Is it possible for me to retire in California? How much does it cost to retire in California? Is California too expensive? Are California’s income taxes too high to retire? Is it cheaper to retire outside of California? What do I need to do to maintain residency in California? Who should I talk to if I’m considering whether or not to retire in California?
By James L. Cunningham Jr, Attorney at Law
Fear spreads quickly: especially, it seems, when it’s unfounded. That’s certainly the case in my home state, where we lead the world in technology, entertainment—and intelligent, affluent adults who are suddenly scared to death that they’ll never be able to afford retirement.
Each year at my firm, I hear more and more of my clients ask, “Is it even possible for me to retire in California?” Their misgivings range from concern over California’s sometimes high taxes and cost of living to the belief that they might be happier in another state. (I have nothing against Texas, but I’m going to pick on it because it’s becoming so popular!)
My cards are on the table. I’m a proud, lifelong Californian. I was born in California, I love living in California, and I plan to retire in California myself. At this writing, I’m in my 50s, so I’m not ready to retire just yet, but it’s certainly on my mind. As an Estate Attorney and tax planning expert, I also work with countless Californians at or near their retirement who are considering the pros and cons of retiring in California. I admit that I’m biased, but I really believe that, for many people, retiring in California may be their best bet.
It’s true that the reputation of the Golden State has been tarnished somewhat in recent years. Our marginal income tax rate is the highest in the nation for high income earners – but not for middle income people. The price of housing has skyrocketed. And there are always those pesky wildfires and earthquakes to worry about. But it is my well-considered opinion that not only is it still possible for many people to retire comfortably in California, but that there are many reasons why it may be the best option available to you.
None of this constitutes “legal advice,” but I think you will find my perspective as an experienced Estate and Tax Planning Attorney useful and informative if you’re making a decision about whether or not to retire in California. (And if you’re not working on retirement decisions, that time may come sooner than you expect!)
Here are some of the most frequently asked questions I receive in my practice regarding retirement in California, along with my thoughts on why it may be a great idea for you and your loved ones—if you do things right. Book a call with us to learn more about advanced tax planning for high net worth families.
Q. Does it matter where I retire? What are California retirement taxes?
Of course it matters where you retire—but you have to take a decades-long view of the question and consider all the factors. Indeed, “retiring somewhere” may not be a one-time move.
When can you retire in California? When you can retire in California depends on the year you were born:
- For individuals born between 1943 and 1954, the full retirement age is 66.
- If your birth year falls between 1955 and 1960, the full retirement age gradually increases until it reaches 67.
- For those born in 1960 or later, retirement benefits become payable at 67.
Many people can expect to live into their 80s, perhaps even their 90s and beyond. That’s a long time. In 30 years, a person can graduate from high school and college, build a career, get married, raise children, and watch them graduate. In the same way, believe it or not, you can expect your life to continue to change dramatically during your 60s, 70s, and 80s.
When making plans for your retirement, it’s crucial to consider how much your circumstances and mindset can shift during that large slice of time. In any case, if you’re thinking of a move, think about more than California income taxes. Take into consideration:
- Being near to family, friends, and community
- Culture and activities
- Weather and climate
- Being near to multiple, top-notch healthcare options
- Housing: not just the monetary cost, but the “care and feeding,” weather damage, property taxes, and more
Q. Do California’s high taxes make it a bad place for me to retire?
For many people who love California, leaving the state to retire is not such a good idea from a tax perspective, no matter how trendy it is to consider escaping what naysayers like to call “Taxifornia.” At the very least, I urge you to consider all the many factors that come into play even on the tax front when you are retirement planning in California.
Yes, the marginal income tax rate in California is the highest of the 50 states. But there’s much more to the tax story, and if you get nothing else from this article, I would encourage you to not focus myopically on California’s 13.8% income tax when making decisions that affect your retirement.
The truth is that most people’s tax situations are too complicated to be explained using one simple figure. In fact, depending on your specific circumstances, your overall tax bill may be significantly lower if you retire in California than if you move out of state in search of lower taxes.
That’s because you have to take the picture at all levels into account when considering California retirement taxes: Income and capital gains are generally taxed at the federal, state, and local levels, while property taxes are generally levied at the county level. Balancing these issues and doing appropriate tax planning can be mindbogglingly complex: many people need the help of an attorney, CPA, and financial advisor to play the game correctly. Or even to answer the question, “In what state will I pay the lowest taxes during retirement?”
Q. Does California tax retirement income?
The state of California doesn’t include Social Security retirement benefits in its income tax rates, but other forms of income can be subject to taxation, which can be anywhere from 1% to 12.3%.
Q. How Do California retirement taxes actually compare to other states?
California has a progressive (or graduated) tax system, meaning that we pay different proportions of our income in taxes depending on how much we bring in. California’s income tax goes up significantly around the $100K level.
That means California has a high marginal tax rate, but other states can have higher taxes altogether, particularly for those outside the top brackets. For example, Washington State has lower income taxes but a higher Estate or “death tax.” Minnesota and Oregon have flat tax and show you no mercy if you make a lot less than $100K.
When you’re older, a lot of things you most commonly buy aren’t taxed at all in California, including food and health care. But, does California tax retirement income? If you make less than $100K a year, and especially if you subtract social security, savings, Roth IRAs, etc., you could easily find yourself paying less in taxes if you stay in California than you would if you leave the state to retire.
Overall relative to other states, taxes are actually on the low side for some retirees. Why? Because we have stable property taxes, no taxes on social security benefits, and no capital gains tax after one spouse dies.
That last fact bears emphasis: Many people do not know that in some cases, if one spouse dies, the surviving spouse can sell community property for its value at one spouse’s death and not pay capital gains tax. Depending on the value of this shared property, this maneuver can create a significant windfall in California versus other states.
And guess what: If you’re living off your savings, that’s not taxable income in California. If you’re living off savings and social security, your taxes may be nearly a nonissue!
Rarely do the naysayers point out any of the tax advantages available to seniors in California.
Property tax caps matter a lot to retirees!
With stable and low property taxes under Prop 13, owning real estate in California can also be an extraordinary wellspring of value. The value of property in California has increased by an average of 6.2%, year over year, for the last 40 years, while increases in property taxes are capped at 1% of its purchase prices and can only increase 2% per year. This means property taxes, broadly speaking, stay consistently low.
I worked with one couple who considered leaving the state to avoid their $1,500 property tax bill only to discover that, in Texas, it would increase to $15,000.
In California, this couple’s property taxes were capped by Prop 13, which revolutionized California’s property tax system with its passage into law in 1978. Prop 13 and its later amendments are a complex and fascinating topic, and another important factor that makes California so different from any other state.
If your life is affected in any way by property taxes, I encourage you to check out all my materials and resources related to Prop 13 and Prop 19—overall, the picture is rosy for those who already own a residence and plan to retire here, even if they want to switch homes. Indeed, if you properly use Prop 19, you can take your low tax caps with you pretty much anywhere in the state.
Q. Are there places besides California where it would be cheaper for me to retire?
The answer to this question is a hearty maybe or maybe not. It depends on a lot of different factors.
For starters, if you have established a lifestyle and community in California, you can think of that as an investment you would have to duplicate elsewhere. Staying in California allows you to leverage that investment without making a new investment in a new state.
The overall cost of living is certainly a factor, but remember that cost of living is closely related to quality of life. Considering cheap property in Idaho? If you love golf, maybe you don’t want to only be able to golf five months out of the year or have to travel long distances to find a variety of world-class courses.
Access to the best available health care is, of course, also essential during retirement. It’s far better to have highly qualified medical professionals close at hand than it is to travel hundreds of miles to get the care you need. Moving to a remote ski resort area in Colorado may sound pretty amazing, but what’s the distance to the nearest high-quality doctors and hospitals? One major benefit of retiring in California is the world-class medical services and programs available here.
California leads the nation in quality of life across many categories. Certain goods and services are actually more affordable and certainly more easily accessible in California than in, say, Texas. Others are more expensive because, well, they’re worth it.
You don’t want to sacrifice the things you love, along with the support of your family and trusted community, just to save a few bucks on the margins.
Some other great things about retiring in California
I’ve already admitted that I’m biased, so let me go all in: In terms of culture, weather, food, and diversity, I don’t think California can be beat—and that’s one reason it’s kind of expensive to live here.
Retirement is a wonderful time to enjoy meals at your favorite restaurants or scout out new ones, and California cuisine is heralded worldwide. Many think we now beat New York and Paris for great eateries—which makes sense when you consider the access to fresh ingredients (California is an agricultural powerhouse) combined with the presence of discerning people with money.
About half of Michelin three-star restaurants in the USA are in California, and our cultural variety in restaurants is perhaps unequalled in all the world.
But it’s not just the variety you find in the food. California might be the most diverse society in human history. Two out of five of us were born outside the United States. One hundred and twenty languages are translated in our court system. The state is also home to people from across the political spectrum, from the far left to the far right. No matter who you are or what you believe, you can find a supportive community of like-minded souls in California. You may find other locales significantly less diverse on all fronts.
My state is hardly immune to extreme weather conditions, particularly in its deserts, and we can safely say that climate is not a static phenomenon. But there are plenty of climate reasons people pour in from around the world, including the brisk, foggy mornings in the San Francisco Bay Area and the showers of sunshine in Greater Los Angeles (in February, no less).
Like our food, our weather is world-famous, and you may find yourself missing it more than you expect after you’ve decamped for that cute farmhouse in the extreme temperatures of Wyoming. Or, again, Texas (told you I’d pick on Texas).
Q. What if I’ve already decided where I want to retire?
Maybe like many people you’ve “always figured” you would move out of California when you retire. If the time is close, I urge you to pause and reconsider.
Before you uproot yourself, take a closer look at your life now and think deeply about the life you want. Try out some other places. It’s okay to visit several states before you make your final decision. In fact, I strongly encourage it.
I once worked with a couple originally from South Asia who had moved to San Francisco. Over the years, they loved the culture but hated the taxes. Like a lot of Californians, they were pretty sure they wanted to retire in the great state of Texas. Just to be safe, they planned a trip there for three weeks. They came back to California in three days.
I worked with another couple; let’s call them Hank and Wendy. They were in their mid-60s, recently retired, with a million dollars in 401Ks and a million dollars in other assets. Like everyone, they were worried about high California taxes during their retirement. But to thwart those taxes, they made what I consider a very smart move, which was a series of major Roth conversions over the years. They took their 401K and converted it to a Roth IRA bit by bit. Thus, future distributions from the retirement account, even if it grows, are not taxable.
In other words, with a little planning, Hank and Wendy dodged the whole issue of high taxes.
Q. When I retire, should I plan to downsize to a smaller living space?
Many people I speak with assume that when they retire they’ll contract their lives into a smaller space—sell their house and move into a condo, an apartment, or a smaller home in order to reduce costs and overall living expenses.
A lot of retirees do this, but from the many retirees I’ve spoken with, I don’t necessarily recommend it. First of all, where will the grandkids stay? Where will you put your stuff? How will your life change with less space to move around in?
Before you downsize, look closely at your current living situation and consider what comforts you’re willing to sacrifice and what aspects of your lifestyle are supported by the space you now take for granted.
Do you maybe still want a home office? A place to build your model airplanes? Do you have a really compelling personal reason to downsize or is it just what you’ve heard is a good idea?
Then again, you may have health concerns, regarding stairs or other difficult-to-navigate areas in your current home as you get older. Definitely plan ahead on the subject of elder care in California and think about the long-term ease-of-use in your house. Does it offer the accessibility you need?
Q. Can I “leave California” for tax purposes but still remain a California resident?
The short answer is no. But let’s look more deeply at the question.
Because of some of the important tax breaks you get as a California resident, especially on property taxes, a lot of people ask how to maintain their residency when they leave. And if they want to escape California taxes, they ask if they can still keep a house here. Here’s a hypothetical:
Our friends Hank and Wendy always wanted to travel. During the first year of their retirement, they spent three months in Hawaii, two months in France, seven months in Nevada, and zero months in California.
Were Hank and Wendy still California residents? That depends on a legal concept called “domicile.”
Your domicile is where you voluntarily establish a present intention of making your true, fixed, and permanent home. People come to California for a reason, for a season, or for life. If you leave California and you have an intent to return on a more-or-less permanent basis, then California remains your home.
How that is defined under the law is a bit more complicated.
In California, factors that support termination of domicile include:
- Full-time employment in another state
- Minimal time spent in California
- Moving all your possessions out of state
- New professional and social relationships elsewhere
- Changing your voter registration
- Changing your driver’s license or vehicle registration
- Becoming professionally licensed in a different state
Factors that support residency include:
- Maintaining a home for personal use (if this applies to you, you are going to be a Californian under the law)
- Spending time in California and having strong connections to the state
Living in California is one thing, while doing business in the state is quite another. If Hank and Wendy move to another state but keep a home and rent it out, they must pay California taxes on the property and money they make in rent, even if they no longer live here.
Before you leave California for your retirement, consider whether or not, and to what degree, you may want to remain a Californian, under the law and in your heart.
Then talk to your accountant and your estate attorney about your California plans so you don’t get any surprises at tax time.
Q. What are the phases of retirement? How should I think about different periods of retirement?
Overall, I think it’s vital to take the long view on retirement as a series of phases, because far too many people consider retirement as a monolithic block of time. Indeed, it may be useful for you to think about retirement only in decade-long segments. If you will forgive some sweeping generalizations:
Sixties. If you retire at 60 years old, you’re not drawing social security yet, nor are you tapping your IRAs or your 401K. It’s likely that you’re living off savings—but you still have the energy to see the world. Opportunities to explore new places and try new things abound in retirement, and if you plan appropriately, you can provide a lifestyle for yourself that is leisurely and enjoyable while you are healthy enough to do whatever you wish to do.
I’d encourage you to make the most of your 60s and experience everything you’ve worked so hard for over the years. If travel appeals to you, you should plan your early retirement in such a way that facilitates many globetrotting adventures.
You’ll have time for sorting photos and watching reruns later—is setting up your retirement nest in some new locale really your highest priority in this period?
Seventies. By the time you reach your 70s, you may still be in sterling health, albeit feeling a bit less footloose. And your financial situation is likely to change, perhaps dramatically. For example, you may be receiving a required minimum distribution from your IRAs. When you receive these RMDs, your tax situation will change—but do you still have to worry about those marginal tax rates? How will this affect your overall choice of location?
Eighties. When you reach your 80s, you may be less active, relying more on your adult children or caregivers for assistance. Your highest priorities at this point may include being physically close to your family, including your grandchildren.
Are they likely to visit that condo near the ski resort in Colorado very often?
In short, your circumstances can and will change during retirement. The things you consider important will change. You can still plan ahead, of course, but resist the tendency to say, “Well, here’s how I’m going to spend the next 30 years!”
Q. Am I trapped if I’ve already planned my retirement?
Finally, I would urge you to leave yourself flexibility.
A lot of people have “planned their path” so far in advance that when retirement actually comes, their circumstances, needs, and desires have changed. They quickly learn what they thought an ideal retirement looked like is no longer what they want.
Take it slow and avoid trapping yourself into only one option. See how you feel when the date actually arrives before making any dramatic advance decisions. And if you’ve already planned out your retirement path, please consider getting a second opinion. And a third opinion. Your retirement should not be a do-it-yourself project. Share your plans with others to ensure they make sense for you and your quality of life, and will be supported sufficiently by your retirement funds—and your family! This is your whole life we’re talking about.
You also need trained, trusted, and qualified professionals on your side. At a minimum, you need what I call an A-team of professional services:
- Qualified Estate Attorney
- CPA
- Financial Advisor
Indeed, for estates over $10M or incomes over $1M per year, I suggest you consider going even further by hiring professionals who run a Multi-Family Office at a firm like mine to handle financial and legal issues to free yourself to truly live your best life in retirement.
Don’t blindly accept the words of the California naysayers
I hope I’ve helped open your eyes to the myriad factors surrounding any decisions you make about your retirement—along with possibilities you hadn’t considered before, including retiring right here in California.
Don’t blindly accept the words of the naysayers. You can still celebrate your golden years in the Golden State. In fact, it may be the smartest decision you’ve ever made—even for your taxes!
What do we do as California estate attorney specialists?
The lawyers and staff at CunninghamLegal help people plan for some of the most challenging, as well as some of the best times in their lives. Then we guide them when those times come.
Make an appointment to meet with CunninghamLegal for California Retirement Planning, Elder Care Planning, Tax Planning, and California Estate Planning overall. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book a free call online. Please also consider joining or replaying one of our free online webinars, where we have an entire playlist that features retirement planning.
We look forward to working with you!
Best, Jim
James L. Cunningham Jr., Esq.
Founder, CunninghamLegal
At CunninghamLegal, we guide savvy, caring families in the protection and transfer of multi-generational wealth.
