People sometimes say that geography is destiny. Where you choose to live certainly can make a big difference in your social life, career, activities, and without question, your finances. If you are considering moving, whether that's due to a new job, retirement, or any other reason, you should definitely weigh the financial trade-offs.
Consider the vast variation in expenses in different parts of America. The cost of living in Manhattan is more than twice as high as the national average, while San Francisco, California, is 1.7 times and Washington, DC, is nearly 1.5 times, according to the Council for Community and Economic Research (CCER).1 On the other hand, Kalamazoo, Michigan, is about 83% of the national average, and Decatur, Illinois, is about 78%.
Cost of living takes into account differences in costs for housing, health care, food, taxes, and other expenses. They can vary a great deal from town to town as well as state to state. Cost of living comparisons can also vary based on individual expenses and how the estimate is calculated.
With such big differences in cost, why not consider what a move could mean for your retirement? Working with a Fidelity advisor or other financial professional can help you understand how a shift in cost of living might change your financial picture throughout your retirement, and the legacy you may leave behind. Financial planning with an advisor is one way to do this kind of analysis, but Fidelity also offers planning tools so you can do at least some of this modeling on your own.
Let's look at a hypothetical situation. Henry and Linda live in San Francisco and work with a Fidelity financial professional named Daniel as part of their relationship with Fidelity.2 They tell Daniel they love San Francisco but are considering moving to Kalamazoo where several friends have retired, and the cost of living is lower, according to the CCER. So Daniel helps them illustrate 2 options.
First, they discuss Henry and Linda's goals. Both are age 60, healthy, and hope to retire in 3 years. They want a retirement plan that will enable them to maintain their current active lifestyle, and leave a legacy for their 2 adult children and their families.
Daniel encourages the couple to set a goal of planning to age 96, based on longevity trends in the US, so they can be confident in their plan even if they have a very long retirement.
Next, Daniel helps Henry and Linda review their financial situation. Currently, the couple earns about $250,000 each year, before taxes, spends about $80,000 a year, and saves close to $100,000. They have managed their money well and have no debt other than a $200,000 mortgage on their San Francisco home, which is worth $500,000. (The scenario assumes the sale of their house would be a wash.) They also have $1 million in savings: $510,000 in Linda's workplace retirement plan, $360,000 in Henry's IRA, plus another $130,000 in a joint account. Looking across all their accounts, their money is about 55% in US stocks, 20% in international stocks, 15% in bonds, and 10% in cash.
To compare the San Francisco and Kalamazoo options, Daniel starts by going through the couple's expenses and estimating how they may change in retirement. Some costs, like commuting and saving for retirement, are expected to drop. But for Henry and Linda, some other expenses will actually go up, because of the couple's plans for travel and adventure. After going through their budget, they think their overall expenses won't change much after they retire. They decide to plan for their expenses to remain around $80,000 per year if they stay in San Francisco.
Daniel uses a financial planning tool that models 1,000 different scenarios based on different market simulations. Since it's impossible to predict the actual return of the markets, the goal is to look at lots of different possible outcomes and create a plan that will work even in challenging market conditions.
If they stay in San Francisco, the illustrations suggest the couple would have a moderate chance of maintaining their lifestyle until age 96, meaning the plan succeeded in about 80% of the scenarios. In an average market, they could leave a legacy of about $2.4 million. Of course, sometimes markets are below average. In about 20% of the scenarios, the couple would need to cut spending or make other lifestyle changes to avoid running out of money in their portfolio. And in a very challenging market (defined as the worst 2.5% of scenarios), the couple could have spent all their savings and be about $687,000 short of their estimated expenses.
If they move to Kalamazoo, the illustrations suggest the couple would have a stronger likelihood of maintaining their lifestyle and leaving a legacy. Their estimated expenses, including federal and state income taxes, would drop to about $64,000 a year starting in 2024. In an average market, the couple's legacy could grow to nearly $5 million. Even in a very challenging market, the couple's portfolio is projected to provide for all but roughly $150,000 of their anticipated lifetime retirement expenses.
Henry and Linda review the numbers and consider the trade-offs. Daniel discusses some other options, like downsizing in San Francisco or moving to a nearby community, working a few additional years, or trying to save more in the final years of retirement. But Henry and Linda really want to enjoy their retirement—and leave a legacy. Plus, they think a new place sounds like fun. After considering various options, the couple decided that with the financial savings and economic climate, the move made sense for them.
The power of planning
Deciding where to live in retirement is a very personal decision that can shape relationships, hobbies, and many other parts of life. Among those many considerations are your finances. It can be hard to estimate what a change in location might mean for your retirement income. You have to consider the cost of everything from housing to health care, taxes, and more. Over a long time period, these differences, and the impact on your investment portfolio, can really add up. But scenario planning as part of the financial planning process can help illustrate those trade-offs, so you can feel more confident in your ultimate decision.