Spend less when you retire

Forget what you know about withdrawal rates. The key to making your nest egg last is to spend less money than you earn.

Due to state tax law differences, however, you’ll soon learn that where you live during retirement largely dictates what you spend.

Some states, such as Minnesota and Vermont, impose a hefty tax on retirement income, while California’s top income tax rate is a budget busting 13.3 percent. Others, including New Jersey, have the highest property tax rate in the nation, while 14 states tax Social Security benefits either in part or in full. They are: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. (Not all, though, made our list of least tax friendly states for retirees.)

Up-and-Coming Retirement Cities, Around the WorldUp-and-Coming Retirement Cities, Around the WorldAlso, the sheer size of the aging baby boomer population has encouraged most states to consider more tax-favorable legislation for seniors, said Kathleen Thies, state tax analyst for CCH tax services firm in Riverwoods, Ill. And some relief programs have already been enacted.

But due to their combination of taxes on ordinary income, pensions, real estate, inherited property and estates, the following 10 states can best be described as hostile territory for retirees.

The list was culled with data collected from CCH, the Tax Foundation, state revenue departments, retirementliving.com and the Federation of Tax Administrators. (Property tax rates, compiled by the Tax Foundation using Census Bureau data, are through calendar year 2011 and reflect the mean property tax as a percentage of mean home value.)

And because tax laws impact retirees differently, depending on their financial circumstances, we did not attempt to rank each state in terms of tax friendliness—or lack thereof. The states are instead presented in alphabetical order.

California

State income tax: 1% – 13.3%
State sales tax: 7.5% (combined state, local rate)
Mean property tax rate as a percentage of mean home value: 0.8%
Property tax ranking: 33
Estate tax: Limited to the federal estate tax collection rate
Inheritance tax: None

The sunny skies of California may be a playground for movie stars and millionaires, but retired residents should take their money and run.

The so-called Golden State, where fortune cookies, blue jeans and Apple computers were invented, levies one of the nation’s highest personal income tax rates. Its tax exemption for Social Security benefits is little comfort, given that most other retirement income gets taxed in full.

And property taxes are assessed at 100 percent of the home’s value, up to a maximum of 1 percent of the home’s cash value. That can deliver a serious dent to your standard of living. Median home prices for new and existing houses and condominiums reached $340,000, with high real estate prices in cities including San Francisco, Los Angeles and San Diego.

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