The Social Security Administration has something called the Normal Retirement Age which it uses as a baseline to calculate benefits. In the popular imagination, this is 65 years old but as seniors now know the normal retirement age is creeping up to 67.
But there are many Americans who choose to retire earlier than the normal retirement age either through financial success or through being physically unable to continue working.
Retiring early has its own set of challenges and SmartAsset has looked at the best states for early retirees to live in.
To find the best states for an early retirement, SmartAsset looked at six separate metrics for each state, emphasizing taxes and living costs in our analysis. We started by calculating effective state and local tax rates for retirees age 55-64, using our retirement income tax calculator to simulate over 600 different tax scenarios in each state.
We also considered sales tax rates, property tax rates and living costs such as health insurance and housing.
Based on this criteria, here are the 10 best states for early retirement:
The state allows taxpayers to claim a tax deduction of the first $41,110 in retirement income, from sources such as a 401(k) or IRA. And unlike similar rules in other states, there is no age restriction on who can claim the deduction.
In addition to that tax deduction, early retirees in Kentucky will appreciate a low cost of living. Average annual housing costs in Kentucky are just $8,544, fourth lowest in the U.S. Likewise, living expenses in Kentucky’s largest cities, including Louisville and Lexington, compare favorably to other major U.S. cities.
Across the board, South Dakota’s taxes rank close to the lowest in the U.S.
That means every dollar you stash away will go that much further when you stop working – key for a successful early retirement. Likewise, housing costs in South Dakota (which has the sixth lowest population density of any state) rank as the fifth lowest in the U.S.
Retirees in Wyoming enjoy state and local taxes that are among the lowest in the U.S. Wyoming has no state income tax and its sales tax ranks as the eighth lowest in the U.S.
Early retirees should be aware that buying health insurance on the individual market in Wyoming can be pricey, however. We found that the average annual cost for a silver plan in Wyoming could be over $11,000 per year, second only to Alaska.
Tennessee can be enjoyed without feeling the stress of a budget restricted by high taxes or living expenses. Tennessee has no income tax and its cost of living ranks among the lowest in the U.S. Retirees who love to shop should take note, however. Tennessee has the highest sales taxes in the U.S.
The early retirement math can be hard to work out. While other retirees can rely on Social Security for a source of income, early retirees need to rely entirely on savings for the first few years or retirement. Meanwhile, they have fewer years to build up their nest egg.
Retiring in Mississippi can make all that calculus a little easier. The state has the lowest cost of living of any U.S. state, with living expenses more than 15% below the national average. Furthermore, seniors living off of income from a 401(k), IRA or pension will benefit from an extremely retiree-friendly tax system. All retirement income is exempt from state and local taxes in Mississippi.
While retirees who are 65 or older are eligible for Medicare, early-retirees may need to buy their own health insurance on the individual market. Health insurance rates for seniors are limited to three times the rates for 20-year-olds, which means seniors will no longer face exorbitant premiums. Nonetheless, in some states, average annual premiums on seniors can be more than $10,000 per year.
Not so in New Mexico. We found that a 60-year-old buying a silver plan in New Mexico would pay $5,150 annually on average. That’s the third lowest rate in the U.S.
Unlike most of the other states in the northeast and mid-Atlantic, Pennsylvania rates quite well as a destination for those who want to get a jump-start on retirement. The state exempts all income from retirement accounts, like a 401(k), from taxation. For taxpayers over the age of 59.5, pension income is also exempt.
There is no sales tax in Montana and housing costs average just $8,928 per year, eighth lowest in the country.
While early retirees will have to pay state taxes on their retirement income, the rates are relatively low. For example, we found that a 60-year-old with $40,000 in income from retirement accounts would pay $1,483 in state taxes in Montana, which can also be deducted from federal taxes.
The Sunshine State is a favorite among retirees because of its warm weather, endless beaches and friendly income tax environment. There is no state income tax in Florida, saving retirees hundreds or thousands of dollars a year as compared with most other states on the east coast.
For early retirees, living expenses are especially important. In this regard, some parts of Florida rate well while others do not. For example, housing costs in the Miami area are quite high, while panhandle cities like Tallahassee are far more affordable. Early retirees will have to choose carefully when settling down to make sure their nest egg can meet their retirement expenses.
Early retirees in the Lone Star State will benefit from the state’s relatively low cost of living. Texas has no personal income tax, although property tax rates are among the highest in the U.S.