Leaving California in retirement has become a popular consideration for many professionals in the region. The state income tax rate is among the highest in the country, the cost of living needs no introduction, and the financial appeals of favorable tax states like Nevada, Texas, Florida, or Washington seem obvious on paper. But for those who have saved sufficiently in a liquid portfolio and are not depending on home equity to fully fund retirement, the economics of staying are more competitive than the conventional narrative suggests. The hidden costs of leaving, however, rarely get the airtime they deserve. As a financial advisor in Silicon Valley for the past 15+ years, and lover of the State of California, indulge me for a moment in my defense to staying and enjoying retirement in the Golden State.

Is California a Good Place to Retire If You Have Saved Sufficiently?

The short answer, for those who have built a well-funded liquid portfolio, is yes. The longer answer requires separating the California retirement narrative from the California working years narrative, because the two are quite different financial experiences. Much of the frustration with California taxes is earned during the accumulation phase, when ordinary wage income is taxed heavily at both the state and federal level, and retirement for those who have planned well tends to look considerably different.

How Much Does California’s Tax Rate Change in Retirement?

The concern about California’s income tax is understandable, but it tends to overstate the real burden once you stop drawing a paycheck. What often gets lost in the conversation is that state income tax, while real, is a relatively modest line item compared to federal taxes, and federal taxes on retirement income tend to be low given how favorably most portfolio income is treated. Social Security benefits are fully exempt from California state income tax. Long-term capital gains receive preferential federal treatment, and qualified dividends follow the same logic. For retirees living primarily off a diversified liquid portfolio, the effective tax rate is often a fraction of what they paid during their working years. California’s income tax rate weighs heavily on ordinary wage income, which is precisely why it feels so significant during your career. In retirement, as the nature of your income shifts toward capital gains, dividends, and Social Security, that burden looks considerably different.

How Does Homeownership and the Overall Cost of Living Compare to Other States?

States like Washington, Nevada, Texas, and Florida attract significant attention for their lack of state income tax, and for the right person the savings can be real. Washington, my home state, is not a low-cost state by most measures (unless you want to live amongst the cows, apple orchards, or lumber mills that are prevalent outside the Seattle metro area), and anyone relocating primarily for tax savings may find the math underwhelming once Seattle pricing and a nine-month rainy season enter the equation. The overall cost savings of relocating to a no-income-tax state are frequently less significant than people anticipate once the full picture is accounted for.

For established California homeowners outside of disaster-prone areas (e.g. Lake Tahoe), the cost of homeownership also tends to be more favorable than a headline comparison might suggest. California’s Proposition 13 caps annual property tax increases at 2% regardless of how much the property has appreciated in value. A homeowner who purchased decades ago is paying taxes on a base assessment that has grown only modestly over time, regardless of what the home would sell for today. That protection does not exist in Texas, where properties are reassessed at or near current market value annually. Homeowners insurance in states with meaningful natural disaster exposure, including Texas and Florida, has also risen sharply in recent years and is often not fully factored in when running the initial numbers. These are the costs that tend to go unadvertised but have a way of closing the gap with the Golden State faster than expected.

An underappreciated benefit in California is the ability to take your property tax basis with you should you want to move within the state. Under Proposition 19, homeowners older than 55 years old can transfer their original property tax basis to anywhere within the state as long as it’s your primary residence and within two years of when you sold your previous home. There are other rules to be aware of but for our clients who wanted a calmer area of California to retire to (e.g. Napa, Sonoma, Monterey, Carmel, Central Coast, etc.) this is an amazing benefit to keep your low property tax basis.

When Is Leaving California the Right Call?

If your retirement math only works by leaving California, the income tax rate is likely not the primary driver. The more common explanation is that there is not enough saved in a liquid portfolio and the plan depends on converting home equity into cash. Relocating to a lower cost area in that case may make sense, but it is a savings adequacy problem rather than a state income tax problem, and that distinction matters. For those who have built a sufficient liquid portfolio and are not relying on home equity to cover living expenses, California offers a high quality of life, a favorable climate, proximity to family and professional networks (all important factors for a happy and fulfilling retirement), and a retirement tax environment that is considerably more manageable than it appeared during the accumulation years.

At Traveka Wealth, we work with clients in Los Altos and across the Bay Area to stress-test these assumptions with real numbers rather than inherited ones. If you are weighing whether retiring in California makes sense for your situation, we are happy to work through it with you.

Tony Blagrove, CFA, CFP
Founder, CEO
Direct: (650) 397.2395
Tony.Blagrove@TravekaWealth.com

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