It nearly broke my heart when one of my clients told me the news. “Kimberly, I’m moving,” she said. “I just need to live someplace where my retirement income will stretch a little farther. And my grandchildren are in New Mexico, so I’d also like to be closer to them.”
Of course, I understood. Like most of my clients, she had a comfortable retirement nest egg, thanks both to her own career and the assets she received when her husband of 47 years, passed away. However, California’s high ranking for cost of living, combined with our relatively high state personal income tax, heightens the appeal of a place with neither of these disadvantages (California’s top income tax tier is 13.3%; New Mexico’s is 4.9%).
With no immediate family remaining in California, the move made total sense for my client, even before accounting for the potential windfall she was likely to achieve by selling her home in a state where the median home price is over $700,000 and buying in a state where it is just over $293,000.
On the other hand, as often happens in our business, after working with my client (and her husband, before his death) for many years, I had come to see her as a friend, not just a client. I knew I would miss her.
But my client’s story is far from unique. A 2022 study by Nationwide found that 40% of pre-retirees said they expected to move to a different city or region when they finished their active employment careers. In New Jersey alone, 67% of those moving were headed somewhere else, with retirement cited as a main reason, according to a 2019 survey of customers by United Van Lines. The Nationwide survey mentioned above cited reduction in cost of living for retirement as one of the top three reasons for relocation.
In other words, many of us are likely to be in the same position: counseling clients in or nearing retirement who intend to relocate. As trusted advisors, then, we’re obligated to provide them with sound, authoritative counsel that fully considers their financial situation and goals. We may not want to see them go, but we must provide guidance that helps them achieve their aims, in conformity to their best interests. This means that several topics need to be top-of-mind, both for us and our soon-to-be-relocating clients.
While it’s popular to aim for retirement in a state with no income taxes, we need to make sure our clients understand that that’s not the only tax they need to be thinking about. If they plan to own a home in their new location, they’ll have to pay property taxes. Some states tax Social Security income, while others don’t. Some states offer better breaks for seniors than others.
For example, Texas — one of the top ten destinations for relocating retirees — has no state income tax. However, its property tax rate is sixth highest in the nation. Especially for affluent retirees who expect to own a home commensurate with a comfortable lifestyle, this can be a significant consideration. On the other hand, Texas offers a break on property taxes for seniors by exempting the first $100,000 of assessed value on a primary residence from school taxes. Other states do the same to a greater or lesser degree; South Carolina, for example, exempts the first $50,000 of assessed value.
If your client cites taxes as a primary motivator for making a move in retirement, they may be surprised by the figures they see when you explain the total tax picture.
It’s reasonable to assume that our clients, most of whom have significant resources, will want to own rather than rent (although offloading the costs of upkeep and property taxes onto a landlord can be an advantage to retirees who want a lower-stress lifestyle). This means that we also need to be helping them consider the impact of housing costs on their retirement budget.
It shouldn’t be surprising that, according to a Vanguard study, a whopping 60% of relocating retirees tap into home equity as a source of retirement funding. Perhaps the most popular way of doing this is by selling highly appreciated property in a state where housing is more expensive and buying in a place closer to the other end of the cost spectrum.
Retirees in this situation are often able to pocket six figures or more in net equity after buying in a less expensive location — typically, even after paying cash for their new home. It makes sense when you consider that the two places people tend to have the most assets are in their retirement plans and their home equity.
We need to help clients who are considering this strategy look at potential capital-gains issues around the sale of a highly appreciated home. If there is reason to believe that they may net more than the maximum exemption ($250,000 for single individuals; $500,000 for married couples filing jointly), we need to help them plan for the resulting tax bill and mitigate it as much as possible (possibly through harvesting losses in other areas). For clients wishing to dispose of a second home or vacation property, a 1031 exchange could help them put off a capital gains tax bill on that transaction.
Of course, everyone can understand the pull exerted by the desire to be closer to children or grandchildren. And while this isn’t strictly a financial decision, certain financial considerations should be remembered. For example, what is the estate-tax situation in the intended destination? Seventeen states have estate or inheritance taxes; 33 do not. And of those that do tax intergenerational wealth transfers, significant variation exists on the size of the exemption (in Massachusetts and Oregon, estates of $1 million or more are taxed; in Connecticut an estate of up to $12.92 million is exempt). Rates also vary widely; in Washington the estate tax can be as high as 20%; in Maine the top rate is 12%.
Clients who are relocating for family reasons may also need to consider the impact of estate and inheritance taxes on their heirs, especially if they have significant assets. Our job is to bring this to their attention and help ensure that their estate planning strategy is optimized for the laws in their new place of residence.
Finally, let’s not forget the matter of state registration requirements for financial advisors. Though it may seem obvious, it should probably be said that if we intend to continue our advisory relationship with a relocating client, we need to be able to do business in their new state of residence.
Michael Kitces posted an informative article about this topic to his website in October 2022. Among other things, the article stated that even when RIAs aren’t required to register with the state, they may still be required to make some filings in order to legally advise clients in certain states. Don’t fail to verify that you’ll be able to continue working with a valued client after they’ve moved out of state. After all, you’ve spent years building the relationship. Don’t let a paperwork glitch force it to a halt.
Kimberly Foss is a CFP® professional at Mercer Advisors practicing in the Sacramento Valley area. The opinions expressed by the author are her own and are not intended to serve as specific financial, accounting or tax advice. Mercer Global Advisors Inc. is registered with the SEC and delivers all investment-related services. Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Click here for a full disclaimer.