Best states for early retirement, according to 'Joe'

A growing number of people dream of retiring in their 40s.

They have joined Reddit's Financial Independence subreddit, they frequently comment on Early Retirement Extreme's forums, and they follow the scrappy and thrifty examples set by popular personal finance bloggers, such as the Frugalwoods and Mr. Money Mustache.

Members of the FIRE (financial independence, retire early) movement want to maximize their savings rate, ideally squirreling away half of their take-home pay each month, and then "retire" to pursue the lifestyles they desire.

They are people like Joe S., a 37-old-year project manager in West Virginia. He has saved more than $400,000 in his retirement accounts and is about 35 percent to reaching his goal. He expects that he, his wife and their two children will live off the nest egg he is building by the time he turns 45.

"Early retirement is not impossible. It's more of a slow grind. I have always been thrifty," said Joe, who asked to remain anonymous so he could openly discuss his net worth.

Joe set out to know the best state for early retirement after he reached his savings goal, so he created a spreadsheet, which quickly became one of the most popular financial independence posts on Reddit in October.

Here's how Joe created his state ratings:

First, he ranked each state by tax load for an average family, assuming they had an annual income $55,000, a home worth $180,000 and a $20,000 vehicle. State taxes are important to early retirees because they provide fewer deductions than federal taxes.

"State tax rankings are highly dependent on income and home values," Joe said. "Even states that people think of as being high tax, like California, can be low tax states if your income is lower."

Then, Joe considered assets protections for retirement accounts, such as IRAs and Roth IRAs, from bankruptcy in each state because you never know what the future will bring. He also examined each state's homestead exemption, which shields your home equity from creditors.

"I view them as a free umbrella insurance policy with an infinite amount of coverage. That being said, the asset protections are a secondary consideration for our family," Joe said.

Finally, he used cost of living data from the personal finance website WalletHub to price out what day-to-day expenses would be.

Read Joe's full analysis here.

— By CNBC's Tom Anderson
Posted 18 Nov. 2016.

Utah has low state income tax rates and strong asset protections for retirement accounts. However, the state's homestead exemption of $30,000 was the lowest compared to other states in the top 10.

South Carolina has reasonable asset protections and cost of living. The Palmetto State's income tax rate of 7 percent for a family making $50,000 and its 6 percent sales tax kept it from being ranked higher on Joe's list.

Alabama's low property taxes are a big draw for Joe. Yet the state doesn't protect Roth IRAs from creditors and has a homestead exemption of just $7,500.

Nevada has everything that would make early retirement easy except a sales taxes of 7.94 percent and a cost of living that is slightly above the national average.

Alaska's natural beauty comes with a steep price. It is the fifth most expensive state to live in, according to WalletHub, which can strain the budget of early retirees.

You can live in Idaho inexpensively, but the state has a relatively high income tax rate of 7.4 percent for a family making $50,000 per year and doesn't protect Roth IRAs in bankruptcy.

Tennesse has the highest sales tax in the country at 9.46 percent. In spite of that, the Volunteer State made Joe's list because of its low cost of living and protection on retirement accounts.

Montana offers early retirees many things, though its income tax rate, which is 6.9 percent for a family making $50,000 per year, prevented the state from reaching the top of the heap.

Wyoming's low taxes overall helped it reach the penultimate spot on the list for early retirees. The state doesn't have an income tax and its sales tax is reasonable at 4 percent.

Delaware's low taxes — 5.55 percent for $50,000 in annual income plus no sales tax — and robust asset protections make it the friendliest destination for early retirees on Joe's list.