Arizona beckons to retirees for a number of reasons, ranging from its great climate to its senior-friendly population and tax-friendly financial opportunities. But how much do retirees really need to have in the bank to make an Arizona retirement comfortable?
Given that the state’s cost of living is about 4% higher than the national average, soon-to-be retirees who are planning to join the many other seniors who call Arizona home in retirement will likely want to be prepared.
To offer some insight into how much the average Arizona retiree should have in their savings account and retirement accounts, financial experts explain what makes Arizona unique where it pertains to your finances.
Arizona’s Tax-Friendly Policies
Other than the temperate climate, one of the advantages of living in Arizona is that it’s one of the most tax-friendly states for retirees, according to Christopher L. Stroup, a CFP with Abacus Wealth Partners.
“Income tax is a flat 2.5%, which is one of the lowest compared to other states,” Stroup explained. “Also, for retirees, Arizona doesn’t tax Social Security income, which is a valuable savings in terms of planning your monthly cash flows and expenses. Not being taxed statewide could be big.”
And while Arizona’s cost of living is around 4% higher than the national average, it’s still relatively lower than many other states, Stroup said.
“Another perk is that Arizona doesn’t have state or inheritance taxes, so when you’re thinking of that generational planning, and passing your assets down to the next generation, that’s a big benefit for those who decide to live in Arizona,” he said.
How Much Should You Have in Savings?
While the focus on retirement income is typically on retirement accounts like 401(k)s and IRAs, Stroup does feel it’s important to have a savings account with fluid cash available for emergencies, unexpected expenses and the like.
“I think it’s important for anyone who is currently working or retired to have an emergency fund,” Stroup said. “That fund can serve as a buffer to those retirement assets that are for a longer term to fund your life.”
Whether you have around three to six months’ worth of expenses saved or six to 12 months depends on how much peace of mind you need and other financial needs, Stroup said. Additionally, whether you have a partner, who is also bringing financial means to your household, may change how much you have saved.
“If you’re single, six to 12 months might be the goalpost. If you have someone else to rely on, you might be able to get away with putting less in cash,” Stroup said.
The Importance of Savings
While the bulk of your income is likely coming from retirement accounts and Social Security benefits, Stroup stressed that there are a number of reasons you may need to dip into cash at hand in a savings account.
“One time expenses [may occur], such as if you own a home and need to replace a roof, or as you get older your health changes, so you might have unexpected health events,” he said. “Being able to pull into some of that cash could be helpful to preserve some of the retirement assets you have.”
Additionally, since most retirement assets are taxable income, he pointed out that if you want to mitigate your annual tax burden, it could be smart to pull from that cash instead of a 401(k), which can be taxed.
Also, if most of your retirement funds are invested in the stock market and there’s a downward trend, that could hurt you financially.
“Let’s say you’re in a bear market, and if prices are suppressed, you don’t necessarily want to be pulling extra funds from those accounts. Having that buffer allows you to preserve those assets,” Stroup said.
How Much Should You Have in Retirement Savings?
Stroup makes clear that there is no one-size-fits-all approach to retirement savings, but he typically recommends to his clients having 10 to 12 times the amount of their annual income saved at retirement.
“Say they plan to retire at 67, and their income in their final year is $100,000. They should have $1 million to $1.2 million to make sure that everything should be covered,” he said.
Should People Keep Working a Little in Retirement?
If retirees find themselves not quite at the financial savings goal by retirement, they may want to keep working a little, even just as a side gig, Stroup said.
“People may transition away from main work to something that’s more of a passion project and earn a little money,” Stroup said. “If there’s a desire or the health to do that, it’s a good idea to supplement any income or assets they have.”
This can help defer taking Social Security as long as possible.
“We use the word retirement,” Stroup said, “but it’s more of a work optionality transition in the sense that work gives us much more than just financial needs: It gives us community and so on, and there’s so much value to that.”
Always Consult a Financial Advisor
Because retirement planning is so individual, it’s important to work with a financial advisor, ideally before you retire, to figure out your strategies.
“What makes the most sense in optimizing your cash flow and minimizing your tax burden is part of the conversation you would have with your advisor before you go through retirement,” Stroup said.
Don’t let retirement planning sneak up on you, no matter where you decide to retire.
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