Planning for retirement requires careful consideration of where your money will go — and where it will come from. Unlike working years when income typically grows, retirement income is largely fixed, making the cost of living in your chosen location one of the most consequential financial decisions you will ever make. The difference between retiring in an affordable state versus an expensive one can easily amount to $200,000 or more over a 25-year retirement. This guide examines every major cost factor, highlights the most retirement-friendly states, and provides a framework for building a retirement budget you can trust.
Understanding Retirement Income Sources
Before evaluating costs, you need a clear picture of your income. Most retirees draw from multiple sources: Social Security provides an average monthly benefit of approximately $1,900 for individuals and $3,200 for couples as of 2025. Pension income, if available, adds a fixed monthly amount that varies by employer and years of service. Retirement account withdrawals — from 401(k)s, IRAs, and Roth accounts — are governed by the 4 percent rule, which suggests withdrawing no more than 4 percent of your portfolio in the first year and adjusting for inflation thereafter. A $500,000 retirement portfolio supports approximately $20,000 per year under this guideline, while a $1 million portfolio supports $40,000.
Investment income from taxable brokerage accounts, rental properties, or part-time work may supplement these core sources. The total picture determines your monthly budget, and matching that budget to a location's cost of living is the essential calculation of retirement planning.
Healthcare in Retirement
Healthcare is often the largest variable expense in retirement and the one most likely to increase over time. Medicare Part A covers hospital care and is premium-free for most retirees, but Part B (outpatient care) costs approximately $175 per month per person in 2025, with higher-income retirees paying more. Part D prescription drug plans add another $35 to $100 per month depending on the plan and medications needed.
Medicare does not cover dental care, vision care, hearing aids, or most long-term care services. Supplemental Medigap policies that fill coverage gaps cost $100 to $350 per month depending on the plan and location. Alternatively, Medicare Advantage plans bundle Part A, B, and often D benefits with additional coverage for premiums that can be lower than traditional Medicare plus Medigap, but they restrict provider networks.
The geographic variation in healthcare costs is significant. States with lower healthcare cost indices — including many Southern and Midwestern states — offer lower premiums for Medicare Advantage and Medigap plans, lower copays, and lower out-of-pocket costs for services that Medicare does not fully cover. A retiree couple can easily save $2,000 to $4,000 per year on healthcare costs by choosing a state with a healthcare index below 95 versus one above 110.
Healthcare costs also increase with age. The average 65-year-old couple retiring today will spend an estimated $315,000 on healthcare throughout retirement, according to Fidelity's annual estimate. Planning for annual healthcare cost inflation of 5 to 7 percent — roughly double the general inflation rate — is essential for a realistic retirement budget. States with strong healthcare infrastructure, good Medicare provider networks, and competitive insurance markets help contain these costs.
Tax-Friendly States for Retirees
Tax policy creates some of the largest financial differences between retirement destinations. The most impactful tax feature is whether a state taxes retirement income. Nine states levy no personal income tax at all: Alaska, Florida, Nevada, New Hampshire (interest and dividends only through 2024, then fully tax-free), South Dakota, Tennessee, Texas, Washington, and Wyoming. Several additional states exempt Social Security benefits from taxation, and some offer partial or full exemptions for pension and retirement account income.
For a retiree couple with $80,000 in annual income from Social Security, pensions, and retirement account withdrawals, the difference between a tax-free state and one with a 6 percent income tax rate amounts to approximately $4,800 per year, or $120,000 over a 25-year retirement. This single factor often outweighs differences in housing or grocery costs.
Property taxes are the second major tax consideration. Retirees who own their homes face annual property tax bills that range from under $1,000 in low-rate states like Alabama, West Virginia, and Hawaii to over $8,000 on a median-priced home in high-rate states like New Jersey, Illinois, and New Hampshire. Some states offer property tax freezes, exemptions, or deferrals for senior citizens that can significantly reduce this burden.
Sales taxes affect retirees' purchasing power on everyday goods. While the per-transaction impact seems small, a retiree spending $25,000 to $35,000 per year on taxable purchases will pay $1,500 to $3,500 in sales taxes in high-rate states versus zero in the five states with no sales tax (Alaska, Delaware, Montana, New Hampshire, Oregon).
Housing Strategies for Retirement
Housing decisions in retirement often involve downsizing, relocating, or transitioning from owning to renting. Each strategy has financial implications that extend beyond the monthly payment. Downsizing from a $400,000 home to a $250,000 home unlocks $150,000 in equity (minus transaction costs) that can be invested to generate retirement income. Moving from a high-cost state to a low-cost state can multiply this effect: selling a $600,000 home in New Jersey and purchasing a $200,000 home in Tennessee frees up $400,000 while simultaneously eliminating state income tax and reducing property taxes.
Renting in retirement eliminates maintenance costs, property taxes, and the risk of major repair expenses, but it exposes retirees to rent increases over time. A fixed mortgage payment provides cost certainty, but homeownership carries responsibilities that become more challenging with age. The optimal choice depends on your financial situation, health, and preferences.
Continuing care retirement communities (CCRCs) offer a long-term solution that bundles independent living, assisted living, and skilled nursing care on a single campus. Entry fees range from $100,000 to $500,000 or more, with monthly fees of $2,000 to $5,000. While expensive, CCRCs eliminate the uncertainty of future long-term care costs and provide a guaranteed continuum of care as needs change.
Best States for Retirement
Florida
No state income tax, warm year-round weather, extensive Medicare provider networks, a massive retiree community, and a wide range of housing price points make Florida the most popular retirement destination in the country. The cost of living varies dramatically within the state — from affordable Panhandle communities to expensive South Florida — giving retirees options at every budget level. Property taxes are moderate, and the homestead exemption reduces taxable home value by $50,000 for primary residences.
Arizona
Arizona's dry climate appeals to retirees with arthritis and respiratory conditions, and the state offers affordable housing outside the Phoenix and Scottsdale areas. Tucson, Prescott, and numerous planned retirement communities provide options at below-national-average prices. Arizona taxes Social Security benefits but offers deductions for other retirement income. The 300-plus sunny days per year support an active outdoor lifestyle.
South Carolina
A low overall cost of living, beautiful Atlantic coastline, favorable tax treatment of retirement income, and mild winters make South Carolina increasingly popular with retirees. The state does not tax Social Security benefits and offers a generous deduction on other retirement income for residents over 65. Charleston, Myrtle Beach, and Hilton Head offer coastal living at prices well below equivalent communities in Florida or California.
Tennessee
No state income tax, affordable housing across most of the state, and a central location that keeps retirees connected to family throughout the eastern United States. Nashville and Knoxville offer urban amenities, while smaller communities like Chattanooga and Clarksville provide quiet living at very low cost. The state's music, food, and natural beauty add lifestyle value that cost indices do not capture.
North Carolina
The Tar Heel State offers mountain communities, coastal towns, and everything in between at costs well below the national average. The state taxes retirement income but offers a standard deduction and has been reducing its flat income tax rate in recent years. Asheville and Wilmington attract retirees with distinct lifestyle appeals, while the Research Triangle area provides top-tier healthcare access.
Building a Retirement Budget
A realistic retirement budget starts with your guaranteed monthly income and works backward. List all income sources and their monthly amounts. Then estimate expenses in these categories: housing (rent, mortgage, property tax, insurance, maintenance), healthcare (premiums, copays, dental, vision, prescriptions), food (groceries and dining), transportation (car payment, insurance, gas, maintenance, or transit), utilities (electric, gas, water, internet, phone), insurance (life, long-term care, umbrella), taxes (income, sales, property), and discretionary spending (travel, hobbies, entertainment, gifts).
A common guideline suggests that retirees need 70 to 80 percent of their pre-retirement income to maintain their lifestyle, but this varies widely. Retirees who have paid off their mortgage and have no debt may need less. Those who plan to travel extensively, maintain a vacation home, or support adult children may need more. Build your budget based on your actual expected spending, not a generic percentage.
Long-Term Care Planning
The elephant in the retirement planning room is long-term care. Approximately 70 percent of people over age 65 will need some form of long-term care, and Medicare does not cover custodial care beyond short rehabilitation stays. The national median cost of a private room in a nursing home is approximately $9,000 per month, while home health aide services average $5,500 per month. These costs vary by state, with Northeast and West Coast states charging significantly more than Southern and Midwestern states.
Long-term care insurance can cover these costs but is expensive and must typically be purchased before age 65 when premiums are more affordable. Self-insurance — setting aside assets specifically for potential long-term care needs — is an alternative for those with sufficient savings. Medicaid covers long-term care for those who have exhausted their assets, but it requires spending down savings to very low levels and limits facility choices.
Budgeting Tips
Plan for healthcare cost increases of 5 to 7 percent annually, which means your healthcare budget should roughly double over a 15-year retirement. Consider downsizing housing to free up equity for investment income. Factor in inflation across all categories when projecting long-term expenses — a budget that works at age 65 may be tight at 75 and insufficient at 85 without inflation adjustments. Build an emergency fund of at least six months' expenses to cover unexpected costs without disrupting your investment withdrawal strategy. Review and adjust your budget annually to reflect changes in health, housing, and lifestyle.