I'm 56, single and thinking of moving from San Diego to Austin for the no-income-tax benefit. Will it really boost my $500,000 retirement savings?
It’s often said that America’s wage earners can’t get something for nothing, but that’s not always the reality.
Ask anyone living in the nine states where income tax doesn’t exist. They’ll show you the math, though you can do it yourself. To wit: Zero dollars levied can equal thousands and thousands to potentially invest.
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To better illustrate, let’s use the hypothetical example of Doug, a 56-year-old wedding singer who pulls down $125,000 a year (which is why he doesn’t mind singing “Super Freak” 200-plus times a year). Doug has $500,000 stashed for retirement, but he isn’t thrilled with his California state income tax, which at his earnings level tops out at 9.3%.
In a manner of speaking, this single guy wants a divorce. He wants to leave San Diego for Austin, Texas, what with all the affluent, young techies down there. What’s more, the Lone Star State has that lovely 0% income tax. Superfreaky!
So, is relocation a good move? For Doug, the answer mainly boils down to where it leaves him in 10 years. He hopes to retire at that point and wants to know where he might land financially without state income taxes to worry about. For things to work out, he needs to know the fundamental tradeoffs and which way they’ll tip the retirement account scales.
A state of no taxation
Besides Texas, the states Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming do not demand income taxes on wages. Assuming that Doug holds steady at his current earning level and tax rates held, he’d save around $78,800 over 10 years compared to what he’d sacrifice in the Golden State, according to Forbes Advisor’s calculator.
Assuming he can invest half of his tax savings each month in a fund tied to the S&P 500, our in-the-money minstrel could wind up with around $104,000 in extra cash after a decade, based on the index’s 10.48% historical average annual return, according to the Official Data Foundation. Add what Doug otherwise puts in his retirement account to begin with, and he could be looking at a nice chunk of change for his golden years.
But is financial life ever that simple? First, a non-existent income tax doesn’t mean much if you land in a place where your base earnings take a hit. As a solopreneur who can’t work remotely, Doug would have to build a client base from scratch. (When was the last time you attended a Zoom wedding?)
What’s more, states that don’t collect from earnings have to find other ways to keep the lights on. Texas has some of the highest property taxes in the nation, clocking in with an effective rate of 1.68%, per Rocket Mortgage. That’s more than double California's rate of 0.75%. But the mortgage company also notes the median home value in California far exceeds that of Texas, and lists the average annual property taxes for both states at around $5,347 and $4,777, respectively.
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Cost of living, cause for relocating
Let’s move on to what arguably concerns savers most: the cost of living. It turns out San Diego is a high-price place to live, on par with other major cities such as Boston, Washington D.C. and even the notoriously expensive San Francisco, according to figures compiled by Livingcost.org.
According to Livingcost’s data, a single person will typically spend around $3,400 a month to live in San Diego versus roughly $2,600 in Austin — an annual difference of roughly $9,600.
Renters also do way better in Austin, where the average for a two-bedroom unit currently runs around $1,850 per month, compared to San Diego’s $2,900, figures from Apartments.com show. Thus, from a purely financial standpoint, it’s easy to see why trading in the Pacific Coast beach attire for a cowboy hat and boots makes so much sense.
That said, it’s hard to put any sort of price tag on quality of life. Just as many Texans brag about never wanting to leave their state, it’s hard to imagine any San Diego denizen willing to give up their ocean view.
The difference in cost of living between your city and one in a no-income-tax state may also not be reflective of the contrast between San Diego and Austin. One might also want to consider the impact of such a move in terms of government programs and rights and protections for certain demographics. If life is better for you in your own state than another, you may want to stay put.
And don’t forget about the weather — Florida may be sunny most of the time, but watch out if you find yourself in the path of a hurricane, or brace yourself when you see your insurance bill.
Let’s also not forget the cost of moving long distances, which for some people can take months to recover from.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
