Retirement Planning in Chicago

How retirement works for a Chicago household

Retirement here rarely rests on one source. A retired Chicago Transit Authority mechanic may draw a pension and Social Security. A former teacher might have a pension and a 403(b). A longtime office worker may rely on a 401(k), Social Security and the equity in a home. A good plan first lists every source, when each starts and what happens to it when one spouse dies. Only then does it ask how much you can spend.

According to the U.S. Census Bureau, 2020 to 2024 American Community Survey, about 13.8 percent of Chicago residents are 65 or older and the median owner cost with a mortgage is about $2,339 a month. Many longtime owners have no mortgage, so their costs are mostly property tax, insurance, repairs and utilities. Those costs rise even when income does not.

Public pensions: tiers, funds and questions to ask

Illinois public employees belong to separate systems. Teachers in Chicago Public Schools are in the Chicago Teachers’ Pension Fund, while teachers elsewhere in the state are in the Teachers’ Retirement System. University staff are covered by the State Universities Retirement System, and police and firefighters have their own funds. Workers hired in 2011 or later are generally in a second tier with a later retirement age and a cap on the salary used to compute the pension. Tier 2 members should check the cap and cost-of-living adjustment carefully, since both are less generous than the older tier.

Before you retire, request a written estimate from your fund under several retirement dates and survivor options. Choosing the highest single-life payment can leave a surviving spouse with nothing, so the survivor option often deserves a hard look, sometimes paired with life insurance. Public employees often do not pay into Social Security through their government job, which can reduce or remove the benefit based on that work. The Social Security Fairness Act removed two older offsets, so recheck your estimate if you also have private-sector earnings.

Pension funding and what it means for you

Illinois public pension systems carry large unfunded liabilities, and Chicago’s city funds have faced the same pressure. That does not mean accrued benefits disappear. The Illinois constitution protects pension benefits for members, and the courts have enforced that protection. Still, the funding gap affects taxes, future hiring and reform proposals, so it is reasonable not to build a plan that depends on a benefit increase. Keep your own savings alongside the pension as a margin.

What Illinois taxes in retirement

Illinois does not tax Social Security, qualified pension income or most withdrawals from retirement accounts, and Chicago has no city income tax. Interest, dividends and capital gains outside those accounts are taxed at the flat state rate. Federal tax still applies to pensions and account withdrawals, and part of Social Security may be taxable federally. The planning point: when you need cash, a withdrawal from a traditional IRA may cost you federal tax only, while selling investments in a taxable account may add Illinois tax on the gain. Confirm your own situation with a tax professional.

Property taxes and the cost of staying put

The tax bill is the cost retirees most often misjudge. Property taxes are due in installments, they depend on assessments, exemptions and local levies, and they have a way of rising faster than a fixed pension. Check each year that you claim every exemption available to older owners, and file an appeal if your assessment looks out of line with similar homes. Our retirement planning guide explains the general framework for sizing a nest egg before you decide how long to stay.

Stay, downsize or leave Illinois

This is the question many Chicago couples argue about. A couple in a three-bedroom home in Edison Park or Beverly might sell and move into a condo downtown near better transit and hospitals, or to a one-story home in a suburb such as Orland Park. Others consider Florida, Arizona or Wisconsin for lower property tax or warmer weather.

Run the numbers before you decide. Moving reduces property tax in some places and raises homeowner insurance, which is very high in parts of Florida. Selling a home that has gained value can trigger capital gains, though a large federal exclusion applies to a primary residence. If you keep a home in Illinois, the state may still tax the property in your estate when you die, so ask an estate attorney. Visit in January and August before you commit.

Medicare, health systems and the years before 65

Chicago has major hospital systems and academic medical centers, which gives retirees many choices, but networks differ by plan. At 65 you choose between Original Medicare with a supplement and a Medicare Advantage plan. Compare what your doctors accept and what you pay out of pocket, since a plan that works in a suburb may exclude a specialist you rely on downtown. If you retire before 65, plan for a bridge year or more with marketplace coverage or retiree benefits, and estimate the premium honestly. Higher income in retirement can raise Medicare premiums through a surcharge, so a large Roth conversion or property sale needs planning.

Social Security timing

Claiming at 62 produces a smaller check for life, while waiting until 70 produces a larger one. For a married couple, the higher earner’s delay often protects the surviving spouse, because the survivor keeps the larger of the two benefits. A planner will test combinations, such as one spouse claiming early while the higher earner waits. Public pension recipients should check how their pension affects spousal and survivor amounts before assuming any rule applies.

Drawing down accounts in a sensible order

A common approach is to spend taxable accounts first, then traditional retirement accounts, leaving Roth accounts for last. It is only a starting point. If you have years of low income before required distributions begin, filling lower tax brackets with Roth conversions can reduce lifetime tax. Required minimum distributions begin at a federal age set by law, so confirm the current rule. Keep one to two years of spending in cash or short-term bonds so a market drop does not force you to sell stocks.

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Winter, travel and part-year living

Some Chicago retirees spend January through March somewhere warmer. That changes the budget: two housing costs, travel, and sometimes a second health provider. It also raises residency questions, since the state where you spend most of the year and keep your driver license and voter registration is generally your tax home. A snow-free winter can also lower costs, such as snow removal and heating, so the net result needs a spreadsheet, not a guess.

Long-term care and the surviving spouse

Care can be expensive, and Medicare covers only limited stays. Options include self-insuring from assets, long-term care insurance, hybrid life policies with care riders, and a family plan. Costs differ widely by city and facility. Start planning in your fifties or early sixties, when coverage is easier to buy. Separately, run a scenario where one spouse dies: Social Security drops to the larger check, a pension may shrink, and the tax filing status shifts to single. That scenario often shows a gap worth fixing early.

Estate documents that go with retirement

Update your will, power of attorney for property, healthcare power of attorney and beneficiary designations. Illinois has a state estate tax, so a larger estate may need trust planning. Read our estate planning guide for the basics, then work with an attorney.

Choosing a retirement advisor

Look for experience with your kind of income, whether that is a CTPF pension, a SURS plan or a 401(k) from a large employer. Ask how they are paid, whether they are a fiduciary and how they would handle your survivor choices. Check records on the SEC and FINRA lookup tools and ask for the firm brochure, Form ADV Part 2. Meet two or three before you decide.

A short checklist before you retire

• Request pension estimates under several dates and survivor options.
• Get your Social Security statement and test claiming ages.
• Price health coverage for the gap before Medicare.
• List fixed costs, including property tax, insurance and utilities.
• Decide on a withdrawal order and a cash reserve.
• Update beneficiaries and legal documents.

Keeping an older Chicago home running

Much of the city’s housing is old brick, from bungalows on the Northwest and Southwest sides to two-flats and greystones closer in. Owners who plan to age in place should budget for the roof, tuckpointing, a boiler, porch repairs and basement waterproofing, which can each cost thousands of dollars. A reasonable rule is to set aside a percent or two of the home’s value every year, or to keep a dedicated repair reserve in a savings account. If the house has stairs, price a bathroom on the first floor or a stair lift before a fall forces a rushed decision.

Owners of two-flats can sometimes use rental income from the second unit to cover the tax bill. That works until a tenant leaves or a landlord faces a long vacancy, so keep a cushion and review the lease terms. Some retirees sell the building to a family member over time or turn it into a trust-owned asset, and a real estate attorney should draft those documents.

Neighborhoods and suburbs for retirees

Retirees weighing a move often look at walkable areas near the lake and transit, such as Edgewater, Lincoln Square and Hyde Park, or at suburbs such as Evanston, Oak Park, Naperville and Arlington Heights. Each comes with different property tax rates, condo fees and access to hospitals. A move to a lakefront high-rise may cut maintenance but add association fees that rise every year. Compare the full monthly cost of the new place with your current one, and stay for a week in winter before you buy.

Frequently asked questions