Disclaimer: Nothing on this article ought to ever be thought of recommendation, analysis or an invite to purchase or promote securities. I’m not a monetary advisor.
In the case of retirement, one of many largest selections that we’ll must make is deciding on whether or not or not we’re going to relocate to a different space.
Apart from the apparent emotional prices (distance from household, and so forth.), relocating may have a domino impact on our funds in retirement that can lead to vital will increase/decreases in bills corresponding to:
- Housing
- Meals
- Transportation
- Medical Care
- Taxes
In consequence, it’s crucial to know how a lot our distinctive life-style will value us in one other state.
In immediately’s article, we can be analyzing the best way to successfully use the price of residing index technique so as to consider whether or not or not relocating in retirement is financially prudent.
Let’s dive in.
What’s the Value of Residing Index Technique?
Value of residing refers back to the sum of money required so as to cowl our bills.
Our particular person value of residing is influenced by quite a lot of elements together with:
- Our Life-style Decisions
- Our Household Dimension
- Our Age/Well being
- The place We Reside
From a retirement perspective, we will consider value of residing as being synonymous with the annual funds that’s required so as to help our life-style. Nevertheless, because of quite a lot of financial elements, the annual funds for our life-style can fluctuate considerably from state to state.
Luckily, we will depend on knowledge from the Council for Community and Economic Research (C2ER) so as to higher perceive what these value fluctuations are. “Utilizing over 60 items and providers collected on the native stage from over 300 unbiased researchers,” the C2ER has one of the vital complete value of residing datasets accessible.
The result’s a value index that precisely and reliably compares costs amongst completely different states in addition to cities. Right here is how we might learn and interpret the index:
- A value of residing index = 100 signifies that an space’s prices are in step with the nationwide common
- A value of residing index < 100 signifies that an space’s prices are decrease than the nationwide common
- A value of residing index > 100 signifies that an space’s prices are increased than the nationwide common
Utilizing this knowledge, we will evaluate two space’s value of residing indices so as to get an thought on whether or not or not our life-style prices would both enhance or lower with a possible transfer. This is essential to know earlier than we transfer as a result of:
- An elevated value of residing can probably end in not having sufficient cash to help the kind of life-style that we would like for our retirement
- A decreased value of residing can probably give us extra discretionary funds that we will spend in retirement
With that being mentioned, let’s have a look on how we will use the price of residing index technique.
Making use of the Value of Residing Index Technique
Let’s check out a hypothetical situation utilizing C2ER knowledge printed by the Missouri Economic Research and Information Center.
Think about that a person from New York was contemplating relocating to Florida to retire.
In Q3 2022, the price of residing index for New York was 135.7. In different phrases, residing in New York was 35.7% dearer than the nationwide common. Throughout the identical time interval, the price of residing index in Florida was 104.5. Whereas residing in Florida is 4.5% better than the nationwide common, a transfer from New York to Florida would signify a median value of residing lower by 31.2%.
Whereas it is a good ballpark approximation, it’s necessary to keep in mind that these are state stage averages and may range broadly primarily based on particular person cities. In consequence, so as to get essentially the most correct illustration of an space’s value of residing, one ought to use a metropolis/county particular calculator that leverages C2ER’s knowledge corresponding to NerdWallet’s cost of living calculator.
Persevering with with our instance, utilizing NerdWallet’s calculator, let’s check out what a $100,000 annual retirement funds seems to be like when transferring from Manhattan NY to 2 completely different cities in Florida.
Manhattan NY to Orlando FL:
Manhattan NY to Miami-Dade County FL:
On this instance, transferring to Miami-Dade County could be 51% cheaper than Manhattan whereas Orlando could be 58% cheaper than Manhattan (and seven% cheaper than Miami-Dade County)
From a retirement portfolio perspective, we will actually discover a sizeable distinction. On this specific case, if the person have been to remain in Manhattan, their estimated retirement portfolio (assuming a 4% secure withdrawal fee) could be equal to $2.5M.
With that being mentioned (assuming the identical 4% secure withdrawal fee) transferring to Orlando would solely require an estimated retirement portfolio of $1,050,925. This interprets to a -58% lower within the portfolio required to help an analogous life-style! This may soften years off our path to financial independence.
By utilizing this publicly accessible and city-specific value of residing knowledge, we’re in a position to make a greater judgement name in relation to exploring potential relocation choices.
Remaining Ideas
The place we determine to stay is a foundational pillar in deciding what our retirement will appear to be.
Whereas relocating in retirement generally is a enjoyable daydream, we should always pragmatically perceive what’s concerned so as to make sure that we’re setting ourselves up for achievement and making essentially the most out of our hard-earned retirement.
Lastly, cash is just one a part of the retirement equation. We additionally must make certain that we’re emotionally ready to retire in the correct location.
The views and opinions expressed herein are the views and opinions of the creator and don’t essentially replicate these of Nasdaq, Inc.
