Managing the pros and cons of moving to a lower cost regionIn a recent Viewpoints blog, Fidelity examines the talking points for geographic financial planning. Reprinted with permission. Learn more here.
You may be surprised how much moving to a lower cost region can supercharge your client’s retirement plan.
Consider the vast variation in expenses in different parts of America. The cost of living in Manhattan is almost two and a half times the national average, while Washington, D.C., is 1.6 times and Orange County, California, is 1.5 times, according to the Council for Community and Economic Research (CCER). On the other hand, Amarillo, Texas is about 80% of the national average and Kalamazoo, Michigan, 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 Seattle and work with a Fidelity financial professional named Daniel as part of their relationship with Fidelity. They tell Daniel they love Seattle but are considering moving to Arizona where several friends have retired, and the cost of living is 38% lower, according to the CCER. So Daniel helps them illustrate two options.
First, they discuss Henry and Linda’s goals. Both are age 60, healthy, and hope to retire in three years. They want a retirement plan that will enable them to maintain their current active lifestyle, and leave a legacy for their two 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 Seattle home, which is now worth $500,000. 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 Seattle and Arizona 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 travel plans and some big adventures they are planning. 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 Seattle.
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 Seattle, 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.
For illustration only. IMPORTANT: The projections and other information generated by eMoney Advisor regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The results are based upon market assumptions provided by Fidelity. Results may vary with each use and over time. eMoney Advisor is a diagnostic, Web-based tool owned and maintained by eMoney Advisor, LLC, a Fidelity Investments company. See endnotes for important details about how these values were calculated and how median and downside markets were defined.
If they move to Arizona, 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.
For illustration only. IMPORTANT: The projections and other information generated by eMoney Advisor regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time. eMoney Advisor is a diagnostic, Web-based tool owned and maintained by eMoney Advisor, LLC, a Fidelity Investments company. See endnotes for important details about how these values were calculated and how median and downside markets were defined.
Henry and Linda review the numbers and consider the tradeoffs. Daniel discusses some other options, like downsizing in Seattle 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 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 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 tradeoffs, so you can feel more confident in your ultimate decision.
1. The cost of living data is based on the Cost of Living Index research from the Council for Community and Economic Research after the first three quarters of 2020.
2. The hypothetical situation depicted in this story reflect services available to some clients in fee-based advisory relationship with Fidelity and may not be available to all customers.