The best US cities for an early retirement

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Fewer Americans plan to work past the age of 62. In a March 2022 survey conducted by the Federal Reserve Bank of New York, 49.2% of Americans plan to work past the age of 62, a figure that is 6.2% lower than two years prior. However, it can be difficult to make early retirement a reality. Stretching retirement savings long enough to live comfortably is challenging, but some cities are better than others for bringing early retirement plans to fruition.

In this study, we determined the best places for an early retirement, comparing the 100 largest cities across four categories. They include tax friendliness, elderly care, affordability and livability. For more information on underlying metrics within each category and how we put together our findings, read our Data and Methodology section below.

Key Findings

  • Arizona cities are the most affordable for early retirees. Four of the top 10 cities are located in Arizona. Gilbert and Chandler claim the first two spots, while Scottsdale and Mesa rank fourth and seventh, respectively. All four cities are very tax friendly for retirees. Specifically, we estimate that the effective income tax rate for retirees is less than 19% on average in all four cities and the state of Arizona does not tax capital gains.
  • Housing costs make up roughly 20% of income in the top 10 cities. The general rule of thumb is to spend at most 30% of income on housing costs, and this is especially important for retirees who are on a fixed budget. Across the top 10 cities for an early retirement, median housing costs make up 20.42% of the median household income, on average.

Top 25 Cities for an Early Retirement

We considered four categories scored on a scale of 0 to 100. To see overall rank and category scores, hover over each place.

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1. Gilbert, AZ

 

Across the 14 individual metrics we considered, Gilbert, Arizona ranks in the top five cities for three of them. It has the fifth-best average housing costs relative to income (19.35%) and ranks third-best for its low violent crime and property rates (109 and 1,077 per 100,000 residents, respectively).

 

2. Chandler, AZ

 

Chandler, Arizona is located less than 10 miles away from Gilbert. Across our four categories, Chandler ranks 12th-best in tax friendliness and 13th-best in elderly care. In terms of health and senior care, the average annual cost of a silver health insurance plan is roughly $8,600 (16th-best) and there are 11.19 retirement homes available for every 100,000 residents (13th-best). Housing costs relative to income fall below 20% (seventh-best).

 

3. Henderson, NV

 

Henderson, Nevada ranks 10th-best in our tax friendliness category: it has an effective income tax of 16.24%, an effective average property tax of 0.58% and the state has no capital gains tax. Henderson also has the eighth-best property crime rate (1,426 per 100,000 residents) and the 12th-best violent crime rate (208 per 100,000 residents). Dining and entertainment establishments make up close to 12% of all establishments, which ranks 11th-best.

 

4. Scottsdale, AZ

 

Scottsdale, Arizona ranks well in tax friendliness (15th-best) and elderly care (14th-best). This city also has a 0.52% average effective property tax rate (fourth-best). In terms of elderly care, Scottsdale ranks 13th-best for the number of retirement homes per capita (roughly 11 for every 100,000 residents) and 16th-best for the average annual cost of a silver health insurance plan (roughly $8,600). This city also has the sixth-best housing costs relative to income (19.72%) and the eighth-best violent crime rate (179 per 100,000 residents).

 

5. Plano, TX

 

Across the cities we considered, the most affordable Texas city for an early retirement is Plano. This city places in the top 30 across all four categories in this analysis: 16th-best in the tax friendliness category, 27th-best for both affordability and livability and 30th-best for elderly care. Plano also has the best effective income tax for retirees (16.24%) and there is no state capital gains tax in Texas. Additionally, it ranks second for housing costs relative to income (19.26%), fifth for violent crime rate (155 per 100,00 residents) and ninth for the number of medical facilities per capita (almost four per 1,000 residents).

 

6. Louisville, KY

 

Individuals looking to retire early may be interested in Louisville, Kentucky as the city ranks very well for our categories of affordability and livability. This city’s median annual housing costs make up only 20.30% of median household income (11th-best) and the estimated annual cost of living is $24,505 (19th-best). The city is also relatively safe. It has the ninth-lowest property crime rate (about 1441 per 100,000 residents) and 21st-best violent crime rate (less than 346 per 100,000 residents).

 

7. Mesa, AZ

 

The third-most populous city in Arizona, Mesa ranks well for the categories, elderly care and tax friendliness. Residents here can expect to pay roughly $8,600 annually for a silver health insurance plan (16th-best). There are also roughly 11 retirement homes for every 100,000 residents (13th-best) and three medical facilities for every 1,000 residents (44th-best). In terms of taxes, the average effective property tax rate is seventh-lowest, at 0.53%, and the state capital gains tax in Arizona is 4.50%.

 

8. Boise, ID

 

Boise is the only Idaho city in the top 10 and it ranks in the top 30 across three categories: affordability (19th-best), elderly care (22nd-best) and livability (29th-best). When comparing specific metrics, Boise has the seventh-highest concentration of retirement homes (roughly 12 per 100,000 residents), 10th-lowest annual cost of living ($23,106), 10th-best comparison of housing costs to income (20.04%) and 14th-lowest violent crime rate (less than 293 per 100,000 residents).

 

9. Pittsburgh, PA

 

Pittsburgh, Pennsylvania ranks ninth-best for elderly care and 12th-best for affordability. The average annual cost of a silver health insurance plan is just under $8,400 (15th-best). Additionally, the average annual cost of living in Pittsburgh is $23,403 (14th-lowest) and housing costs make up 22.18% of the median household income (33rd-best).

 

10. Lexington, KY

 

Lexington is the second Kentucky city in our top 10. Across our four categories, Lexington ranks highest in affordability (ninth-best) and livability (19th-best). Across specific metrics, Lexington ranks ninth-best for housing costs relative to income (20.01%), 12th-best for estimated annual cost of living ($23,163), 16th-best for violent crime rate (about 320 per 100,000 residents) and 19th-best for average number of days with extreme temperatures (less than 15 per year).

Data and Methodology

To find the best cities for an early retirement, SmartAsset looked at data for the 100 largest cities in the U.S. We compared them across four categories, spanning 14 individual metrics:

  • Tax friendliness. We analyzed the effective income tax for a retiree with $50,000 in income, average effective property tax rate, sales tax (combination of state and local) and state capital gains tax. Data comes from the Census Bureau’s 2020 5-year American Community Survey and realized1031.com.
  • Elderly care. This category includes the average annual cost of the silver health insurance plan, retirement homes per 100,000 residents and medical facilities per 1,000 residents. Data comes from the Census Bureau’s 2020 5-year American Community Survey and Kaiser Family Foundation health insurance calculator.
  • Affordability. To create this score, we looked at the estimated annual cost of living for an individual, home value-to-income ratio and housing costs relative to income. Data comes from the Census Bureau’s 2020 5-year American Community Survey and MIT Living Wage calculator.
  • Livability. This includes property and violent crime rates, concentration of dining and entertainment establishments and average number of days with extreme temperatures (i.e. less than 30 degrees or higher than 80 degrees). Data comes from the Census Bureau’s 2020 5-year American Community Survey, the 2020 FBI crime report, neighborhoodscout.com and the National Oceanic and Atmospheric Administration.

First, we ranked each city in all metrics, assigning an equal weight to each. We then averaged the rankings across the four categories listed above.

For each category, the place with the highest average ranking received a score of 100. The place with the lowest average ranking received a score of 0. We compiled our final list by averaging category scores.

Tips for Succeeding in Early Retirement

  • Make your money work for you. Regardless of how you are stashing money away, use our savings and investment calculators to project your growth over time – both of which take into account the rate of return and additional contributions.
  • Make a retirement plan as early as you can. While vehicles exist for compounding savings later in life such as catch-up contributions, the earlier you start investing in your future, the easier it will be to retire early. Learn about the different retirement accounts that exist to help you make an informed decision on which option suits your needs best. Then use our retirement calculator to visualize your progress over the next several years.
  • Work with an expert. A financial advisor can help you manage and make the most of your money, which could mean less financial stress for you as you plan your early retirement. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

This article originally appeared on SmartAsset.com and was syndicated by MediaFeed.org

 

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8 retirement plan options for the self-employed

 

You can avoid costly retirement mistakes by picking the right retirement plan for yourself and your business.

As a self-employed freelance writer, I spent hours researching and learning about different self-employed retirement plans. When you’re self-employed or run a small business, these retirement savings plans are not an automatic benefit like an employer-sponsored 401(k) or pension plan that many employees receive as part of their job.

Thankfully, there are a number of self-employed retirement plan options, but each comes with its own benefits and limitations. Ultimately, I settled on a solo 401(k) for my business, but that doesn’t mean it’s the best fit for everyone.

Here’s everything you need to know about self-employed retirement plans and how to choose the right plan for you. We’ll talk through the plans one by one, and then give you some tips on how to open the retirement account of your choosing, so you can start putting aside some of your self-employment income to create a successful retirement scenario for yourself.

Related: 7 brilliant moves to thrive in an uncertain economy

 

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An individual retirement account — IRA for short — is a type of retirement plan that anyone can use, including self-employed individuals. You can contribute to an IRA in addition to other self-employed retirement plans, and depending on your income and the type of account you choose, you may be able to take advantage of tax savings.

With a traditional IRA, you may be able to deduct your contributions when you file your tax return every year. Any earnings you receive will be taxed on a tax-deferred basis when you withdraw them in retirement. That means you’ll pay taxes on them according to your tax rate at the time of withdrawal.

In contrast, a Roth IRA doesn’t allow you to deduct contributions from your taxable income. You pay taxes on those contributions in the year you make them, and then when you take the money out in retirement, you receive it tax-free.

However, there are some limitations that can reduce the value of an IRA, depending on your situation:

  • In 2020, IRA contribution limits are set at a maximum of $6,000 or your taxable compensation for the year, whichever is less. If you’re age 50 or older, that limit goes up to $7,000.
  • Contributions made in excess of the annual limit will be taxed at 6% for each year they remain in the IRA.
  • Depending on your modified adjusted gross income on your tax return, you may not be able to contribute to a Roth IRA, or you may be subject to a lower contribution limit.
  • Your MAGI may also impact your ability to deduct contributions you make to a traditional IRA. IRA deduction limits can vary based on whether you also have an employer-sponsored retirement plan.
  • If you take withdrawals from an IRA before you reach age 59 1/2, you may have to pay taxes on the amount plus a 10% penalty for early withdrawals. There are, however, exceptions to this rule.

Because of the nature of IRAs, they can be a great way to supplement savings you’ve put into a self-employed retirement plan. However, because of their low annual contribution limit, they’re not the best option as a primary retirement plan.

 

 

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Also called a one-participant 401(k), a solo-k, a uni-k, or a one-participant k, a solo 401(k) is designed specifically for small business owners who have no employees (other than a spouse, if applicable).

In general, a solo 401(k) functions similarly to an employer-sponsored 401(k). You’ll make contributions with pre-tax dollars, and these contributions will grow tax-deferred until you take withdrawals in retirement.

There are, however, a few differences besides the single-participant nature. For starters, as the business owner, you can make contributions as yourself and also as the employer:

  • In 2020, you can make employee contributions of up to $19,500 as an individual; if you’re age 50 or older, you can add another $6,000 in catch-up contributions.
  • As the business owner, you can make employer contributions of up to 25% of your compensation annually, up to a maximum of $57,000 in 2020.

Those employer contributions can also be counted as a business expense, further reducing your tax liability each year. Depending on which plan provider you go through, solo 401(k)s are relatively inexpensive. For instance, I paid a few hundred dollars to set up mine plus an ongoing monthly fee of $25.

Unlike with an IRA, you may be able to set up a loan option with your solo 401(k), though interest charges will be involved. In addition, doing something like taking a 401(k) loan to pay off debt and borrowing from your own retirement should be considered only as a last resort.

All that said, here are some potential drawbacks of a solo 401(k) to consider:

  • As with IRAs, if you take withdrawals from a solo 401(k) account before you reach age 59 1/2, you’ll be assessed taxes plus a 10% penalty. Although there may be options to allow loans or hardship withdrawals, there are fewer exceptions to the 10% early withdrawal penalty than you’d get with an IRA.
  • You’re not eligible to open this plan if you employ anyone besides yourself and your spouse, though 1099 workers don’t count.
  • You may not be eligible if you’re also covered under an employer-sponsored retirement plan — for example, you work as an employee at a company and also run a side business in your spare time.

Because of how a solo 401(k) is set up, you might consider it if you’re an independent contractor or sole proprietor with no salaried employees — though, you can still qualify even if you employ your spouse.

 

TimArbaev / istockphoto

 

Simplified Employee Pension IRA is a type of IRA that you can establish to benefit you, your employees, or both. The primary difference between a SEP IRA and a traditional or Roth IRA is that only an employer can contribute to a SEP IRA.

The maximum contribution amount for each employee, including yourself, is the lesser of 25% of compensation or $57,000 in 2020. A SEP IRA functions similarly to a traditional IRA for tax purposes, which means your earnings will grow tax-deferred. Also, your contributions as the employer are tax-deductible.

If you want to make separate contributions to a traditional or Roth IRA, you can. In some cases, however, you may be permitted to make your personal IRA contributions to your SEP IRA.

Here are some potential issues you might run into with a SEP IRA:

  • A SEP IRA allows only employer contributions, unlike a solo 401(k), which allows you to contribute to your self-employed retirement plan as an individual and an employer.
  • If you have employees, you must contribute the same percentage of salary for each person who’s participating in the plan. That includes employees who are no longer employed on the last day of the year.
  • If you take a withdrawal before age 59 1/2, you’ll need to pay income tax and a 10% penalty on the distribution. There are, however, some exceptions to the 10% penalty requirement, which are the same as traditional and Roth IRA exceptions.
  • You can’t borrow from a SEP IRA as you can a solo 401(k).

A SEP IRA is for business owners who want the simplicity and lost cost of an IRA, but with a much higher contribution maximum. There’s also less paperwork involved than with a solo 401(k).

 

Andrii Dodonov / istockphoto

 

A Savings Incentive Match Plan for Employees IRA allows both employers and employees to contribute to a traditional IRA. In 2020, you can contribute $13,500 as an individual or $16,500 if you’re age 50 or older. The same limit applies to any employees. As the employer, you can also choose to make a nonelective contribution of 2% of compensation or a matching contribution of up to 3% of compensation.

Because the SIMPLE IRA is designed as a traditional IRA, your contributions are tax deductible in the year you make them, and your earnings will grow tax-deferred. You can also contribute to a traditional or Roth IRA on your own.

Here are some important things to know about the SIMPLE IRA:

  • Although the structure of a SIMPLE IRA is similar to a solo 401(k), in that you can contribute as the employer and individual, its contribution limits are lower.
  • You can’t borrow from a SIMPLE IRA as you can a solo 401(k).
  • You may need to work with a special custodian to open a SIMPLE IRA account.
  • Withdrawals made before age 59 1/2 will be subject to income tax and a 10% penalty, though there are the same exceptions to the penalty as other IRA plans.

Consider a SIMPLE IRA if you want the chance to contribute as the business owner and an individual, but don’t expect to need the higher plan contribution limits of a solo 401(k). This self-employed retirement plan is also better if you have employees and don’t qualify for a solo 401(k).

 

designer491 / istockphoto

 

A Health Savings Account isn’t technically a retirement plan, but you can use one to set money aside to use in retirement. You can use this account in addition to one of the other self-employed retirement plans and a traditional or Roth IRA. In fact, I contribute to both a solo 401(k) and an HSA every year.

HSAs are available to taxpayers, including business owners, who have a high-deductible health plan. You can set aside money in the account to use for out-of-pocket medical expenses on a tax-free basis. In other words, your HSA contributions are tax-deductible, and you won’t pay any taxes when you make withdrawals for eligible medical expenses. If you take withdrawals for ineligible reasons, the amount will be subject to income taxes plus a 20% penalty.

That said, if you hold onto your HSA funds until you’re 65 or older, withdrawals for non-medical reasons will still be subject to income tax but not the additional 20% penalty. As a result, an HSA can function similarly to a tax-deferred retirement account. Of course, you can also use HSA funds to pay for health care costs in retirement and avoid all tax-related costs.

In 2020, you can contribute up to $3,550 to an HSA if you’re the only one on your health insurance plan, or up to $7,100 if you have a family plan. Depending on your HSA provider, you may be able to invest these funds.

If you’re considering an HSA, here are some things to keep in mind:

  • Because it’s not a traditional retirement plan, it’s not a good idea to rely solely on an HSA to save for your future.
  • You won’t qualify for an HSA if you don’t have a high-deductible health plan.
  • HSA contribution limits are lower than most other self-employed retirement plans.

If you qualify, consider an HSA as a way to supplement your other retirement contributions. Keep in mind, though, that any ongoing medical expenses may make it challenging to use the funds to save for retirement.

 

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Depending on your personal financial situation, you may also consider other types of small business retirement plans. Here are a few less-common options that self-employed people might consider.

Take some time to consider all of your options to determine which retirement plan is right for you. Also, consider consulting with a tax professional and/or financial advisor to get an idea of which plans would benefit you most when it comes to your tax planning.

 

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A tax-deferred pension account, a Keogh plan allows you to set up a defined-benefit or defined-contribution plan. Keogh plans are relatively complicated and require more upkeep and costs than other types of self-employed retirement plans.

 

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With a Keogh plan or a separate defined-benefit plan, you’ll make contributions based on a set amount you aim to receive annually in retirement. There may be contribution limits, though, depending on how you plan to structure the plan.

 

designer491 / istockphoto

 

With this type of retirement plan, employees get a share in the profits of the business. There are no contributions from the employee with this type of plan, and contributions by the business will depend on quarterly or annual earnings.

 

Andrii Dodonov / istockphoto

 

In most cases, you can get any of these self-employed retirement plans from a major brokerage firm. In some cases, some brokers may not offer certain types of plans, so decide which plan you want to go with before you start shopping around.

As you compare brokers and their self-employed retirement plans, review several features, including:

  • Cost (setup and ongoing fees)
  • Ease of use and access
  • Administrative help
  • Investment options (mutual fundsETFs, etc.)
  • Resources and advice

There’s no single best investment broker for everyone, so it’s important to take your time and consider how to choose a brokerage that’s best for you and your business.

 

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Self-employment comes with a lot of perks. But without an employer-sponsored retirement plan, you’re responsible for making sure you have everything in place to save for your future. Saving for retirement sooner rather than later is important because it gives you more options when you’re ready to slow down or stop working entirely.

Think about your financial goals, ability to save and tax situation to help you determine which retirement plan is the best option for you. Also, think about the costs, upkeep, and potential pitfalls associated with each plan. The retirement planning process can take some time, but getting the right account set up could make it easier to avoid costly retirement mistakes in the long run.

Learn more:

This article originally appeared on FinanceBuzz.com and was syndicated by MediaFeed.org.

 

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