These Are the Areas Where It Costs the Most to Retire

How much will you need to retire? $500,000? $1 million? $2 million? There’s no easy answer. Some people won’t be able to enjoy their dream retirement without millions of dollars in the bank. Others will try to get by with $100,000. It depends on your lifestyle.

It also depends on where you live, according to data from the Employee Benefits Research Institute. Many retirement-savings recommendations are based on national benchmarks, noted the authors of the report on geographic variations in spending in older households. But because there can be huge differences in how much people in different parts of the country have to pay for housing, health care and other necessities, it’s probably more useful for those who are planning for retirement to consider how much people in their region spend.

Nationwide, the average household with people between the ages of 65 and 74 spent $45,633 per year, including nearly $21,000 on housing costs, $4,300 annually on health care and $4,700 on food. (Data on spending came from the University of Michigan’s long-running Health and Retirement Study.) As people age, overall expenses decline and a greater share of the typical household’s budget goes to housing and health care, while spending on travel and entertainment falls. (The survey didn’t include people who were living in nursing homes or other care facilities.)

But when the Employee Benefits Research Institute’s authors broke down the data by Census division, they found big differences, with retirees in the most expensive regions spending $15,000 per year or more than those in cheaper states.

Where is it cheapest to retire? Let’s take a quick look to find out how much the average retiree spends in your part of the country.

Average spending is for households with residents ages 65 to 74, unless otherwise noted.

9. West South Central

Average spending: $28,540

Younger retirees in Texas, Oklahoma, Arkansas and Louisiana spent less than retirees in any other part of the U.S. At $11,742 per year on average, their housing costs are lower than anywhere else in the country. (Go here to see how much house you can afford.) They also spent less on health care. But unlike most regions of the country, where retiree spending falls over time, people in the West South Central region spend more as they get older. By the time people are between the ages of 75 and 84, they’re spending $33,257 per year, in part because of a jump in health care spending to $2,600 per year.

8. East South Central

Average spending: $29,140

Retirees in the East South Central region (which includes Mississippi, Alabama, Tennessee and Kentucky) have the second-lowest spending in the country. They also have the biggest difference in spending between pre-retirees (those ages 50 to 64) and people ages 64 to 74, with annual expenditures falling from $42,261 annually to a little less than $30,000. Downsizing might be the main reason. The older survey respondents spent nearly $7,400 less per year on housing than those in the 50-to-64 age group.

A low cost of living is another reason this region is also home to four of the 10 best cities for people who hope to retire early.

7. East North Central

Average spending: $35,201

People in the Great Lakes states of Wisconsin, Michigan, Illinois, Indiana and Ohio had the lowest average spending outside of the South. That’s good news for people retiring in that region, but it comes with a caveat. Average spending in this region didn’t decrease as dramatically with age as it did in some parts of the country. By the time people reached age 85, they were still spending $31,059 per year on average, more than any other region except New England.

6. Middle Atlantic

Average spending: $38,125

Retirees in the mid-Atlantic states of New York, Pennsylvania and New Jersey spend an average of $38,125 every year, only slightly less than those in the 50-to-64 age group. Their average expenses included $13,440 on housing and $1,940 on health care. (You can determine your housing budget here.)

5. Pacific

Average spending: $38,464

Retirees in Washington, Oregon, California, Hawaii and Alaska spent about $38,000 per year on average, including $2,360 on health care and $18,300 on housing. Their housing costs were the second-highest in the country after New England, which may not be surprising considering this region is home to eight of the 10 least affordable cities in the United States.

4. Mountain

Average spending: $39,411

Living isn’t cheap for retirees in the vast Mountain region, which includes Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and New Mexico. But things get better as you age. People in these states spend about $10,000 less per year between ages 75 and 84 than they do in the first decade of retirement.

If you end up retiring in the Mountain region, you’ll have lots of company. States such as Arizona, with its sunny skies and relatively low taxes, are perennially popular with retirees.

3. West North Central

Average spending: $42,240

Stereotypically frugal Midwesterners actually had the third-highest spending in the U.S. People in Minnesota, North Dakota, South Dakota, Iowa, Nebraska, Kansas and Missouri spent more than $42,000 per year on average from ages 65 to 74. About $20,000 went to housing and health care, with $22,000 left over for expenses, including food, transportation, travel, entertainment and dining out.

One reason retirees in this region can spend big? Some are quite wealthy. Minnesota, North Dakota, Nebraska and Iowa are all in the top 25 states in the number of millionaires per capita, according to a study by Phoenix Marketing International.

2. South Atlantic

Average spending: $44,350

Retirees in the sprawling South Atlantic region, which stretches from Delaware to Florida, have some of the highest spending in the U.S. People living in Delaware, Maryland, West Virginia, Virginia, North Carolina, South Carolina, Georgia and Florida spend $44,350 per year, on average, including $16,980 on housing and $3,000 on health care.

1. New England

Average spending: $46,019

New England retirees are the biggest spenders in the U.S., with annual expenditures of a little more than $46,000 per year. People in Maine, New Hampshire, Massachusetts, Vermont, Rhode Island and Connecticut have the highest housing costs in the country, at $19,507 annually — almost twice as much as those in the cheapest states — though costs fall significantly as people age. Health care spending among 65- to 74-year-olds is also higher than anywhere else, at nearly $6,000 per year, almost twice as much as what retirees in other parts of the country pay.

This article originally appeared on The Cheat Sheet.

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I’m in College. Should I Start Saving for Retirement?

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It is never too early to start saving for retirement. In fact, the sooner you start, the less you will need to save in the long run. This means more money in your pocket to spend on non-retirement over your lifetime, and if you want to retire early rather than working to 65 or 70 like so many Americans, this is your golden ticket.

The Power of Compounding Interest

As a millennial, you have the greatest retirement tool: time. It’s a commodity that you can’t get back as you get older and one many boomers would be jealous of. The earlier you start investing, the more time you’ll have to let compounding work for you. You add less now but have more later. Use a retirement calculator to determine your savings goal, a compounding tool to see the numbers, then create a plan and stick with it.

It can be difficult for a young person to save big money during and right after college, considering many students only work part-time or not at all while in school. Entry-level salaries may also not provide a big savings cushion, and high levels of student loan debt, too, can eat into a young person’s savings.

However, let’s assume for illustrative purposes that Christine saved $600 per month in college for 5 years, from the time she turned 18 until she turned 23. She saved $1,000 per month for 7 years after college when she began working, from 23 until she turned 30. Then she stopped saving and left the money in her account, where it continued to accumulate interest at an annual rate of 5% until she retired at age 65.

Now let’s compare her to Jason, who didn’t start saving until after college on his 24th birthday, when he got his first “real” job. He put away $1,000 per month for 13 years, until he turned 37. He also left the money in his account, where it continued to accumulate interest for 28 years at a rate of 5% per year until he turned 65.

Over that 13-year period, Jason contributed about $156,000 and Christine contributed about $120,000. Christine saved $36,000 less than Jason, but she wound up with about $21,000 more than Jason had saved for retirement.

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If Christine chooses, she can stop contributing at age 30 and have more money in her pocket for other goals (if she has determined that this retirement amount at age 65 is sufficient). Jason, on the other hand, is saving in his 30s when other constraints like starting a family or mortgage payments may make it difficult to save for retirement.

Christine can use that money from age 30 to 36 to travel, save for a house or add to her retirement account to help it grow even more. The latter would very easily contribute to the possibility of her retiring earlier than 65, creating a more secure retirement and helping to ensure that she will not need to work due to poor planning. The point is, she has more options – saving earlier has created the financial freedom to let her live the life that she wants.

How to Super-Charge Your Savings

These results can be further enhanced by utilizing an employer match in a deferred plan such as a 401K to reduce your actual weekly out-of-pocket contribution to your retirement account. Plus, it’s free money (as long as you meet your company’s vesting requirements).

The bottom line is, saving is like a muscle; it takes discipline, much like going to the gym. Start slow and early and keep building, and you lessen the chance that you may face the painful task of trying to catch up later in life.

You can consider consulting a Certified Financial Planner (CFP®) for comprehensive advice on calculating your retirement goal amount and strategies to support savings for this and other life goals. (Full disclosure: I am a CFP®.) And as you work toward those goals, you can see how your habits are affecting your credit by viewing two of your credit scores, updated each month, for free on Credit.com.

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Can You Use Your IRA to Pay for College?

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Families or individuals sometimes want to tap retirement assets in an Individual Retirement Account (or IRA) to pay for educational expenses. This has become even more attractive recently, as the rules governing both traditional IRAs and Roth IRAs have been changed to allow withdrawals for qualified higher education expenses.

The tax treatment of the funds used to pay for college varies based on whether the assets being used for college expenses are in a Roth IRA or a traditional IRA. But as long as the amount of the withdrawal does not exceed the cost of higher education costs for that year, the withdrawal will avoid the 10% additional penalty.

Higher education costs are defined as any postsecondary education that is eligible to participate in student aid by the U.S. Department of Education, along with the tuition, fees, books and supplies that come with attending.

The Difference Between Using Roth or Traditional IRA Funds

With a Roth IRA, the principal portion, or amount you put in, can be withdrawn tax-free and penalty-free at any time for any purpose. A key benefit of Roth IRAs is that distributions are not taxed as earnings until the entire principal balance is withdrawn. That means you can take out as much as you put in, tax-free, to pay for college and withdraw the earnings portion tax-free when you turn 59-and-a-half.

By way of example, imagine having $100,000 in a Roth IRA on your child’s first day of college, $65,000 of which is principal and $35,000 of which represents earnings over the period that you have been contributing to the Roth IRA. You would be free to use that entire $65,000 towards college expenses before needing to worry about any tax consequences. And then you would still have $35,000 remaining that could be used for retirement purposes.

Note, however, that any withdrawals that exceed the total contributions are attributable to earnings and will be taxable for those under age 59-and-a-half. Therefore, if you withdraw $75,000 of the $100,000 from the example above to pay for college expenses and you are under 59-and-a-half, then the $10,000 of earnings withdrawn would be taxed as ordinary income on the following year’s tax return.

In the event you choose to withdraw moneys from a traditional IRA to pay college expenses, the full amount of the withdrawal will be taxed as ordinary income, assuming that you are under 59-and-a-half and that all your contributions to the traditional IRA were made on a pre-tax basis.

To use the same example from above, imagine you have contributed $100,000 to a traditional IRA. Whatever amount you take out of the IRA to pay for college expenses is taxable, no matter whether you take out $10 or the full $100,000 in the IRA. Therefore, whatever amount you withdraw will be taxed as ordinary income on the following year’s tax return.

When it’s time to prepare your taxes, any amount that you withdraw from a Roth or traditional IRA will be documented to you from the custodian on a 1099R, and are required to be reported on Form 5329 with your tax return.

Know the Tax Implications Up Front

Tapping retirement assets to pay for college expenses can provide an alternative to taking out costly student loans or paying college expenses in cash. You should ensure, however, that you understand up front what the tax implications will be, so you can avoid an unexpected, and most likely hefty, tax bill. If you do intend to withdraw assets from a traditional IRA or amounts in excess of your contributions to a Roth IRA, then consider either making quarterly estimated tax payments or adjusting your withholding to account for these distributions.

Another consideration from a planning perspective is that the $5,500 (for those under 50) or $6,500 (for those over 50) IRA contribution limits apply, no matter whether you plan to use moneys in an IRA for retirement purposes or to pay for college expenses. Therefore, if you decide you like the thought of using an IRA to save for college, make sure to factor the IRA contribution limits into your planning.

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