California appeals to older adults as the perfect place to reconcile as they near their golden years. However, this thought may unsettle you a bit, given that the state is costly to live in!
Knowing how to budget your retirement defines your freedom to cherish the vibrant life in California. After toiling your entire life to earn a peaceful retirement, you’d love to pamper yourself amidst the venerable forests and ecstatic ocean views. No wonder exhausted retirees find California’s diverse locales the perfect place to reconcile.
In case you weren’t aware, California offers significant tax exemptions for retirees. Do you know that California remains one of the best places to retire in the US? The sound healthcare infrastructure in the state, dramatic views, and moderately affordable homes make it perfect for retirees.
A well-planned retirement calls for strategic financial planning. How well are you financially poised to make the most of your golden days in California? We have come up with this comprehensive guide to help you achieve your dream retirement.
The cost of retirement in California
With inflation looking menacing, the $ 1 million asset portfolio is far from what retirees should eye. Considering California’s high cost of living, an asset mix of nearly $2 million should see you through.
Let’s understand the cost of retirement in California based on the primary overheads.
Based on the US Census Bureau of 2019, the median cost of monthly mortgage and rent in Los Angeles amounted to $ 2,357 and $1,503, respectively.
- The average monthly expense in Los Angeles is $2,120.56 for a couple.
- Federal taxes in the state range between 12% and 24%, while residents need to shell out state taxes between 1% and 13.3%.
- The cost of medicines in old age in California can be as high as $504.90 per month.
What are the best places to retire in California?
As a retiree, you’d like to weigh your personal preferences and financial stature to determine the kind of lifestyle to embrace during your golden years. Accordingly, you can narrow down your options while looking for the best places to retire in California. The state presents you with urban towns as well as coastal cities where you can cherish your retired life.
We have shortlisted both vibrant locales and retirement communities in California, where you can settle after all these years of working.
- If you crave vibrant city life, go for San Diego, Fresno, Santa Barbara, San Francisco, or Santa Cruz. In particular, retirees account for more than 20% of the population in the Pacific coastal city of Santa Barbara.
- Retirees willing to cherish a full-on urban lifestyle should settle in San Francisco. However, unless you have a robust retirement savings portfolio, thriving in San Francisco can turn out to be financially strenuous. In such circumstances, San Diego would be the next-best alternative.
- Fresno is more affordable for retirees. It’s located inland, so you won’t get to cherish the beach life. With pleasant weather and tons of outdoor activities, Fresno continues to be a popular choice for retirees.
- In California, retirees cherish the privilege of accessing a wide range of active retirement communities, both large and small. Check out Laguna Woods Village in Orange County, which houses over 19,000 residents. This community has five swimming pools, two golf courses, and an art studio.
How can tax exemptions in California benefit retirees?
California’s tax regime looks exorbitantly high. At 13.3%, the state’s income tax is the highest in the US. However, informed retirees can save significantly on sales and housing exemptions.
For senior citizens, prescribed medicines and groceries constitute two of the most significant cost overheads. Thankfully, these items have been exempted from sales tax for retirees. Besides, you have a provision of a $7000 tax exemption on housing if you own your property.
Besides, you can lower your taxes further by deferring the payment of property taxes to manage your funds. Also, don’t overlook the best legal ways to save taxes as a retiree in California.
Remember, it’s imperative to plan your retirement savings way ahead. A well-balanced asset mix and social security benefits can help you thrive in expensive cities in California. Unless you have a 401(K), IRA, or pension that warrants a steady cash inflow, retiring in California can be challenging.
Creating your retirement paycheck: How to stream in income while retiring in California?
Retiring as a couple in California requires you to stream in some fixed income. Considering average household expenses, including grocery, medicine, and living costs, a couple would need a monthly cash inflow of $4,626.06 with a mortgage and $3,772.06 in rented accommodation.
Now, exploring different income channels, you should consider the following for a couple.
- The combined social security benefits for a couple would be $3,086 a month.
- Having retirement savings of at least $360,000 would help you generate a monthly income of $1,540.
- Having an additional retirement saving of $165,000 can dilute the impact of inflation, generating around $274 of monthly cash inflow.
So, how do you plan to build your retirement portfolio? Start investing today to build a well-balanced asset mix. Here are the safest investment avenues to build your retirement portfolio.
Go for immediate fixed annuities
Complement your pension and social security income with immediate fixed annuities to ensure a steady income stream. Reputed insurers offer immediate fixed annuities to warrant income for a pre-defined period.
The term ‘immediate’ implies that retirees can immediately draw monetary benefits from the insurer. Usually, you can stream in the monthly income just a month after making your purchase.
However, the downside of annuities lies in the uncertainty of your longevity. Retirees who don’t live long enough after investing a lump sum amount in an annuity wouldn’t benefit from the contract.
However, income from fixed annuities isn’t free from the risk of inflation. Considering that you plan to receive the payments long after you invest in the annuity, you can’t rule out the eroding impact of inflation. That’s why retirees should invest in specific bonds to hedge against inflation.
Buy treasury bonds
Investing in treasury bonds can help retirees combat inflation. When you purchase a government bond, you lend money to the government. Therefore, you earn interest on the contract. The safest bonds are the ones that government agencies and the Federal government issue from time to time. Therefore, retirees can count on government bonds as a reliable income source.
Broadly, you can choose from two types of government bonds in the US. These are Series I Savings Bonds and Treasury Inflation-Protected Securities.
- Series I Savings Bonds: These government bonds bear interest and serve as a low-risk option for retirees to earn interest. The annual interest rate for Series I Savings Bonds is fixed. However, a semi-annual interest rate is calculated after factoring in inflation. The rate of bonds issued in 2022 between May and October offered an impressive rate of 9.62%.
- Treasury Inflation-Protected Securities (TIPS): Since TIPS are indexed to rise and fall with inflation, they help retirees secure against increasing costs. Therefore, with rising inflation, your TIPS investments would also undergo an increment in value.
Systematic withdrawals
Well, once you invest in an annuity and stream a monthly income, your capital gets blocked. Why not consider another strategic investment where you can systematically withdraw your capital, too?
After factoring in all your expenses, calculate your income deficit. Accordingly, set up a systematic withdrawal plan where you can receive your income annually, quarterly, or even every month.
With systematic withdrawals, retirees don’t get the assurance of a fixed income like an annuity. However, the most privileged advantage of systematic withdrawal is its liquidity. The fund managers would preserve your capital, enabling you to access it anytime you need it in the future.
Invest in real estate
With their low volatility and anchoring effect, real estate investments go a long way in balancing your retirement portfolio. Unlike stocks and mutual funds, where your returns largely depend on the market performance, renting out your home would bring in a fixed monthly income.
Besides diversifying your investment portfolio, real estate also ensures long-term security. Most importantly, retirees can enjoy tax benefits on real estate investments.
Real estate also allows you to build capital and use your asset as leverage in times of financial distress. However, with fixed sources of income, you need to make calculated decisions before leveraging home equity.
The best advantage of investing in real estate is its ability to curb the impact of inflation. GDP growth and the demand for homes are positively correlated. With an increment in real estate demand, rental returns shoot up. As a result, this income serves as a hedge against inflation.
Retirees can use their IRA or 401(k) funds to invest in real estate. So, as long as you work, make sure to maximize your savings in these accounts.
Dividend-paying stocks
Stocks are different from bonds and represent your share of ownership of a company. Investing in dividend-paying stocks continues to be a strategic move for retirees. Apartment from capital appreciation with the company growth, investors receive regular dividends that serve as a reliable source of income.
However, dividends aren’t as reliable as some other investments. The business’s performance largely determines whether shareholders would receive dividends. Therefore, investing in dividend-paying stocks exposes you to market risk.
Dividend-paying stocks should be the last investment avenue for retirees. Even when you invest, allocate just a small part of your retirement portfolio and balance this risk with other assets like bonds. It’s wise to buy shares of established and financially stable companies that have historically paid their shareholders handsome dividends.
California isn’t a dream!
Are you all set to realize your retirement goals in California? Strategic financial planning right from your late 20s or early 30s can glide you through your retirement! Long-term investment planning would help you reap the compounding benefits of interest over the years!
We have comprehensively discussed how to hedge against inflation while retiring in California. Financial woes shouldn’t bother you as you celebrate your retired life in style!
[Related: California Freelancing: How AB5 can change the freelancing game?]
FAQ
Which is the most comfortable place where I can retire in California?
This largely depends on your lifestyle preferences. If you want your retirement savings to last longer, go for smaller cities like Sacramento or Fresno. However, San Francisco would be a great choice if you are financially well-planned and can manage expenses in large cities.
Is it too expensive to retire in California?
Although California is one of the most difficult places to retire in the US, intelligent fund management and investment define your financial ease. The state ranks third in terms of cost of living in the country. The income tax rate is also high. Therefore, financial resilience is what you need to live your retired life in California.
What is considered to be a decent retirement income in California?
Considering California is expensive for retirees, working professionals should try to exceed the median income. As per the U.S. Census Bureau, the state’s median household income is around $79,000. To enjoy a comfortable retired lifestyle in this state, ensure adequate savings to exceed this amount. Create a well-balanced asset mix to manage your funds during your retirement.
How good is the healthcare infrastructure for retirees in California?
California is currently one of the best states for retirees in terms of healthcare infrastructure. It ranks fourth in the country, following Minnesota, North Dakota, and Massachusetts. Therefore, retirees would find sound healthcare facilities in this state.
Which sources of income are taxable for retirees in California?
Although you need to pay both Federal and State taxes on income after retiring in California, social security benefits are exempt from tax. However, your withdrawals from 401(k) or IRA accounts would be taxable.
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