saved and you want your dollar to go as far as it can. State sales tax rates can range dramatically and The Retirement Advisor expects the trend of sales taxes to increase. There are only five states that have no state sales taxes: Alaska, Delaware, Montana, New Hampshire and Oregon. On average, most states levy a sales tax of around 4-5%. However, at least five states have sales taxes that are 7% or higher, including California, Indiana, Mississippi, New Jersey, Rhode Island and Tennessee. Under California's proposed budget the sales tax will reach a whopping 8.25% before local taxes are added. Even in places where there is low or zero state income tax, if you know you want to live in a major metropolitan area, you should consider what you will pay in taxes to live in that city. For example, Seattle has a 9.5% sales tax, tied with Chicago as the highest among big cities. In the Los Angeles area, five communities have sales taxes of 10%! A few states have exemptions on sales taxes for such items as food, prescription drugs and non-prescription drugs. The following URL will bring you to a web site that shows a state-by-state breakdown of state and local sales tax rats as of January 1, 2012:
http://tinyurl.com/7tscjhu

Real Estate Taxes

For retirees wanting to build and live in their dream home, real estate taxes might be a deciding factor. According to Kiplinger, the five states with the lowest median real estate taxes are: Alaska, Louisiana, Mississippi, Alabama and West Virginia. Conversely, the five states with the highest median real estate taxes are: New Jersey, New York, Connecticut, Virginia and Illinois. Kiplinger has a web site that has various lists as to which state is most and least friendly for retirees for different categories at this URL:

http://tinyurl.com/6tu8qdu

This week, Forbes published an article entitled, “The 25 Best Places to Retire in 2012” which explores the average price of a home, the cost of living and the tax burden on retirees. The article can be found at this URL:

http://tinyurl.com/6w5n75x

The Intangible

There are reasons other than financial to pick a certain place to retire. CNNMoney published a list of the 25 Best Places to Retire that lists towns that offer tons of amenities at a reasonable cost of living. You can find the list at the following URL:


http://tinyurl.com/5to53af

Read a sample of our Retirement Advisor Newsletter and learn how to subscribe."The Retirement Advisor"

No Social Security Cost of Living Adjustment for 2011

Flat COLA for Social Security recipients for the second straight year.

There will be no fizz in Social Security checks for the new year.  The Social Security Administration announced "There will be no increase in Social Security benefits payable in January 2011, nor will there be an increase in SSI payments."

COLA Computation

• The last year in which a COLA became effective was 2008. Therefore the law requires that we use the average CPI-W for the third quarter of 2008 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 215.495, as shown in the table below.
• Also shown in the table below, the average CPI-W for the third quarter of 2010 is 214.136. Because there is no increase in the CPI-W from the third quarter of 2008 through the third quarter of 2010, there is no COLA for December 2010.

	CPI-W for—
	2008	2010
July	216.304	213.898
August	215.247	214.205
September	214.935	214.306
Third quarter total	646.486	642.409
Average (rounded to the nearest 0.001)	215.495	214.136

Remember that the price of oil peaked during the three months in 2008 when the COLA for 2009 was set at 5.8%. 

Chart showing oil prices vs the S&P500.
click image to see a larger version

With oil prices the past three months about half their peak value, CPI is slowly catching up but still below the 2008 calculation. The good news for seniors is they benefited from a higher SS payment than they would have received if the 2009 COLA was set a few months later after the price of oil crashed to $35 at the end of 2008.

Here is a chart and current quote for crude oil prices.

CPI peaked in July 2008 at 219.964.  This September the CPI recovered to 218.439, still slightly below its 2008 peak. CPI for 2008 was only up 0.1% but Social Security beneficiaries got a 5.8% adjustment because of the spike in oil prices. They were very, very lucky to get a 5.8% raise while the rest of the country got fewer hours or lost jobs during the recession.

 

This table Automatic Social Security Cost-Of-Living Adjustments by Year clearly shows the January 2009 adjustment of 5.8% was the largest since July 1982!

 

Since actual CPI was effectively lower than what Social Security recipients were getting paid for, taxpayers were very generous to retired people at a very good time... during this recession. My guess is the CPI will make a new high in the next few months and COLAs will show up again next year for 2012.