Welcome to the January edition of FAQs and RAQs!
Here, we address client questions—some Frequently Asked, and others Rarely Asked.
FAQ: Are Some States Better for Retirement Than Others?
Definitely! The state you choose to retire in can make a big financial difference. Let’s explore three key areas: living expenses, retirement taxes, and estate planning considerations.
1. Living Expenses
Costs vary significantly by state, so it’s worth researching:
- Housing: Some states like Pennsylvania offer affordable options, but high-demand regions might strain your budget.
- Healthcare: Don’t overlook medical costs, which can differ greatly depending on the state.
- Everyday Costs: Groceries, utilities, and transportation also play a role. A state with a lower cost of living will help your retirement savings go further.
2. Retirement Taxes
Taxes can quietly chip away at your retirement income. Here’s what to look for:
- Income Taxes: Some states have no state income tax, making them attractive for retirees.
- Social Security Taxes: Most states don’t tax Social Security benefits, but a few do—know your state’s rules!
- Retirement Account Taxes: Withdrawals from 401(k)s or IRAs are taxed differently across states. Some offer exemptions, others don’t.
- Property and Sales Taxes: Low-income-tax states often compensate by imposing higher property and sales taxes. Be sure to look at the full picture!
3. Estate Planning
When it comes to planning for heirs, some states make it easier than others:
- Estate Taxes: Roughly 12 states tax the total value of your estate.
- Inheritance Taxes: A few, like Pennsylvania, tax what heirs actually receive.
- Portability: Certain states allow spouses to more easily preserve estate tax exemptions.
The Bottom Line
It’s no surprise that some states in the South are retirement favorites. They combine tax advantages, lower living costs… and warm weather!
Still, what’s best for you depends on your income, lifestyle, and legacy goals. If you’re not sure how to evaluate your options, we’re here to help!
RAQ: Are Municipal Bonds at Risk in the Event of a Natural Disaster?
This is a question we rarely hear—perhaps because natural disasters are relatively uncommon in Pennsylvania. However, for investors holding municipal bonds, it’s a relevant risk, as underscored by recent wildfires in California.
Municipal bond investors typically enjoy a variety of protections against natural disasters. These include state and local rainy-day funds, federal emergency assistance, and bond insurance. Some municipal bonds even include provisions allowing issuers to defer payments in the event of a disaster, as seen with hurricane-prone regions.
That said, the risk isn’t zero. In 2024, a Texas city defaulted on its municipal bond payments due to severe drought conditions. The drought caused water shortages, reducing the city’s revenue from its waterworks and sewer system, which led to the default.
Thankfully, such occurrences are rare. Even so, understanding these risks can help investors make better-informed decisions.
Have a question? Drop us a line at carlsongroup@rwbaird.com. We’d love to hear from you!
Baird does not provide tax advice. All investments carry a level of risk, including loss of principal. PAST PERFORMANCE DOES NOT PREDICT FUTURE RESULTS.