I, my spouse, and my college-age son moved from Mooresville, NC to Loudon, TN. There were a lot of reasons for the move including to be closer to relatives, closer to the college our son is attending, and closer to the Oak Ridge National Laboratory where I'm consulting. One of the surprising side benefits of the move I wasn't expecting is a lower cost of living and it is not a trivial difference. In the not too distant past, I published several articles on Seeking Alpha on the subject of retirement planning, saving, and investing. Those articles can be found here, here, here, here, and here. The significantly lower cost of living (COL) in The Volunteer State and the potential to bolster retirement savings prompted me to write yet another article.
It seems to be a fairly consistent and universal law that the high tax state's governing class's approach to budget shortfalls is to raise taxes. We seldom read in the news where a state government actually cuts expenses; it seems that the only direction taxes go in these states is up. This of course results in the enterprising and mobile citizens of those high tax states deciding to move to more tax-friendly locales. Several of those higher tax states have actually experienced a net loss of citizens (e.g. CA, NJ, NY, and CT) to the benefit of the lower tax states (e.g. FL, TX, AL, GA, SC, NC, and TN) over the last decade.
This has been happening for several years but during the last couple of years, the high tax state exodus has accelerated. The acceleration pretty clearly is due to the 2017 GOP tax bill that limited state and local tax (SALT) deductions on Schedule A to no more than $10,000. The $10,000 SALT limitation affects few people in the lower tax states but the impact is deep and wide in the higher tax states. Logically, this has fueled more household moves from the high tax states to low tax states.
While taxes are one of the main drivers, it is also generally true that the overall COL is lower in low tax states. The reason for this should be relatively obvious. Small business and corporations don't really pay those high corporate taxes. Corporate and business taxes are almost universally passed on to the end consumer in the form of higher prices. The economics of running a business simply don't work any other way. The difference in COL between high tax and low tax states is really quite stunning. Below are four randomly chosen examples of the difference in the COL between higher tax city/states (NC, MA, NY, and CA) and low tax Loudon, TN.
Readers will note that I included NC in the comparison. While NC is not considered a high tax state (#26 of 50), all things are relative including taxes. The state of TN has no state income tax and, in 2017, passed legislation to phase out their Hall Tax completely by 2021 which applied only to dividends and interest. In more concise form, the total difference in annual COL for a family of three, at various income levels, between the original locale and Loudon, TN is shown in the table below.
Readers should note that the chart and table above are based on a family of three, with a gross salary as noted in the original locale, moving to Loudon, TN and the resulting cost of living needed to maintain a standard of living similar to the original locale.
In my personal move from Mooresville, NC to Loudon, TN, I estimate that I'm saving roughly $28,000 per year. So, even a move from a state with roughly average state and local taxes resulted in a significant improvement in our family's cash flow. While not of the same magnitude as the difference in moving from New York City to Loudon, $28,000/yr is not trivial. Some folks may dismiss this article on the false pretense that Loudon, TN, or even the entire state of Tennessee, is “not civilized enough.” In an attempt to allay those misconceptions, I’ll describe the community to which we chose to move, Tellico Village.
Tellico Village is an unincorporated, homeowner’s association-governed community built along the western shore Tellico Lake in East Tennessee about 30 minutes south-southwest of Knoxville. The roughly 8000 resident community includes the following amenities.
- Three 18-hole golf courses.
- Extensive walking and hiking trails.
- Two large fitness centers with 2 pools, tennis and pickleball courts, fitness classes, and extensive cardio and weight training equipment.
- A marina with 630 slips (wet and dry) with mechanics, fuel, Wi-Fi, boat launch, and trailer storage.
- A yacht club, five restaurants, two coffee shops, a full size grocery, two full service banks, a post office, a hardware store, a beauty shop, a library, 4 churches, and a dozen other shops and service providers.
- A 100-member choir, TV station, and a theater group.
- Over 70 different clubs (e.g. fishing, tennis, classic cars, travel, astronomy, bridge, etc.).
Most of the residents in Tellico Village are retired but the community is not a 55+ retirement community. There are working families with children and some working empty-nesters as well. Housing in Tellico Village runs a little more expensive than the general area driven by high demand but you can spend as little as $250k for a 1600 square foot home up to roughly $1.5M for a 5000 square foot home with lake frontage and private dock. The community is about 70% developed so building a custom home is also an option. If you can’t find enough to do in Tellico Village, Knoxville (and University of Tennessee) is 30 minutes away, Chattanooga is about 1.5 hours away, and Nashville 2.5 hours away.
Personally, we’ve been finding more things to do within Tellico Village than we have time for. We occasionally venture to the West Knoxville/Farragut area for shopping or entertainment. While this doesn’t come close to New York or San Francisco on a relative basis, Tellico Village and the surrounding area has everything that most people want and/or need. A side benefit for those moving from areas with a large homeless contingent is not having to put up with used needles and human excrement on the sidewalks.
Pumping Up Your Retirement Savings
So, how does moving to a low tax/COL state translate into a bigger retirement nest egg? Invest the annual savings you get from moving to a lower tax state in a stable, conservative mutual fund or exchange traded fund (ETF) and watch it grow. For this article, I chose an example more in line with a move from a high tax state to a low tax state saving a total of $65,000 per year. That $65,000/yr over 10 years invested at 8% return with a marginal tax rate of 24% grows to $1,009,867 in a taxable non-qualified account.
As noted earlier, if invested in a qualified retirement plan account, the result would be higher yet. And given the magic of compounding, if you have 15 or 20 years till retirement, you could amass well over $2M. Note, your results will vary based on your specific financials, tax environment, and rate of return. Finding a long-term return of roughly 8% sounds difficult but it is easier than most people believe, at least it has been for the last 90 years.
The Vanguard Wellington Fund (NYSE: VWELX) was founded July 1, 1929 or just a little over 90 years ago. It is a stable, conservative, balanced fund with a roughly 60/40 split between stocks/bonds. The table below shows the average annual return of VWELX for various periods going back as far as 90 years. The consistency of annual average returns achieved by VWELX is noteworthy.
There are certainly many other funds from which to choose but most investors would be well served by investing in VWELX as their primary IRA holding. For a very modest management fee of 0.23% last time I checked, you get broad equity diversification, a reasonable 60/40 split of stocks versus bonds, and a solid return history stretching back 90 years. I'm not sure you can find these qualities in very many other mutual funds or ETFs.
If you live in one of higher COL states, generally a high tax state, one of the simplest ways to boost your retirement savings is to move to a state with a lower COL and tax levy. With the discipline to invest the annual savings from your move into a conservative and balanced mutual fund or ETF, you can easily boost the value of your retirement nest egg over a period as short as 10 years.
Disclosure: I am/we are long VWELX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended to provide my opinion to interested readers and to serve as a vehicle to generate informed discussion in the comment posting. I have no knowledge of individual investor circumstances, goals, portfolio concentration or diversification. Readers are strongly encouraged to complete their own due diligence on any stock, bond, fund or other investment mentioned in this article before investing.