For many retired Americans, their Social Security benefit isn’t just another monthly check. It’s a financial lifeline that’s crucial to helping make ends meet.

According to the Social Security Administration (SSA), more than three out of five retired workers rely on their monthly benefit check to account for at least half of their income, with roughly a third leaning on Social Security for 90% or more of their income.

This payout is also keeping more than 15 million retired workers out of poverty each month. Suffice it to say, deciding when to begin taking benefits is a really important decision.

Where you live can play a big role in determining how much Social Security income you’ll keep
But what can be equally important is deciding where to live once you begin receiving a monthly stipend from Social Security.

As a reminder, the SSA suggests that your benefit will replace only about 40% of the average workers’ wages or salary.

Therefore, the state where you live, and the various costs of living associated with that state, can have a bearing on how much of that income you’re liable to keep.

Each quarter, the Missouri Economic Research and Information Center (MERIC) utilizes voluntary survey data from the Council for Community & Economic Research in cities throughout the U.S. to gather price information to determine which states have the lowest and highest costs of living.

The categories examined by MERIC include groceries, housing, healthcare, utilities, transportation, and a miscellaneous category, all of which lead to an overall cost-of-living rating.

With a national average cost-of-living rating of 100 in each category, any figure below 100 signifies a lower cost of living than the national average as a whole, or within a specific category. Likewise, a rating above 100 denotes a category or state where it’s more expensive to live than the national average. Given that the average retired worker is only bringing home $1,469.52 a month as of May, or $17,634.24 a year, choosing the right state to call home can help your Social Security income go further.

These 11 states have the lowest cost of living
One way to choose would be to pick states with the lowest overall cost of living (i.e., taking into account all six of the aforementioned categories). According to data from MERIC, the average cost of living in the following 11 states is more than 10% below the national average:

  • Mississippi: 86.1
  • Arkansas: 86.9
  • Oklahoma: 87
  • Missouri: 87.1
  • New Mexico: 87.5
  • Tennessee: 88.7
  • Michigan: 88.9
  • Kansas: 89
  • Georgia: 89.2
  • Wyoming: 89.3
  • Alabama: 89.3

For example, Mississippi residents can expect their average cost of living to be 13.9% (100 minus 86.1) lower than the national average, while residents in Kansas come in about 11% lower than the national average.

But there are anomalies mixed into this bunch. For instance, New Mexico’s healthcare costs are 0.1% higher than the national average, while Kansas and Alabama have utility costs that are at least 3% above the national average.

A focus on housing and healthcare expenditures
Perhaps an even better means of picking out low-cost states would be by focusing on the costs that matter most to senior citizens, who rely most on Social Security. Namely, housing and medical expenses.

In terms of housing costs, the following 15 states offer the lowest costs, relative to the national average:

  • Mississippi: 70.1
  • Missouri: 70.6
  • Alabama: 71.5
  • Oklahoma: 71.9
  • Wyoming: 72.3
  • Ohio: 73.6
  • Georgia: 73.8
  • Kansas: 73.8
  • Arkansas: 73.9
  • Michigan: 75.2
  • Indiana: 77.3
  • Kentucky: 77.4
  • New Mexico: 77.7
  • Iowa: 79.6
  • West Virginia: 79.6

As you’ll note from the figures above, these 15 states offer housing costs that are, on average, 20% to 30% lower than the national average. With the exception of Tennessee, each of the previously mentioned lowest-cost-of-living states also have low housing costs. According to the experimental Consumer Price Index for the Elderly (CPI-E) — a measure of expenditures for households with persons 62 or older — in December 2011, housing accounted for roughly 44.5% of seniors’ budgets, compared with just 39.2% for predominantly working-age urban and clerical workers via the CPI-W.

You could also take healthcare expenses into account. Average seniors spent 11.3% of their monthly budget on medical care in December 2011, based on CPI-E readings, versus 5.6% for urban and clerical workers. The following 10 states offer the lowest healthcare costs, according to MERIC:

  • Arkansas: 85.6
  • Tennessee: 88.5
  • West Virginia: 89.1
  • Kentucky: 89.2
  • Maryland: 89.2
  • Alabama: 90.8
  • Mississippi: 91.4
  • Pennsylvania: 91.9
  • Michigan: 93
  • Oklahoma: 93.2

You’ll see a number of new states make their first appearance, such as Pennsylvania and Maryland, both of which offer modestly lower healthcare costs than the national average. Unfortunately, Pennsylvania’s housing costs are nearly 1% higher than the national average, while Maryland’s housing costs are a whopping 84.5% higher.

It’s a start, but it’s not perfect
As you can see, there are a number of states that could be quite cost-friendly to retiring seniors who expect to lean on their Social Security income during retirement.

But understand that a brief cost-of-living analysis doesn’t tell the full story.

For example, MERIC’s analysis doesn’t factor in how taxes might affect residents in each state. As a quick reminder, the federal government imposes normal income tax on a portion of Social Security benefits when modified adjusted gross income plus one-half of benefits exceed $25,000 for individuals or $32,000 for couples filing jointly.

There are also 13 states that tax Social Security benefits, to some degree — a few of which mirror the federal tax schedule. One of those states is West Virginia, which has one of the lowest healthcare and housing costs in the country. What you save on these expenses may go right back out the door due to double taxation if you earn too much in West Virginia.

There are other intangibles that can’t be accounted for by this data, either, including weather, crime rates, and proximity to friends and family.

Obviously, there are lot of factors that go into determining where a retiree calls home. But take this first-quarter cost-of-living data from MERIC as a starting point to getting the most out of your Social Security income.

— Sean Williams

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Source: The Motley Fool