After years of working and careful saving, it’s almost time to kick back and enjoy that retirement nest egg.
But before you begin splurging on world travel and daily rounds of golf, get to know the common financial pitfalls that can impact retirees as they transition into their golden years. Some financial decisions can leave you in much better shape than others.
Here are three key factors that can have a significant influence on your retirement finances.
Most people think that healthcare and ancillary costs represent the greatest retirement expenses. While they can be excessive, they don’t compare to the bite that taxes can take out of your savings. No one likes paying taxes and fortunately, effective tax planning can alleviate much of the pain. For example, your tax situation might become more complicated in retirement, especially if you have significant savings. You could be moved into a higher tax bracket by required minimum distributions from retirement funds that typically must start at age 70 ½. The higher income can also cause more of your Social Security to be taxable and even raise your Medicare premiums. To reduce future taxes, in some cases it can be beneficial to begin required distributions earlier or to utilize Roth Conversions. Tax strategies like these are complex and a number of factors must be evaluated, so be sure to consult with your financial advisor or tax professional.
Many retirees also relocate to be closer to their families, take advantage of more comfortable climates and, yes, to escape taxes. An income-tax-free state may sound appealing, but before you load up the moving van, take time to evaluate all of the possible tax issues that may come into play. Essentially, states are businesses: they need make a certain amount of revenue to operate, so if they don’t have an income tax, they’re likely raising the money in some other way. Sales taxes and property taxes are likely higher. And if a locale’s taxes do turn out to be low, important services like healthcare, infrastructure and transportation may suffer.
While many people can’t wait to start collecting their Social Security checks, there are few situations when it’s a good idea to start taking it at 62, the earliest age at which you can elect to receive this benefit. That’s especially true if you’re single or are the higher earner in your marriage. If you start collecting at 62, your monthly payout will be a whopping 25 to 30 percent less every month for the rest of your life than what you would receive by waiting until your full retirement age (66 or 67, depending on the year you were born). And if you take Social Security early and you die before your spouse, his or her survivors benefit will be lower, too. If you’re in fairly good health, waiting until age 70 to file for Social Security might be a better way to go. For every year you wait between your full retirement age and age 70, Social Security will add a guaranteed 8 percent to your monthly payout. These larger Social Security checks also serve as a kind of longevity insurance.
Medicare supplement plans.
These private health insurance plans help aging adults to bridge the gap between what original Medicare plans pay and what they don’t, such as deductibles, copayments, and coinsurance. They’ve always been a smart investment, but with the future of government-sponsored health insurance plans so uncertain, Medicare supplements are more important than ever. Medigap policies typically pay the majority or all of the remaining Medicare-approved charges after the primary policy pays. Plan F, for example, is a type of Medicare supplement that pays all Part A and B deductibles, in addition to hospital and doctor coinsurance amounts. And in the event that your health takes a turn for the worse, a Medicare supplement plan is renewable for life as long as you pay the premiums. These policies have no lifetime maximums, and your insurer cannot cancel your policy due to the frequency or amount of your claims. In other words, a good Medicare supplement plan can help protect your savings in the event of a major health crisis that Medicare doesn’t fully cover. Investing in a quality Medicare supplement policy is one of the best things you can do to safeguard your health and financial security in retirement.
In retirement, expenses can be far greater than anticipated.
The good news is that proper planning and preparation can even the score. At FAI, we’re here to ensure that your money lasts as long as you. If you need guidance avoiding the financial pitfalls and money wasters that can reduce your retirement savings, our knowledgeable advisors are here to help. Please contact us to learn more.
About FAI Wealth Management, Inc.: Located in Columbia, Maryland, FAI focuses on helping clients create the financial future they desire by protecting their wealth, making the most of their assets, and planning for life's uncertainties. The firm combines fee-only, fiduciary-driven guidance with highly personalized, consultative financial planning and investment services that enable individuals, families, and businesses to navigate complex life transitions. Founded in 1987, FAI currently manages more than $350 million in client assets nationwide. For more information about FAI Wealth Management, please visit the website at https://www.faiwealth.com or call 410.715.9200.