Retirement Planning in South Dakota

Retirement in a state with no income tax

Saving for retirement is the easy half. The harder half is spending the money without running out. A solid plan lists your expected monthly costs, subtracts steady lifetime income from Social Security and any pension, and then asks how much must come from savings and at what pace.

According to the U.S. Census Bureau, 2020 to 2024 American Community Survey, about 18.0 percent of South Dakotans are 65 or older, about 68.6 percent of homes are owner occupied and the median home value is about $257,400. Many retirees have paid off their house, which helps, and some stay on a farm or ranch for decades past the usual retirement age. Others split time between a home in Sioux Falls and a warmer place in January.

What the state does and does not tax

South Dakota has no personal income tax. That means the state does not tax Social Security, pension payments, IRA or 401(k) withdrawals, interest or dividends. It also has no estate or inheritance tax. Your retirement tax planning is therefore a federal exercise. Up to 85 percent of Social Security can be taxable federally, depending on other income, and withdrawals from traditional accounts count as ordinary income. A retired couple in Spearfish might draw from a taxable account in one year, a traditional IRA in the next and a Roth IRA when they need to stay inside a bracket. Required distributions from traditional accounts start in your seventies, so many people convert some money earlier. Sales tax still applies to many purchases, so include it in your budget, and check current rules with the Department of Revenue.

The South Dakota Retirement System

Teachers, state employees and many local government workers belong to the South Dakota Retirement System, known as SDRS. It pays a lifetime benefit based on years of service and average pay, and the cost-of-living adjustment depends on inflation and the plan’s funded status instead of a fixed promise. Members may also have a variable retirement option that invests part of a member’s money, which carries more risk and more potential for growth. Ask SDRS for a benefit estimate, compare survivor choices for a spouse and learn how an early retirement reduces the payout. A retired teacher from Watertown should also check how Social Security applies, since some public workers have it and others do not. Our retirement planning guide explains how pensions fit with other income.

Social Security timing

The earliest claiming age is 62 and the latest useful age is 70. Each year of delay lifts the check, and every year taken early shaves it for good. Your health, your other income and whether you are married all change the answer. For couples the two benefits belong in one calculation, because the higher earner’s choice sets the survivor benefit. A widow of 66 in Pierre who claimed early at 62 may live on a smaller check than she expected. Create an account at ssa.gov to see your own estimate and review it each year.

Healthcare when the doctor is far away

Medicare coverage opens at 65. The original program pays for hospital stays and doctor visits but leaves you with deductibles and a share of each bill, so most enrollees either buy a supplement and a drug plan or choose an Advantage plan that bundles everything. In South Dakota, the plans on offer differ between Sioux Falls, Rapid City and rural counties. Sanford Health and Avera Health run large networks, and critical access hospitals serve small towns. Before enrolling, check that your doctors, hospital and pharmacy are in the plan, and ask how much a trip to a distant specialist would cost. Higher earners pay a surcharge on Medicare premiums, so income decisions affect costs two years later. The state’s senior health insurance counseling program offers free help comparing plans.

Paying for long-term care

Medicare pays for a brief rehab stay after a hospital visit and little else. Help with bathing, meals or memory care is a private expense that can reach thousands of dollars a month at home, in assisted living or in a nursing home, and in rural areas there may be fewer choices, which sometimes means moving to a larger town. Medicaid pays for care for people with limited assets, and it looks back at transfers made in the years before an application. Options include saving, long-term care insurance, a life policy with a care rider, and early talks with an elder law attorney. Our estate planning guide covers powers of attorney and health directives.

Retiring from the farm or ranch

Farm and ranch families often work into their seventies. The land may be worth a great deal, but the operation may produce little cash. A plan answers several questions. Who will operate it, and on what terms? Will you lease the land to a son or a neighbor for cash rent? Will you sell part to fund retirement? How will heirs who do not farm be treated? Heirs generally receive a stepped-up basis at death, while a sale in life may trigger federal capital gains tax. Landowners can use installment sales, trusts and life insurance. A 70-year-old couple in Gregory who lease their land for cash rent might want a plan to cover the years after they move into town.

Want your numbers checked?

An advisor who serves South Dakota can test your plan against market drops and rising costs. There is no charge.

Request a free review →

Housing choices

Many retirees ask whether to stay in the house. Staying keeps you near family and holds housing cost steady if the mortgage is paid, although winters, snow removal and upkeep add up. Downsizing frees equity. Moving into town can put medical care and groceries closer. South Dakota offers assessment freeze and refund programs for some older or disabled homeowners and renters, with income limits that change, so confirm details with your county or the Department of Revenue. Owners of vacation cabins in the Black Hills should include travel, insurance and fire risk in the budget.

Making savings last

Most plans pick a starting withdrawal as a small share of the portfolio, then raise the dollar amount each year with prices. What is safe for you turns on your life expectancy, your mix of stocks and bonds and how much you can cut back when markets fall. A cushion of one to two years of expenses in cash or short bonds lets you leave stocks alone after a decline, and a habit of skipping the raise after a down year stretches the money further. Our investing guide explains how stocks and bonds behave in retirement.

Questions to ask a retirement advisor

1. Are you a fiduciary on this advice? Get the answer in writing.
2. How will you set my withdrawal order?
3. How do you charge? Ask for the total fee in dollars.
4. How do you handle healthcare and long-term care?
5. How often will we update the plan?
6. Have you worked with SDRS or a farm family before?

Beneficiaries and documents

An IRA or 401(k) goes to whoever is named on the account form, whatever your will says, so an old form naming an ex-spouse can undo careful plans. Look at every form after a marriage, a birth, a divorce or a death. Sign a durable power of attorney and a health care directive, and let a child or friend know where the papers sit. Most adult children who inherit an account today must empty it within ten years under federal rules, and the withdrawals count as their income, so talk with a tax professional about timing.

Winters, snowbirds and where you claim residence

Long winters lead many retirees to spend January through March in Arizona, Texas or Florida. South Dakota has become popular as a legal home base for full-time travelers and snowbirds, partly because of the lack of a state income tax and because a mail forwarding service makes it easy to keep an address. Residency is a matter of facts, not a mailbox. Courts and tax agencies look at where you sleep, where you vote, where your doctors are and where you keep your driver license. If you spend more than half the year in another state, that state may claim you as a resident, so keep a calendar, talk to a tax professional and confirm current rules before you rely on a South Dakota address.

A sample monthly budget

Numbers make the plan real. Take a couple, both 67, living in Mitchell with a paid-off house. Social Security pays them about $3,600 a month together, and a small pension adds $900. Their spending is $5,200 a month, including property tax, insurance, Medicare premiums, a vehicle and winter heating. The gap of $700 a month, or $8,400 a year, comes from savings. On a $400,000 portfolio that is roughly two percent a year, a very comfortable draw. If the same couple wanted to spend $7,000 a month, the gap would be $2,500 a month, which is $30,000 a year or 7.5 percent of the portfolio and would be risky. A planner tests choices like this before you retire. Our budgeting and saving guide helps you track what you spend now.

The first five years after you stop working

The first years are the most important. A bad stretch in the stock market just after you retire can do more damage than the same drop 15 years later, because you are selling shares while prices are low. Some retirees hold a cash bucket for early spending, others use a flexible withdrawal rule, and many delay Social Security by using savings first. Pay attention, too, to health insurance if you retire before 65. Marketplace plans, a spouse’s plan or a retiree plan from the employer can bridge the gap, and each has different costs. A retired nurse in Sioux Falls who stops work at 62 needs three years of coverage before Medicare starts.

Protecting a surviving spouse

When one spouse dies, one Social Security check ends, and a pension may drop depending on the option chosen. Expenses fall less than income. Plan for this by choosing a survivor option on the pension, considering life insurance for the younger spouse, and keeping both names on accounts and beneficiary forms. Our life insurance guide explains how coverage can help a surviving spouse, and a will and powers of attorney keep the household running through a crisis. Widows and widowers should avoid big decisions in the first months and lean on a trusted advisor, family member or attorney.

Benefits for tribal members and veterans

Enrolled members of South Dakota’s tribal nations may use the Indian Health Service in addition to Medicare, and the details differ by reservation and by person. Veterans, a large group in the state with Ellsworth Air Force Base and the Black Hills community, may be eligible for Department of Veterans Affairs health care and pension benefits, and the VA hospital in Sioux Falls and Fort Meade serve many. Check eligibility directly with the agencies, since each program has its own rules, and make sure an advisor coordinates these benefits with Medicare and your other insurance.

Frequently asked questions