3 Retirement Potholes (and How to Avoid Them)

By Erin Wood

The retirement planning process is full of potholes – they seem to pop out of nowhere and can do major damage if you’re not careful. 

In my years as a financial guide, I’ve put in a lot of man-hours helping people avoid financial potholes. The danger is real and the monetary bruises take a while to heal. 

It’s extremely important to go into retirement with a financial advisor by your side to help you recognize all the areas you could be at risk. However, there are fundamental retirement planning mistakes that I’ve seen far too many people get trapped in: Social Security, taxes and healthcare costs.

Social Security 

The world has changed drastically since the Social Security Act was signed in 1935. At the time, life expectancy was about 61, and you could work at one place in one trade for your whole career. Now life expectancy is near 80, and moving or changing careers is often the norm, not the exception. 

When and how to take Social Security depends on your wealth journey, your chosen profession, your goals and many other factors. It’s no longer just filling out a few forms and waiting for a check. Whether you retire early or work until you’re 70 to maximize benefits is a decision you should discuss with your family and your advisor. 

There are 2,728 rules in the Social Security handbook. It’s a complex program to say the least. Forbes published a statistic that as much as $10 billion in Social Security benefits is left on the table every year. To make sure you’re best utilizing these benefits, you should sit down with an advisor and a benefit check. 

Another complicating angle here is the fact that Social Security benefits have lost about 34% of their buying power since 2000. So in less than 20 years, you’re essentially getting 66 cents on the dollar because of the cost of living in today’s world. 

Tax Efficiency 

Just because you retire doesn’t mean you retire from taxes. There are three categories of taxes to keep in mind, even in your retirement years. 

Taxed Always 

This category includes brokerage accounts, checking, savings, dividends, interests and capital gains. These are the taxes you’ve always paid and will continue to pay – retirement doesn’t make those disappear. 

Taxed Later

Here is your 401(k), IRA, 403(b) or other retirement plan. You didn’t pay taxes on it going in, but you must pay taxes on these when you withdraw. You also must consider real estate, as well, which can be taxed on many occasions.

Tax Rarely 

Here’s your Roth IRA, interest from municipal bonds and even some kinds of life insurance. These accounts can be taxed at different points in time, so it’s best to know beforehand. 

Notice there isn’t a “taxed never” category! Even your Social Security benefits can be taxed. All you can do is prepare for this kind of inevitable expense, and build it into your overall plan. 

One example is your Required Minimum Distributions (RMDs), which you’re required to start taking from most retirement accounts by age 70 1/2. Having a strategic plan for RMDs can help your tax situation. For example, you can roll many accounts into a Qualified Charitable Distribution (QCD), thus helping you meet your RMD requirements and supporting a nonprofit that you’re passionate about. 

All this to say that taxes will still be in the picture, and can be even more complex in retirement. 

Healthcare & Long-term Care 

A private room in a long-term care facility is about $100,000 per year. If you really want to save money, go semi-private for only $89,000! Needless to say, long-term care can be a huge expense. 

Again, preparation is key. Reasonable long-term care insurance isn’t difficult to find and can be built into your current financial plan. Keep in mind that Medicare doesn’t cover long-term care costs and even the best Social Security payout will only just touch the cost of a nursing home. 

In the long run, health care costs are about $135,000 for men and $150,000 women in retirement, and that’s excluding long-term care. Given the average life expectancy hovering around 80, you’re looking at least $9,000 per year, which is certainly worth paying attention to. 

Chart Your Path

Retirement planning mistakes, like potholes, can be a burden. But thinking ahead and using proper planning will help you avoid any major pitfalls. Our advisors are experienced in financial planning for now and the future – set up a consultation today to see if there are any potholes in your retirement plan. 

Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty..