Financial Considerations for “Snowbirding” in Retirement

Welcome to Retired-ish, a podcast produced for those exploring retirement and those currently in retirement. While the vast majority of people will continue to live in the same home once they retire, many more housing opportunities typically open up during your retirement years due to kids having left the nest and the fact that you don't have any obligations to show up to any specific workplace. Or maybe now you're able to work on your own terms from the comfort of your own home.

If you're looking to change things up in retirement with your spouse, snowbirding by splitting time between two homes might be worth exploring. Snowbirding is one of the unique ways people are choosing to spice up their retirement to rejuvenate life, especially if you live in an area with extreme weather patterns where the cold isn't just cold. It's a chore. Snowbirding allows retirees to get the best of both worlds when it comes to comfort and climate. You get to get out of dodge when the cold sets in and return when it's just right, whether that means having multiple homes, a home in a condo, a home, and maybe renting a place for a portion of the year, or even a home and a boat on the coast, or an RV of some sort.

Whatever your preference, it can make life a bit more interesting and will surely keep you on your toes in retirement. When choosing where to split your time, what's nice is you don't need to worry as much about picking the city with the best school district, which might actually save you some money in property taxes. And by saving a commute to work, you likely save gas money as well. Making the decision to have multiple homes shouldn't be taken lightly, and the move in and of itself can equate to quite a physical task. Of course, there's also the financial component as well, but don't let that hold you back from exploring the idea and trashing it altogether.

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In today's episode, I'm going to share with you my best attempt at a comprehensive dive into the nuances of snowbirding in order to help you make a better decision should you decide to go this route. Before we get into the financial aspects of snowbirding, I want to take a moment to go over a couple of important nonfinancial considerations. First and foremost, and this may seem rather obvious, is that you'll want to consider a living situation that will give you emotional comfort and stability over the remainder of your life. If you're going to bounce back and forth each year, it better be worth it. In other words, will you keep the family home where countless memories were made, or will you sell it to finance a different housing situation?

How far and how long will you be away from your community, your family, and friends throughout each year? Are there like-minded communities where your second or nonprimary residence will be? Emotional stability and happiness are all a part of your wealth. It's not just the money. In fact, I give you permission to spell it this way. W-E-L-L-T-H - meaning wealth and health.

I personally think that's a better definition of wealth, but anyway, I digress. In addition, you'll want to be mindful of how your and maybe your spouse's needs will change as you enter your later years in retirement, also known as the no-go years, when normal physical and cognitive decline begins to set in. Once you start to slow down, how easy will it be to implement the exit plan and stay in one place? And which place will that be? What health care will be accessible? Who will help care for you?

These are the important questions you need to ask yourself early on before making the decision to snowbird. These are, of course, only a small handful of nonfinancial things you'll want to consider. But for those of you who have already checked all of these boxes or who are maybe on the fence, let's get into the various financial aspects of snowbirding, which are affordability when it comes to owning versus renting, various taxes, and establishing residency.

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The cash flow issues that you might run into, such as the extra cost to maintain multiple homes, estate, and legacy planning considerations, and last but not least, health care costs and coverage complexities. So let's start with buying versus leasing. Most retirees are likely to keep their current home, or “family home,” as one of the two residences, and in this case, most assume that they need to simply go find and buy a second home. But that's not necessarily the case. Many people either choose to downsize in square footage, and some even upsize to make room for when grandkids may come to visit in the future.

Regardless, downsizing in cost, if you're able to, makes the buying option easier. But first, I would suggest either renting or leasing your first go-around. That way, you can test drive the snowbird life in a second location and see if it's really for you. Treat it as an extended vacation in that first year. This will be far more cost-effective than jumping the gun and buying a place and then a couple of years later regretting it and having to sell it potentially in a bad market after you've possibly put a decent amount of money into it other than giving the new location a test run. Leasing, at least at first, has a couple of other advantages. One, you won't be responsible for maintenance and repairs. And don't underestimate this. This can be huge. You know this likely if you've been a homeowner for many years.

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Your insurance is cheaper, you won't be paying for property taxes, and of course, you'll have no mortgage, so getting out, if needed, makes for an easier exit. There are also some disadvantages. The big one has to do with your legal domicile. If let's say, you have a home in California and you want to lease a second residence in Las Vegas, Nevada, where there's no state tax and you plan to spend over half of the year there, you won't easily be able to prove that that's your official residence since you're leasing it and own your home in California. This can get quite complicated.

Another disadvantage for some might be the fact that you won't be able to cash flow the second property while you're away. So in my last example, you wouldn't be able to, say, Airbnb the Vegas residence to generate income while you're living in California because you don't own it. And lastly, you're not building any equity in an asset, of course. However, I'd argue that that's only relevant if that residence was actually to be held for the long run. Paying rent and not building equity could still be the better financial decision if things need to change in the short term.

Buying a property has many more costs than meets the eye. So let's talk about buying and owning property. What are the advantages? Well, first and foremost, it will be easier to determine your homestead or domicile if you own it and you plan on changing your legal residence to a new place or a new state. The primary advantage of this typically has to do with taxes, but it all depends on where you are going.

However, many retirees who choose to snowbird often pick one residence in a state with no state income taxes or at least one with much lower taxes than the state where the original residence is located. I'll get to taxes more in-depth a bit later, and in fact, we will dive even deeper into specifics on taxes in different states in the next episode. Next is the fact that over the long run, you will be building some equity which can be available if a financial emergency were to ever crop up. In addition, it can allow for legacy planning. You can leave the property to kids, and they may receive significant tax benefits when inheriting it if it has appreciated in value over time.

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And lastly, if you choose, and if the area where the home is located allows for it, you may be able to cash flow it while you're away for extra retirement income. On the other side of the coin, we have some disadvantages of owning, of course. One is being fully responsible for maintenance and repairs, which I mentioned earlier can be very costly and usually unforeseen and unexpected. For example, an AC unit or furnace goes bad, solar panels get damaged while you're away, et cetera. Dealing with potential estate planning issues and the related costs.

I'll dive into that a little bit later, a bit more, paying more for insurance and, of course, having to pay property taxes, which will also increase over time. And primarily the fact that in order to purchase the residence, you either pay cash, which means you'll have to take money from some other asset that can potentially appreciate at a greater rate than residential real estate in order to get that money. And therefore, it makes that money far more illiquid because you'll be putting it into a physical property. It's not easy to get that money out, or a portion of it, if you need it. Or, two, you have a mortgage and have to pay interest to a bank, decreasing your available cash flow in retirement.

Okay, I want to divert here slightly and talk about establishing residency since it is so critical when you have two homes. Now, the primary reason for this, as I mentioned, is because you'll want to understand where your income is going to be taxed or whether will it be taxed in both states. You'll want to get your ducks in a row first before making any assumptions here. Many states will come after you and try to audit you, especially states like California and New York.

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So, in general, here are some of the fundamentals when aiming to establish residency in a new state. However, I want to caveat, and I want you to know that each state has its own specific rules and requirements to establish residency. So be sure to understand your own state's laws or consult an attorney first. But in general, here's a list of the different things that you'll want to be mindful of.

First things first, you'll generally want to own the home in the new state you want to have residency in. You'll also want all of your vehicles registered there. So new license plates as well. Your driver's license should be changed. You should register to vote in the new state. If you continue to do some form of work or want to do some part-time work, it should be in that state, if possible. Review any business operations you may have outside of the new state.

Try to join churches or even gyms in the local area. Replace or get a new will created in the county of the new state. This is a big one many people forego, but it is so important. Not necessary, but important. Consider owning the residence in the previous or non-primary state through a living trust and potentially in an LLC.
This may make the probate process easier for your estate's executor, but of course, consult an attorney for more information before doing so. In some states, you can file a statement of domicile in the new county, which can also help. Generally, the more indicators you have, the better. You'll want to change your addresses for bills and investment accounts. That way, you get tax forms such as 1099s sent to your new address.

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Even if you have things like paperless settings online for bills or different assets, you'll still want to update your address with the different entities. For instance, it won't look good when the state of New York, for example, sees a tax form with your New York address, but then you're not filing a tax return there because you're establishing residency in, let's say, Florida.

Get a new primary doctor in the new state. You'll want to do this anyway, in case something ever happens to you while you're away from your other doctor, of course. But again, this is another one of those indicators, and one super duper important one is to reside at the desired state of domicile for at least six months each year. You actually need to live there and keep receipts or use tracking software, like maybe an app on your phone, if you still travel frequently to other parts of the country or have a very high net worth.

And lastly, a rather unique one I wanted to mention was to register any pets you may have in the new state. I mentioned this particularly because of a noted court case where this was a determining factor because no one lives for any extended period of time without their pets. Okay, let's circle back to the numbers and consider some other expenses and aspects of the financial management that go along with being a snowbird. When it comes to the changes in your income and your expenses, or what I call cash flow, there are some key items that you're going to want to be aware of. One of the main new expenses you'll likely have is property taxes on the new property, in addition to property taxes on the other residence, of course, assuming you purchase the second property. This ultimately depends on the state and locality where the property is located. Some states and localities have higher property taxes than others.

For example, a place like Texas may have no state income taxes, but its property taxes can be higher than most other states. And although it still depends on the value of the property, expect that if you're buying a new place today, the property taxes are generally going to be higher than maybe your longtime residence or family home purchased maybe decades ago. You'll also want to know how much the locality or state can increase those taxes each year.

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You'll also have homeowners insurance, which can be more costly for the home where you stay for a lesser time period throughout the year since most insurance companies worry about things going wrong while you're away, such as mold building up, for example. More often than not, expect insurance to be cheaper in flyover states and more expensive in states like Florida and California, for instance.

You may also have additional expenses such as lawn care, HOA dues, and maybe even snow removal. And if you do choose to rent one of the properties short term while you're away, hiring a property management company might be worth it since you won't be able to attend to tenant calls in the middle of the night if you're in another state. You may also want to consider things like smart applications that you can access on your phone or computer to help monitor your property, things like digital locks, camera doorbells, security cameras, et cetera.

And you should probably sign up for some sort of digital mail service that sends you images of any potential mail that may come through at the other property, or maybe even something like a private mailbox or PO box. Most of these things have monthly subscription costs that will add to your monthly bills. Of course, you also have to consider the utility payments on both properties. It's not typically the case where you don't have to worry about all of your utilities while you're away. Things like heating and cooling, for instance, still need to run because of mold or cracking issues that could happen if it's not taken care of.

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And lastly, you want to consider the cost of traveling back and forth. Try to include this in your budget and be realistic about how often you'll need to go from one property to the other. Once a year, a few times a year, gas plane tickets. You get the point.
Let's go through a hypothetical cost example. You'll have your one-time costs, such as purchasing the residence, let's say, a condo in Florida for 350,000, furnishings for 25,000, new legal or estate planning documents of, say, 2,500, miscellaneous things such as filings and registrations to change the domicile of, say, $1,500.
Then you have the ongoing additional annual expenses, let's say an HOA for the Florida condo that costs $6,000 a year, cable, Wifi, et cetera, of $1400 a year, homeowners insurance, $800 a year, utilities, $2,500 a year, property taxes of, say, $3,500, added maintenance and security while you're away from your other residence of $700, transportation costs of going back and forth throughout the year of $2,500.

Now let's put this all together. In my example, you would increase your current annual expenses by around $17,400 or $1,450 a month, and that's assuming that there's no mortgage for the costs of the second residence. Then any net savings in state and local taxes should be factored in as well, which, depending on where you go, could be substantial. The tax implications go beyond just income taxes, and as I mentioned, I will dive deeper into that in the next episode, so don't miss it.

Then, of course, you must liquidate some sort of asset in order to purchase the $350,000 condo, in addition to the furnishings and other one-time costs. If this money comes from something other than proceeds from selling a different property, this means you will have around $375,000 in less liquidity in your finances, meaning you will be essentially locking up that money into the walls of the new home. The key here is not to overspend, even if you're technically able to afford the purchase itself. Just because you can afford the purchase doesn't mean you'll then be able to afford your own retirement and ongoing expenses. I'll put it to you this way, the longer you're alive and enjoying retirement, the higher the chances of something expensive and nasty happening.

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That's just reality. So make sure you have additional liquid assets to tap into should something happen. Make sure not all of your net worth is tied up in these residences. This leads me to my next consideration, which is health care. If you're not yet age 65 and you're on a former employer's retiree health plan or went to what we call the marketplace for your own health insurance, you need to be sure that that insurance works in both places.

You may have something like an HMO-type plan where you are only covered in a certain network, maybe local to where you live. If you're covered in your network in one state and something happens to you while you're in the other, you may be responsible for significant out-of-pocket expenses that you didn't plan for. And if you're on Medicare and you're over age 65, you'll want to consider coverage or extra coverage, I should say, via a Medicare supplement plan or Medicare Advantage. One isn't necessarily better than the other, but they will have different rules for coverage as well as different costs, so you'll need to be sure that they work in both locations as well. Some states may not even offer a particular policy that you might already have.

If you have something like prescription drug coverage, you should make sure that it works in both areas as well. It may be wise to go from visiting a pharmacy to maybe a mail-order pharmacy in these instances. And lastly, when it comes to healthcare, you'll want to coordinate between both locations if you have any regular, ongoing treatments done, such as getting monthly shots or what have you.

While there are definitely more comprehensive topics than what we've discussed today, this should at least get you thinking in the right direction. If you have fairly substantial assets and complicated finances, there may be a lot more planning to do when it comes to things like estate planning, titling of property, and each state's specific laws.

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So be sure to have your professional team very involved if you decide to live the snowbird lifestyle. If living the snowbird life is something you want to explore in retirement, don't let the upfront work and extra responsibilities deter you. Work alongside your financial, legal, and tax advisors to help you work up a plan and identify your best options.

If you have trouble finding someone who can do this sort of comprehensive planning, you can always reach out to our firm, Planable Wealth. We specialize in comprehensive retirement planning for those over age 50 and cover all of the aspects mentioned today and much, much more.
That's a wrap for today's episode. Be sure to join us on the next episode, where we will be diving into some of the major differences between states when it comes to the different types of tax challenges you may face and how you can better prepare yourself and maybe even implement some strategies to further reduce your taxes.

Remember, it's 2024, and there are new laws, regulations, and tax and retirement-related planning numbers that you need to be aware of. That being said, we have a new 2024 tax cheat sheet as a free gift for download when you join our Retired-ish newsletter. This will provide you with the important tax numbers and thresholds for your personal tax and financial planning throughout 2024.

If you want more insight or help preparing for your dream retirement and want to automate your financial life, feel free to reach out to us at RetiredishPodcast.com or email us at info@retiredishpodcast.com. You can also ask a question to me personally that I will answer anonymously in a future episode.

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