Don’t Write Off High-Cost States for Early Retirement // Why We’ll Never Leave California

When we revealed our identity last week, by far the most common question we got was, “Why would you choose to retire in California, when it’s such a high-tax state?!” 

It’s interesting to me that many of our other more-expensive-than-necessary choices draw less incredulity, like paying some of the highest grocery and gas bills in the country just so we can live in a ski town.

But of course it’s because Americans are obsessed with taxes in ways other countries are not. That’s why the false belief persists that we are the most highly taxed country on Earth, when the reality is that we’re among the lowest taxed industrial nations.

And it’s why most “best places to retire” lists focus disproportionately on income taxes, and leave out important factors like health care quality, and even other direct pocketbook issues like property and sales tax rates.

I’ve made no secret here that we are not tax avoiders, and that we like the things taxes pay for, like schools, firefighters and libraries. So it’s safe to say that tax rates weren’t even in our minds when we chose our forever home in North Lake Tahoe, California. (And we moved from Los Angeles, so the tax difference was negligible in that transaction anyway.)

But we’d argue that the value we get by living in California vastly outweighs the costs of taxes here, and that’s why the taxes weren’t a dealbreaker for us. If you dream of retiring in a high-tax state, some of our reasoning might resonate with you.

One of the most interesting things about state tax rates is that groups who study these things don’t even agree on who is the most heavily taxed. It’s easy to find lists that rank California as the worst when you look at marginal income tax rates for the very highest earners only (which does NOT apply to most people), or just out of the top quartile, or in the top quintile for income taxes but way down the list at 30th for property taxes. In general, blue states pay more taxes than red states, but even that stat is only the average, and based on a personal combo of income and property, a person could be fairly highly taxed just about anywhere. (Ask your favorite Texan about their property taxes sometime.)

But just as with health care, we think looking only or mostly at income tax rates puts the focus on the wrong things. (And yes, I’m now plugging that post for the third time because I think it’s that important: Think Health Care, Not Just Taxes and Weather, When Deciding Where to Retire)

A bigger reason not to stay in California, in our view, is the overall high cost of living. Taxes are a piece of that, but things generally cost more here than they do in the eastern half of the country, even though a lot of the stuff is grown, extracted or transited here. (We have the most produce farms, we produce oil and we have the largest ports for goods from Asia.) And if you’re trying to buy a home, say, now, you’d be right to feel discouraged about how overheated most of the real estate markets are at the moment. (I hear the word “bubble” almost every day, especially when I’m in the Bay Area.)

We count ourselves among the fortunate few who can account for these higher prices and not have to consider moving elsewhere, especially because we got super lucky in being able to buy our house near the bottom of the market in 2011. But the housing bubble is a current problem, and it’s helpful to look at the more constant factors for the sake of this discussion.

(Psst. The Frugalwoods have a post called “Why Vermont?” that answers the very similar question they got, especially because they live close to New Hampshire, a much lower tax state.) 

Income Taxes Are Negligible For Most Early Retirees

While it’s true that we’ve been paying a high tax rate while in our accumulation phase, income taxes are about to get a whole lot less relevant to us as soon as we wave goodbye to our W-2 jobs. Our taxable income will be extremely low, in the zero federal income tax bracket plenty of years, especially if current proposals to raise the standard deduction proceed. Most early retirees whose finances we have a sense of are in this same boat.

We may owe state taxes some year, and will be stuck with annoying taxes like the mandatory minimum $800 tax on LLCs even if you don’t make money, but the difference between here and another state when we’re talking such low income is minimal.

Update: Plotting for Jailbreak actually did the math on California and a bunch of other states and found that, for most early retirees living on a modest income, California has zero income tax liability, making the “high tax” reputation not true at all for that particular set of folks. 

Property Taxes Matter More — And California’s Are Predictable

For early retirees who own property (or who rent property and pay pass-through costs), property tax is the far more relevant cost metric, because we can’t escape that. And California is way down the list at #36 for property taxes.

Proposition 13, passed by voters more than 30 years ago, limits property tax increases to essentially 2 percent a year (it’s actually 1 percent of assessed value, but assessed value may go up 2 percent). And while that may be bad public policy, it’s excellent for budgeting purposes. We know exactly how much our property tax can go up year over year, and the highest it could possibly be when we reach our later years, which is something very few others can say. I’ll take knowable any day of the week.

Safety Nets Matter, Especially for Health Care

Given all the uncertainty in health care at the moment, living in a state that’s committed to safety nets counts for a lot. We know, for example, that the state will continue to work hard to keep big insurers in the state health care exchange, and that we are less likely to have the situation of counties with no insurers, like some redder states have. We know our leaders won’t turn down federal health care dollars that benefit the poor for purely political reasons, not reasons of good policy. And we also know that if the Affordable Care Act disappears and we lose our federally mandated health plan options, there’s a better chance here than in many other states that we’ll get a state option.

Psst. Health care open enrollment starts today. If you’re in a state with no exchange of its own, remember that open enrollment ends earlier this year, on December 15. Many but not all of the states with their own exchanges have open enrollment until January 31, but make sure you know your own state’s deadlines so you don’t miss out.

Other aspects of the state’s view on governing benefit us directly. Economic analysis shows that the “sanctuary state” approach makes California both safer and stronger economically (this appears to be true for all or most sanctuary cities), and knowing that other people have access to health care means that we don’t get stuck with those costs in other ways.

Great Weather = Easy, Free Recreation

Even though we now live in a much colder place than our former digs in West LA, we still have a bright blue, sunny sky almost every day, unless it’s dumping snow (in which case, we are usually rejoicing). And that means it’s easy to get outside for free recreation almost every day. And most of the state has little humidity, few bugs and mosquitoes, and almost no unexpected rain. While a little more rain in drought years wouldn’t be the worst thing, we enjoy an idyllic climate that boosts our lifestyle and happiness factor by about a thousand.

A Healthy Culture Matters

California is one of the healthiest states in the country in terms of both physical health and approach to public health (see safety nets above). Our obesity rates are among the very lowest, as are our smoking rates, and for those who’ve railed against paying the costs of others’ lifestyle decisions (even though many folks don’t have the same choices available to them), living in a state where we aren’t collectively paying the same costs for obesity and smoking-related care as other states should be appealing.

But beyond the costs, we value our own health more than anything, and living in a place where it’s normal to ask friends to go for a hike and less normal to ask them to sit on a couch and eat Doritos is good for all of us. And given what a huge impact our social circles have on our personal health, having a generally more health-focused culture benefits all of us.

Total Costs Matter More to Us Than Taxes

This example is super locality-specific, but the larger point applies in plenty of places. When we shared that we live on the California side of Tahoe, many folks asked why we don’t move just across the state line to Incline Village, Nevada, where there’s no personal state income tax. And the reason — beyond Nevada’s lack of commitment to the safety net, and worse health care options — is that property values there are much, much higher than where we live. Why? Because of all the people who focus solely on taxes and not on total cost, which drives up demand, which drives up prices.

To me, this is bananas. Sure, income taxes can cost a lot to high earners, but do they cost enough more to justify adding a 20, 30 or even 50 percent premium onto the price of your home? We sure as hell don’t think so. And outside of our specific example, there are plenty of places where taxes might be slightly lower, but total costs are higher, and that’s absolutely worth factoring in.

Nothing Replaces the One You Love

We have friends who love New York City and can imagine living nowhere else, despite the high cost to live there. Or San Francisco. Or Hawaii. Or Tokyo.

Expensive places are generally expensive for a reason: because they are super desirable places to live. And that’s absolutely true of both LA and Tahoe. And of virtually all of California. This state is a magical wonderland — from jaw-droppingly beautiful coastline up and down the state, to the majesty of the Sierra, the beauty of the high desert and the prehistoric grandeur of the redwoods in the far north. We have a gajillion national parks, all of them different from each other, and crazy beautiful scenery almost everywhere you look. Plus the people are generally more laid back and open-minded than in other places we’ve lived, which suits us a lot better than the high-strung east coast folks we were surrounded by back in DC.

In short, we love it here. We can’t imagine leaving by choice, and we feel grateful every day that we can afford to stay. We know California isn’t for everyone, and we’re certainly not trying to talk anyone else into moving here, but if you love it and want to retire here, don’t let the conventional wisdom talk you out of it.

Same goes for any high tax state or locality. If you love it there, and can budget to make it work, there’s no shame in staying just because taxes are technically lower somewhere else.

Reasons Not to Stay

Of course, California also has some major challenges like many places, and I have no desire to gloss over them. If we had kids, we’d seriously consider leaving, because Prop 13 which caps our property taxes has also unquestionably hurt school quality, making many public schools in the state borderline terrible. In plenty of areas, there aren’t enough health care providers that accept MediCal (our Medicaid program). And the cost of living is too high in many of the largest cities for the majority of workers to afford to live there, which adds to our massive traffic problems because people have long commutes. If we had to live in SF or LA and stare down another 30 years of a long commute, we’d for sure be looking at other options. But because commuting isn’t an issue for retirees and we don’t have kids, these downsides are not at the same level of importance to us.

Time to Chime In!

Something tells me y’all have thoughts, so let’s dig into them! I know plenty of you are Californians, so tell us — what makes you stay? What makes you consider leaving? Folks who’ve left California, what ultimately drove your decision? Folks who can’t believe we’d be okay paying the tax rates here, let’s hear from you, too. And those who want to make the case for a different high cost of living place, chime in!