You can find a lot of articles suggesting cities where you can retire. These cities are often located in North or South Carolina, Arizona, Florida, and Texas.
Why? Because those states have reasonable housing costs, favorable tax regulations, and access to good health care.
What if you want to retire in California? Your choice would be understandable. California has good weather, great beaches, stunning mountain ranges, and the best wine region in the country.
But looking at the retirement savings by state, there are some major obstacles you'll have to overcome. These include taxes and other expenses.
3 must-know things about retirement in California
1. High taxes
The state of California, and its local cities and counties, levy a dizzying array of taxes on its citizens. The impact of these taxes makes it very difficult to afford to retire there.
- Personal income taxes
For a married couple filing jointly, personal income tax rates range from 1% on income between $0 and $18,000 to a whopping 12.3% for those earning $1,250,739 or more.
These taxes are assessed against anyone who was a resident of California and earned income while they were there. State taxes must be paid on income from retirement accounts and pensions, but not Social Security income.
- Sales taxes
California also has the highest sales tax rate of any state in the U.S. You'll pay 7.25% for purchasing a tangible personal property. In addition, localities charge an average sales tax of 1.43%.
- Gasoline tax
You might consider owning an electric vehicle if you plan to retire in California. The state has the highest gasoline tax in the nation. You'll pay 51.1 cents per gallon at the pump.
It doesn't help that the average overall cost of gas is higher in California than anywhere else in the U.S. In May 2022, regular gas costs $6 a gallon.
- Property taxes
There's a bit of good news when it comes to property taxes. They are limited by Proposition 13. General property taxes can't exceed 1% of the property's value. Increases in assessed value are limited to 2% per year.
The impact of Proposition 13 keeps property taxes in California below the national average. If you own and occupy your home, you can reduce your taxable value by $7,000 using California's homeowner's exemption.
According to SmartAsset, a good rule of thumb if you want to calculate property taxes is to multiply the purchase price of your home by 1.25%, which incorporates the base rate of 1% and includes additional local taxes.
- Taxes on the sale of investments
If you sell investments while residing in California, you will pay taxes at the personal income rate, even if those investments qualify as long-term capital gains. Work with a registered investment advisor to help you come up with sales tactics and investment strategies.
2. High housing costs
There's a wide disparity in housing costs, depending on where you want to retire in California. Unsurprisingly, the most desirable areas have very high prices for purchasing and renting property.
In San Francisco, the median home value in 2022 was a stunning $1,236,049. The average market monthly rent was $3,771. At the lower end of the spectrum, the median home value in Fresno was only $284,140, with an average market monthly rent of $1,583.
3. Cost of living
- Low utilities cost
You'll get a welcome break on utility costs if you retire in California. While the average cost in the U.S. is $122.79, in California, it's' only $101.49. Relatively small consolation in the context of other expenses.
- Food costs
The cost of food is higher in California than the average cost in the U.S., especially if you live in highly populated areas. The average cost of a gallon of milk in Los Angeles is $3.91. A dozen eggs will set you back $3.55.
In most locations in California, you'll need a car. Insuring your car is expensive, with an average cost of almost $2,000 annually.
Required savings for a California retirement
Given these costs, how much of a nest egg will you need to at least obtain the average retirement savings in California?
Magnify Money calculated the amount of savings you would need to live in major cities in California. It looked at the average annual spending and subtracted Social Security benefits. It also assumed you would withdraw 4% of your assets in the first year and then adjust that amount every year based on inflation.
You might want to sit down before reviewing its findings.
If you want to retire in San Francisco, you need $1,564,760 in savings. It tops the charts for the most expensive retirement city in California. You would still need significant savings to retire in less populated counties like Visalia, where you would require a nest egg of $855,952.
Almost half of the 28 cities that require millionaire status to retire are located in California.
Here's the bottom line. It's never too early to start planning for retirement. Retirement planners can provide expert advice and assist you in achieving your retirement goals. This advice is particularly compelling for those who want to retire in California.