State Retirement Desirability Ranking Reveals Surprises

Being considered a top state to retire in is desirable for any number of reasons—but only one state gets to brag about being No. 1.

A report from LPL Financial ranks all 50 states and Washington, D.C., on their relative “retirement desirability,” finding some surprising regional trends and disparities around the U.S.  

Perhaps most interesting, the top state to retire in, on LPL’s analysis, is Virginia—a state that falls fairly well down on the list of the fastest growing or healthiest state economies by more traditional measures looking beyond the interests of retirees. In fact, according to the U.S. Bureau of Economic Analysis, Virginia’s economy remained essentially flat in 2014, with zero GDP growth, putting it near the bottom of states on that metric.

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LPL acknowledges the index rankings may raise eyebrows, but they reflect the fact that retirees’ best economic interest can differ somewhat from the best economic interest of a local or regional economy. As noted in the report: “The Retirement Index is also intended to spark discussion on how to improve desirability for pre-retirees, as no state received top grades across all six categories. The holistic nature of the index powerfully demonstrates that no state is perfect.”

Unsurprising in some respects, New York (50th) and New Jersey (49th) bottomed out the list because of factors such as high prices for housing and goods, along with higher tax rates and relatively strained public services due to higher population density. South Dakota, Minnesota, Wyoming and Wisconsin rounded out the top five, LPL says, for basically the opposite reason. Just holding the images of those states in the mind gives one a sense of what the important factors are for a state to rank well on LPL’s list.

NEXT: What makes a state “retirement desirable?”

Reflecting its experience working with real-world retirement savers and retirees—LPL came up with a shortlist of factors to use in ranking states’ retirement desirability. The full report contains detailed A through F letter-grade rankings on each of these factors for each state—making for a telling picture of the U.S. retirement landscape as a whole:

Financial: LPL says the financial health of pre-retirees as a group and the fiscal health of their states of residence are each linked to a fulfilling retirement. While lower growth states aren't precluded from high rankings on the list—for example, South Dakota had 0.6% GDP growth for 2014 but an LPL ranking in the Top 5—a persistently weak economy can drive higher taxes and general economic hardship.

Health Care: Clearly important for a smooth retirement, access to and cost of health care are key determinants of retirement satisfaction, LPL finds. Along with financial factors, health care perennially comprises a top concern in retirement industry research.

Housing: Affordable housing, both while active, during retirement, and, if needed, for nursing care, is of vital importance and can be a major expense, LPL observes.

Community Quality of Life: A more qualitative factor, LPL finds social connections and even the weather are other key determinants of retiree happiness and satisfaction.

Also included in the factors list are Employment and Education, especially for those people in the 15 to 20 years before retirement range, when savings should be at their peak, along with general financial and physical Wellness. 

Important insights for retirement plan advisers emerge from the rankings—not least that the most popular regions for retirement relocation are pretty well down on the desirability rankings.

Notably, popular retirement states Florida and Arizona ranked 37th and 43rd, respectively, while less populated South Dakota and Wyoming were both positioned within the Top 5.

“It’s not all bad for the Northeast though,” LPL says, “as its states received the largest concentration of high health care, wellness, and employment and education grades … Only two other Southern states join Virginia among the top 20, with Tennessee at No. 10 and Georgia at No. 16.”

Anthony Valeri, senior vice president for research and the study’s co-author, notes retirement planning is very personal, so these types of rankings should be taken in context.

“Bearing in mind the personal nature of retirement planning, an examination of the index allows an individual to consider what matters most to him or her, and can facilitate a discussion with a financial adviser about how best to prepare to meet those goals,” he says. “Academics, policymakers and advisers increasingly recognize that retirement readiness includes not only finances, but a broad range of economic and quality-of-life factors.”

The full rankings are presented here.

Morningstar Compares Active vs. Passive Performance

The inaugural Active/Passive Barometer report shows that passive investing trumps active.

Morningstar has launched an Active/Passive Barometer to help investors measure the performance of active U.S. fund managers against passive U.S. fund managers in every Morningstar category. The barometer will indicate success rates, which Morningstar defines as the percentage of actively managed funds that survive and generate higher returns than their passive counterparts in the same time period. Morningstar will also evaluate fund fees.

Key findings from the inaugural Morningstar Active/Passive Barometer, as of year-end 2014 data, include the fact that actively managed funds underperformed passive funds in nearly every asset class and Morningstar category, especially in the 10-year period. Low-cost active funds were more likely to survive, rather than being closed or merged into another fund, and to outperform higher-cost active funds, but their returns were lower than their passive counterparts in nine of the 12 Morningstar categories.

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The U.S. mid-cap value category was the only one where actively managed funds had a 10-year success rate above 50%. In fact, low-cost active mid-cap value funds, which invest in both growth and value, had the highest success rate, at 68.2% for the 10-year period, while high-cost active mid-cap blend funds had the lowest success rate, at just under 5%.

Over the trailing three- and five-year periods, respectively, 72.9% and 69.7% of active intermediate-term bond funds beat their average passive peers. Actively managed U.S. value funds had higher long-term success rates than U.S. blend and growth funds; active large-cap value, mid-cap value and small-cap value funds had success rates of 38.2%, 54.4% and 48.4%, respectively, for the 10-year period.

Over the past 10 years, 40.2% of actively managed foreign large-cap blend funds survived and beat the average passive fund, nearly double the success rate of active U.S. large-cap blend funds.

The report also found that investors tend to select better-performing funds, as category asset-weighted returns were generally higher than the equal-weighted returns. For example, active U.S. large blend funds showed asset-weighted performance of 6.74% versus 6.42% equal-weighted performance over the trailing 10-year period.

“The active versus passive debate is a familiar one in the industry,” says Ben Johnson, Morningstar’s director of exchange-traded fund (ETF) research. “Our approach is squarely focused on the performance of actual investable options, instead of an index. We’re also replicating the investor experience by studying funds based on their category classification at the beginning of the time period, controlling for survivorship and taking into account the importance of fees.”

Morningstar will issue its Active/Passive Barometer twice a year. The full inaugural report can be seen here.

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