This article takes a look at the 15 worst states to retire on social security. If you wish to skip our detailed analysis on shifting trends of middle America, Boomer moves, and financial considerations, you may go to the 5 Worst States to Retire On Social Security.
Shifting Trends: Middle America, Boomer Moves, and Financial Considerations
Based on an analysis of 20 million tax returns, it is safe to say that Middle America has drastically changed. Middle America -- a term defining households with an income between $45,000 and $145,000, has undergone significant transformations over time. Shifts in attitudes towards income, marriage, retirement ages, and the decision-making process for geographical moves has been evident within this demographic.
This analysis has been conducted by H&R Block, Inc. (NYSE:HRB) in their latest Outlook on American Life report. The report reveals that baby boomers predominantly earn under $80,000, and often live near the coast. Only 50% of Baby Boomers are filing their taxes jointly, notes H&R Block, Inc. (NYSE:HRB). This is dramatically lower than a decade ago. Moreover, the seniors are no longer inclined to continue residing where they currently are either. Instead, 7.9% more baby boomers are reported to look forward to changing states since the pandemic. So where are these boomers moving and why is this demographic so important anyway?
“Each year, H&R Block assists 20 million American households in filing their tax returns, many of whom fall into what most consider middle income. This makes us uniquely positioned to paint a portrait of Americans. Understanding their attitudes and decisions that impact their financial status is important because middle Americans can move the economic needle in either direction very quickly.”
According to the study, the number one retirement state boomers can’t get enough of is Florida, followed by Texas. Retirees are also showing a growing preference for Arizona, North Carolina, and South Carolina. Tax advantages, low cost of living, weather, and even amenities are some of the many reasons boomers are moving. Smart Asset agrees, stating that the top cities with the biggest boomer inflows include Clearwater in Florida, Reno in Nevada, Orlando in Florida, and Cape Coral in Florida, to name a few. The report states that almost 30% of the population in many of these cities comprises boomers.
Considering these moves, it is only evident that baby boomers dominate the housing market in terms of the total amount of homes owned. According to a report by Redfin Corporation (NASDAQ:RDFN), baby boomers have the highest worth of US homes, standing at $18 trillion. Despite the difficult housing market, this demographic is staying in their homes longer and even buying more homes.
"The big story for the last couple of months has been a lack of inventory due to mortgage rate lock-ins. Now that rates are above 7%, it doesn’t make sense for a lot of people to sell.”
Even worse, they are also said to be hoarding the few homes available, driving up the prices of homes.
“If you’re retired and you paid off your mortgage or close, it’s easy for you to stay put, but it’s also easy for you to cash in and have a different lifestyle. The equity makes it so they have two really good options: They can stay and have low mortgage payments, but they also have this other great option where they can cash in their equity if they’re able to move to somewhere more affordable or downsize.”
However, this isn’t just true for baby boomers. H&R Block notes that California and Hawaii have been the hardest states to live in financially. As of 2021, Los Angeles lost around 11,000 residents, while San Diego lost 5,000. Meanwhile, 6% of the population in Hawaii packed up and left during the pandemic as well. The report further notes that Honolulu lost more residents than even Chicago and Brooklyn. Meanwhile, Alaska lost 5% of its population.
Just like these individuals are moving away from areas that just don’t make sense financially, retirees with fixed incomes should be avoiding states with a high cost of living as well. For this purpose, we have compiled a list of some of the worst states to retire in. This list can help potential retirees avoid states that are impossible to survive on social security.
15 Worst States to Retire on Social Security
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Methodology
To compile the list of the 15 worst states to retire on social security, we began by listing out all states. Next, we assessed their cost of living indexes, health index, and tax-friendliness. Smart Asset has categorized states based on their tax-friendliness. These are "not tax-friendly", "moderately tax friendly", "tax friendly", and "very tax friendly". For ranking purposes, we have allotted them a score from 2 (not tax-friendly) to 5 (very tax-friendly).
The cost of living and health index has been sourced from the Missouri Economic Research and Information Center (MERIC). For perspective, a cost of living index of 98 means the cost of living in the state is 2% below the national average. Similarly, a health index with a score of 101 implies that the state of healthcare is 1% above the average.
Subsequently, we computed the weighted average rankings for each state, allotting 50% weight to the cost of living index and equal weights (25% each) to the remaining factors. The rankings are presented in descending order, from the highest to the lowest rankings. For places with the same rankings, tie-breaking has been done based on the cost of living index, with a higher cost of living index being ranked higher on our list.
Here are the worst states to retire on social security:
15. Maine
Insider Monkey Rank: 6.45
Cost of Living Index: 110.7
Health Index: 111.2
Tax Friendliness: Not Tax Friendly
Maine can be one of the worst states to retire in for taxes. Even though social security is not taxed in this state, other forms of retirement income are taxed at rates that can be as high as 7.15% (with small deductions). Property taxes are higher than the national average, and the effective property tax rate stands at 1.09%. Coupled with a cost of living that is 10.7% higher than the national average, this state is a difficult place to survive on a fixed income.
14. New Jersey
Insider Monkey Rank: 6.55
Cost of Living Index: 110.3
Health Index: 100.4
Tax Friendliness: Moderately Tax Friendly
New Jersey, one of the worst states for taxes and cost of living, presents a challenging landscape for retirees. The cost of living in the state is 10.3% higher than the national average, making it difficult for seniors to survive on social security alone. Meanwhile, social security benefits are not taxed in the state. Income from retirement accounts and pensions for single filers below $75,000 will be subject to a low-income tax. Property taxes are some of the highest in the country.
13. Colorado
Insider Monkey Rank: 6.95
Cost of Living Index: 106.9
Health Index: 99
Tax Friendliness: Tax Friendly
Another state that makes it to our list of worst places to retire is Colorado. The cost of living in the state is 6.9% higher than the national average. Social security and retirement incomes are partially taxed here, and so are public and private pension income. Sales tax is higher than the national average, while property taxes are low.
12. Hawaii
Insider Monkey Rank: 7.05
Cost of Living Index: 179.2
Health Index: 125.8
Tax Friendliness: Moderately Tax Friendly
One of the worst states to retire in is Hawaii. The cost of living is notably high in the state, being 79.2% higher than the national average. The state is also moderately tax-friendly towards retirees. Even though social security income is not taxed, withdrawals from retirement income are fully taxed. Private pension income is also fully taxed, but public pension income isn’t.
11. Connecticut
Insider Monkey Rank: 7.05
Cost of Living Index: 113.9
Health Index: 108.8
Tax Friendliness: Not Tax Friendly
Connecticut, one of the worst states to retire in 2023, is bad for seniors both in terms of taxes and cost of living. The cost of living in Connecticut is 13.9% higher than the national average. Meanwhile, the state is very unfriendly when it comes to taxes. All sorts of retirement income are taxed. However, some seniors are exempted from these taxes. Seniors cannot afford to live in this state because of its high property taxes as well, with the median property tax payment being $6,096 per year.
10. Alaska
Insider Monkey Rank: 7.2
Cost of Living Index: 126.4
Health Index: 148.9
Tax Friendliness: Very Tax Friendly
Alaska may be tax-friendly, but it can be very expensive to live in the state. According to the MERIC index, living costs are 26.4% higher than the national average. The state is also a bad place to spend retirement because of its long and cold winters, heavy snowfall, and limited sunshine. However, there is no income tax, sales tax, estate tax, or inheritance tax in this state.
9. Rhode Island
Insider Monkey Rank: 7.35
Cost of Living Index: 112
Health Index: 107
Tax Friendliness: Not Tax Friendly
One of the worst states to retire on social security is Rhode Island. The state is not affordable for retirees on a fixed income, as its cost of living is 12% higher than the national average. Retirement income in the state is taxed, but there are some reliefs available. Seniors whose Adjusted Gross Income (AGI) surpasses certain income limits also have their social security benefits taxed in this state.
8. Massachusetts
Insider Monkey Rank: 7.45
Cost of Living Index: 148
Health Index: 115.3
Tax Friendliness: Moderately Tax Friendly
Seniors on a fixed income are going to have a hard time living in Massachusetts as well. The cost of living in the state is a whopping 48% higher than the national average. Moreover, the state is only moderately friendly when it comes to taxes. Social Security retirement benefits are exempt from taxation. However, other forms of retirement income are taxable.
7. Vermont
Insider Monkey Rank: 7.45
Cost of Living Index: 114.9
Health Index: 107.3
Tax Friendliness: Not Tax Friendly
Vermont also makes it to our list of worst states to retire on social security owing to its high cost of living and unfriendly tax policies. Individuals in the state have to bear living expenses that are 14.9% higher than the national average. Moreover, all sorts of retirement income, including social security, are taxed at rates ranging between 3.35% to 8.75%.
6. Utah
Insider Monkey Rank: 7.6
Cost of Living Index: 104.5
Health Index: 91.5
Tax Friendliness: Moderately Tax Friendly
Utah makes it to our list of worst places to retire because of its higher-than-average cost of living, below-average state of healthcare, and moderate tax friendliness. Social Security benefits and other types of retirement income are taxed at a 4.95% flat income tax rate.
