How to Find Your Best Place to Retire

The best rankings are the ones you build yourself. Here are some great places to start.

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Figuring out the best place to live in retirement is easy. Tell me if my kids are going to get married, when that will happen, where they will live, whether they will have children, and if we'll be getting along well with them when this miraculous astral alignment occurs. Then I can tell you where I will live in retirement. Until then, the field is wide open.

[See 7 Costs to Eliminate Before You Retire.]

My ground rules might differ from yours. They differ from my wife's, too. My list includes only places in the United States. Warm climates once played a strong role in my preferences, but not as much today. So many sun-kissed economies have been devastated by the recession and housing bust that they simply are not attractive. Basking by the pool in a neighborhood of foreclosed homes is not my idea of idyllic.

I'm also not into small towns much more than 25 miles from a metropolitan area. I want the culture, entertainment, learning, healthcare, and senior-service resources that larger metropolitan areas offer. I also want access to a decent airport and mass transit resources that will reduce my need for a car. I'm planning to live well into my 80s, but my days behind the wheel will end a long time before then.

My most important yardsticks in evaluating metropolitan areas all involve money: the economic health of an area's private and public sectors, and the state and local taxes I would pay as a resident. The key private measures are job and population growth and local economic activity. State and local fiscal health can be measured by budget stresses and unfunded pension and benefit liabilities for public employees. Overall tax burdens are a key measure as is the composition of an area's taxes—what percentage of revenues is provided by property taxes, income taxes, and other fees.

While overall rankings certainly are important, it makes sense to look behind summary scores. So, look at the details and use them to develop rankings that reflect your needs and priorities. A detailed review of relevant state information I've seen is the AARP State Handbook of Economic, Demographic, and Fiscal Indicators, 2008. It approaches 500 pages in length and includes detailed profiles of each state plus useful summaries that compare state performance on selected measures.

[See How Age Friendly is Your Community?]

Nick Johnson is director of the state fiscal project for a Washington think tank, the Center on Budget Policy Priorities (CBPP). He has looked extensively at measures of the states' relative performance and says it's important to distinguish recession-related impacts from foundational issues that can have a longer-term impact on a state's performance.

For example, Johnson says, most states levy sales taxes on goods rather than services: "This is a relic of a 1950s manufacturing economy." States that do a better job of capturing "new economy" business services and online economic activity are better aligned with future economic growth.

Also, he cautions, some favorable indicators today may have negative implications that might sway retirement relocation decisions. The Center did a state study several years ago of senior-friendly tax breaks and government policies. While states with the most senior-friendly policies might seem to be the most attractive places to live, Johnson has concluded that just the opposite may be true. "These tax breaks are going to become more costly over time" as senior populations rise, Johnson says, putting financial pressure on such states.

The Economy

The Milken Institute has studied America's most successful cities. The Brookings Institution issues a similar quarterly Metro Monitor that takes the economic pulse of the country's 100 largest areas. Job creation is weighted heavily by Milken while Brookings looks a bit more broadly at economic activity, and also includes some measures that reflect the condition of local real estate markets.

I combined the studies' findings. Looking at Brookings' pick for the top 40 big markets, Texas dominates the 10 metro areas that also earn high rankings in the Milken study: Austin; McAllen, Texas; Washington, D.C.; Raleigh, N.C.; El Paso; Houston; San Antonio; Dallas; Oklahoma City, and, Baton Rouge, La.

Fiscal Health

The Kaiser Family Foundation maintains a terrific database of state economic information, including measures of what it calls "fiscal distress." One feature looks at projected state budget deficits, and is drawn from a CBPP report. Only 12 areas are not facing red ink in their projected 2012 budgets: Alabama, Alaska, Arkansas, Delaware, District of Columbia, Indiana, Maine, New Hampshire, North Dakota, South Dakota, Utah, and Wyoming. Of the 38 states with projected deficits, the shortfall averages 18.5 percent of their fiscal year 2011 budget. The 10 in the worst shape are Illinois (with a projected budget shortfall of 52.3 percent), New Jersey (37.5 percent), Nevada (36.1 percent), Mississippi (27.6 percent), South Carolina (26.1 percent), California (25.7 percent), Minnesota (25 percent), Texas (22.3 percent), Connecticut (21.6 percent), and Louisiana (21.2 percent).

[See the Best—and Worst—Places to Build a Nest Egg.]

Another Kaiser measure looks at levels and trends in home foreclosures, unemployment rates, and food stamp recipients. It then provides a blended ranking of the states across all measures. States with the least fiscal distress are Vermont, North Dakota, Alabama, Kentucky, Tennessee, Mississippi, Maine, North Carolina, District of Columbia, and New York. The hardest-hit states are Nevada, Florida, Utah, Idaho, Colorado, Connecticut, California, Arizona, Georgia, and Delaware.

Taxes

The Tax Foundation just released its 2011 rankings of state tax burdens, which includes an overall rank and separate marks for corporate taxes, individual income taxes, sales taxes, and property taxes.

The 10 states with the best state tax climates, it says, are South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah, and Indiana.

[See The Lowest Tax States for Retirees.]

The 10 worst states: New York (50th), California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island, and North Carolina. It can pay to check out individual taxes. New Mexico, for example, fares no better than 33rd in the Tax Foundation's overall rankings. But it ranks No. 1 on its property taxes. So if that tax is especially important to you, New Mexico's state tax climate looks much more attractive.

The AARP State Handbook also includes a very useful way to put state taxes into perspective. It looks at each state's tax capacity, which is a measure of the size of its tax base and thus of its ability to generate tax revenue. "A state with a high tax capacity likely has a relatively healthier economy and will probably not be under as much pressure to raise tax rates, expand its tax base, or reduce its expenditures," the handbook said. It then compares a state's actual tax collections with its tax capacity. The resulting "tax effort" is a key measure of a state's tax burden on its residents.

The 10 states with the highest tax capacities in the 2008 report were Connecticut (an index of 130 compared with a national average of 100), Delaware (129), Massachusetts (126), Alaska (125), Wyoming (123), New Hampshire (122), New Jersey (118), Nevada (117), Colorado (115), and New York (111).

The 10 states with the lowest tax efforts were New Hampshire (an index of 75 compared with a national average of 100), Montana (78), Tennessee and South Dakota (both 81), Alaska, Delaware, Nevada, and Oregon (all at 82), Florida (83), and Alabama (85).