Many Americans have misconceptions about retirement planning. Unfortunately, these misunderstandings can lead to the difference between a retirement you want and a retirement you have simply come to expect.
What works in theory doesn’t always work in reality. And that is certainly the case when it comes to retirement. Predicting exactly what your retirement will be like isn't realistic, but, understanding some of the more common assumptions about retirement may help you get closer to your goal than most.
With that in mind, here's the three most common misconceptions the Fiduciaries at Agemy Financial Strategies often hear from clients, and how to plan for the unexpected before stepping your foot over the golden bridge to retirement.
Reality #1: Replacement Rates Aren't a One-Size-Fits-All
A simple online search will show you a common theme: You need to replace 70-80% of your final earnings in retirement from various sources such as Social Security, personal assets, and, for some, earned income. But those numbers are simply an average.
In early retirement you can expect your spending to go down. Then raise as retirement goes on. According to EBRI, average household expenditures totaled $55,000 for people 50-64 in 2017 versus $50,000 for those 65-74, and $39,000 for those 75 and older. What does this mean for your retirement plan? You might save more than you need if you base your retirement savings plan on the rule of thumb that would have you replace 70% to 80% of your pre-retirement income every year throughout retirement. Or on the other end of the spectrum, you have a false sense of hope you have enough retirement savings, but later find yourself cut short. This spells out exactly why a personalized retirement-income plan is your best option.
Realty #2: Healthcare Costs are Rising
Sure you have planned for healthcare in retirement. But have you budgeted enough? Health insurance, drugs, medical supplies, health services and out-of-pocket expenses quickly add up. According to a report by HealthView Services Financial, a healthy 65-year-old couple retiring in 2019 can expect to spend more than $387,000 for retirement health care costs, not including long-term care. This projection is based on the current value of the U.S. dollar and includes Medicare premiums, the costs of supplemental insurance and other out-of-pocket expenses for a man whose life expectancy is 87 and a woman whose life expectancy is 89.
Think you're in good health so no need to worry? Another surprising fact from the HealthView report is that healthy retirees have higher total health care expenses than unhealthy retirees. That’s because healthy people tend to live longer. So even though short-term expenses for sick people are higher, longer life spans mean that total medical costs for healthy people exceed those for their less healthy counterparts. As daunting as these expenses seem, there are some things you can do to mitigate their effect and lessen the risk that they will derail your retirement. From HSAs to Medicaid and the Affordable Care Act, discuss your best options with your full-service financial advisors.
Reality #3: Taxes Could Get You
You're still going to be paying income taxes. Your Social Security benefits might even be taxed. So where do you even begin?
Taxes are calculated on your income each year as you receive it, much like how it works before you retire. Different tax rules can apply to each type of income you receive. You should know how each income source shows up on your tax return so you can estimate and minimize your taxes in retirement.
The six most common types of retirement income are taxed according to varying rules:
- Social Security Income: A formula determines the amount of your Social Security that's taxable. You might have to include up to 85% of your benefits as taxable income on your return.
IRA and 401(k) Withdrawals: IRA withdrawals, as well as withdrawals from 401(k) plans, 403(b) plans, and 457 plans, are reported on your tax return as ordinary income.
Pension Income: Most pension income is taxable. It will be taxed if you withdraw pre-tax money you contributed to the plan.
Annuity Distributions: Tax rules apply to any withdrawals or annuity payments you receive from an annuity that's owned within an IRA or another retirement account. The exact requirements that will apply depend on whether your annuity was purchased with after-tax dollars.
Investment Income: You'll pay taxes on dividends, interest income, or capital gains, just as you did before you retired.
Gains Upon the Sale of Your Home: You most likely won't pay taxes on gains from the sale of your home if you've lived there for at least two years, unless you have gains in excess of $250,000 if you're single, or $500,000 if you're married.
For a headstart to get a complete overview of your retirement taxes, read our dedicated blog here. And don't forget to further utlize our tax resources here.
Other Considerations
Of course there are multiple other realities in retirement to be aware of; including remianing flexible in your retirement date, and even consider including a phased-retirement. Why? Because clocking in at a reduced work schedule allows freedom to focus on the other parts of life, such as family, travel and volunteering, while still earning a paycheck and employer benefits to keep your financial safety net in place.
Whatever your retirement strategy, there are risks to identify and manage as you navigate retired life. But one key factor remians the same: the more you prepare, the less nasty surprises you'll face along the way.
When thinking about how to plan retirement, have you thought about creating a retirement planning checklist? At Agemy Financial Strategies, our first priority is helping you take care of yourself and your family. We want to learn more about your personal situation, identify your dreams and goals, and provide you with the highest level of service. Creating a retirement cheklist with us is a great way to pinpoint your main goals, compare them to retirement realities and make a plan of how to connect the two.
Click here to instantly book the day and time you'd like to connect with us for your complimentary 30 minute consultation. Our financial advisors in Guilford, CT and Denver, CO are looking forward to speaking with you.