Just a few decades ago, this would have been an unthinkable question for those of us living in the Golden State. Songs such as California Dreamin’, Going to California, California Calling and I Left My Heart in San Francisco were gracing the airwaves and California’s population had boomed by 137% between 1960 and 2010.
However, things have changed in the last couple of decades, resulting in a net loss of nearly 3.4 million people (2012). So, what’s changed in recent years? The most popular reason I hear in meetings is taxes. California has the highest state income tax rates in the country which top out at 13.3% (2019). Additionally, California has higher than average sales tax, gas taxes, and energy costs. During our working years, our options are limited as most of us need to live somewhat close to our jobs. However, once we retire, we are free to roam about the country or even the world, which brings us back around to our original question, “should I leave California”?
If you’ve read my previous posts, you probably know that my answer will be, well that depends. As an advisor, I have the benefit of discussing the complex topic with my clients in depth and get to watch it play out over the years. What I have seen and heard repeatedly is that most of the major considerations aren’t financial at all, but emotional. So, before you start looking at property in other states, here are a few questions for you to consider.
Where do your kids (grandkids) live?
In my experience, this is the single biggest determinate for most of my clients. Whether it’s to keep close for family get togethers or because you’ve become the de facto child care specialist (due to the high cost of childcare or for enjoyment), most of us end up living near our loved ones. When it comes down to a cost/benefit analysis, saving 10% in taxes, isn’t worth the emotional cost of being far away from those you care about.
What do you enjoy doing?
Possibly saving money in taxes is great in a vacuum, but if you like to downhill ski and you’ve moved to a location where the mountains are non-existent, or you enjoy going to the beach but have located somewhere in middle America, you may find yourself unhappy you are unable to pursue your hobbies. Sit down and think of the activities you really enjoy doing and then ask yourself, “can I do this for the majority of the year from this location?”
Where are your assets held?
If you are getting close to retirement, you’ve probably saved up a good amount of money to live on the rest of your life, but what type of accounts you’ve saved in could make a difference. If all of your money is in tax-deferred accounts (401k, Traditional IRA, Pensions, Deferred Compensation), you will have to pay ordinary income taxes at both a Federal and State level. However, if you have saved and invested in after-tax accounts (Roth IRA/401k, Savings, Checking, Brokerage) you may be subject to Capital Gains rates at a Federal level or even tax-free income if you contributed to a Roth (IRA/401k). Having money in all three of these types of accounts allows you have some control over your tax bracket which may lower your effective tax rate in CA. I encourage everyone to run some actual scenarios based on their personal situation to make sure you will be saving as much as you think.
Hopefully, these questions help spark a conversation either internally or with your significant other that will prioritize your goals as you make this decision. Additionally, be aware that leaving California doesn’t always relieve you of paying California state income taxes. In some cases, income that was earned while being a resident can be taxed even after you’ve left the state! I also recommend that my clients try living in the location they are thinking about moving to before actually selling the house. Many times you can find a long term rental in or close to the specific neighborhood you are looking at.
Make sure you consult with a knowledgeable advisor if you decide you are no longer, California Dreamin’. Give us a call at (916) 269-0671 or complete our contact form to speak with a financial advisor.