Tax-Smart Retirement: Location, Location … Munis?

Holly Swan: Hi, welcome to SpringTalk. I'm Holly Swan, head of Wealth Solutions at Allspring Global Investments. I'm here with Nick Venditti, head of our Municipal Fixed Income team, and today, I want to talk a little bit about retirement and the impact of taxes on retirement. Allspring recently launched the 2025 retirement study, and for the first time ever, we had a big focus on not just how that impacted the institutional side but how it also impacted individual investors and taxpayers. It's a really trying time for people to shift, mindset wise, from being W-2 earners to being 1099 earners who are really reliant on that investment income for their support. And, only 6 in 10 retirees or near-retirees felt financially secure. Honestly, I was surprised that number was that high. The number of people who felt secure was actually lower in 2025 than it was in 2023. 15% fewer retirees felt financially secure in 2025, and given how strong the market was, I personally found that surprising. Other things that I found really interesting: We found that near-retirees really prefer a very customized approach to their retirement investments. They're really shying away from target date funds. So, when we think about making the shift from 401(k)s—or do they want to stay in their 401(k)s or do they want to move from 401(k)s to IRAs—having more investment options and having the customized advice from financial advisors are really important to them. And when we asked them what advice they needed most, the answer was resoundingly tax planning, which includes tax-efficient withdrawal strategies, which we have found is something that is very confusing to retirees and near-retirees. But it's also about smart asset location and also knowing when to deploy tax-exempt strategies. So, Nick, maybe that's something that you can talk a little bit about.

Nick Venditti: Thanks, Holly. It's great to be here with you today. Look, I think you and I get paired together a lot because we both care about taxes a lot. Or maybe, more specifically, we care about not paying taxes a lot. You, as our resident tax expert, and me, as the head of the Muni Fixed Income desk, I think, as we all know, the beauty of municipal bonds is their tax exemption. I think retirees and I think other investors are looking for a couple of things beyond what you just said. Part of that is the tax-planning reality. The other piece is safety, security, and stability in those distributions. Some clarity into the income that they are going to be able to produce from their investment post their working life. Munis offer that in myriad ways. Obviously, on the tax side, the tax exemption is incredibly beneficial. You do not have to be a 37% taxpayer for municipal bonds to make sense in your investment allocation. You could be far, far lower down the tax bracket and still out-yield comparable fixed income securities and other asset classes. It's something that every investor should be taking a look at. But, beyond just the tax benefits that munis provide, they really do provide that safety and security that most retirees and, frankly, a whole swath of investors are looking for in a very volatile world. Look, I think one of our most famous or favorite statistics is the fact that BBB-rated munis default less frequently than AAA-rated corporate bonds. Think about that for a second, right? That means it's more likely that Apple will default on its debt than the Chicago Board of Education. That seems impossible. It seems impossible to believe, but there's about 100 years of data to support that assertion, right? If you are looking for stability, if you are looking for low volatility, if you are looking into clarity of your income stream, I think munis offer a really, really interesting investment option.

Holly: So, that does seem mind blowing. I was looking at a study recently. So, I live in Massachusetts—a very high-tax state—and we also spend a big portion of our time in Vermont, which is a super high-tax state. Actually, I think, Massachusetts is the 8th-highest-tax state. Vermont is the 9th-highest, and lest you not feel that you're getting off the hook, Wisconsin is the 10th-highest-tax state. I was reading a study recently on where retirees move if they're just moving for retirement purposes only. So, not if they're moving to be closer to family and not if they're moving for job purposes, but if they're moving purely for retirement reasons. And this is just another mind-blowing statistic. I literally stared at my computer with my mouth wide open for like five minutes after I read this. I thought that the highest state would be Florida and that it would be Florida by a high margin. The highest state was actually Massachusetts. 20.4% of people who move for retirement purposes only are moving to Massachusetts, despite the fact that while we have—for most people—a 5% tax rate, income over $1 million has an extra 4% tax or the highest tax rate is 9% for most forms of income. Now, 19.9% of people do go to Florida. So, there is a significant number of people going to Florida. I will add that Vermont also made the top 10 list. Wisconsin—I'm sorry—did not make the list, but I think at any moment that could change because we both know Wisconsin is a really lovely state. Only two states on that top 10 list were states without income taxes, which is shocking to me given how tax sensitive we know retirees to be and given—particularly living in Massachusetts—how many people I know are leaving here and going to Florida. But in this study—it's an AARP study—what they showed was people are moving for culture. They're moving for health care. They are moving to places where they have great vacation memories. So, no offense to downtown Boston, where I moved, but I get the sense these people are actually moving to Cape Cod. They're not coming to exactly where I am. But there actually are a lot of retirees who are going to these very-high-tax states. Another thing that I found shocking: If you look at Vermont here and Massachusetts here, New Hampshire is right here. No state income tax. It's not on the top 10 list. And so, I think that really proves the point that people are going for reasons other than tax mitigation, despite the fact that we know they're tax sensitive, which makes other methods of tax planning so critical for them.

Nick: Yeah, I was shocked by this study as well for similar reasons and, frankly, reasons beyond. Number one is beyond just taxes and cost of living, I would have thought weather would be a big, big factor. We're just coming off of -20 degrees in Wisconsin for the last week or so. I've dreamt of warmer climates almost every day. I'm taking the opposite direction of the world, Holly. Everyone is trying to lose weight. I am actively trying to gain it, partly because it's more fun, but also, I feel like I need that natural insulation to withstand these Wisconsin winters up here. But I think a couple of things are really interesting beyond just the jokes. Number one is this flies in the face of the narrative that's being presented broadly across every kind of news medium, right? It's that there is risk that people are going to flee these high-tax states. They’re going to leave California. They're going to leave Massachusetts. They're going to leave New York en masse to relocate to Florida or Texas or where have you. And the reality is that while some of that stuff happens on the margin, it isn't nearly as aggressive as the narrative would have you believe. And in my asset class, obviously, migration over long periods of time can have detrimental or positive impacts on the bottom-up fundamental credit quality of those municipalities of those states. The fear is that places like Massachusetts are going to see an unbelievable out-migration to Florida. And then, whatever. The state will fall into the ocean and that'll be a disaster. The reality is that isn't true. In spite of what you're reading about some of these high-tax states, they are still doing very well demographically. There are still reasons that people are drawn to them, even post-retirement. And by virtue of that, their fundamental credit quality still remains very, very strong.
Holly: Yeah, actually, the study did mention weather and it mentioned four seasons states as being a draw for some of these people. So, some people maybe don't want all the heat of Florida. So, yeah, maybe there's space for you down there after all. I would guess that living in Massachusetts, some people are escaping to Florida for part of the year. I do wonder, personally, if there's a difference between how W2 earners are thinking about this and how post-retirement earners are thinking about it. And I think maybe we could have another conversation another week about how states that are implementing the wealth tax are seeing in-migration versus out-migration for those high earners who probably do think about this very differently than retirees are thinking about it. But, Nick, thanks for joining us here today on SpringTalk.

Nick: Absolutely. Thank you so much for having me, Holly. It was fun as always.

Holly: And to our audience, thanks for joining us. We'll see you back here again soon.