The Hidden Costs of Retiring to a "Tax-Friendly" State

When retirees pick up and move to a new state, the motivations are as diverse as the individuals themselves. Some want sunshine, others proximity to grandchildren or top-tier medical care, but increasingly, retirees are making relocation decisions based on one powerful factor: taxes.
At first glance, moving to a state with no income tax may seem like a smart financial move. But as many soon discover, lower income taxes don’t always translate to lower overall costs, especially when factoring in real estate prices, property taxes, insurance premiums, and local sales taxes. In some cases, the expected savings can disappear entirely.

Income Taxes Aren’t the Whole Picture
For wealthier retirees with substantial investment income, state income tax rates can have a meaningful impact on their finances. However, for many middle-income retirees, who are primarily drawing down their savings rather than earning new income, the benefits may be overstated.
According to the Tax Foundation, a Washington D.C.-based tax policy research group, states with no income tax often make up the difference through higher sales and property taxes. Take Tennessee, for example. While it boasts zero income tax, the combined state and average local sales-tax rate is 9.56%, the second-highest in the country.
Property Taxes and Home Prices: The Unexpected Tradeoff
Housing costs can be another major curveball. Retirees who haven’t moved in years may be surprised by today’s prices. In many states popular with retirees, property taxes are a major budget item, especially if you don’t plan on downsizing. Texas, for instance, has one of the nation’s highest average property tax rates at 1.58%, more than double Florida’s 0.71%.
Even worse, estimated property taxes listed online can be misleading. That’s because many states offer homestead exemptions that cap property tax increases until the home is sold. New buyers often face a much higher assessment, which is usually reflected in the second year’s tax bill, not the first. Real estate agents can provide rough estimates, but surprises aren’t uncommon.

The Rising Cost of Home Insurance
Then there’s the issue of homeowners’ insurance costs, which are rising rapidly across the country, particularly in areas vulnerable to extreme weather. Even a modest condo can carry steep annual costs when you combine insurance, property taxes, and HOA fees.
According to Bankrate, the average annual premium for a $300,000 policy is now $2,242 nationwide, but in some states, it’s much higher. Florida averages $5,340, second only to Nebraska at $5,640. That’s a significant cost for retirees trying to stretch their income.

Smart Tax Planning Before You Move
Wherever you’re considering moving, some proactive planning before retirement can help you navigate these financial tradeoffs. Roth conversions, for instance, can reduce future state income tax liability. It’s also worth understanding how different states tax retirement income.
Some states, like Illinois, don’t tax income from 401(k)s, IRAs, or pensions, even though they apply a flat 4.95% income tax rate to most other income. Meanwhile, other states tax even Social Security benefits above certain income thresholds, including Colorado and New Mexico.

The Bottom Line
When evaluating potential retirement destinations, it’s important to look beyond just income tax rates. A state’s overall cost structure—including housing, property taxes, insurance, and sales tax—can have a much bigger impact on your bottom line than a seemingly attractive “no income tax” headline.
The best move? Treat relocation as part of a broader financial planning conversation. At Hanover, we help retirees and pre-retirees weigh all the variables so you can retire where you want, with clarity about what it will really cost.