Retirement. It’s a word that triggers a range of thoughts and emotions, depending on where you are in life. However, when approaching retirement, five retirement concepts are often overlooked.
Whether you’re still planning for it or enjoying your golden years, retirement brings unique opportunities and challenges to explore.
While we all think mainly of financial considerations when planning our retirement income, there are specific areas that deserve consideration if you want to help make the most out of this exciting next chapter in life.
Today, let’s take some time to consider these five often-overlooked concepts related to retirement to help prepare you for whatever lies ahead.
Required Minimum Distributions (RMDs)
Retirement planning is a complex process, and it’s important to understand all the components that go into it. Required Minimum Distributions (RMDs) are one such component, and they can significantly impact your retirement savings.
RMDs are the amount of money you must withdraw from certain retirement accounts each year once you reach age 73. These accounts include:
and other employer-sponsored retirement plans.
The amount of the RMD is determined by your account balance at the end of the previous year divided by a life expectancy factor provided by the IRS.
Failure to take an RMD can result in a penalty of 25% of the amount not withdrawn. That’s why it’s important to understand how much you must withdraw each year and when those withdrawals must be made.
You must take your first RMD by April 1st, following the year you turn 73. After that, subsequent RMDs must be taken by December 31st each year.
RMDs are important to consider for retirement planning because they are mandatory withdrawals from your qualified accounts throughout your retirement years that can have a significant impact on your income taxes in retirement.
Retirement is a time to enjoy life and relax, but it’s important to understand how taxes can affect your finances during this period. Regarding retirement planning, taxes are an important factor that needs to be considered.
For those with traditional retirement accounts such as 401ks, IRAs, and 403(b)s, you will owe income taxes on any money withdrawn from these accounts in retirement. Depending on your overall financial situation, you may also owe taxes on Social Security benefits or other investment income. Additionally, tax consequences may be associated with estate planning and other financial decisions you make during retirement.
It’s also important to consider the impact of inflation when planning for retirement. Since inflation erodes purchasing power over time, the amount needed to cover the same expenses increases yearly. This means your taxable income may increase yearly due to inflation-adjusted income levels, resulting in higher taxes owed.
To minimize the impact of taxation in retirement, it’s important to plan and take steps to reduce taxable income during this period. For example, consider taking advantage of strategies such as Roth conversions from 401ks or traditional IRAs, or deferring Social Security benefits until age 70, or other tax-reducing strategies that may be appropriate for you.
Additionally, work with a qualified financial and tax professional when deciding investments and other retirement-related matters.
Understanding how taxes can affect you in retirement and taking steps to minimize their effect can help your money last.
Retirement is when many people look forward to enjoying the fruits of their labor and having more free time to pursue hobbies and activities. However, one thing that can be a significant concern for retirees is the cost of health care. Healthcare costs in retirement can add up quickly and put a strain on your finances if you are not prepared.
The Fidelity Retiree Health Care Cost Estimate states that an average retired couple aged 65 in 2022 may need approximately $315,000 saved to cover health care costs throughout retirement. This includes expenses such as premiums for Medicare or other insurance plans, copays, deductibles, prescription drugs, and long-term care. The report also found that those between 65 and 74 spend about $13,000 yearly on health care, while those between 75 and 84 spend around $24,000 annually.¹
It’s important to plan ahead for these costs so you don’t end up with any surprises down the line. Consider setting aside money each month into a dedicated savings account specifically for health care expenses in retirement, such as a Health Savings Account (HSA). Additionally, research different types of health insurance plans available to you to find one that best fits your needs and budget.
No matter what stage of life you’re in, it’s never too early or too late to start planning for healthcare costs in retirement. Taking the time now to prepare will help ensure that your golden years are filled with peace of mind instead of financial stress.
Elder Care Needs
As people age, their care needs can increase, requiring additional assistance and support in retirement. Elder care may involve various services, from daily transportation to more complex medical needs like long-term health care.
For those who can remain in their own homes, part-time and full-time home care services can help support activities of daily living such as bathing, dressing, meal preparation, housekeeping, and running errands. Additionally, home health aides can provide comprehensive medical services such as wound management and medication administration.
Assisted living or nursing home facilities may be appropriate for those unable to stay in their own home or who need more intensive care. Assisted living is a residential facility that provides personal care and other assistance for those needing help with everyday tasks but not requiring full-time nursing care. Nursing homes offer around-the-clock skilled nursing care and supervision for people with serious physical or mental impairments. Some long-term care insurance providers even allow for a private room.
It’s important to consider how your needs may change over time during retirement so you can plan for appropriate elder care when needed. By researching the types of services available and understanding the associated costs, you can ensure you are taken care of.
Inflation/Rising Costs on A Fixed Income
Inflation and rising costs can have a significant impact on your retirement plan. Inflation measures how much the prices of goods and services increase over time, reducing the purchasing power of your retirement savings when inflation rises.
For example, if you need to withdraw $50,000 from your retirement savings in 25 years because inflation has risen to 4%, that same amount of money will only be able to buy what $37,683 would buy today. This means you will need more money saved to get the same value out of your retirement savings in 25 years and through retirement.
Rising healthcare costs can also erode your retirement savings over time. According to recent estimates by Fidelity Investments, an average retired couple age 65 in 2022 may need approximately $315,000 saved to cover health care costs throughout retirement.¹ How much will it cost in 10, 20, 30 years? Therefore, retirees must plan for these expenses and save as early as possible.
Fortunately, you don’t have to guess at what future inflation or health care costs may be to help you save enough money for retirement. Instead, talk with a financial advisor to help project future costs based on current trends to make informed decisions about how much money you should save.
Retirement is no easy feat; there’s much to consider and plan for to help secure an enjoyable and fulfilling retirement. Adventure awaits, so make sure you’ve taken the necessary steps to enjoy it.
From figuring out your required minimum distributions, how taxes will affect you, what health care costs you may face, planning for elder care needs, and anticipating rising costs due to inflation – these are components of financial planning that should not be overlooked.
If you need more confidence in taking the road ahead, look for the help of a professional financial advisor who can help guide your retirement journey. Whether helping create an individualized retirement plan or addressing holistic aspects of retirement planning — like investments, taxes, social security, and estate planning — finding a knowledgeable professional with your best interests can open up a world of possibility.
Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“PCA”), an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Intelliplan Financial and PCA are separate, non-affiliated entities. PCA does not provide tax or legal advice.
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