Data & Research November 2, 2015

A Map Shows the Worst States for Taxes in Retirement

Kiplinger’s tax map shows the importance of location, location, location for retirees.
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The Green Mountain State (Vermont) is the No. 1 worst state for retirees, according to Kiplinger’s Personal Finance Tax Map. With a steep top income tax rate, taxes on most retirement income, as well as on up to 85% of Social Security benefits, Vermont retirees could be taxed the most.

In an effort to close the state’s $100 million budget gap, Vermont now limits deductions to $15,750 for single residents and $31,500 for married couples—which puts Vermont in the unenviable top spot on Kiplinger’s list of least tax-friendly states for retirees.

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Local jurisdictions can add 1% to the state sales tax. Food for home consumption, clothing, and prescription and nonprescription drugs are exempt. But you’ll pay a 9% tax on prepared foods, restaurant meals and lodging, and 10% if you order a glass of wine or beer in a restaurant.

The median property tax on the state’s median home value of $218,300 is $3,727, the ninth-highest in the U.S., according to the Tax Foundation. Eligible Vermont residents can make a claim for a rebate of their school and municipal property taxes if their household income does not exceed a certain level. (Generally, household incomes of $109,000 or more do not receive an adjustment.) Vermont taxes estates that exceed $2.75 million at a flat rate of 16% on the amount greater than the threshold. Assets left to a surviving spouse are exempt.

NEXT: Tax-free greens fees in the least-terrible tax state for retirees.

In contrast, New Yorkers fork over an average 12.6% of their income in state and local taxes, according to the Tax Foundation, but retirees can still catch several breaks in the state ranked 10th worst on Kiplinger's map. The Empire State doesn’t tax Social Security benefits or public pensions. It also excludes up to $20,000 for private pensions, out-of-state government pensions, individual retirement accounts (IRAs) and distributions from employer-sponsored retirement plans.

No state sales tax on food, prescription and nonprescription drugs—but as life isn’t all food and medicine, New Yorkers also enjoy greens fees, health club memberships, and most arts and entertainment tickets free of state tax. Depending on where you shop, though, sales taxes on everything else can be steep. The average state and local combined sales tax rate is 8.48%, according to the Tax Foundation. The median property tax on the state's median home value of $277,600 is $4,559, the 11th-highest rate in the U.S.

While New York has an estate tax, a law that took effect last year will make it less onerous. For fiscal year 2014 to 2015, estates valued at $2,062,500 are subject to an estate tax with a top rate of 16%. The exemption will rise by $1,062,500 each April 1 until it reaches $5,250,000 in 2017. Starting January 1, 2019, it will be indexed to the federal exemption, which is $5.43 million for 2015.

The top 10 worst states for retirees in terms of taxes are:

  1. Vermont
  2. Connecticut
  3. Rhode Island
  4. Minneosta
  5. Oregon
  6. Montana
  7. California
  8. Nebraska
  9. New Jersey
  10. New York

A link to Kiplinger’s map is here.

The Markets November 2, 2015

Annuity Product Set Still in Flux

Fixed-indexed annuities are posing a threat to traditional variable annuities, according to new research from Cerulli Associates.
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A report from financial research and analytics provider Cerulli Associates finds the increasing popularity of fixed-indexed annuities (FIAs) is posing a threat to traditional variable annuities.

Cerulli finds much of the annuity sales activity measured for 2014 can be attributed to fixed-indexed annuities. Bing Waldert, a director at Cerulli, adds FIA sales are still going strong this year, “largely due to their living benefits and bonuses,” leading them to outpace other segments of the annuity markets.   

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“Fixed-indexed annuities sales are growing because these products are looking much more attractive to investors of late,” Waldert explains. “This rally can be attributed mainly to the shortage of other options available to income-seeking investors, such as bonds and traditional variable annuities.”

Cerulli says variable annuity sales dropped more than 3% in 2014 versus 2013 levels, adding yet another year of sales depreciation since the global financial crisis. As the report explains, “Variable annuity (VA) flows peaked in 2007 at the height of the living benefit arms race, and subsequently plunged during and after the financial crisis. VA flow growth has been non-existent over the past few years as insurers move away from selling living benefits.”

Compare this with FIAs, which have achieved a 9.7% compound annual growth rate from 2007 to 2014, and one can see the importance of FIAs “guaranteed living withdrawal benefits (GLWBs), as some GLWBs in the FIA space sport base rollups as high as 8% or 9%, and withdrawal rates greater than those on the VA side.”

NEXT: Independent B/Ds favoring FIAs 

Matching findings shared by the Insured Retirement Institute in July, Cerulli finds independent broker/dealers are a particularly hot pocket for sales of fixed-indexed annuities. In fact, sales of FIAs by independent B/Ds “more than doubled on a percentage basis in 2014,” according to Cerulli.

“Fixed annuity sales are moving well beyond their key traditional channel, independent agents,” the report explains.

Overall, Cerulli predicts “steady growth of investment-only variable annuities, fixed-indexed annuities, immediate annuities, and deferred income annuities over the next six years.” Further, “traditional VAs will lose market share as insurers move away from living benefits,” Cerulli predicts. “Meanwhile, traditional fixed annuities will remain in scant use until interest rates, and crediting rates, start to rise.”

Other findings highlighted by Cerulli show dividend-paying stocks “continue to be the most-used solution for retirement income by advisers, followed by bond funds.” Cerulli also notes that variable annuities with living benefits were “No. 1 on this list at one time.”

Waldert concludes insurers and advisers alike “should be aware of not overcomplicating product designs as they seek to broaden the [annuity] market.” Regulators have shared similar concerns recently, including Senator Warren of Massachusetts, who went further and accused some bad-apple advisers of colluding with annuity providers to drive up fees and generate kickbacks from steering investor assets into complicated annuities. 

Information about obtaining Cerulli research reports, including “Annuities and Insurance 2015: Evolving Products for a Sustainable Industry,” is here.

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