Retirement Planning in Illinois

Is Illinois really hard on retirees?

People assume it is, and the numbers say the answer is mixed. According to the U.S. Census Bureau, 2020 to 2024 American Community Survey, about 17.0 percent of Illinoisans are 65 or older, the median home is worth about $263,300 and about 67.1 percent of homes are owner occupied. Most of these retirees are staying put.

The tax picture is better than the reputation. Social Security benefits are exempt from Illinois income tax. So are payments from qualified employer plans, government pensions and most distributions from 401(k), 403(b) and IRA accounts, and no minimum age applies. Wages and investment income, including interest, dividends and capital gains in a taxable account, are taxed at the flat 4.95 percent rate.

The problem is elsewhere: property tax, long winters, the cost of care and, for some families, the state estate tax. A retirement advisor works through each and decides whether a different state would improve your plan, or whether the money is better spent staying close to family.

Planning the paycheck

Retirement planning turns savings and benefits into a monthly income. An advisor begins with what you spend, separating needs such as housing, insurance and health care from wants such as travel and gifts. Then comes the income you can count on, which for many Illinoisans means Social Security and a pension, and the gap those leave.

The gap is filled by savings, and the order in which you draw matters. Because Illinois exempts most retirement withdrawals, the early retirement years, before Social Security and required distributions begin, can be a good time to convert part of a traditional IRA to a Roth. The conversion is taxed federally but not by Illinois. Our retirement planning guide explains the sequence, and our tax planning guide covers the federal side.

A plan should also test bad luck. An advisor models a market drop in the first years of retirement and shows how long the money lasts, because the order of returns matters as much as the average.

Property tax relief for older owners

Illinois offers several tools, all of them applied through the county assessor or township assessor.

• Senior Citizens Homestead Exemption. Owners 65 and older reduce the taxable value of their primary home.
• Low-Income Senior Citizens Assessment Freeze. Owners with household income under a set limit can hold the assessed value steady, so the bill does not rise from reassessment.
• Senior Citizens Real Estate Tax Deferral Program. Qualifying owners postpone some of the tax, and the amount, with interest, is repaid when the home is sold or the estate is settled.
• General Homestead Exemption. Any owner who lives in the home can claim it.

The Benefit Access Program, run by the Illinois Department on Aging, also provides help for older residents who meet income limits, including a transit pass and a grant. Income limits and amounts change, so check the current numbers with your assessor and the state before you count on them.

Beyond the exemptions, anyone can file an assessment appeal, and a successful one lowers the bill every year after.

Pensions, tiers and Social Security

Many Illinois retirees come from public service. Teachers outside Chicago belong to the Teachers’ Retirement System, university employees to the State Universities Retirement System, state workers to the State Employees’ Retirement System, and many city, village and county workers to the Illinois Municipal Retirement Fund. Chicago teachers, police, firefighters and city employees have separate funds.

Benefits depend on when you were hired. Members who started before 2011 are in Tier 1, and those hired later are in Tier 2, which has a later retirement age and smaller cost of living increases. Illinois teachers and many other public employees do not pay into Social Security through their public jobs. The Social Security Fairness Act, signed in January 2025, repealed the Windfall Elimination Provision and the Government Pension Offset, which had reduced Social Security for many of them and for their spouses and survivors. Ask the Social Security Administration for an updated estimate before you finalize a claiming age.

Pension elections usually carry a survivor choice, and that choice is hard to reverse. An advisor compares a larger payment for you with a smaller one that continues for a spouse, and weighs life insurance as an alternative.

Medicare, Medicaid and long-term care

Medicare starts at 65. Retiring earlier means paying for coverage through a retiree plan, COBRA or the state marketplace until then. After 65, a choice between traditional Medicare with a supplement and a Medicare Advantage plan depends on your county, your doctors and your budget.

Long-term care is the largest unknown. Care at home or in a facility can cost many thousands of dollars a month. Illinois Medicaid pays for care for people with limited resources, and the rules look back at past gifts, so giving assets to children is not an easy fix. The Illinois Department on Aging runs programs that help older adults stay at home. An advisor compares long-term care insurance, a life policy with a care benefit and paying from savings.

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Staying, downsizing or moving

Many Illinois retirees consider moving to a warmer state, and tax is often the wrong reason. Because Illinois exempts retirement income, leaving rarely saves much income tax, though a state with lower property tax or no estate tax might. The better questions are what you would gain in weather and cost and what you would give up in family and doctors.

Downsizing within Illinois is another option. Selling a large house can free equity, but a new purchase resets the assessment, so the property tax on a smaller home may not fall as much as expected. An advisor puts numbers on each choice, including selling costs and the federal tax exclusion on a home sale.

Claiming Social Security as a couple

For married Illinois couples, the claiming decision is really two decisions. The higher earner’s benefit becomes the survivor benefit when one spouse dies, so waiting to claim the larger benefit protects whoever lives longer. The lower earner may claim sooner to bring in income while the larger benefit grows. An advisor runs the combinations side by side, with your health, your pensions and your other savings in the model, and shows the break-even ages and the lifetime totals under a few assumptions about how long you live.

Public employees need an extra step. If one spouse has a pension from work outside Social Security, the rules for spousal and survivor benefits changed in 2025, and the old reductions no longer apply. A fresh estimate may show a higher benefit than the one used in an earlier plan, so redo the analysis rather than relying on a number from a few years ago.

What retirement costs in Illinois

Illinois spending varies a great deal by region. A couple in the Chicago suburbs faces higher housing, transit and health care costs than one in a small downstate town, while a household in the Quad Cities or Springfield may spend much less. The largest lines in most budgets are property tax, health insurance and Medicare costs, home upkeep, utilities for cold winters and travel to see family. An advisor builds the budget from your real bills, adds a cushion for inflation and for care later in life, and checks whether your income covers it with room to spare.

The estate tax and what you leave behind

Illinois has an estate tax that applies at a much lower level than the federal tax. A retiree with a paid-off house, farmland and retirement accounts can be over the line without feeling wealthy. Married couples often use trust planning so each spouse uses an exemption, and lifetime gifts and charitable bequests can reduce the taxable estate. Keep wills, powers of attorney and beneficiary forms current. Our estate planning guide explains the documents, and our investing basics guide shows how to keep a portfolio balanced in retirement.

What retirement advice costs

Get every cost in writing, including fund expenses and any surrender charges.

Picking a retirement advisor in Illinois

1. Ask how the advisor builds a monthly paycheck from savings and pensions.
2. Ask about experience with TRS, SURS, SERS, IMRF or Chicago pension funds.
3. Check registration with the SEC, FINRA and the Illinois Securities Department.
4. Get the total yearly cost in writing.
5. Ask whether they compare Social Security claiming ages for both spouses.
6. Meet two or three advisors and be careful with anyone who leads with a product.

Frequently asked questions