The 10 Worst States for Retirement

If you’re nearing retirement, or simply dreaming about it, you may be considering a move to another state -- one that has a lower cost of living, or perhaps a nicer climate. If so, retirement-community information website TopRetirement.com suggests you cross these 10 states off your list of potential retirement havens.

TopRetirement ranked the 10 Worst States for Retirement by heavily weighting its list on three criteria: the states’ fiscal health, taxation, and climate. According to the website: “Many U.S. states are having serious trouble balancing their budgets, not to mention adequately funding their future pension and healthcare obligations.”

So what are the worst states for retirement? Here’s TopRetirement’s Top 10:

1. Illinois. Illinois has one of the lowest state tax rates in the country (3%), but it also is one of the country’s biggest financial disasters. In 2010, its budget deficit was about $12 billion, almost half the total budget, TopRetirement says. And its state pension system is so mismanaged that the state had to borrow money to fund it -- and it still has a funding deficit of roughly 50%. Higher state taxes may be needed to fix this mess.

2. California. No doubt, the state has a wonderful warm climate and unmatched beauty, but Golden State has a high cost of living. And, like Illinois, the state is a financial mess. Unlike Illinois, its taxes are extremely high: TopRetirement notes that its marginal income tax rate is 10.3%, and its sales tax is 7.25%, the highest of any state (localities can add another 1.5%).

3. New York. While New York treats retirement income favorably -- military pensions, civil service pensions, state and local pensions, and Social Security are not taxable -- homeowners are hit hard by property taxes. And, like California, TopRetirement says, it’s very expensive to live here, particularly in the New York City metro area.

4. Rhode Island. TopRetirement calls the nation’s tiniest state “probably the worst-off state in the Northeast from a financial viewpoint.” Rhode Island has the 10th-highest state tax burden, with the highest rate at 9.9% for incomes of more than $373,650. The state sales tax is also above-average at 7%.

5. New Jersey. Perennial “winner” for having the country’s highest property tax rates,-the Garden State also has the highest overall tax burden, according to the Tax Foundation. According to a recent news article, the tax burden is forcing many long-time residents to flee the state. And, much like Illinois, the state is in a deep financial hole with its budget deficit and underfunded employee pension system.

6. Ohio. Ohio suffers from frequent, severe snowstorms, so climate is one reason the state appears on the list. But it’s not the only reason: The state income tax is can be as high as 7.18% for those with incomes of $200,000 or more, and the state sales tax is 5.5%. Local taxes add to the burden; TopRetirement notes the total tax burden in the city of Columbus is 9.4%, higher than the median rate for most large U.S. cities.

7. Wisconsin. The cold weather is a big negative for retirees in Wisconsin, but it also has high taxes. The top tax rate in Wisconsin is 6.75% on income over $176,000, and the state sales tax is 5%. On the plus side, TopRetirement says Wisconsin doesn’t tax pensions, nor does it levy estate taxes.

8. Massachusetts. Once widely known as “Taxachusetts,” the state no longer leads the country in income, sales or property taxes. Still, taxes are relatively high: the income tax rate is a flat 5.3%, and the state sales tax is 6.25%. The cost of living in the state is very high, particularly in the Boston metro region, TopRetirement says.

9. Connecticut. Another state with a very high cost of living, Connecticut also has the 3rd-highest tax burden of any state, according to TopRetirement. “There are few, if any, tax incentives for retirees in Connecticut,” TopRetirement says.

10. Nevada. Retirees are often attracted to Nevada for its warm, dry climate and lack of state income and estate taxes. (The state sales tax is 6.5%.) But Nevada was the epicenter for the nation’s housing bust, and the foreclosure-plagued state is reeling financially as a result.

If you’re still considering retiring in one of these states, TopRetirement offers some recommendations for the states’ best retirement communities.