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I am 66, single, and hoping to retire soon. I currently live in Connecticut, where taxes are quite high, and am looking for a less expensive place that is also warmer.
I have cash assets of about $900,000 and another maybe $200,000 in equity in my house (but I might want to keep the house for rental income). I’d like my main source of retirement income to be my Social Security of about $26,300 a year.
I want to travel, so I don’t want to spend a lot on housing, and I would like a small city, no more than 30 minutes from the Atlantic Ocean. I’d also like a city that’s two hours or less by car from an international airport. It would be great if the city has a college or university and/or a mixed population including retirees. Any great ideas?
You’re part of a big trend: People getting the heck out of the Northeast for cheaper living and warmer weather — many of them to the South. And while the South has its downsides, like sweltering summers, you’ll certainly be able to find a reduced cost of living, mostly mild weather for many months of the year, and plenty of good food and culture.
That said, it may be a bit of a struggle to live solely on your Social Security — at least if you want a compelling city right by the coast. But if you’re also getting some rental income from your home, you should be able to do it, while also using some of your savings for travel. With that in mind, here are some affordable spots near the ocean that should meet most of your criteria.
Palm Coast, Fla.
Nestled between St. Augustine and Daytona Beach, this under-the-radar Florida retirement spot — which sits on 70-plus miles of canals and the Intracoastal Waterway — proves that “Florida still can be an inexpensive place to live,” Annette Fuller, the editor of Where to Retire magazine, tells MarketWatch.
The cost of living is roughly average for the U.S. Median homes in Palm Coast cost around $215,000 (with property taxes that are lower than average for the U.S.), and the median rent for a one-bedroom apartment is under $1,000, according to Sperling’s Best Places. (Fuller adds that there is “lots of active-adult housing” in the region.) Another perk in Florida: You’ll avoid income tax.
Residents often come to the area for the Atlantic beaches, but in Palm Coast they find lots of outdoor activities, too, including “tennis, golf, pickleball and even croquet,” Fuller says. Palm Coast has more than 125 miles of walking and biking paths, as well as fishing and boating. And bird watching is also popular here, especially at St. Joe Walkway and Linear Park.
Other things to check off your list: There are plenty of fellow retirees here, and you can get to the Daytona International Airport in a little over a half-hour by car.
Now for some downsides: Summers are hot and humid, there’s a risk of hurricanes, and some residents complain about the rapid growth and sprawl of the area. Plus, if you want to cut costs further, there are cheaper places to retire in the Sunshine State (especially if you’re willing to look inland).
By the numbers:
January low/July high: 45°F/90°F
Source: Sperling’s Best Places
This small city roughly 25 miles from Charleston recently landed on Forbes’ list of the best places to retire, with the publication highlighting its mild winters, above-average air quality, low rate of serious crimes and “sufficient physicians per capita.”
What’s more, it’s affordable: The cost of living is “at national average,” Forbes notes, and Social Security income is not taxed in South Carolina. A median home can be had for about $215,000, with property taxes lower than the U.S. average. Rent for a one-bedroom apartment averages under $1,000 a month.
Summerville is notable for its greenery. Its streets are lined with gorgeous azaleas and towering pines. It’s also bursting with history: Part of the town is on the National Register of Historic Places. And it’s got plenty of that Southern flavor to go around: Summerville claims to be the birthplace of sweet tea, and Southern Living recently wrote of it: “The best two places in the world to enjoy sweet tea this summer are: 1. Your front porch; and 2. Summerville, South Carolina.” Plus, you’re close to Charleston, which is renowned for its excellent food and robust culture, has an international airport and is a college town.
The biggest downside for you might be that you’re a little over your desired half-hour from the popular Atlantic Ocean beaches (for example, Folly Beach is about a 45-minute drive from Summerville). But maybe the proximity to Charleston and the relative affordability of Summerville make up for that.
By the numbers:
January low/July high: 35°F/90°F
Source: Sperling’s Best Places
———————————————————————————————————————Brunswick, Ga., area
While St. Simon’s, Jekyll Island and Sea Island (which make up the so-called Golden Isles) garner most of the attention in the area, Brunswick — the mainland gateway to those islands — gives you access to their amazing beaches at a fraction of the cost. The cost of living is significantly below average for the U.S., with the median home to be had for less than $140,000. Social Security income is exempt from Georgia’s state income tax.
Downtown Brunswick is known for its historic Victorian-era architecture (it was named a Main Street City by the National Trust for Historic Preservation) and has more than a dozen historic squares. Plus, you’ll find a smattering of local shops, art galleries, restaurants and more in this town of roughly 16,000 people — as well as performances at the historic Ritz Theatre.
Outdoor activities like bird watching are big here, as Brunswick is surrounded by saltwater marshes. And the Golden Isles are renowned for golf and miles of beaches. Plus, the Golden Isles have a unique vibe — a “blend of formality and down-home ease,” Travel & Leisure writes. And Where to Retire magazine, which listed Brunswick/Golden Isles among its where-to-retire picks, writes of the area: “Unlike typical touristy East Coach beach towns, Georgia’s Brunswick and the Golden Isles are more sedate, with a focus on preservation.”
Brunswick is also a college town — the College of Coastal Georgia is here — that’s roughly an hour from Jacksonville, Fla., which has an international airport; and there’s a hospital in town (the Southeast Georgia Health System).
One downside is that crime here is higher than average (though there are statistically safer neighborhoods and towns in the area to live in, as you can see from this map).
By the numbers:
January low/July high: 42°F/91°F
Source: Sperling’s Best Place
The question of how much can we earn without paying federal income taxes is relatively easy to answer for most people.
The standard deduction for a married couple is $24,400 in 2019 (if both are under 65 years old), and the top of the 0% capital-gains tax bracket is $78,750. So we can make a total of $103,150 a year, provided that our ordinary income stays below the standard deduction and the rest comes from long-term capital gains and/or qualified dividends.
Those who aren’t married should halve these dollar amounts. Note that the IRS is increasing these numbers slightly for 2020.
With our daughter, we also qualify for the child tax credit ($2,000), so we could actually generate another $13,333 per year in dividends or capital gains, taxed at 15%. The tax liability of $2,000 exactly offsets the tax credit, for a federal tax bill of zero.
Once people file for Social Security benefits, though, things become a bit more complicated. That’s due to the convoluted formula used to determine how much of your Social Security is taxable income. So calculating and plotting the tax-free income limits is more complex.
First, a disclaimer: This exercise is for federal taxes only. That’s good enough for us personally because we live in Washington state, one of the few places without an additional state income tax. If you do have state income taxes, you will probably start owing state income taxes at much lower income levels. Also, all the other disclaimers apply here as well, including contacting a tax expert before you apply any of this.
I will also frequently mention capital gains and dividends as tax-advantaged income because long-term capital gains and qualified dividends are taxed at a lower rate. I may sometimes drop the terms “long term” and “qualified” because it doesn’t always fit into the chart axis labels. But keep in mind that short-term capital gains and nonqualified dividends will fall into the ordinary-income bucket, taxed at a higher rate.
Just to warm up, here are the income limits for a married couple (both under 65 years old) who file a joint federal tax return. They can claim a $24,400 standard deduction in 2019 as well as up to $78,750 of long-term capital gains taxed at 0%. So to stay tax-free, we need to stay under the blue line in the chart below.
What about when we can no longer claim our daughter as a dependent and we file for Social Security? Instead of two, we’d now have three separate major income categories with their own distinct impacts on federal taxes.
Taxable Social Security = F1 (Social Security , Ordinary Income + Capital Gains)
Tax = F2 (Taxable Social Security + Ordinary Income , Capital Gains )
(Side note: There’s a fourth category, municipal-bond interest income, because that enters the Social Security worksheet formula as well but stays tax-free otherwise.)
So it’s no longer feasible to display the tax-free income limits in a simple one-size-fits-all chart because our tax liability depends on three distinct variables, and I can’t easily plot that zero-tax boundary in three dimensions. So, here’s how I did it.
• Start with Social Security on the x-axis. I used a range of $0 to $90,000, which is probably close to the absolute maximum two spouses can haul home in combined benefits.
• On the y-axis, plot the maximum of the “other income” to guarantee zero federal taxes. This is the combination of all ordinary income and dividends and capital gains (i.e., Line 3 in the Social Security worksheet).
• How much “other income” is sustainable at zero taxes clearly depends on the composition: ordinary income vs. tax-advantaged income (long-term capital gains and dividends). So I plotted a line for three different cases: 100%/0%, 50%/50%, and 0%/100% in the two income buckets.
• I also assume that this is for a couple where both spouses are 65 years or older to increase the standard deduction to $27,000 ($24,400 base plus $1,300 extra per spouse above age 65).
Let’s look at the results:
• The lowest tax-free income allowance prevails if all of the other income is ordinary income. Say you get $50,000 in combined Social Security, then you can make around another $20,000 in other ordinary income. The sustainable amount of income gradually declines because more Social Security income will become taxable and limit the amount of other income you can make before hitting the $27,000 standard deduction. But you can still haul in a lot of income: $50,000 in Social Security and another $20,000 in ordinary income. Or $90,000 in Social Security plus another close to $11,000 in other ordinary income for a total of more than $100,000.
• Not surprisingly, that boundary shifts up if part of the “other income” is long-term capital gains. That’s because less of the income pushes against the standard-deduction limit. Capital gains and dividends become taxable only if we go beyond the second federal tax bracket. Of course, capital gains still impact the Social Security taxable calculation in the IRS worksheet.
• If all of the other income comes from capital gains, we get the peculiar-looking green boundary. I had to double and triple check my math because of that drop at around $31,000 of Social Security income. But it’s legit! For Social Security low enough, even with a lot of capital-gains income, 85% of Social Security is taxable. We simply stay below the standard deduction as long as Social Security is less than $31,765 (because 85% of that is less than $27,000), and we fill up the rest with capital gains taxed at 0%. But once we hit $31,765, we have to instantly and drastically lower the other income to push the taxable portion of Social Security back below $27,000 so it can be offset by the standard deduction.
Here’s another way to slice and dice the data: I created a chart with capital gains on the x-axis and other ordinary income on the y-axis for one fixed Social Security level at a time, going from $0 to $90,000 in $5 steps. The capital-gains and other income levels go in steps of $1,000, and I plotted the different ranges of tax levels with dots: green = no federal tax at all, blue = average tax rate of 0% to 5% and red dots for 5% to 10%. If you go beyond the red region, you guessed it: You’ll owe more than 10%, on average.
Because I didn’t want to publish 19 different charts, I just put it all into this animation:
I was positively surprised that, even when tapping Social Security, we should be able to keep taxes quite low. Much less of our Social Security will likely be taxable than the 85% maximum. So you can have a total income in the high five figures, potentially even six figures, and still keep federal income taxes low or even at zero. On top of that, you may still have tax-free Roth distributions.
Karsten Jeske retired at age 44 and blogs on his website Early Retirement Now. This is adapted from his post “How much can we earn in retirement without paying federal income taxes?” Follow him on Twitter @ErnRetireNow.