Florida, which does not have state personal income tax, has always been a popular destination for American retirees. However, saving on income taxes does not necessarily mean retirement life is cheaper. According to a report published by the American financial website 24/7 Wall St. on Thursday (October 8), it was found that retiring in Arizona may cost retirees $2,200 less annually compared to Florida at the same standard of living, with retirement assets potentially differing by about $40,000.
24/7 Wall St. used data from the U.S. Consumer Expenditure Survey, based on the average annual expenditure of American households of $78,535, and adjusted it according to the price levels in each state to calculate how much money is needed to maintain the same standard of living.
The results showed that in Arizona, the annual cost of living is around $79,000; whereas in Florida, the same standard of living requires $81,200 annually, resulting in an extra $2,200 per year.
This expenditure covers housing, food, utilities, transportation, home maintenance, gifts, and out-of-pocket medical expenses, but does not include income taxes and additional purchases of medical supplementary insurance. This estimation is based on the overall price levels of the two states and may not reflect the actual average expenditures of retired households in those areas. The cost of living in different cities may also vary significantly.
Florida’s advantage lies in its tax system. The state does not levy state individual income tax, while Arizona imposes a flat 2.5% tax on most taxable income. However, Arizona does not tax Social Security benefits. For individuals who primarily rely on Social Security income in retirement, the tax gap between the two states may not be as significant as one might imagine.
Assuming a retired couple receives a total of $4,152 in Social Security benefits per month, amounting to $49,824 annually.
This income is not sufficient to cover the full-year cost of living in either state, with the shortfall needing to be supplemented from retirement savings. In Arizona, the couple would need to withdraw around $30,000 per year from their retirement savings, including estimated state income tax; while Florida would require about $31,400.
If a 4% annual withdrawal rate is applied from retirement investment assets, Arizona would require approximately $750,000 to be saved, whereas Florida would need $785,000, resulting in a $35,000 difference.
With a more conservative 3.5% annual withdrawal rate, the required retirement assets for both states would increase to $857,000 and $897,000 respectively, with a difference of about $40,000.
This difference arises from comparison of the same couple, same standard of living, and 3.5% annual withdrawal rate. Variations in income sources, housing arrangements, and spending habits will lead to different actual retirement savings requirements.
Apart from daily living expenses, Medicare supplemental insurance is also a cost retirees need to consider.
Americans aged 65 and older can generally enroll in federal Medicare, but medical visits may still require paying a portion of copayments and coinsurance. Many retirees opt to purchase Medigap supplementary insurance separately.
The initial premiums for Medigap in Florida are relatively high, and the premiums may increase with age. This cost needs to be paid over the long term, and the aforementioned annual $81,200 cost of living in Florida does not include this additional premium.
There is also a timing issue with Medigap enrollment. Typically, once a person turns 65 and joins Medicare Part B, there is a six-month initial enrollment period for Medigap. During this time, insurance companies generally cannot refuse coverage or increase premiums due to health issues. Missing this deadline may require health underwriting for future applications, possibly leading to refusal or increased premiums, depending on state regulations.