How advisors can help clients decide if relocating is worthwhile.

The process of relocating involves a lot more than just packing boxes and calling the moving van. Whether the move results from a job change or retirement, or whether the new locale is across the state, across the country or across the globe, there are a host of cost of living considerations to weigh that can have profound impacts on the purse strings.

Marge Schiller knows that first hand. She's twice moved her financial planning practice because her husband, a city manager, found new towns to oversee. After establishing her business in Connecticut, she went to Minnesota before landing in Florida. "City managers move around the country a lot," says Schiller, who manages the financial planning arm of the Sarasota accounting firm, Goar, Endriss & Walker. "It's part of their jobs. But it's not a highly-paid profession, and the political reasons for taking new jobs don't always translate into a good financial fit for the family."

Being the financial planner that she is, Schiller crunched the numbers on everything from housing costs to water bills before each move to make sure the couple wasn't shortchanging themselves. Many others, though, aren't as careful. "I don't think people always do the math," she says.

Housing costs, taxes, and transportation expenses are some of the major considerations that can make relocations a financial misstep. Smaller details often get overlooked but can add up, such as paying $300 a month for a parking garage in New York City or the need for year-round lawn service in Florida. It's up to advisors to do the math for their clients who are contemplating a move. "Our message to clients is to look at what they have, make sure they can duplicate it, and know the costs of duplicating it," says Lou Stanasolovich, president of Legend Financial Advisors in Pittsburgh. "We try to paint a picture by working up all the numbers on an after-tax basis. If a person is getting a promotion but is moving to a high-cost area, will this actually mean a net reduction in their lifestyle? We take the same approach for retirees with second homes who are pondering where to set up permanent residence."

Stanasolovich uses two low-cost states, Pennsylvania and Florida, to illustrate the finer points of juggling cost-of-living considerations. The former has a state income tax rate of just 2.8%, and pensions, IRAs and Social Security aren't taxed at the state level. The latter has no state income tax, nor does it tax pensions, IRAs or Social Security.

He says housing costs in Pittsburgh are modest compared with places like New York or California, but real estate taxes are high because they go to support excellent schools. Real estate taxes tend to be lower in Florida, Stanasolovich says, because the schools generally aren't as good. The flip side, though, is that moving to an area with so-so schools might require sending the kids to private school, in some cases offsetting the savings in lower real estate taxes and perhaps requiring a significant boost in salary to cover the costs. One other note: Private school tuition isn't tax deductible in most states.

That's not an issue for retirees, where housing costs have the biggest impact on cost of living. In fact, for some folks, it can be the difference between working and retiring. Peter Traphagen, a partner at Traphagen Investment Advisors in Oradell, N.J., recently suggested to one couple that they sell their home in affluent Bergen County in northern New Jersey and move to the state's lower-cost southern region.

As of autumn, their existing home was listed for $700,000, and the couple eyed a new residence to the south in the $250,000 range. With current laws allowing for a $500,000 tax-free gain on the sale of personal residences, Traphagen wants to put the anticipated $450,000 profit into investment-grade corporate bonds earning 6%. This would provide the couple with an additional $27,000 in annual income.

Tack on annual savings from the move amounting to $9,000 in reduced real estate taxes, $3,000 in lower home maintenance costs, and an estimated $1,200 less in utilities, and the couple could have a nice windfall. "They have only $200,000 in savings," says Traphagen. "They had to downsize and move if they wanted to retire comfortably. It was a forced choice."

In many ways, cost-of-living expenses revolve around the value of the home. "When people move, the biggest decision they have to make is how much house can they afford," says Bert Whitehead, founder of Cambridge Advisors in Franklin, Mich. His rule of thumb is that cost-of-living expenses typically are four times a person's monthly house payment. Over the past 10 years, Whitehead has recommended to some of his clients that they move to less expensive regions to make ends meet and live comfortably. Not only does this cut direct costs such as taxes and maintenance, but one's social expectations change and there's less need to keep up with the Joneses.

Of course, relocating to save money isn't the right prescription for everybody. Kacy Gott, a principal at the financial advisory firm of Kochis Fitz in San Francisco, says that a few years ago a number of the firm's clients expressed interest in leaving California to avoid the state's 9.3% tax rate. Nevada and Washington were tops on the list for possible relocation because they don't have state income taxes. But financial analysis showed that the tax savings weren't enough to motivate people to move, and so none of their clients did.

"Perhaps three or four years ago they had enough resources to maintain their living standards here in California," says Gott. Given the lousy equity market performance since then, his firm is encouraging clients to update their financial goals. "It will be interesting to see how people will react now to the idea of relocation," he says, adding that early indications are that cost-of-living considerations still don't matter much with his clients because few of them have lost their jobs. "The plan now is to maybe work longer than they originally hoped."

Still, tax situations in different states can go a long way in shaping one's finances both now and later. Traphagen, the New Jersey advisor, had one client who sold his $250,000 condo in New Jersey and relocated to an $80,000 condo in Florida. He took the additional $170,000 and put it in government securities. The client saved a bundle on housing, and Florida was easier on his roughly $1 million estate.

For starters, Florida doesn't tax IRA distributions or income from U.S. government securities. The client can withdraw $50,000 annually from his IRA tax-free, but he would have paid a $1,270 tax in New Jersey. Regarding his estate, the man has no immediate family and plans to leave his money to friends and to a charity. Because New Jersey doesn't recognize the $1 million federal exemption on estate taxes (it still limits exemptions at $675,000), combined estate and inheritance taxes would take a $48,000 bite out of his fortune.

Florida abides by the federal standard, so moving there means his heirs won't pay a cent in taxes after he dies. But Florida has a high probate tax based on a sliding scale of 6%, while New Jersey probate costs total $110 for a $1 million estate. By switching to a living will, Traphagen's client won't pay any probate fees in Florida.

A move across state lines is one thing, but a move across the Canadian border is a different can of enchiladas. The similarities between the United States and English-speaking Canada lull many people into thinking that relocating from New Hampshire to Newfoundland is as easy, financially speaking, as moving to New Mexico. Such insouciance also exists north of the border when Canadians move to the States.

The currency in both nations is the dollar, but that's where the similarities end. For instance, the weak Canadian dollar means that CDN$100,000 is worth only about U.S.$62,000, a fact that unsettles some people when they get salary offers in the United States.

"Educating people about currency exchange is sometimes a monumental task," says Brian Wruk, founder of Transitional Financial Advisors, a Gilbert, Ariz., firm specializing in trans-border relocations between the two countries. "If a Canadian makes $60,000 up there and is offered a job in the U.S. for $60,000 in American dollars, I tell them to grab it because the cost of living and taxes are generally less here, and their new salary puts them ahead of the game from the get-go."

There's also the matter of different taxation policies between the United States and Canada. When a Canadian moves here, he or she can sever ties with Canada and avoid that country's higher tax rate because taxation there is based on residency. But U.S. taxes are based on citizenship, so Americans who move to Canada and retain their citizenship are subject to double taxation.

When it comes to retirement, Wruk emphatically states that retirees are hands down better off in the United States, especially if they qualify for free U.S. Medicare Part A when they turn 65. Canadians have two government pensions that are roughly equivalent to U.S. Social Security. Both pensions are 100% taxable at certain levels, with the trigger at one of the pensions at just CDN$53,000.

In the United States, the first 15% of Social Security is tax-free and the amount of taxes paid on the rest depends on a person's overall income. In Canada the top tax bracket of 45% begins at CDN$55,000; in the States the top rate of nearly 38% kicks in around $285,000.

Wruk's recommendation to anyone relocating across the border is to seek professional advice before making the move. That's the best way to learn about various financial relief offered by U.S.-Canada treaties, proper foreign tax-credit planning, exemptions, rolling over pensions and 401(k)s, and the like. "I encourage people to get all their assets on one side of the border or the other before relocating," he says. "It makes things a whole lot easier."